EXPLANATORY MEMORANDUM TO
THE CROSS-BORDER INSOLVENCY REGULATIONS 2006
2006 No. 1030
1. This explanatory memorandum has been prepared by the Department of Trade and
Industry and is laid before Parliament by Command of Her Majesty.
This memorandum contains information for the Joint Committee on Statutory
Instruments.
2. Description
2.1 Recognising that disparities in national laws governing international trade created
obstacles to the free flow of trade, the UN General Assembly established the United
Nations Commission on International Trade Law ("UNCITRAL") and regarded the
Commission as a vehicle by which the UN could play a more active role in reducing or
removing these obstacles. A project to produce a Model Law on cross-border
insolvency was initiated by UNCITRAL and in the early 1990s two international
colloquiums were held to discuss whether that body should facilitate the development
of a legal instrument providing a framework, which would encompass judicial
cooperation, court access for foreign insolvency administrators and recognition of
foreign insolvency proceedings. In 1995 a working group was established and in
1997, as a result of their work, UNCITRAL adopted the text of a model law designed
to assist States to equip their insolvency laws with a modern, harmonised and fair
framework to address more effectively instances of cross-border insolvency. The
model law is intended to cover cases, for example, where the debtor has assets in more
than one State or where some of the creditors of the debtor are not from the State
where the insolvency proceeding is taking place.
2.2 This instrument gives effect to the model law in Great Britain.
3. Matters of special interest to the Joint Committee on Statutory Instruments
None
4. Legislative Background
4.1. The Regulations are made under section 14 of the Insolvency Act 2000 (c.39).
Section 14 allows the Secretary of State by regulations to make any provision, which
he considers necessary or expedient for the purpose of giving effect, with or without
modifications, to the UNCITRAL model law on cross-border insolvency. This is the
first use of the power in section 14 to give effect to the model law in Great Britain.
4.2. The Regulations are subject to the affirmative resolution procedure and making the
Regulations requires the agreement of the Lord Chancellor insofar as they extend to
England and Wales and of the Scottish Ministers insofar as they extend to Scotland.
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5. Extent
This instrument applies to Great Britain. The instrument will not apply to Northern
Ireland.
6. European Convention on Human Rights
Gerry Sutcliffe MP, Parliamentary Under Secretary of State for Employment Relations
and Consumer Affairs, Department of Trade and Industry has made the following
statement regarding Human Rights:
In my view the provisions of the Cross-border Insolvency Regulations 2006 are
compatible with the Convention rights.
7. Policy background
Introduction
7.1. National insolvency laws are often not designed to cope with cross-border insolvencies
and any problems that arise whether jurisdictional or practical. This makes it difficult to
administer such insolvencies both quickly and effectively and any conflict in respective
national laws can result in the dissipation of assets and the loss of a potential opportunity
to rescue a viable business. Such uncertainties can be a barrier to trade and can have a
negative impact on the flow of investment between countries. The UNCITRAL Model
Law on cross-border insolvency is that body's attempt to promote modern and fair
legislation for cases where the insolvent debtor has assets in more than one State. The
Model Law is, however, designed to respect the differences amongst national procedural
laws and does not attempt a substantive unification of insolvency laws.
7.2. The British Government has a commitment to the promotion of a rescue culture and
supports the Model Law as an appropriate legislative tool to support this objective on the
wider international stage. In addition, implementation of the Model Law will be
beneficial in serving the cause of fairness towards creditors who may be located
anywhere in the world. We hope that it may also provide an example to other countries
of our readiness to engage in a genuine process of co-operation in international
insolvency matters and that our actions will encourage other countries to implement the
Model Law. In this way, insolvency officeholders in Great Britain should be able to
enjoy, progressively, the same benefits abroad as their international counterparts, and be
able to reduce administrative costs incurred in recovering assets from overseas. As a
result funds available for distribution to creditors, wherever they are located, should
increase.
7.3. Limitations on cooperation and coordination between different national jurisdictions can
be the result of lack of a legislative framework or from uncertainty regarding the scope of
the existing legislative authority, for pursuing cooperation with foreign courts. The
passage of a specific legislative framework is useful for promoting international
cooperation in cross border cases. The Model Law fills the gap found in many national
laws by expressly empowering courts to extend cooperation in the areas covered by the
Model Law.
