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WRAP AROUND STUDY GUIDE

A Framework for, and Concepts and Instruments of

International Insolvency

2017/18

HOW TO USE THE WRAP AROUND STUDY GUIDE

The purpose of the Wrap Around Study Guide study guide is to provide the candidates with some

basic framework regarding the scope of the work to be covered during the session. The guide

therefore includes a summary of the required prescribed materials that you should read against

the backdrop of the insolvency law framework. (It also contains some cross referencing to the Study

Notes which serve as the basic preparatory notes for this part of the course.)

Candidates are urged to read the required prescribed materials in advance, using the Study Notes as

the point of departure, in order to prepare themselves for this session. (Please bring a copy of the

Wrap Around Study Guide along to this session.)

In this session we will try to establish what international insolvency law is all about, and to assess the

general sources, terminology and the broad principles against the backdrop of general features or

essentials of insolvency systems. The development of international insolvency law will thus be

discussed from the point of view of the development of both cross-border insolvency rules as well as

the setting of standards for the development of domestic insolvency law systems.

In order to do so we will consider the essential features of insolvency law, the sources of international

insolvency law and some problem areas to be considered when working with cross-border matters.

It must be pointed out that the lecturer of this session does not present all the contents of this

guide as his own since it is largely structured around a summary of the prescribed texts and a

number of other selected sources in order to make these more accessible for the purposes of the

session.

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OUTCOMES:

SECTION A: GENERAL BACKGROUND

After completion of this section you must know the basics of the following aspects:

• The framework and essential features of insolvency law.

• Some comparative aspects.

• Classification of insolvency systems.

• Different classes of creditors.

• Core terminology.

SECION B: THE SOURCES AND NATURE OF INTERNATIONAL INSOLVENCY

After completion of this section you must know the basics of the following aspects:

• What international insolvency law is.

• The sources and nature of international insolvency law.

• Basic principles and approaches to cross-border insolvency cases.

• Various models and instruments available and in those in the process of being developed in the

area of cross-border insolvency law.

• Problematic areas in cross-border insolvency law.

SECTION C: THE HARMONIZATION OF NATIONAL INSOLVENCY LAW AND ITS USE

IN INTERNATIONAL INSOLVENCY LAW

After completion of this section you must know the basics of the following aspects:

• Principles to harmonise national insolvency laws.

• Difficult areas for harmonisation, like:

Voidable dispositions;

Labour contracts;

Priorities;

Securities, and

Principles relating to the qualifications of estate representatives.

SECTION D: PRINCIPLES RELATING TO THE QUALIFICATIONS OF ESTATE

After completion of this section you must know the basics of the following aspects:

• Appointment and qualifications

• Regulation

• Remuneration

A. REQUIRED READING

• Boraine, André., Wrap Around Study Guide with cross referencing to sources for reading as

indicated.

• Boraine, A., Insol Fellowship Study Notes (compiled by A Boraine), read sections as

indicated in Wrap Around Study Guide.

• Omar, Paul., “The Landscape of International Insolvency Law” [Updated version of Omar,

Paul J., “The Landscape of International Insolvency. Law”, in: 11 International Insolvency

Review 2002, 173ff.]

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• Wood, Philip R., Principles of International Insolvency (2007) pp. 1 -30 (General

Introduction).

[Note: Follow Wrap Around Study Guide and Class Notes below as a guide]

B. ADDITIONAL READING

• Fletcher, Ian F., Theory and Principle in Cross-Border Insolvency, in: Ian F. Fletcher,

Insolvency in Private International Law: National and International Approaches (2005) pp.

3-17.

• Fletcher, Ian .F., The Law of Insolvency(2009, with 2014 Second Cumulative Supplement)

Chapters 1 & 2. (Fletcher ‘2’).

• Garrido, J.M., The Role of Personal Insolvency in Economic Development in the World

Bank Legal Review (2014) Vol 5 pp 111 – 127.

• Hatzimihail, NE, “The Many Lives – and Faces – of the Lex Mercatoria : History as Genealogy

in International Business Law” (2008) 71 Law and Contemporary Problems at 169.

• Levinthal, L., “The early history of bankruptcy law” 1919 University of Pennsylvania Law

Review 223.

• Wessels, B., International Insolvency Law (2012)

• Wessels, Bob and Boon, Gert Jan., Sources of International Insolvency Law.[Chapter 1

"Introduction to International Instruments: Commentary" from: Wessels, B and Boon, GJ.,

Cross-Border Insolvency Law. International Instruments and Commentary, 2nd ed Kluwer

Law International, (2015), pp. 1 – 134.]

• Westbrook, J., “Locating the eye of the financial storm” (2007) Brook. J Int’l L vol 32:3.

• Westbrook, J., “Ian Fletcher and the Internationalist Principle” 2015 (3) NIBLeJ at 30.

C. SOURCE MATERIALS

• See Annexures A to E at the end of Study Notes.

D. GENERIC MATERIAL OFTEN COVERING MORE THAN ONE SESSION

• Read: Sections of Insol Fellowship Study Notes as indicated in this Study Guide.

• Read: Omar, Paul., “The Landscape of International Insolvency Law” [Updated version of

Omar, Paul J., “The Landscape of International Insolvency. Law”, in: 11 International

Insolvency Review 2002, 173ff.]

