Consultation outcome

Implementation of two UNCITRAL Model Laws on Insolvency Consultation

Updated 10 July 2023

Applies to England, Scotland and Wales

Introduction

Executive Summary

This consultation proposes the implementation into UK law of two “model laws” adopted by the United Nations Commission on International Trade Law (“UNCITRAL), further developing the international framework for the management of cross-border insolvencies. By being amongst the first countries to consider their implementation, the UK will signal its ongoing commitment to mutual cooperation and international best practice.

The Model Law on Recognition and Enforcement of Insolvency-Related Judgments deals with cross-border recognition of judgments that are associated with insolvency proceedings. The Model Law on Enterprise Group Insolvency provides tools to manage and coordinate insolvencies within corporate groups, while respecting that each company within the group remains a separate legal entity. These two model laws would join and complement the Model Law on Cross-Border Insolvency, which provides a grounding framework for international cooperation in respect of insolvency proceedings, and which the UK implemented in 2006 and 2007.

Cooperation between nations on insolvency related matters is generally mutually beneficial. Avoiding unnecessary insolvency proceedings and the piecemeal destruction of viable businesses helps to preserve value throughout the insolvency, increase returns to creditors and protect employees’ jobs. International recognition of insolvency proceedings and related legal decisions makes the different national insolvency regimes accessible to business, allowing them to choose the most appropriate jurisdiction in which to restructure or liquidate based on their needs and the requirements of their creditors.

Implementation of the model laws can be achieved through a power introduced in the Private International Law (Implementation of Agreements) Act 2020. This consultation highlights one issue in particular that affects the Model Law on Recognition and Enforcement of Insolvency-Related Judgments: its interaction with the unique position that contracts governed by the law of England and Wales currently hold. We are proposing that this model law should be partially implemented, in a way that reserves that issue for future consideration. The Model Law on Enterprise Group Insolvency is proposed to be implemented in full.

Glossary

This consultation makes use of a number of uncommon abbreviations, which are introduced at various points throughout the text. For convenience these are also reproduced below:

CBIR

the Cross-Border Insolvency Regulations 2006, and the Cross-Border Insolvency Regulations (Northern Ireland) 2007, which together provide a basis for the recognition of foreign insolvency proceedings in the UK, and for assistance to be provided to foreign insolvency officeholders.

MLCBI

The UNCITRAL Model Law on Cross-Border Insolvency, which has been implemented in the UK through the CBIR.

MLEG

the UNCITRAL Model Law on Enterprise Group Insolvency.

MLIJ

the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments.

UNCITRAL

the United Nations Commission on International Trade Law.

The UNCITRAL Model Laws on Insolvency

The United Nations Commission on International Trade Law (“UNCITRAL”) was established in 1966 to “further the progressive harmonization and modernization of the law of international trade” through the development of legislative and non-legislative instruments in several key areas of commercial law. Its 60 members are drawn from the member states of the United Nations, elected for six year terms by the General Assembly, with membership allocated so as to include representation from various geographical regions and the principal economic and legal systems throughout the world. The UK is actively involved in the Commission’s work and was re-elected as a member in 2019. The Commission’s work has included insolvency law since 1995: notably publishing the UNCITRAL Model Law on Cross-Border Insolvency in 1997, as well as a legislative guide on insolvency law to assist states in implementing international best practice, initially in 2004.

The model law has been implemented in 48 states worldwide and represents a significant step forward in international cooperation on insolvency matters. It provides a template for the implementing states, with their separate legal systems, to subscribe to a common framework for the recognition and enforcement of foreign insolvency proceedings.

Where there is a foreign insolvency, this framework makes the process of handling of assets located within the implementing state more predictable for the foreign insolvency practitioner. This allows the insolvency to proceed as efficiently as possible, reducing costs and so increasing returns to creditors, and promoting trade between nations. Mutually implementing states benefit, as their insolvency professionals can cooperate in dealing with the insolvency of a cross-border or multi-national entity under a set of rules that are understood in both jurisdictions. The original Model Law was implemented in UK through the Cross-Border Insolvency Regulations 2006 (which apply to England, Wales and Scotland); and the Cross-Border Insolvency Regulations (Northern Ireland) 2007. These supplement the other means of obtaining assistance that may be available in respect of foreign insolvencies under the common law, or in England and Wales for example through court to court cooperation under section 426 of the Insolvency Act.

UNCITRAL’s work on insolvency has continued, and the Commission has recently adopted the Model Law on Recognition and Enforcement of Insolvency-Related Judgments (in 2018) and the Model Law on Enterprise Group Insolvency (in 2019). These both expand and further develop the framework provided by the original Model Law.

Recognising insolvency-related judgments

A foreign court’s involvement with insolvency proceedings does not always end with its opening of the proceedings in its jurisdiction. Further orders or judgments may be necessary in order to manage the insolvency effectively: this occurs most obviously in the event of disputed assets where the ownership or most appropriate disposal is in doubt, but could happen in relation to almost any aspect of the case.

The original Model Law on Cross-Border Insolvency did not explicitly specify the extent to which insolvency-related judgments can be recognised and enforced under its rules. As a result, how this works has depended in part on the implementing jurisdiction. In the UK for example, the Cross-Border Insolvency Regulations have been interpreted as only allowing the court to provide the relief that would be available in domestic insolvency proceedings under UK law [Pan Ocean Co Ltd – also known as Fibria Celulose S/A v Pan Ocean [2014] EWHC 2124 (Ch)]. A foreign insolvency judgment cannot currently be enforced here under the Cross-Border Insolvency Regulations; while more generally, common law holds that foreign judgments cannot be enforced in England and Wales unless the parties were present in or in some sense submitted to the foreign jurisdiction [Rubin v Eurofinance SA [2012] UKSC 46]. The ambiguity in the original Model Law leaves a gap in the coordination of international insolvency proceedings, with different countries taking different approaches as to what is acceptable, thus making the proceedings less efficient and their outcome less certain.

The UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments takes steps towards resolving this situation. It provides a stand-alone framework that, while building in the necessary safeguards against situations that would compromise public policy, allows the implementing state to recognise and enforce foreign insolvency-related judgments in a predictable way. An optional provision excludes judgments that relate to insolvency proceedings that cannot be recognised under the original Model Law: for example, if the judgment does not originate in a jurisdiction where the insolvent debtor has their centre of main interests or an establishment. This balances the efficiency of operating a single global set of insolvency proceedings against the need to ensure that those proceedings are fair and safeguard the interests of local creditors. The judgments Model Law also offers an alternative approach to the recognition of judgments for states that have already implemented the original Model Law, through the explicit clarification that it is possible for the court to recognise and enforce a judgment as part of the assistance available to foreign officeholders under that law.

Insolvency in corporate groups

The UNCITRAL Model Law on Enterprise Group Insolvency expands the system under the original Model Law on Cross-Border Insolvency to deal with situations affecting interlinked groups of enterprises. The original Model Law provides a framework for international cooperation as regards the insolvency of a single entity, and the rules provided by this new Model Law address situations where, for example, several companies share the same owners and are operated as a group, and one or more of those businesses enters insolvency.

The new Model Law aims to promote cooperation and coordination between the courts, insolvency practitioners and other bodies dealing with the insolvency of group members, with a focus on the development of group proposals that will protect, preserve, realise or enhance the overall combined value of the members.

The value of international cooperation to the UK

One of the primary drivers for the development of efficient insolvency proceedings is the preservation of economic value, and its return to the marketplace to spur further growth. In implementing any new rules in this area, it is important to consider the impact on the UK’s own commercial environment and any effect on our insolvency sector carrying out that work.

Such an economic analysis is not straightforward. Restructuring can occur within formal insolvency proceedings, which in the UK may be initiated in or out of court with varying levels of judicial oversight and publicity. As the arrangements reached between debtors and their creditors can be commercially sensitive, the detail may not always be made public. At the same time, it is possible for a company to reach an agreement with its creditors against the backdrop of the UK’s insolvency framework without entering formal insolvency. In those cases where formal insolvency proceedings are commenced, any cross-border element may not be readily apparent to an outside observer, making the capture of relevant cases for examination a difficult task in its own right. With this in mind, it is not possible to accurately measure the impact of any changes to the insolvency framework in this area in monetary terms.

There is, however, strong reason to suggest that the UK’s participation in systems of global cooperation on insolvency matters is widely beneficial, both to the UK and its international partners. Efficient insolvency proceedings mean greater returns to creditors. That strengthens economic activity, both within the UK and abroad. By removing the barriers that prevent insolvencies from being dealt with in a holistic fashion, rather than piecemeal in each jurisdiction, the value that is present in a business as a going concern can be better preserved: direct returns from insolvency are boosted, and jobs and livelihoods maintained; the economic disruption from the business failure is minimised. Cooperation between jurisdictions in this way helps to bolster international trade by setting clear expectations as to how matters will be handled in the event that one of the parties to a contract becomes insolvent.

The UK’s insolvency regime is highly respected internationally for its flexibility, efficiency and reliable outcomes, while our courts and legal and insolvency practitioners are valued for their professional expertise and experience. Global cooperation allows international businesses to choose to restructure in the UK, knowing that this will lead to the best result for their creditors, shareholders and management, with confidence that the outcome will be accepted both in their local courts and across the world. As Britain faces outward following its departure from the EU, we remain well-placed to continue to lead the way in this area.

Implementing the new model laws

Together, the two new model laws represent useful additions to the international toolbox for cooperation in respect of insolvency proceedings. By taking a place among the first countries to consider their implementation, the UK continues to signal its commitment to that cooperation and the sponsoring of international best practice.

In making the necessary choices regarding the implementation of the Model Law dealing with insolvency-related judgments, we have taken account of concerns that have been raised regarding its interaction with other UK law. These are discussed briefly below. There is a risk that the full implementation of the Model Law could have as yet unanticipated effects upon domestic contract law. We consider that we should proceed with caution in its implementation, and preserve flexibility for UK courts to choose to recognise judgments issued in foreign jurisdictions based on the full circumstances of each case.

We have therefore chosen not to implement the system of recognition provided by the full “judgments” Model Law. We instead propose to implement its “article X”. This would introduce the concept of recognition of insolvency-related judgments under the UNCITRAL Model Laws to the UK in a way that minimises the impact on our existing legal framework. In doing this we will draw upon other parts of the Model Law in order to provide guidance to the courts, detailed later in this document.

The Model Law on enterprise group insolvency provides additional options to the UK’s courts and insolvency professionals. As it does not have the same wider implications as the other new judgment Model Law, we propose to implement it in full as soon as possible.

The practical implementation of the model laws is facilitated by the powers under the Private International Law (Implementation of Agreements) Act 2020) [Section 2(13), “Implementation of other agreements on private international law”]. This allows the implementation of international model laws through secondary legislation, rather than requiring a further Act of Parliament. Subject to the outcome of this consultation, we will make use of this power to implement both “article X”of the Model Law on Recognition and Enforcement of Insolvency-Related Judgments and the Model Law on Enterprise Group Insolvency.

