“The absence of an international forum dealing with the resolution of sovereign debt problems has led to decisions being made across a wide range of institutional settings at the local level and at the expense of global coherence.”
One of the most pressing current issues facing the international restructuring community is community itself.
Since the arrival of the UNCITRAL model law on cross-border insolvency in 1997, the possibility of cohesive insolvency regulations across different jurisdictions has gone from a small, academic discussion to become a major area of study – one that has gathered considerable momentum in the past few years.
In 2013, UNCITRAL’s Working Group V (which focuses on insolvency) approved the creation of an ad hoc group to discuss and make preliminary recommendations for a UN convention on international insolvency law, which would move beyond mere model law to create a reciprocally enforceable framework of rules. The move came in response to a perceived lack of coordination and consistency in the administration of cross-border insolvencies, and followed a period of study by the group on the insolvency of large and complex financial institutions in the wake of the 2008 financial crises.
The same uncertainties have been addressed in the EU by the recast European Insolvency Regulation (EIR), adopted by the European Parliament in May 2015, which aims, among other things, to make cross-border insolvencies more efficient and effective.
Around the same time, the UN Conference on Trade and Development (UNCTAD) published its Roadmap and Guide to Sovereign Debt Workouts, which included a list of key problems with current practice. That list opened by saying, “The absence of an international forum dealing with the resolution of sovereign debt problems has led to decisions being made across a wide range of institutional settings at the local level and at the expense of global coherence.”
The appetite for change among these official bodies is supported, if not prompted, by insolvency law’s grassroots – the lawyers themselves. The developments at UNCITRAL, UNCTAD and the EIR have all been buoyed by taskforces and advisory committees formed of members of the IBA’s insolvency section, and have formed the basis for panel discussions and papers by members of that organisation and many others.
As the ongoing international fallout from the Lehman Brothers collapse attests, the risk to creditors in the event of insolvency and restructuring is multiplied when companies and banks are incorporated, conduct their business, hold their assets and access capital in a variety of different jurisdictions. When government finances falter – as they have in Argentina, Greece and elsewhere – the effects reach even further, affecting investors, other nations, currency valuations and private citizens.
As these few examples indicate, the internationalisation of insolvency cases and the measures legislators are taking to mitigate their fallout is an important trend and one that will form the editorial focus of Who’s Who Legal’s new sister publication Global Restructuring Review, which launches in March 2016. For now, GRR offers a brief overview of the recent steps taken on the road to harmonisation of insolvency regulations across borders. More coverage will surely follow in the coming year.
According to Duane Morris’s Patrick Rona, co-chair of the IBA insolvency section’s legislation and policy subcommittee, one reason UNCITRAL’s 1997 model law didn’t catch on is because it lacked any promise of reciprocity between adopting states.
“Nations hesitate to modify legal rules, cede jurisdiction or grant privileges in a manner, or to an extent, that might not be reciprocated by other nations,” he writes in the section’s magazine from September 2015. “An Insolvency Convention binding and effective only between contracting states would address that objection,” he writes.
Speaking at the IBA’s annual conference in Vienna last year, Rona admitted that this concept of community trust is a “leap of faith”, but noted that with the ability of parties to rely on the courts and the appeals process to answer whether the proper rules have been applied, mistakes can be worked out.
Having accepted this, the route to the drafting of a binding convention hasn’t been plain sailing.
Working Group V, for instance, spent time considering and eventually rejected so-called “synthetic” insolvency proceedings, which had enjoyed some success in the EU.
These proposed to allow corporate group members of various nations to bypass their national courts and file in a foreign state where one centralised court decision could be made to filter down for enforcement elsewhere in the world where group members had interests. The centralised court, in such cases, would be made to apply the national laws applicable to each group member, effectively conducting foreign law proceedings “synthetically”.
Most delegations viewed this as not workable, and suggested that a more realistic step might be to create a framework to allow group members’ courts to cooperate across borders, with one acting as a “group coordinator”. While this approach would present its own challenges – including limiting judges’ discretion – experts suggest it might allow the necessary community trust for the success of cross-border cooperation to develop organically over time.
The EIR recast also includes the concept of group coordination, however, this was only added after the Commission’s initial proposal was ruled out.
As Jessica Schmidt of Bayern University notes, it had wanted to achieve coordination only via extensive mutual participation rights of the insolvency practitioners of the individual group companies, but this approach immediately met with criticism: “On the one hand it was widely perceived to be too cautious and not far-reaching enough, on the other hand there were concerns that it would have led to severe difficulties and frictions and ultimately even a mutual logjam of proceedings,” she writes in the autumn edition of INSOL Europe’s eurofenix journal.