• Read: Wood, Philip R., Principles of International Insolvency (2007) pp. 1 -30 (General

Introduction)

NOTE: FOR SECTIONS A TO D: FOLLOW STUDY NOTES AND READ COMPULSORY

READING MATERIALS

SECTION A: GENERAL BACKGROUND [Read: Study notes pp 9 - 24]

After completion of this study unit you must know the basics of the following aspects:

• The framework and essential features of insolvency law.

• Core terminology.

• The history of insolvency law.

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• Comparative aspects.

• Classification of insolvency systems.

• Different classes of creditors.

1 FRAMEWORK OF ESSENTIAL FEATURES OF AN

INSOLVENCY SYSTEM

[UNCITRAL Legislative Guide:

Different approaches to effective and efficient insolvency law. Most

suitable national or local context.]

A. ESSENCE OF INSOLVENCY/ BANKRUPTCY

• Collective (versus individual) nature/ procedure

• Meaning: insolvency and bankruptcy

• Terminology: consider principles

• Liquidation of Assets v rescue

• History:

- English law and civil law

o Insolvency law families

- Individuals & corporate

B. POLICY CONSIDERATIONS etc

• Pro creditor

• Pro debtor

• Traditional English v continental approach

AND

Key Objectives etc

• Certainty in market place

Transparent and predictable

• Maximization of assets

• Balance: rescue and liquidation

• Equitable treatment of creditors (and distribution)

Rules for ranking and priorities

• Timely, efficient impartial resolution of insolvency

• Preservation of estate

Insolvency law should:

• Deal with rescue(restructuring) and liq

• Recognise rights established outside insolvency (general

law) - local and foreign?

– Rights of real security

• Harmonised, predictable rules for cross-border

Considerations:

Balancing: interests of creditors, debtor, society …different

approaches… policy…

Fresh start… liquidation v rescue culture

Society constantly changing… insolvency not static

Dependent on well-developed commercial system and regulatory

framework

• Courts and role players … professionals

C. SOURCES

• Insolvency legislation (single Act or various pieces of

legislation)

• Examples:

USA

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Germany

Australia

South Africa

England and Wales

• General law v Insolvency Law

Legislation, Common law, precedent

CONSUMER

BANKRUPT

-CY

-INDIVI-

DUALS

D. COMMON CHARACTERISTICS

(General features)

• Liquidation

• Debt restructuring

[Liquidation or rescue: result provides more value to creditors]

CORPORATE

BANKRUPTCY

E. GATEWAYS AND COMMENCEMENT

(How to open an insolvency proceeding?)

• Court?

• Other?

• Who can apply? (locus standi)

Who not?

Debtor/ creditor

Open access?

• When to apply and requirements

Insolvency

▪ Balance sheet

▪ Cash flow

▪ Imminent insolvency

Same basis liquidation and rescue?

• Notification

NB: Importance of commencement of formal insolvency, i.e.

bankruptcy

F. EFFECTS

F.1. AUTOMATIC STAY

(Moratorium on individual collecting and execution procedures)

• Extent of moratorium

• Exceptions?

• Uncitral Insolvency Guide of 2004 (UIG) 95

-Exempt and

excluded

assets

- Matrimonial

dispensations

F.2.ESTATE/ ASSETS

• Identification of estate assets: the estate

Local and foreign

• Protection ad preservation(control):

Liquidation v rescue

• Level of control retained by debtor

Limitations

• Position of regulator/ insolvency representative

• Tracing of assets

• Position: un/encumbered assets

• Third party owned assets [UIG 77; 110]

• Foreign assets

• Pre-post commencement transactions [UIG 79]

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F.3.a. Rights,

duties,

liabilities and

limitations of

debtor as an

individual

F.3. PERSONAL CONSEQUENCES AND LIABILITY F.3.b. Rights,

duties, liabilities

and limitations of

directors and

officers

F.4. EXECUTORY CONTRACTS [UIG 119]

• General powers of estate representative

• Maximising estate value

• Acceleration and termination clauses

• Special cases: i.e. labour contracts? [UIG 70]

• Effect of consumer protection in consumer insolvency

Same principles/considerations in liquidation and

rescue?

F.5. SET-OFF AND NETTING

(PRE-AND POST COMMENCEMENT)

[UIG 70]

F.6. AVOIDABLE DISPOSITIONS [UIG 71; 135]

• Fraudulent conveyance (undervalued)

• Preference

[-rule or standard-]

Commencement (relevant time)

• [Conversion rescue to liquidation UIG 152]

G.ADMINISTRATION

• Regulator (Structure: court or otherwise)

• Court involvement (special court/ other body?)

• Insolvent Estate Representative (qualifications etc.?) [fees

UIG 63; 174; 176, EBRD principles]

• Proof of claims and verification

Types of claims, subordinated claims

Ranking – see H below

• Meetings of interested parties

• Creditors [creditor committees; monitoring UIG 190]

• Position of debtor

• Tracing of assets

• Examinations

• Post commencement contracts [UIG 131]

• Realisation of the assets [UIG 109]

Mode of sale

Un/encumbered

Burdensome, no-value... relinquish?

H.DISTRIBUTION

• Classes of creditors

• Types of claims [UIG 251]

Secured

Priorities [UIG 266]

• Administrative

• Other

Concurrent

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• Special cases [UIG 273]

[Employee claims]

Related persons (subordianted)

Owners and equity holders

I.COST OF ADMINISTRATION

• Who must fund?

• Estate

• Creditors

• Public office

J. REHABILITATION [AND DISCHARGE]

J.a.