We have set out below details of the approach that we propose to take in implementing each of the model laws, and their impact on the UK’s existing legal framework: this consultation will help us to understand the views of the insolvency sector and others who may be affected by the change.

Impact on Devolved Administrations

Insolvency policy is devolved to Northern Ireland, which is not directly affected by the outcome of this consultation.

Insolvency law is part devolved to Scotland, and the consultation touches on a range of reserved and devolved matters. The implementing power that we expect to use requires that the Secretary of State acts with the consent of Scottish Ministers in making regulations that have effect in Scotland.

Insolvency is a reserved area of policy as regards Wales.

Notwithstanding the areas in which insolvency policy is devolved, we consider that it is important to maintain a unified approach to the recognition of foreign insolvency proceedings and judgments throughout the UK. The changes proposed in the consultation will be further discussed with the devolved administrations in Northern Ireland and Scotland in order to facilitate this.

About this Consultation

Who this is for

This consultation is intended to be read by, and seeks responses from, anyone with an interest in the UK’s adoption of the two model laws. It may be relevant to anyone affected by the UK’s recognition of foreign insolvency proceedings and related judgments; or the management of the insolvency of corporate groups.

This may include:

• Insolvency practitioners
• The legal profession
• Directors

• Creditors

• Business and consumer groups

Responses are particularly sought from individuals and organisations dealing with cross-border insolvency work.

How to respond

Responses to the consultation should be addressed to Andrew Shore at the Insolvency Service. We would encourage all responses to be sent by email rather than physical post, for the attention of Andrew Shore, to Policy.Unit@insolvency.gov.uk.

Physical written correspondence may be sent (please use the full address below):

FAO Andrew Shore, Policy

The Insolvency Service

16th Floor, 1 Westfield Avenue

London

E20 1HZ

Please include, when responding, your background or interest in this area (e.g. if you are an insolvency practitioner and/or a legal professional). If you are responding on behalf of an organisation or group, please indicate this.

Enquiries

Please address all enquiries to Andrew Shore using the above contact details.

Confidentiality and data protection

Information you provide in response to this consultation, including personal information, may be disclosed in accordance with UK legislation (the Freedom of Information Act 2000, the Data Protection Act 2018 and the Environmental Information Regulations 2004).

If you want the information that you provide to be treated as confidential please tell us, but please be aware that we cannot guarantee confidentiality in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not be regarded by us as a confidentiality request.

We will process your personal data in accordance with all applicable data protection laws. See our privacy policy.

We will summarise responses and publish this summary on GOV.UK. The summary will include a list of names of organisations that responded, but not people’s personal names, addresses or other contact details.

What happens next?

This consultation addresses the requirement for public consultation in the Private International Law (Implementation of Agreements) Act 2020, allowing regulations to implement the model laws to be brought forward under that Act. In order to maintain a unified framework within the UK, such legislation will require further discussion, agreement and coordination with the devolved administrations as highlighted above.

UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments

The Government accepts that it is not appropriate to implement the model law on insolvency-related judgments in full at the present time. Implementing “article X”, will enable the courts to recognise foreign insolvency-related judgments as relief under the UK UNCITRAL Model Law on Cross-Border Insolvency. We will provide a framework for the courts to use, in deciding whether to recognise an insolvency-related judgment in this way, that reflects elements of the full model law.

Background

The Model Law on Recognition and Enforcement of Insolvency-Related Judgments (“MLIJ”) addresses the disparity in the handling of insolvency-related judgments that arises due to the legal differences between different jurisdictions, by providing a simple, straightforward and harmonised procedure to complement and clarify the original Model Law on Cross-Border Insolvency (“MLCBI”) and assist with the conduct of cross-border insolvency proceedings. It was developed with reference to the documents published by the “Hague Conference on Private International Law”, the principal organisation that sets international best practice on the recognition of non-insolvency foreign judgments. Although the Hague Conference’s instruments exclude insolvency proceedings from their scope, maintaining a compatible approach between the two is in the interests of moving towards a consistent international framework for private international law as a whole.

The MLIJ sets out rules under which an implementing country can recognise and enforce foreign insolvency-related judgments in a predictable way. These stand alone and (aside from “article X” which is covered below), separately from the MLCBI’s own rules regarding the assistance that can be provided in respect of foreign insolvency proceedings. For the purposes of the model law, insolvency-related judgments are those judgments, issued on or after the commencement of insolvency proceedings, that arise as a consequence of, or are “materially associated” with, the proceedings. The judgment that opened the proceedings is excluded and dealt with under the MLCBI, and together the two model laws provide a comprehensive approach to the recognition and enforcement of both insolvency proceedings and subsequent related judgments.

The MLIJ aims to provide:

• A simple, clear-cut process for the recognition and enforcement of insolvency-related judgments originating from foreign jurisdictions.
• The option for the court to provide interim relief (e.g. ordering steps for the immediate protection of an asset that is affected by the foreign judgment) while it is deciding whether to recognise a judgment, preserving assets and value that might otherwise be lost.
• As much certainty as possible that insolvency-related judgments will be recognised and enforced, where they do not contravene the implementing country’s public policy, by mandating that foreign judgments will be accepted unless several specific requirements for refusal are met.
• An option to refuse recognition where the insolvency proceeding to which the judgment in question relates could not be recognised under the MLCBI.
• Severability: where only one element of a multi-part judgment can be recognised and enforced (e.g. as other parts of the judgment relate to matters that fall out of scope) that element will still be recognised and enforced in isolation from the rest of the judgment.