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7.4. In May 2002, the European Union adopted its own Regulation on insolvency
proceedings. There is a significant element of overlap between the UNCITRAL Model
Law and the EC Insolvency Regulation and although the latter governs only the
coordination of insolvency proceedings within the European Union, its underlying
principles and approaches have been extremely influential in the international
community. However the Regulation does not deal with cross-border insolvency matters
extending beyond Member States of the European Union. Thus, the Model Law will
provide a complementary regime of considerable practical value that will be capable of
addressing instances of cross-border insolvency and cooperation outside the European
Union. This will place Great Britain, by virtue of the operation of s426 of the Insolvency
Act 1986, in the unique position of having a suite of statutory procedures available in
cross-border insolvency cases, as well as the flexibility of common law.
Key provisions of the Model Law
7.5. Some of the key aims of the Model Law as set out in the Regulations and the way it will
operate are summarised below.
7.6. An important objective of the Model Law is to provide direct access for the person
administering a foreign insolvency proceeding (the foreign representative) to the courts
of this country to seek a temporary respite and to allow the courts to determine what
relief or coordination is needed for the optimal disposition of the insolvency.
7.7. The foreign representative is given the right to initiate an insolvency proceeding in this
country in relation to the debtor who is the subject of the foreign proceeding and the right
to participate in a British insolvency proceeding regarding that debtor.
7.8. The Model Law establishes criteria for determining whether a foreign proceeding is to be
recognised and if so whether as a "main" or "non-main" (depending on whether the
foreign proceeding is taking place in the country where the main operations of the
business are located).
7.9. The Model Law sets out the effects of recognition and the relief available to a foreign
representative. The relief accorded upon recognition of a foreign main proceeding
includes a stay of actions by individual creditors and of enforcement proceedings against
the debtor and a suspension of the debtor's right to dispose of or encumber assets. This
moratorium (which is automatically triggered by the recognition of a foreign main
proceeding) provides a respite until appropriate measures can be put in place for the
reorganisation or liquidation of the debtor's assets. Exceptions and limitations to the
moratorium will be the same as if the debtor had been wound up or made bankrupt under
British insolvency law.
7.10. Following comments from respondents to our consultation, we have clarified that the
stay and suspension does not affect specified security rights or the exercise of set-off
rights which will be exercisable in the same way as they would in a British winding up or
bankruptcy. This is intended to give protection to secured creditors and enable them to
have greater predictability as to the likely outcome in a cross-border insolvency.
7.11. The Model Law also provides for the court to grant discretionary relief for the benefit
of any recognised foreign proceeding, whether main or non-main. Such discretionary
relief may consist of access to information concerning the assets of the debtor, appointing
a person to administer all or part of those assets and any other relief that may be available
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under British insolvency law (including the kind of moratorium imposed in a British
administration). Urgently needed relief may be granted by the court on an interim basis
pending a decision on formal recognition.
7.12. The Model Law contains provisions to protect the interests of local creditors
(including secured creditors), the debtor and other affected persons. In particular, the
court cannot grant discretionary relief without being satisfied that the interests of such
persons are adequately protected. The court may subject the relief it grants to conditions
and may modify or terminate the relief granted if so requested by a person affected by
such a provision.
7.13. Recognition of foreign proceedings does not prevent local creditors from initiating or
continuing with insolvency proceedings in this country in relation to the debtor.
7.14. The Model Law also aims to provide a transparent regime for the right of foreign
creditors to commence and participate in an insolvency proceeding in this country.
7.15. A further key aim of the Model Law is to provide a legislative framework for
cooperation and coordination between courts and insolvency officeholders in different
States. Accordingly the Model Law expressly provides for the British courts to have the
power to cooperate to the maximum extent possible with foreign courts or foreign
representatives in the areas covered by the Model Law. In addition, a duty to cooperate is
placed on British insolvency officeholders (to the extent it does not conflict with their
duties under British insolvency law).