DISCHARG

E

Process?

• On what policy is the system based?

• Pro debtor or pro creditor?

• Problem to determine which procedure:

• Liquidation or rescue?

J.b.

CORPORATE/

BUSINESS

RESCUE [UIG

28]

- Discharge:

cram down

or consent

Conclusion of Proceedings

• Individual

• Corporate: rescue – liquidation

• [UIG 222]

• Reorganisation/

Rescue plan

Debtor in

Possession (?)

Discharge

Creditors’

committees(?)

Conversion to

liquidation

• Formal

arrangement

• Pre-pack

Informal v.

Formal:

(statutory)

repayment

plans

K. ALTERNATIVES

• Creditors’ workouts [UIG: 22]

• London

approach

• Insol Guidelines

• Pro’s – cons?

• Voluntary

arrangements; v.

• Statutory

regimes

L. CROSS-BORDER DISPENSATIONS [UIG 41, 69, 70]

-Some

systems: no

collective

procedures for

individuals,

except traders

-NINA [see I.

above]

M. SPECIAL DISPENSATIONS Like:

• Groups [UIG

276]

Court

discretion

Consolidation

• Administrative

processes [UIG

32]

• Banks, financial

institutions and

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groups of

corporations

• SME’s

• SOE’s

• Sovereign debt

1.1 BACKGROUND TO ABOVE FRAMEWORK

Important sources:

• UNICTRAL legislative Guide to Insolvency Law, (Part 1 and 2) 2004 – [The narrative in the

Study Notes pp 9-22, is based on this document]

(Part 3) 2010 – Enterprise groups

(Part 4) 2013

• 2001 UN Convention on the Assignment of Receivables

• 2007 UNCITRAL Legislative Guide on Secured Transactions

• 2010 UNCITRAL Legislative Guide on Secured Transactions: Supplement on IP Rights (2010)

• World Bank Principles

1.2 LEGEND (NARRATIVE) TO FRAMEWORK: Wood; Fletcher (2); Garrido; Annexure E

to Study Notes pp 61 et seq]

[Note: Follow cross referencing to the above Framework. The narrative in the Study Notes is largely

based on the UNICTRAL legislative Guide to Insolvency Law, (Part 1 and 2) 2004, accessible on

the UNCITRAL website, and read summary in the Study Notes, pp 9 - 25.]

A. Systems and Essentials and B. Policy Considerations

• Wood:

– Pro-creditor

– Pro-debtor

– Not interested

• [Advantage of creditors?]

• Essentials:

– Pooling of assets (universal concept)

– Creditors are paid pari passu (?)

– Initiation process

– Administrator

– Publication (notification)

– Powers of administrator

– Creditors participation

– Supervision

– Culture: rescue - liquidation

• Sealy and Hoolley:

– Individuals – protect, fresh start/ discharge

– Corporations – preserve business or viable parts

– Pari passu – except priorities

• Fletcher:

– Common denominator – collectivity

• Distribution rules: Wood:

– Super-priority

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– Priority creditors

– Pari passu creditors

– Deferred or subordinated creditors

• Contract

• Statutory

• Equitable (by court)

– Expropriated creditors

F.1. AUTOMATIC STAY

(Moratorium on individual collecting and execution procedures)

• Extent of moratorium

• Exceptions?

– Court or RP approval

– Encumbered asset not needed

– Low value

– Perishable goods

F.6. AVOIDABLE DISPOSITIONS [UIG 71; 135]

• Transactions after inception financial crisis

• Fraud/ with or w.o. adequate value

– Fraudulent conveyance law/ Actio Pauliana

• Preferences

– Defences: varied but good faith and lack of knowledge (debtor and/ or creditor), ordinary

course business (subjective and objective)

• Time period: fixed or discretionary (maximum)

• Suspect periods

• Presumptions: insolvency

• Related persons

• Who to initiate?

• Before or after commencement

• [Rule or standard: cost and fairness]

• The same in liq and rescue?

– Commencement - relevant time (Conversion rescue to liq UIG 152)

D. DISTRIBUTION

TYPES OF CLAIMS

• Types of claims [UIG 251]

– Secured

– Priorities [UIG 266]

• Administrative

• Other

CORPORATE/BUSINESS RESCUE [UIG 28]

Discharge: cram down 22

Essentials (UIG):

• Submission to proceedings

• Automatic stay

• Continuation of business by existing management or independent manager or both

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• Formulation of Plan:

– Save viable part of business

– Better return creditors

– Rights of stakeholders

– Discharge ?

• Consideration of, voting on, and acceptance of plan

• Some instances, judicial approval/ confirmation

• Implementation

• Closure

Creditor-work out (Insol Principles)

8 Insol principles for a global approach to multi-creditor workouts, 2000:

• P1 Financial distress, all creditors must co-operate

• P2 Not take individual actions, standstill

• P3 Debtor also not take action

• P4 Coordinating committees (coordinated response)

• P5 Debtor provide full information (P7 confidential)

• P6 Proposal, position of creditors at standstill

• (P7 confidential)

• P8 New credit - priority

M. Special rules

Groups [UIG 276]

• Court discretion (factors indicating operated as a single entity)

• Consolidation (statutory)

Administrative processes [UIG 32]

• Initiated by governments or regulators:

• How to deal with corporate debtors by banks for instance in case of financial crisis

• Sweden

Sovereign debt

Buckley “The Desperate Need for a Global Sovereign Bankruptcy Regime”

IMF Principles for Sovereign Debt Restructuring Mechanism (SDRM)

• Problem twofold: not timely restructuring process;

and

• only available mechanism is default – highly disruptive.