The MLIJ includes one provision, “article X”, that is intended to be added to the MLCBI. Article X states that the recognition of insolvency-related judgments is a form of assistance that can be granted under the MLCBI. It removes the ambiguity previously present in the MLCBI in that area, and confirms a regime for the recognition of insolvency-related judgments through the MLCBI. That system differs in some particulars from that of the “full” MLIJ. Most importantly, relief granted under the MLCBI is always at the discretion of the receiving court, in contrast to the generally mandatory recognition that the MLIJ rules impose.

In our view the differences between the full MLIJ system and the system provided by article X (when it is added to the MLCBI) require states that are considering the implementation of both model laws, and that wish to maintain a single coherent approach, to make choices between the two. These are further explored below.

Further detail regarding the MLIJ and additional resources can be obtained via the UNCITRAL page at:

https://uncitral.un.org/en/texts/insolvency/modellaw/mlij

Legal impact in the UK

The MLIJ is a free-standing model law focusing only on the recognition and enforcement of insolvency related judgments. Importantly, while it is designed to complement and clarify the MLCBI, it is not dependent on the prior or simultaneous adoption of that earlier model law.

The MLIJ has effect in two areas. Firstly, it addresses the question of whether the recognition and enforcement of an insolvency related judgment is a relief available to assist foreign insolvency representatives under (article 21 of) the MLCBI.

Article X of the MLIJ relates directly to this issue:

“Notwithstanding any prior interpretation to the contrary, the relief available under [… article 21 of the UNCITRAL Model Law on Cross-Border Insolvency] includes recognition and enforcement of a judgment.”

With this provision UNCITRAL makes clear that under the MLCBI it is envisaged that the relief available under article 21 does include the recognition and enforcement of a judgment. We expect that the effect would be to set aside the approach taken in the previous judgment of the Supreme Court in Rubin v Eurofinance in respect of the recognition of foreign insolvency-related judgments, i.e. article 21 of the MLCBI did not encompass their recognition and enforcement.

The MLIJ’s main focus though is to make specific freestanding provision for the recognition and enforcement of insolvency related judgments. It sets a framework for the recognition and enforcement of judgments and for the instances when the courts are to be able to refuse recognition and enforcement on jurisdictional or on other grounds.

Crucially it deals only with what is in effect a subset of the reliefs available under article 21 of the MLCBI (because the reliefs available are now known to include the enforcement of insolvency related judgments). In this regard there now seem to be two ways to adopt model laws relating to insolvency-related judgments, and the impact in the UK of implementation of both parts of the Model Law would be the creation of two different systems for the recognition and enforcement of insolvency-related judgments. The system described in the full MLIJ is not a straightforward duplication or restatement of the system that would be created in the MLCBI through the adoption of article X. In our view, therefore, implementing both systems would represent unnecessary and confusing duplication.

The approach adopted by article 14(g) of the MLIJ is different from that taken by the MLCBI in respect of the rules as to jurisdiction of the foreign court. Instead of requiring the debtor to have a centre of main interests or establishment in the jurisdiction of the court of the foreign judgment, the requirements are that one of four criteria are met (for example that the affected party consented, or that they submitted to the proceedings).

Under the MLIJ if a judgment is recognised it must be enforced.

As previously indicated, the MLCBI and MLIJ are designed to be free-standing. There is no “Guide to Enactment” regarding the joint enactment of these model laws together. It is clear however that states wishing to provide a unified framework for the recognition and enforcement of insolvency-related judgments will need to make certain choices.

The “Rule in Gibbs”

One consequence of implementing the full MLIJ would be to undermine the “rule in Gibbs”, which was first established in a case brought by Antony Gibbs & Sons [Antony Gibbs & Sons v La Société Industrielle et Commerciale des Métaux (1890) LR 25 QBD 399] in 1890. This long-standing caselaw in England and Wales holds that where a contract specifies that it is governed by a particular country’s law, it cannot be compromised or discharged by insolvency proceedings under a different law. As many international contracts specify the law of England and Wales as their governing law, in the eyes of the courts of England and Wales a restructuring using insolvency proceedings in a foreign jurisdiction cannot be effective against the debts owed under those contracts, unless the affected parties have taken part in the proceedings or otherwise submitted to them. Such debts remain outstanding after the foreign insolvency proceeding concludes, and can then be pursued against any assets the insolvent company or individual may hold here.

The Gibbs rule may cause particular difficulty for foreign companies that are seeking to restructure their debts in their native jurisdiction, if they also have interests in the UK and contracts governed by the law of England and Wales. This can lead to convoluted and inefficient results. In proceedings relating to the OJSC International Bank of Azerbaijan [OJSC International Bank of Azerbaijan v Sberbank of Russia [2018] EWCA Civ 2802 (also known as: Bakhshiyeva v Sberbank of Russia)], the courts of England and Wales’ refusal to stay the creditors’ rights to enforce their debts beyond the end of Azerbaijani restructuring proceedings led to those proceedings remaining open indefinitely. In some cases a separate scheme of arrangement governed by the law of England and Wales might be entered into in order to resolve the issues the rule in Gibbs creates, but with consequent duplication of effort, higher costs and reduced returns to creditors.

In many situations, knowing the law that a contract will be adjudicated under provides greater certainty of outcomes for the contracting parties, and so supports international trade. By contrast, the inefficiency of enforcing this jurisdictional rule in insolvency scenarios, over the more commonly recognised test of where the insolvent’s “centre of main interests” is located, could be considered to have the opposite effect. The approach of the law of England and Wales to this issue pre-dates modern thinking on the management of cross-border insolvencies, and its emphasis on the value of cooperation between jurisdictions for the benefit of creditors. The discrepancy has been the subject of negative commentary internationally, including from courts in Singapore [See Pacific Andes Resources Development Ltd and other matters [2016] SGHC 210] and the United States [See In Re Agrokor d.d., 591 B.R. 163 (Bankr. S.D.N.Y. 2018)], which have taken an opposite view to that of the courts of England and Wales.