Germany successfully lobbied the European Parliament to introduce the group coordination concept to the EIR, but its adoption is still a topic for debate.
The European Commission’s Ondrej Vondracek, speaking at the IBA conference, said “the entity-by-entity approach in group proceedings is still very much entrenched in member states.” But he suggested a more universalist approach could be achieved, first by potentially tying a company’s centre of main interest (COMI) to the same jurisdiction as its headquarters in order to avoid secondary proceedings, and second by taking a leaf from UNCITRAL and encouraging cooperation between administrators in cases of group insolvency.
Schmidt too says it remains to be seen whether the system will work in practice: “The EIR recast can be perceived as a large-scale ‘field-trial’ in this respect,” she writes. “Yet, given the almost endless variety of group structures, it may ultimately depend on the individual group which one of the (‘new’ or ‘old’) options is ‘the best’”.
The complexity of some corporate structures, while effectively providing an argument in favour of harmonisation on the one hand, can complicate the process further. When it is difficult untangle group structures and establish COMI, it is equally difficult to decide which of the host of ongoing court cases it is engaged in should be considered the “lead” proceeding.
Even when this lead proceeding is decided in principle, under the EIR recast courts and trustees in other jurisdictions must necessarily cede control, with at least two-thirds of all appointed trustees agreeing that the suggested lead court is the most appropriate to take on that role.
Ahead of its 48th session (two weeks away at the time of this writing) Working Group V set out eight key principles for facilitating the cross-border insolvency of multinational enterprise groups, which explicitly put forward the possibility of adopting similar measures to the EIR recast as one of several ways of achieving “the desired level of coordination”. The session will also consider the development of a model law to provide for the recognition and enforcement of foreign insolvency-related judgments.
On the sovereign debt side, UNCTAD’s April 2015 Roadmap and Guide says the “fragmentation and lack of coordination” among the international community on this issue “heightens the possibilities of bad faith conduct on the part of some creditors”, as well as sometimes allowing states to delay the decision to restructure their debt.
A single, comprehensive debt workout mechanism would provide the means for effective creditor coordination, the paper states, without which it is “likely that more creditors will systematically buy distressed sovereign debt at a discount and engage in litigation in order to collect the full nominal value of the debt.”
Argentina, which has been subject to numerous lawsuits brought by funds that purchased the country’s distressed debt following its 2001 default, recently became the first country to pass a law adopting the UN’s new Basic Principles on Sovereign Debt Restructuring Processes, which were approved as a non-binding resolution in September.
The resolution sets out basic principles that should apply to sovereign debt restructuring processes, including the right of sovereign states to restructure their debt without being “frustrated or impeded by any abusive measures”, and the recognition that restructuring by qualified majority should not be prejudiced by the wishes of other states or minority creditors.
Other principles in between mandate good faith, transparency, impartiality and equitable treatment in the way the sovereign approaches its creditors and vice versa. One of the most prescriptive of the principles gives states the right to sovereign immunity from jurisdiction and execution regarding sovereign debt restructurings before foreign domestic courts. The principle emphasises that any exceptions to this rule should be interpreted restrictively.
The UNCTAD guide also urges states to recognise that debt workouts “often come too late as a result of a lack of creditor coordination, or because governments of debtor states wish to avoid a process that is politically costly to them”.
The guide (which, it must be added, goes much further than this introduction has space to analyse in full) is ultimately designed to contain the key elements that could be used to set up an institutional solution to facilitate debt workouts, and suggests that states and international organisations consider establishing a “Debt Workout Institution” in line with UNCTAD’s sovereign debt workout principles of legitimacy, impartiality, transparency, good faith and sustainability. Establishing a legal basis for such an institution meanwhile could be achieved by a treaty-based international organisation, a subsidiary body of the UN General Assembly or an independent institution, but as the guide notes “the more effective an option, the more difficult its establishment.”
International conventions and regulations take years to prepare and can take decades to become adopted. One speaker at the IBA conference noted that UNCITRAL can boast of huge success stories – like its international arbitration rules – but that some other mechanisms only have a handful of ratifications. “We have to look at the process by which treaties are passed,” he said. “Where is the demand among governments and end users of the treaties, and who is the relevant stakeholder?”
One way these and other hurdles are cleared, he said, is through the collaboration of “an epistemic community of like-minded people working on a set of issues”. This sounds, as much as anything, like the type of community GRR is hoping to contribute to, alongside no doubt many of the practitioners listed in this guide. We look forward to it keenly.
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