SDRM to address these:

Krueger:

1. Imposition of a standstill.

2. Temporary foreign exchange and capital control standstills.

3. Collective action provisions – 75% majority acceptance.

4. Seniority for new lending.

5. IMF assurance of good conduct by debtor that will assure creditors the debtor will pursue

policies that protect asset values and restore growth.

6. Subsequent IMF financing limited to rebuilding reserves and paying for essential services

and imports.

Subsequent amendments:

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7. More control to debtor and super-majority creditors.

8. Contracts re collective action clauses in bonds and statutory approach.

[Global Bankruptcy Court?]

2 CORE TERMINOLOGY

SOURCE: EXTRACT GLOSSARY OF TERMS FROM UNCITRAL INSOLVENCY GUIDE

OF 2004

(a) “Administrative claim or expense

(b) “Assets of the debtor”:

(c) “Avoidance provisions

(d) “Burdensome assets (e) “Cash proceeds”:

(f) “Centre of main interests”: the place

where the debtor conducts the administration

of its interests on a regular basis and that is

therefore ascertainable by third parties;

(g) “Claim”:

(h) “Commencement of proceedings”:

(i) “Court”:

(j) “Creditor”:

(k) “Creditor committee”:

(l) “Debtor in possession”:

(m) “Discharge”:

(n) “Disposal”:

(o) “Encumbered asset”:

(p) “Equity holder”:

(q) “Establishment”:

(r) “Financial contract”:

(s) “Insolvency”:

(t) “Insolvency estate”:

(u) “Insolvency proceedings”:

(v) “Insolvency representative”:

(w) “Liquidation”:

(x) “Lex fori concursus”:

(y) “Lex rei situs”:

(z) “Netting”:

(aa) “Netting agreement”:

(bb) “Ordinary course of business”:

(cc) “Pari passu”:

(dd) “Party in interest”:

(ee) “Post-commencement claim”:

(ff) “Preference”:

(gg) “Priority”:

(hh) “Priority claim”:

(ii) “Protection of value”:

(jj) “Related person”:

(kk) “Reorganization”:

(ll) “Reorganization plan”:

(mm) “Sale as a going concern”:

(nn) “Secured claim”:

(oo) “Secured creditor”:

(pp) “Security interest”:

(qq) “Set-off”:

(rr) “Stay of proceedings”:

(ss) “Suspect period”:

(tt) “Unsecured creditor”:

(uu) “Voluntary restructuring negotiations”:

3 HISTORICAL DEVELOPMENT AND SOME COMPARATIVE ASPECTS [Read Study

Notes pp 23 – 25]

3.1 General

Roman law:

• Cessio bonorum(debtor)

• Distractio bonorum(creditor)

• Remission and dilatio(composition)

– Cross-border insolvency (CBI)

• Lex mercatoria

– Only merchants (companies)

– Common law – civil law influence

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[See in general Fletcher (2); Levinthal; Wood]

3.2 Some comparative aspects

England

Cork report of the 1980’s

• Insolvency Act of 1986 (Unified At)

• Insolvency Act 2000 and Enterprise Act 2002

• Common Law; s 426, Ins R 2006(Model Law), EU Ins R

America

• Review commission 1973

• 1978 Bankruptcy Code (Unified Act)

• Fresh start

• Reform late 1990’s –

• 2005 Amendments: chapter 15 –CBIL (adopted version of UNCITRAL Model Law

on Cross-Border Insolvency)

• Bankruptcy Code of 1978.

• Straight bankruptcy (liquidation) – chapter 7;

• Municipalities – chapter 9;

• Reorganisation(rescue) – chapter 11;

• Family farmer – chapter 12;

• Rescheduling – chapter 13.

• Review Commission of the 1990’s;

• Reforms of 2005: Inter alia “means testing” and new Chapter 15, i.e. adoption of

UNCITRAL Model Cross-Border Insolvency Law.

The Netherlands

• Faillissementswet of 1897

• Fresh start – Shuldsaneringsregeling

• Insolvency Reform

Africa

• South Africa (mixed legal system)

Insolvency Act of 1936

Not unified Act and Mixed legal system

Reform

Dual CBI law system (CBIL)

• Western Africa: OHADA

Australia

• Harmer Report

• Not single unified Act

• CBI: 2008 Model CBIL

ASIA

• China: 2006 PRC Bankruptcy Law

• Asian Development Bank (ADB)

• Hong Kong: English insolvency laws:

Personal: amended in 1996

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Companies: under review

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SECTION B: THE SOURCES AND NATURE OF INTERNATIONAL INSOLVENCY: Read

Study Notes pp 25 to 48; Omar.

Sources: Fletcher (1); Wessels and Boon (Chapter 1); Omar (4); Wood (7).

After completion of this study unit you must have a sound knowledge of:

• What international insolvency law is.

• The sources and nature of international insolvency law.

• Basic principles and approaches to cross-border insolvency cases.

• Various models and instruments available and in the process of being developed in the area of

cross-border insolvency law.

4. What is Int Ins law/ CBIL ?:

In its simplest forms, a transnational insolvency involves an insolvency proceeding in one country,

with creditors located in at least one additional country.” In the most complex cases, it involves

multiple proceedings, subsidiaries, affiliated entities, assets, operations and creditors in dozens of

nations” - Sandy Shandro, Freshfields.