Implementation of the MLIJ in full in the UK would provide foreign courts with the means to override the rule in Gibbs, through an “insolvency-related” judgment regarding the contracts governed by the law of England and Wales, provided that they are exercising their jurisdiction in a way that is compatible with the law of England and Wales and none of the other grounds for refusing recognition apply.

The addition of article X to the MLCBI clarifies the interpretation of Article 21 of that model law. However, without the implementation of the rest of the MLIJ it will not itself override the rule in Gibbs (see “Proposals”, below).

Additional impacts

The MLIJ could have further consequences that are particular to the UK’s legal system and the popular use of contracts governed by the law of England and Wales for international business, including financial contracts (such as those governing international swaps and derivatives [As of 2018 ISDA noted that “virtually all” of the ISDA master agreements entered into between counterparties based in the EU or EEA were governed by the law of England and Wales. This position may change, following the UK’s exit from the EU and ISDA’s issue of French- and Irish- law governed master agreements.]). Contracts governed by the law of England and Wales hold a unique position in their widespread international use combined with the certainty that the rule in Gibbs provides to the contracting parties.

We are not aware of any evidence to demonstrate the extent to which this certainty has played a part in the choice of the law of England and Wales for particular contracts or types of contract; nor the impact that the loss of that certainty might have.. Although the rule in Gibbs was effectively negated as regards European restructurings by the EU’s Insolvency Regulation and remains subject to reinterpretation and review by the courts as the caselaw develops, this remains an area of concern.

The long-term economic value of the UK’s ongoing participation in international systems of cooperation in this area, and the efficient management of insolvency proceedings have to be balanced against the short-term disruption that the MLIJ would create for our insolvency sector.

There is a tension between the need to develop new ways of cooperating internationally, especially following our departure from the EU, and the need to retain as much as possible of the existing certainty in how insolvencies are managed in the current global economic climate following the pandemic. We need to strike a balance between offering some certainty to the sector whilst at the same time forging new relationships and enhancing our ability to deal with cross border insolvencies.

Proposals

The UK remains committed to the development of international cooperation in insolvency matters. However, in order to maintain some certainty, we do not consider that it would be appropriate to implement the full MLIJ at the present time.

We therefore propose to give effect to “article X” in the Cross-Border Insolvency Regulations 2006, i.e. the UK’s implementation of the MLCBI. This will enhance the UK version of the MLCBI by allowing the courts discretionary power to recognise and enforce foreign insolvency-related judgments where it is appropriate to do so.

Implementing this change will require secondary legislation, using the power contained in the Private International Law (Implementation of Agreements) Act 2020.

Article X

This provision of the MLIJ is intended to be added to the MLCBI, to create greater uniformity in interpreting the assistance that can be provided to foreign insolvency proceedings:

Article X. Recognition of an insolvency-related judgment under [the Cross-Border Insolvency Regulations 2006]

Notwithstanding any prior interpretation to the contrary, the relief available under [article 21 of schedule 1 to the Cross-Border Insolvency Regulations 2006] includes recognition and enforcement of a judgment.

Implementing article X will provide a new route for foreign insolvency-related judgments to be recognised in the UK. We expect it will set aside the ruling in Rubin v. Eurofinance to the extent that it was held that article 21 of the Cross-Border Insolvency Regulations 2006 does not extend to the recognition of a judgment, and our intention is that it should be possible for a foreign insolvency-related judgment to be recognised in the UK where this will assist foreign insolvency proceedings that have also been recognised.

Recognition of the judgment in this manner will be at the court’s discretion. In applying article X, we expect that UK courts will continue to have regard to other UK law and to apply the safeguards specified in the Cross-Border Insolvency Regulations. For this reason we do not anticipate, and it is not our intention, that the addition of article X will affect the application of the rule in Gibbs to the rights of creditors who have contracted with the insolvent under the law of England and Wales.

In order to give effect to article X in the UK, we will add a reference to it on the list of documents specified in regulation 2(2) of the Cross-Border Insolvency Regulations 2006, which implement MLCBI in Great Britain. Regulation 2(2) lists documents to which the courts in Great Britain may look in ascertaining the meaning of the MLCBI. Currently these documents are specified as the MLCBI itself, UNCITRAL documents relating to the preparation of the MLCBI, and the original Guide to Enactment from 1997.

We will also take the opportunity to update the same regulation to take account of the publication by UNCITRAL of “The Model Law on Cross-Border Insolvency with Guide to Enactment and Interpretation” (the updated Guide to Enactment of the MLCBI) in 2014. This incorporates updated guidance on the interpretation of the insolvent’s “centre of main interests” and other clarifications to the earlier guidance issued in 1999.

As well as these additions to the list of documents under regulation 2(2), we will insert a new regulation that will provide a list of discretionary, illustrative, and non-exhaustive grounds of refusal, that courts can rely on when deciding whether or not to recognise and enforce a foreign judgment under article 21 of the MLCBI. This list will build on article 14 of the MLIJ (see “Process of recognition”, below).

Process of recognition

Under the MLCBI there is an established process for the recognition and enforcement of a foreign insolvency proceeding.

An application will be made by the foreign representative; the court will consider whether interim relief to assist in managing the insolvent’s affairs is appropriate while the matter is examined

Article X stipulates that relief can include the recognition of a foreign judgment relating to the insolvency. As article X states that this relief is available under article 21 of the MLCBI, which is the provision that allows relief to be granted following the recognition of a foreign insolvency proceeding, the recognition of judgments is only explicitly available once a related insolvency proceeding has itself been recognised.