7.16. Furthermore, the Model Law provides for the coordination of a British insolvency
proceeding and a foreign proceeding concerning the same debtor and facilitates
coordination between two or more foreign proceedings concerning the same debtor. This
is intended to foster coordinated decisions that would best achieve the objectives of both
proceedings.
7.17. Finally, the Model Law expressly authorises British courts and insolvency
officeholders to seek assistance from foreign courts and foreign representatives.
Our approach to enactment
7.18. The Model Law is a legislative text that is recommended to countries for incorporation
into their national law. In Great Britain, we have tried follow UNCITRAĽs exhortation
to stay as close as possible to the original drafting in order to ensure consistency,
certainty and harmonisation with other countries enacting the Model Law.
7.19. The language of the Model Law is similar to that used in international treaties and
conventions and will almost certainly be approached by the courts in that way, i.e. it will
be interpreted purposively. Accordingly the UNCITRAL Guide to Enactment will be a
useful tool in interpreting the text.
7.20. Following consultation with the Treasury and in view of the extensive EC legislation
regarding the winding up and reorganisation of credit institutions and insurance
companies, it was decided to exclude these bodies from the ambit of the Regulations.
However, a number of respondents to the consultation have asked that they be included
and after further consultation with the Treasury we have agreed that there could be
benefits in doing so. However, the interaction between the Model Law and the relevant
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EC legislation needs to be dealt with correctly. As the drafting of these provisions will
take time, we have decided not to include them within the Model Law for the time being,
but will consider their inclusion as soon as it is practicable and possible.
Scotland
7.21. The Regulations will apply to Scotland and accordingly they require the consent of the
Scottish Ministers. In Scotland, the Regulations will be supplemented by Rules of Court
both in the Court of Session and the sheriff court. These Rules are the responsibility of
the Lord President of the Court of Session and are being developed separately, with a
view to implementation to coincide with the commencement date for the Regulations.
Consultation
7.22. The Insolvency Service have engaged in discussion and exchange with other
government departments, representative organisations and other interested parties, with
regard to the implementation of the UNCITRAL Model Law on cross-border insolvency
in Great Britain. This has included:-
22nd
August 2005 ­ A public consultation on the Insolvency Service's proposals to
implement the UNCITRAL Model Law on Cross-Border Insolvency in Great Britain
October 2005 ­ Meeting with the Department for Constitutional Affairs and senior
members of the Judiciary to hear their views about the implementation of the Model Law.
October/November 2005 ­ Meetings with the Insolvency Lawyers Association (ILA) - a
representative of the Insolvency Service attended all the meetings held by the ILA in
considering the consultation document.
January 2006 ­ Meeting with The Law Society to discuss their concerns about the
implementation of the Model Law.
7.23. The consultation paper was sent to approximately 100 individuals, organisations and
other government departments. We received 12 replies from a range of respondents,
including many representative groups. Many of the responses were well thought out and
of high quality and were overall in favour of implementing the Model Law. In the
consultation response document, we have answered the issues raised by the respondents
to the consultation, highlighting the main issues raised and detailing how we intend to
proceed taking into account comments made and other pertinent information obtained
since the commencement of the consultation.
7.24. Details of the consultation and response document can be found on The Insolvency
Service website through the following link:-
http://www.insolvency.gov.uk/insolvencyprofessionandlegislation/con_doc_register/regis
terindex.htm
8. Impact
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8.1 As the incidence of cases using the Model Law is predicted to be relatively low and any
costs and/or regulatory impact is likely to be negligible, a Regulatory Impact Assessment
has not been prepared for this instrument.
8.2 The framework should enable businesses and individuals to act with certainty by
providing a predictable low cost regime for initiating and dealing with cross-border
insolvency proceedings. The key benefits will be greater legal certainty and predictable
procedures. There have been no specific compliance cost issues identified to date and
there were no specific views raised from the consultation on this issue.
9. Contact
Any queries regarding this instrument can be addressed to Christine McCreath, Assistant
Director, Policy Unit, The Insolvency Service, Room 510, 21 Bloomsbury Street,
London, WC1B 3QW Tel: 020 7291 6858 or e-mail:
[Christine.Mccreath@insolvency.gsi.gov.uk]
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