• No universal set of laws

– National legal systems differ-

• Bankruptcy/ insolvency and

• The general law (rights)

• Wessels: insolvency rules which cannot be fully enforced…

• Fletcher: …insolvency that transcends a national legal system… regard to other systems than

domestic

• Quest: predictability

5. Notes regarding cross-border insolvency

Context –

Introduction:

– Recognition of foreign judgments & PIL

– Economic affairs with foreigners

– Interests in property in more than one country

– Contractual obligations in various countries

– Free markets/ different national laws

– Absence global - court, parliament, law

– Territorial: jurisdiction, local laws

– Approaches:

• Insular

• Cooperate

– Risk of multiple insolvencies:

• Weaker creditors may lose out

• Risk of fraud, asset dissipation across borders

– Thus: dealings various jurisdictions, assets different jurisdictions, companies,

– Groups

Examples:

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Scenario 1:

– ABC Co. Incorporated in USA

– Branches in England and SA

– (business operations)

– Treatment of branches?

– Order in USA?

– England, SA?

Scenario 2:

– ABC Co. holding company of X Co. in England and Y Co. in SA.

• Difference?

Sources for cooperation:

• Comity (and reciprocity)

• Court’s discretion (inherent, common law)

• Legislation (national and supra national? – EU; OHADA)

• Treaties:

– Historical examples: Verona

– Nordic countries

– South America

– Euorpe

• Protocols: Maxwell; UNICTRAL etc

er

Terminology:

• Universality

• Territoriality

• COMI: Other than place of incorporation, either headquarters (real seat) or its operations (like

business, main assets); nerve centre; ascertainable by third parties.

– DUAL COMI: Maxwell case: headquarters England but assets in USA (but prefer

headquarters.)

• Main proceeding: domicile; principal office? (COMI) – universality

– What law will regulate procedure?

• Non main proceeding: (secondary proceeding) – modified universality

– Local law will apply

• Concurrent proceeding

– Different bankruptcy proceedings running concurrently

• Recognition (ancillary proceeding)

– Foreign main proceeding

– Foreign non-main proceeding

• Concurrent jurisdiction and cooperation

• Foreign representative

• Concurrent insolvency order v Recognition

• Lex concursus

• Lex loci rei sitae

Essentials:

– Foreign representatives - direct access

– A clear and speedy recognition procedure

– A moratorium or stay

– Non-discrimination between creditors

– Courts and administrators to cooperate.

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• Goal of maximizing value of debtor’s worldwide assets

• Protecting the rights of both debtors and creditors and

• furthering just administration

Some practical issues:

• Recognition of foreign judgments

• Technical meaning of insolvency

– Balance sheet/ cash flow

• Priorities/ preferential claims

• Avoidance law

• Executory contracts

– Labour dispensation

• Estate representative and structure

• Prior-acquired rights: securities

• Rescue v liquidation

• Funding/ contributions

Historical development:

• Lex mercatoria

• Jabez argued in 1825 for uniform system of insolvency in Europe

• Henry 1827 – stumble block absence of general consent

• Jitta end 19th

century:

• World law and federal parliament (unattainable)

• Assimilation of national laws based on set of rules

Essentials:

• Fletcher poses 3 questions:

– In which jurisdiction must procedure be opened?

– Which system must rule elements of diversity?

– International effects to proceedings in a particular forum?

• Two aspects:

– Comity: recognition

– Choice of law (Private international law ‘PIL’)

• PIL gives direction amidst diversity’

• PIL principles universal?

• But not even uniform PIL principles

– jurisdiction

– choice of law

– international recognition

Approaches – theory:

• Universality (Fletcher, Omar & Friman)

– One procedure (unitary), co-ordination

– Covers all the assets

– Problems: administer worldwide scale, [lex concursus v lex loci rei sitae]

• Territoriality (‘grab rule’)

– Procedure in each jurisdiction (plurality)

• Unitary: one procedure

• Plurality of proceedings

• Shades of theories:

– Modified universality (Westbrook)

– Cooperative territorialism (LoPucki)

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• Conventions

• Problem: Local asset protection

• Contractualism (Rasmussen)

– Company, articles of incorporation, no real contract

• Internationalist theory - Fletcher

Determinants:

– Type of assets

• Location

– The court first issuing the order

• Adhere: universalism or territorialism?

Some current approaches:

England and Wales

• Inward bound request for recognition (s 426)

• EU Insolvency Regulation ??

• UNCITRAL Model Law

• Common law

USA

• Former s 304 of the USA BR Code

– Universal effect, modified universality

– Inward and outward requests

– Factors for relief:

• Comity: international duty and convenience (Hilton v Guyot) but sometimes

not granted:

• Public policy: Cost order English court

• Where recognition inimical to US interests

• Since 2005, Chapter 15 adopted Model Law

RSA

• Dual system in theory:

– Common law: comity, convenience

– Adopted model law (not operable yet)

– No treaties

• Common law:

• Outward bound request:

– Letter of request, but?