Neither the MLCBI nor article X address the question of whether a judgment should, or should not, be recognised. The approach taken in the wider MLIJ is helpful in this regard, and we therefore propose to provide a non-exhaustive list of factors that the court may take into account when deciding whether or not to recognise a judgment. These will be based primarily on article 14 of the MLIJ, which states that recognition may be refused where (in short):

• A defending party was not given sufficient notice to arrange their defence;
• The judgment was obtained by fraud;
• The judgment is inconsistent with a UK court’s judgment in respect of the same parties;
• The judgment is inconsistent with an earlier judgment in another foreign jurisdiction that would also be recognised in the UK;
• The enforcement of the judgment would interfere with the administration of the debtor’s insolvency proceedings;
• Creditors’ rights were not adequately protected; or
• The defending party did not submit to the foreign jurisdiction and the originating court did not otherwise exercise jurisdiction on a basis that is compatible with UK law.

In addition, the court will be required to have regard to public policy in the UK.

In contrast to the system contained in the full MLIJ, the court will retain its discretion as to the relief granted. The court will retain discretion to recognise a judgment even if one of the above factors applies, if that is appropriate, or to apply another relevant factor in deciding not to recognise a judgment.

Further review

In a number of areas, greater clarity may be expected in the coming years. We will continue to monitor the situation in the expectation that, in due course, , it will be right to re-examine the rule in Gibbs and its impact. We will also provide the opportunity for affected parties to assess their risk and make additional representations to us, by returning to this subject in a future call for evidence.

Questions

As explained above, we propose to:

1. Allow the recognition and enforcement of insolvency-related judgments in the UK by adding article X of the MLIJ to the list of documents in regulation 2 of the Cross-Border Insolvency Regulations 2006;
2. Provide the court with a non-prescriptive list of possible grounds for refusal to recognise and enforce an insolvency-related judgment, based primarily on article 14 of the MLIJ; and
3. Update regulation 2 of the Cross-Border Insolvency Regulations 2006 to take account of the clarifying guidance issued by UNCITRAL in 2014.

We will issue a further call for evidence on the rule in Gibbsin due course

We welcome views on the above proposals, and responses to the specific questions below.

Q1. What is your view on the proposal to partially implement the MLIJ in the UK by adopting article X?

Q2. What is your view on the proposal to provide the court with a non-exhaustive list of factors that it may take into account when deciding whether to recognise an insolvency-related judgment?

Q3. In your opinion, what approach is needed to create the legal effect we are seeking?

Q4. What is your view of updating the list of documents to which the court can refer, to take account of the guidance issued by UNCITRAL in 2014?

UNCITRAL Model Law on Enterprise Group Insolvency

The Government recognises the value of the tools provided by the enterprise group model law, and proposes to bring forward legislation to implement it.

Background

The Model Law on Enterprise Group Insolvency (“MLEG”) deals with insolvency where it affects two or more of a group of related enterprises, where the financial and business affairs of the group’s different members are interlinked. It addresses situations where the best results can be obtained by considering several members together or the group as a whole rather than the individual parts.

In the UK this might be, for example, a business that operates through a group of companies, with different parts of the corporate group being responsible for different aspects of the business. The tools offered by the MLEG complement and expand upon the rules for recognition of insolvency proceedings found in the MLCBI, although they can be applied both in an international context where the participating group members are distributed between two or more jurisdictions, and to wholly domestic groups whose participating members are all present in one country.

The MLEG aims to provide:

• A legal framework to enable cross-border cooperation to manage the insolvency of enterprise groups, providing legal authority for insolvency practitioners, judges and others to work together towards a common outcome.
• The coordination of multiple insolvency proceedings affecting different group members through the development and implementation of an appropriate group plan.
• Cross-border recognition of the group plan within each relevant jurisdiction.
• Avoidance of unnecessary insolvency proceedings through the use of legally enforceable undertakings to creditors.

The concept of the coordinating plan or “group insolvency solution” is central to the approach taken in the MLEG, and many of its provisions are intended to ensure that the group members can cooperate effectively in implementing the plan regardless of where they may be based. While this coordination will be carried out by a “group representative” who must also be authorised to represent insolvency proceedings in respect of one or more of the group members, solvent group members may take part in the plan (and in many cases their participation will be crucial to its success). Such plans are entirely voluntary in nature, with each part of the group independently choosing to be included, and do not themselves interfere with other requirements of national law.

The benefit offered by the MLEG is that the proceedings can be coordinated so as to deal with the business of the group as a whole, so producing a greater return for all of the creditors involved than if each part of the group was handled separately. This can include avoiding insolvency proceedings where practicable, and managing the interdependencies between group members to preserve the greater economic value that is present in the group as a whole.

While the plan will not itself affect the order of payment of creditors, the MLEG’s provisions that aim to avoid unnecessary insolvency proceedings allow for a limited modification to the priority of payments where that will be helpful. Those provisions allow the insolvency practitioner responsible for a main insolvency proceeding, with the court’s approval, to treat creditors according to the insolvency law of another country – making payment to them as if they had opened an additional local insolvency proceeding but without actually requiring them to do so. As a result, where creditors could recover more money by making their claims in another country against the assets there, this can be accommodated without the expense of opening a second insolvency proceeding. This improves efficiency and returns from the insolvency, and enables it to be coordinated in one place.

A supplemental part of the MLEG allows this concept of synthetic insolvency proceedings to be further extended, allowing insolvency practitioners to give similar undertakings to those mentioned above even where the foreign insolvency proceeding would have been a main proceeding. This makes possible centralised management of the insolvency of a group member in the most convenient jurisdiction for the benefit of the creditors, and assists a single insolvency practitioner to manage the insolvencies of two or more group members based in multiple countries in a single jurisdiction.