– Foreign jurisdiction will dictate

• Inward bound request for recognition

• Movable/ immovable assets

– Approach local high court

– Discretionary (comity) grant recognition

– Except for precedents no predictability

– Powers determined by court order

– Surplus go to foreign proceeding

– Foreign tax claims (no basis)

• Opening of local insolvency proceeding: must comply SA law

Japan

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– At earlier stage no assistance (insular approach)

– Now Uncitral model law

Germany

– Statutory

– EU Insolvency Regulation

Discretionary powers derived from legislation

o Unilateral statutory regulation

o USA and Germany

– Direct application without court’s discretion?

Pragmatic approaches and solutions:

Discretion of courts:

– See SA, (UK)

– Comity

Determinants:

– Type of assets

• Location

– The court first issuing the order

• Adhere: universalism or territorialism?

Treaty: (See Wessels and Boon for Examples)

– Bilateral

– Multi national: Latin America, the 1889 and 1940 Montevideo Conventions and the 1928

Bustamante Code; Nordic Bankruptcy Convention

– Benefits:

• Conventional way to set uniform approach

• Even out procedure and minimise exceptions re:

• Priorities

• Avoidance rules

• Revenue claims

• Classes of creditors

• Asset recovery

– NB: Important UNCITRAL instruments

Need for universal rules:

Omar:

– Cross-border insolvency issues will not be resolved by leaving it to individual States.

We need coordination on an international level;

– Features pertaining to corporate rehabilitation and international considerations;

– Informal corporate workouts and restructuring, and

– Implementation of the insolvency system (institutional and regulatory systems).

NOTE: SEPARATE LECTURES ON UNCITRAL MODEL LAW, EU, USA AND ENGLAND

AND WALES TO FOLLOW DURING COURSE – HENCE ONLY A BROAD SUMMARY

OF VERY BASIC PRINCIPLES:

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UNCITRAL Model Law: Soft law (Study Guide pp 60-63; Wessels and Boon at doc no 8)

– See Annexure D.5. to the Study Notes – re countries who have adopted Model Law.

– Model law: Does not attempt to harmonise local insolvency law but:

• Recognise foreign proceedings;

• Coordination of proceedings;

• Rights of Foreign debtors;

• Rights and duties of foreign representatives;

• Cooperation.

– Foreign main: COMI - automatic stay etc

– Foreign non-main: Establishment - apply for certain forms of relief

– Creditor protection and “hotchpot” rule.

– Treaty and Public Policy.

EU Insolvency Regulation (Study Guide pp 60-63; Wessels and Boon at doc no 45)

Current EU Insolvency Regulation:

• Uniform jurisdictional rules to be applied by all MS (except Denmark)

• COMI:

• Rebuttable Presumption where registered office is:

• EUROFOOD rebut, factors objective and ascertainable by third parties to

establish that situation is actually different.

• COMI shopping: England, Ireland – 12 months and 12 year before discharge.

• Law reform

• Choice of law provisions

• Apply to collective proceedings not rescue or groups

• Law reform

• Recognition of the proceedings and the liquidator

• Addressing concerns of creditors (exceptions)

• Choice of law provisions

• Conflict of law rules – standardised - Predictability

• Only MS’s (but where COMI is) inter se

• Basic rule: Lex concursus (LC) will apply to MP and SP’s:

• Assets, contracts, avoidance, administration, distribution and closure

• In principle avoidance rules of LC but exceptions:

• (1) the action in question is subject to another state’s law (lex causae), and

• (2) that law does not allow such impeachment.

• A number of exceptions (lex loci)

– Third party’s rights in rem

– Set-offs – cross-claims

– Reservation of title (sales contract)

– Contracts relating to immovable property

– Payment systems and financial markets

– Contracts of employment

• England: EU Reg takes precedence over adopted UNCITRAL Model Law.

• Reform:

– COMI;

– Extending to rescue and groups;

– EU wide system of web –based insolvency registers;

– Possibility of avoiding multiple proceedings.

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Revised EU Insolvency Regulation: 2015 to address::

Wessels and Boon state at 86:

- “The [current] EIR excludes pre-insolvency proceedings, hybrid proceedings, and certain

personal insolvency proceedings;

- Application of the COMI principle has led to some difficulties as well as to allow forum

shopping by relocating COMI;

- Opening of secondary proceedings has shown to disturb efficient administration of the

debtor’s assets;

- There is currently no obligation to publicise the opening of proceedings, for lodging of claims

creditors need to be aware of an insolvency proceeding; and

- The EIR does not deal with the insolvency of groups of companies.”

Note also:

• ALI’s Guidelines Court to Court Communications (2012)

• UNCITRAL Model Law on Cross-Border Insolvency: the judicial perspective (2013)

• CLOUT case law on UNCITRAL Texts

• UNCITRAL Practice Guide on Cross-Border Insolvency Cooperation (2009)

• CoCo guidelines.

6 Summary of Various International instruments

International/ global/ regional Instruments

Wessels and Boon para 1 – 134 [See summary in Study notes pp Annexures, pp 61 et seq]

• These instruments cover:

– Cross-border aspects

– Establishing international guidelines for local insolvency reform (harmonisation)

– Related topics, like securities (general law)

SECTION C: THE HARMONISATION OF NATIONAL INSOLVENCY LAW AND ITS USE

IN INTERNATIONAL INSOLVENCY LAW: Read Study Notes pp 48- 54

Outcomes of Study Unit C:

After completion of Study Unit C you must have a good knowledge of:

• Need to harmonise/ converge?

• Principles to harmonise national insolvency laws.