The text of the MLEG can be obtained via the UNCITRAL page at:

[https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/mlegi_-advance_pre-published_version-e.pdf](https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/mlegi-advance_pre-published_version-_e.pdf)

Legal impact in the UK

The failure of large multinational firms in recent decades has already seen the need for international insolvency regimes to develop methods for handling complex multiple insolvency proceedings simultaneously. The administration of Maxwell Communication Corporation, which commenced in 1991, met this challenge by developing a protocol between English and US courts, which aimed to manage proceedings in both jurisdictions without conflict. The protocol also proposed a common system for of the distribution of assets to avoid creditors having to claim in both jurisdictions. A cross border insolvency protocol was also used in the complex proceedings arising from the collapse of Lehman Brothers in 2008, in which several US Lehman entities agreed on principles of cooperation, communication and data sharing, to preserve and enhance assets for creditors and to resolve intercompany claims. Both of these protocols were non-legally binding, and were made possible by the flexibility of common law jurisdictions.

The approach of the courts of England and Wales under the Model Law on Cross Border Insolvency and the European Insolvency Regulation to group insolvency has been based on finding the mutual COMI in one jurisdiction, allowing for multiple members to be considered within the same jurisdiction, although each group member still has to be treated as a single entity. That approach has recently been followed in the case of Re Agrokor DD [2017] EWHC 2791 (Ch), in which the Court recognised Croatian group proceedings under the Cross Border Insolvency Regulations 2006 (“CBIR”) but only in relation to one of the members of the group, confirming that group proceedings as a whole are out of scope of the CBIR.

The same reasoning was also adopted in case of Leite v Amicorp (UK) Ltd [2020] EWHC 3560 (Ch), where the Court held that the pooling of Brazilian assets from several companies did not preclude the proceedings from being collective proceedings, unlike in case of Re Stanford International Bank [2011] EWCA Civ 137 where assets were pooled for the benefit of only one set of creditors.

None of these cases, however, established a common approach to group proceedings in which the various group members are treated as a whole. The path taken relied either on the group members all having a mutual COMI, or being situated in common law jurisdictions which afford the courts the necessary flexibility to be able to consider pooled assets or to follow a non-binding group process. The MLEG provides a more expansive formal framework, introducing the concept of “planning proceedings” that can be used to coordinate the management of the insolvency between the members of the group, and associated group insolvency solutions.

A planning proceeding originating in the UK will require an application to the UK court under a new process, to initiate the proceeding alongside a qualifying UK insolvency proceeding (under articles 2(g) and 19). The court may then grant appropriate relief in order to facilitate the planning proceeding and the development and execution of a group insolvency solution, under article 20. A foreign planning proceeding which requires assistance from the UK court in order to proceed will first need to seek recognition under article 21 (another new court process), at which point the court may order relief under articles 22 and 24 as appropriate.

The decision to participate in a planning proceeding will be taken by each company’s directors, by the affected individual in the case of a sole trader business, or by an appointed insolvency practitioner as appropriate.

Article 26 further provides that the effects of a group insolvency solution must be approved under the law of each state, for each affected group member with its centre of main interests or an establishment in that state. In the UK, where there is a relevant insolvency proceeding, approval must therefore be obtained from creditors; or if there is no insolvency proceeding then from the individual concerned or the company’s directors. Where the centre of main interests is elsewhere and there is no establishment in the UK, the group insolvency solution can be given effect through the court granting relief where necessary (following recognition of the planning proceeding, in the case of a foreign proceeding). The court’s involvement will not be required where the plan has the agreement of all the relevant parties, and can simply proceed.

It should be noted that nothing in the Model Law can affect the law of a country that has not implemented it, and it is not intended to do so. The enforcement in a foreign jurisdiction of a group insolvency solution originating in the UK – or the enforcement of a group insolvency solution, originating in one foreign country, in another foreign country – are matters for the receiving jurisdiction rather than the UK courts. We anticipate that in granting relief, in appropriate cases, the UK courts will nevertheless wish to consider whether the group insolvency solution will be effective in other relevant jurisdictions, in order to ensure that their orders meet the requirements of the Model Law.

The relief that the court might order in the UK includes the stay of individual creditors’ actions to enforce their debts against an enterprise group member. This is limited by the requirements of article 27, i.e. that the interests of creditors be adequately protected. Where there are insolvency proceedings in the UK, the interests of minority dissenting creditors are protected against unfair prejudice or harm arising from those proceedings (for example, in administration, under paragraph 74 of schedule B1 to the Insolvency Act 1986) and we expect similar consideration would be required as regards the available relief under the Model Law.

If there is no relevant insolvency proceeding in the UK, before agreeing to grant relief the court will need to consider whether the relief sought would prejudice dissenting creditors’ other rights (for example the right to enforce a debt under a contract governed by the law of England and Wales, a right which a UK insolvency might curtail).

Proposals

Although much of the MLEG is a standard template, its implementation into UK law requires that various details be amended appropriately to complement our existing legal framework. This section outlines the approach that will be taken, with reference to the relevant parts of the Model Law. Other than where explicit reference is made below, the articles of the Model Law will be implemented as published by UNCITRAL.

Preamble

As with the MLCBI, and in accordance with the usual approach to legislation in the UK, the preamble to the MLEG that sets out the purpose of the law will not be included in the legal text.

Scope (article 1)

The scope will exclude the entities listed in paragraph 2 of schedule 1 to the Cross-Border Insolvency Regulations 2006.