• Difficult areas for harmonisation, like:

• voidable dispositions;

• labour contracts; Special cases: i.e. labour contracts? [UIG 70]

• priorities;

• Types of claims [UIG 251]

-Secured (securities)

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-Priorities [UIG 266]

• Administrative/ regulatory frameworks

How far will we come with cross border rules if we don’t harmonise national insolvency and

related laws?]

7. Background to Section C – difficulties relating to and initiative re CBI:

Some problems re CBI

• No global parliament or court

• National laws differ: both insolvency and general

• Terminology

• Initiatives to harmonise: summary

• World Bank Principles

• IMF principles

• OECD

– Various regional initiatives: EU, ABD, IBA, ERBD, OHADA

– UNCITRAL Guidelines 2004

• Comprehensive addressing basically all core aspects

• Related initiatives: securities

– Regional: EU, ADB

– UNCITRAL: Securities

• Harmonise: PIL principles

– Hard law

– Soft law

– Mere guidelines

• Draft ALI principles

The way forward with cross-border rules?:

• UNCITRAL Model CBI Act

• EU Regulation and 2015 amendment/ revision

• Still need for treaties?

• Fletcher –data?

• Omar: :Little will happen if left to countries

• Approach of/ by courts

8. Issues for discussion:

– Labour contracts

– Avoidance provisions

– Priorities

– Real rights and securities (English floating charge)

– Groups and financial institutions

– Regulation of insolvency

– Insolvency/ estate representatives

– Comi

– Other

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9. Next evolutionary step in EU?:

EU – 12 March 2014 Recommendation: New Approach to Business Failure: harmonise EU

members’ laws

– Flexibility in procedures and limiting costs;

– Commence early on with objective to prevent insolvency;

– Limited court involvement;

– Appointment of mediator or supervisor by court rather case-by-case than compulsory;

– Right to ask temporary stay, not interfere performance of contracts: four months;

– Restructuring plan;

– New financing: as agreed by plan, contracts not void or voidable

– Limited discharge for honest entrepreneurs.

EU: Convergence of insolvency laws (Working group):

“The Working Group developed 14 Principles that deal with the following topics:

1. Insolvency Proceedings

2. Institutions and Participants

3. Effects of the Opening of the Proceeding

4. Management of the Assets

5. Obligations Incurred by, and Fees of, the Administrator

6. Treatment of Contracts

7. Position of Employees

8. Reversal of Juridical Acts

9. Security Rights and Set-Off

10. Submission and Admission of Insolvency Claims

11. Reorganisation

12. Liquidation

13. Closure of the Proceeding

14. Debtor in Possession”

SECTION D: PRINCIPLES RELATING TO THE QUALIFICATIONS OF ESTATE

REPRESENTATIVES [Read study notes pp 55 - 60]

After completion of this section you must know the basics of the following aspects:

• Appointment and qualifications

• Regulation

• Remuneration

10. Regulation of insolvency representatives

• EBRD Principles:

– P 1 – Qualifications & licensing generally

– P 2 – Appointment in an insolvency case

– P 3 – Review of office holder appointment

– P 4 – Removal, resignation & death office holder

– P 5 – Replacement of office holder

– P 6 – Standards professional conduct

– P 7 – Reporting and supervision

– P 8 – Regulatory and disciplinary

– P 9 – Remuneration and expenses

– P 10 – Release of office holder

– P 11 – Insurance and bonding

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– P 12 – Code of ethics

• World Bank Principles:

• UNCITRAL LGIL (2004) [Part 2, chap. III, paras. 35 -74.]

Wessels and Boon at 104:

“Structure of the Draft Statement of Principles and Guidelines for IOHs

• The framework developed in Report I and tested in Report II proposed four categories:

• 1. IOH Selection and Appointment

• 2. Professional Standards

• 3. Roles and Responsibilities

• 4. Insolvency Governance

The analysis on the presence of rules on these four categories resulted into room for seven

Principles and 33 Guidelines. The Guidelines are related to one of the Principles and provide for

further practical guidance.

• Principle 1 Definition of an IOH (three related Guidelines)

• Principle 2 Professional Standards (four related Guidelines)

• Principle 3 Ethical Standards (two related Guidelines)

• Principle 4 Administration (five related Guidelines)

• Principle 5 Communication (eight related Guidelines)

• Principle 6 Coordination and Cooperation (four related Guidelines)

• Principle 7 Insolvency Governance (seven related Guidelines”

SECTION E: INTERNATIONAL INSTRUMENTS: ANNEXURES A TO E OF STUDY

NOTES [Study Notes pp 61 et seq]

11. PLEASE NOTE: NOT FOR STUDY PURPOSES FOR THIS SESSION AS SUCH:

• Wessels and Boon Chapter 1: Commentary on international instruments, either directly

relating to cross-border insolvency or related issues:

Index (Wessels and Boon)

International Instruments and Commentary

“Global

The World Bank

• 1. The World Bank – The World Bank Principles for Effective Insolvency and Creditor

Rights Systems (Revised 2011), 2011

Institut International pour l’Unification de Droit Privé (‘UNIDROIT’)

• 2. UNIDROIT – Convention on International Financial Leasing, 1988

• 3. UNIDROIT – Convention on International Interests in Mobile Equipment, 2001

• 4. UNIDROIT – Protocol to the Convention on International Interests in Mobile Equipment

on Matters Specific to Aircraft Equipment, 2001

• 5. UNIDROIT and OTIF – Luxembourg Protocol to the Convention on International

Interests in Mobile Equipment on Matters Specific to Railway Rolling Stock, 2007

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• 6. UNIDROIT – Protocol to the Convention on International Interests in Mobile Equipment

on Matters Specific to Space Assets, 2012

• 7. UNIDROIT – Principles on the Operation of Close-Out Netting Provisions, 2013