This provides consistency of approach, aligning the MLEG with the MLCBI and ensuring that it does not encompass entities that are excluded from the latter.

Definitions (article 2)

The MLEG does not define “significant ownership”. We are satisfied that it is nevertheless clear what is meant by this phrase, and we expect that “significant ownership” may be demonstrated with reference to the definition of people with significant control found in Schedule 1A to the Companies Act 2006, as well as the definitions of parent and subsidiary undertakings in that Act.

The definition of “insolvency proceeding” contained in the MLEG is:

“‘Insolvency proceeding’ means a collective judicial or administrative proceeding, including an interim proceeding, pursuant to a law relating to insolvency in which proceeding the assets and affairs of an enterprise group member debtor are or were subject to control or supervision by a court or other competent authority for the purpose of reorganization or liquidation;”

We consider that the above definition is wide enough to encompass company and individual voluntary arrangements. The status of Companies Act schemes of arrangement (and restructuring plans introduced by the Corporate Insolvency and Governance Act 2020) may vary from one jurisdiction to another and between specific cases. We do not expect that a scheme of arrangement will fall within the definition of “insolvency proceeding” for these purposes in the UK, and so will not satisfy the requirements necessary for a “planning proceeding” to be initiated under the MLEG; but a scheme of arrangement may nevertheless feature as part of a “group insolvency solution” developed using the MLEG tools. The status of restructuring plans as insolvency proceedings has been the subject of judicial comment and it may be that they will meet the requirements for a planning proceeding to be initiated. We consider that it will be most appropriate for this to be determined by the courts, as the status of restructuring plans is settled, rather than explicitly in the implementation of the MLEG (which could otherwise create a mismatch between the treatment of restructuring plans under the MLEG and more generally).

It is our intention that any “group representative” appointed within the UK should be a qualified insolvency practitioner, who will have the necessary skills and knowledge to undertake this role effectively. We will include explicit provision to this effect within the UK implementation of the MLEG in order to remove any ambiguity regarding what is appropriate. This does not affect the appointment of group representatives in foreign planning proceedings outside of the UK.

The role of a group representative, as defined, is separate to that of insolvency officeholder. Due to the voluntary nature of participation in planning proceedings under the MLEG, it may be possible for a single insolvency practitioner to occupy both roles without creating a conflict of interest. This could be the most expedient approach, but is not required: alternatively, separate independent individuals could undertake each role, especially if there otherwise might be a perception that the single insolvency practitioner was conflicted. Insolvency officeholders will need to carefully consider whether planning proceedings are in the interests of creditors before agreeing to participate, regardless of their origin.

The MLEG does not stipulate a process by which the work of the group representative is to be funded or fees are to be agreed, although fees might be negotiated alongside the group insolvency solution, according to the individual circumstances of each case. Where this involves payments from a UK insolvency that are not to independent third parties (which might be the case in respect of the group representative’s fees, for example) the regulatory rules to which insolvency practitioners are subject require the payments to be appropriately approved [See Statement of Insolvency Practice 9; category 2 disbursements should be approved by those responsible for approving remuneration].

Competent court (article 5)

Taking into account the nature of the work that the court will be required to do, including ruling on questions involving large international insolvencies; and taking into account the placement of other similar work; applications under the MLEG should be heard before the High Court of Justice in England and Wales and its equivalent in Scotland.

Cooperation (articles 10 and 15)

We consider that the list of examples provided in articles 10 and 15 that demonstrate how cooperation might be implemented, and the flexibility available to courts and insolvency practitioners in the UK, is sufficient to enable effective cooperation.

Agreements (article 16)

Insolvency practitioners in the UK are already able to enter into agreements where this is necessary to the management of the insolvency, and may seek directions from the court in appropriate cases. We do not consider it necessary to require the court’s approval in every case where an agreement is reached under article 16.

Appointment of single representative (article 17)

The appointment of a single insolvency practitioner to manage related insolvencies is already permitted in UK law; this article makes explicit provision for cooperation between courts for that purpose. Any potential conflicts of interest are managed by existing systems, e.g. under the Insolvency Practitioner Code of Ethics.

This does not override the requirements in UK law as to the necessary authorisation, qualifications and experience for an individual to act as an insolvency practitioner.

Participation (article 18)

Any data shared between participating enterprise group members will be subject to the existing regimes of data protection as well as any confidentiality requirements agreed between the members.

Appointment of group representative (article 19)

As noted above (article 2), we consider that only authorised insolvency practitioners can take such appointments and we will make explicit provision to this effect in the UK’s implementation of the MLEG.

Provisional relief (article 22)

The notice requirements for relief hearings will be in line with those of schedule 1 of the Cross-Border Insolvency Regulations, which in the first instance require notice to be served upon relevant parties not less than five business days before the date of the hearing; but which allow the court in cases of urgency (as is likely to be the case when dealing with provisional relief) to hear the application immediately either with or without notice, or to authorise a shorter period of notice.

Questions

We welcome views on the above proposals, and responses to the specific questions below:

Q5. What impact do you think the MLEG will have, particularly on our insolvency regime and the insolvency sector, if it is implemented in the UK?

Q6. What are your views on the approach to implementation that we have outlined above?

Q7. The proposal does not prescribe how the work of the group representative is to be funded, leaving that to be discussed in each case between the prospective group representative and the group members who expect to participate. What are your thoughts on this?

Q8. What more, if anything, needs to be done to ensure that the MLEG does not undermine the rights of minority and dissenting creditors, including rights to enforce contracts governed by the law of England and Wales in the UK?

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[1] See Statement of Insolvency Practice 9; category 2 disbursements should be approved by those responsible for approving remuneration.