United Nations Commission on International Trade Law (‘UNCITRAL’)

• 8. UNCITRAL – UNCITRAL Model Law on Cross-Border Insolvency with Guide to

Enactment and Interpretation, 1997 (revised Guide to Enactment and Interpretation, 2013)

• 9. UNCITRAL – UNCITRAL Legislative Guide on Insolvency Law, 2004

• 10. UNCITRAL – UNCITRAL Legislative Guide on Secured Transactions, 2007 (and

Supplement on Security Rights in Intellectual Property, 2010)

• 11. UNCITRAL – UNCITRAL Practice Guide on Cross-Border Insolvency Cooperation,

2009

• 12. UNCITRAL – UNCITRAL Legislative Guide on Insolvency Law, Part Three:

Treatment of Enterprise Groups in Insolvency, 2010

• 13. UNCITRAL – UNCITRAL Legislative Guide on Insolvency Law, Part Four: Directors’

Obligations in the Period Approaching Insolvency, 2013

• 14. UNCITRAL – UNCITRAL Model Law on Cross-Border Insolvency: The Judicial

Perspective, 2013

Other

• 15. International Bar Association – Model International Insolvency Cooperation Act, 1989

• 16. International Bar Association – Cross-Border Insolvency Concordat, 1995

• 17. G22 – Key Principles and Features of Effective Insolvency Regimes, 1998

• 18. INSOL International – Statement of Principles for a Global Approach to Multi-Creditor

Workouts, 2000

• 19. United Nations – Conventions on the Assignment of Receivables in International Trade,

2001

• 20. AIPPI – Resolution Question 190, Contracts Regarding Intellectual Property Rights

(Assignments and Licenses) and Third Parties, 2006

• 21. American Law Institute and International Insolvency Institute – Transnational

Insolvency: Global Principles for Cooperation in International Insolvency Cases, 2012

• 22. International Insolvency Institute – Guidelines for Coordination of Multinational

Enterprise Groups, New York, 2013

• 23. AIPPI – Resolution Question 241, IP Licensing and Insolvency, 2014

Regional Africa

• 24. Organization for the Harmonization of Business Law in Africa (OHADA) – Uniform

Act Organising Collective Proceedings for Wiping Off Debts, 1999

Asia

• 25. Asian Development Bank – Good Practice Standards for Insolvency Law, 2000

• 26. Asian Development Bank – Promoting Regional Cooperation in the Development of

Insolvency Law Reform, 2008

• 27. Asian Bankers Association – Asia-Pacific Informal Workout Guidelines for Promoting

Corporate Restructuring in the Region and Model Agreement to Promote Corporate

Restructuring: A Model Adaptable for Use Regionally, by a Jurisdiction, or for a Particular

Debtor, 2013

Europe

European Bank for Reconstruction and Development (‘EBRD’)

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• 28. EBRD – Model Law on Secured Transactions, 1994

• 29. EBRD – Core Principles for a Secured Transactions Law, 1997

• 30. EBRD – Core Principles for an Insolvency Law Regime, 2004

• 31. EBRD – Insolvency Office Holders Principles, 2007

• 32. EBRD – Core Principles for a Mortgage Law, 2008

European Union

• 33. Council of the European Union – Council Directive 90/314/EEC of 13 June 1990 on

package travel, package holidays and package tours, 1990

• 34. Council of the European Union – Convention on Cross-Border Insolvency, 1995

• 35. Council of the European Union – Council Regulation (EC) No 1346/2000 of 29 May

2000 on insolvency proceedings, 2000

• 36. European Commission – Commission Recommendation of 12.3.2014 on a new approach

to business failure and insolvency law, C(2014) 1500 final, 2014

• 37. Council of the European Union – Position of the Council at first reading with a view to

the adoption of a Regulation of the European Parliament and the Council on insolvency

proceedings (recast) – Adopted by the Council on 12 March 2015, 2015

Other

• 38. Nordic Bankruptcy Convention, 1933 (latest revision of 1982)

• 39. Council of Europe – European Convention on Certain International Aspects of

Bankruptcy, 1990

• 40. Virgós & Schmit – Report on the Convention on Insolvency Proceedings, 1996

• 41. International Working Group on European Insolvency Law – Principles of European

Insolvency Law, 2003

• 42. European Communication and Cooperation Guidelines for Cross-Border Insolvency,

2007

• 43. EU Cross-Border Insolvency Court-to-Court Cooperation Principles, 2014

• 44. INSOL Europe – Draft Statement of Principles and Guidelines for Insolvency Office

Holders in Europe, 2014

Latin America

• 45. Montevideo Treaty on International Commercial Law, 1889

• 46. Havana Convention on Private International Law, 1928

• 47. Montevideo Treaty on International Commercial Terrestrial Law, 1940

• 48. Montevideo Treaty on International Procedural Law, 1940

North America

• 49. American Law Institute – Transnational Insolvency: Cooperation Among the NAFTA

Countries: Principles of Cooperation Among the NAFTA Countries, 2000

• 50. American Law Institute and the International Insolvency Institute – Guidelines

Applicable to Court-to-Court Communications in Cross-Border Cases, 2001”