Consultation outcome

Implementation of two UNCITRAL Model Laws on Insolvency Summary of consultation responses and Government response

Updated 10 July 2023

Introduction

On 7 July 2022 the Government published a consultation on changing UK law to implement two model laws in the field of insolvency, which have been adopted by the United Nations Commission on International Trade Law (“UNCITRAL”). The model laws further develop the international framework for the management of cross-border insolvencies, which supports the efficient and predictable resolution of financial failure:

• The Model Law on Recognition and Enforcement of Insolvency-Related Judgments (“MLIJ”) deals with cross-border recognition of judgments that are associated with insolvency proceedings.
• The Model Law on Enterprise Group Insolvency (“MLEG”) provides tools to manage and coordinate insolvencies within corporate groups, while respecting that each company within the group remains a separate legal entity.

We are grateful to have received the views of the organisations and individuals who responded to the consultation, and to everyone who contributed to the discussion in what is a highly technical area. This document sets out a summary of the responses received, the Government’s response and next steps.

Executive Summary

The Government received responses to the consultation from a range of organisations and individuals with an interest in the legal, insolvency and financial services sectors. Most of these responses supported the Government’s aims in implementing the model laws as set out in the consultation, particularly the ongoing development of international cooperation in insolvency matters.

Some responses in respect of the MLIJ suggested that significant impacts could flow from the recognition of judgments in the UK under the model law framework, and were doubtful that the Government’s proposed approach to implementation would be sufficient to avoid difficulties. These responses focused on the interaction with the long-standing UK caselaw that was highlighted in the consultation document, and the adverse effect that a lack of clear conflict of law rules could have on those who rely on UK law for legal predictability, including our financial institutions. With this in mind, some respondents indicated that they did not agree that the Government should proceed with its proposals in respect of the MLIJ at present. The Government acknowledges the concerns in this area and will consider further how the technical detail of the proposal can be adapted to address the issues.

Responses regarding the MLEG noted that the majority of its provisions will be most useful when operating between jurisdictions that have also implemented them. Respondents nevertheless supported implementing the model law, even though other jurisdictions have yet to do so. The primary value of the MLEG is as an evolution of the internationally recognised regime for mutual cooperation between countries on insolvency matters. As an international text it will become familiar to practitioners based in other jurisdictions, and so enhance the clarity and predictability of the UK insolvency regime.

Having considered and taken into account the views expressed by the respondents to the consultation, the Government remains of the view that enacting the model laws will enhance the UK’s highly regarded insolvency regime. Doing so will be an important step in ensuring that the UK stays aligned with international best practice, and remains in the best possible position to lead, influence and respond to future developments in this area. We will continue to develop the detail of the proposal to implement the MLIJ, to ensure that the surrounding issues that have been raised are resolved before proceeding. We intend to legislate to implement the MLEG at the earliest opportunity.

Glossary

This Government response makes use of a number of uncommon abbreviations, which were introduced by the consultation document. For convenience these are 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.

Responses to the Consultation

Ten responses were received to the consultation. Four of these responses were from organisations with an interest in legal matters and insolvency law (including a body dealing with financial law). Two responses were provided by organisations representing or authorising insolvency practitioners. The remaining four responses were provided by a financial services firm and individuals, including academics.

During the consultation the Insolvency Service held discussions with several of the respondents to discuss their views on the approach to be taken, and with government officials dealing with relevant areas of policy and law.

The responses to the individual questions raised in the consultation are summarised below, alongside the Government response. Annex A lists the organisations and the firm which responded to the consultation (personal names, and the details of those responding in an individual capacity, have been omitted).

The Model Law on Insolvency-Related Judgments

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

Many of the responses to the consultation welcomed the Government’s ambition to keep the UK at the heart of international cooperation on insolvency, and considered this to be an appropriate aim. While a minority took the view that changes in insolvency law or practice should not be driven by a desire to signal commitment to cooperation and the sponsoring of international best practice, most respondents supported the overarching goals in this area.

A number of the responses entirely welcomed the proposals to implement the MLIJ by adopting article X, highlighting for example the potential for overlap and inconsistency between the “full” MLIJ and the MLCBI.

A significant number of respondents, and the majority of the organisations representing legal practitioners, wish to see further development of the surrounding policy questions before proceeding with the implementation of the MLIJ. These policy issues include settling the UK’s stance on the “rule in Gibbs”, historic caselaw which holds that where a contract is governed by a particular country’s law, it cannot be compromised or discharged by insolvency proceedings under a different law (discussed further in the consultation document). Responses also referenced other applicable law considerations currently under discussion at UNCITRAL. Several respondents strongly argued that for reasons summarised below, implementation should not proceed without clear rules in this area.

It is clear from the responses to this question that foreign recognition of UK insolvencies remains a live issue for insolvency practitioners dealing with corporate failure as part of their core business. As noted elsewhere, we believe that implementing insolvency model laws signifies the UK’s commitment to ensuring that its insolvency regime remains best in class, and helps retain the UK’s position as a world leading jurisdiction for dealing with insolvency.

whether or not to overrule Gibbs is [an] important policy decision which is implicated in implementing Art X. An equally important question is whether insolvency law is “special” and whether different principles should govern recognition and enforcement of insolvency-related judgments than those that govern non-insolvency-related judgments. There are good policy arguments for both of these positions and right-thinking individuals can readily arrive at different positions on them. We would suggest that there must be a full debate about this and other threshold questions before Art X is implemented.

Insolvency Lawyers’ Association

We fully support the aim of the Insolvency Service in ensuring that the UK remains a key jurisdiction in the context of cross-border insolvency cases.

Our members are interested to know what the Insolvency Service is planning to do, if anything, to assist UK officeholders faced with seeking recognition in foreign jurisdictions where the Model Law is not available and in particular where the UK no longer has the benefit of automatic recognition across Europe.

R3

Some respondents raised concerns that the existing protections in the MLCBI/CBIR, and the proposed approach of introducing article X as a document to which the court can have regard when making decisions on what relief to offer to a foreign officeholder, might not be sufficient to achieve the Government’s intended outcome. They were not persuaded that this approach would on the one hand give the courts leeway to continue to apply Gibbs in accordance with current practice, while on the other providing sufficiently clear direction to enable the courts to recognise foreign judgments as a form of relief under the MLCBI.

Respondents were also concerned that providing the court with a wide discretion may undermine certainty for users of the legal system. This would have a detrimental effect on those relying on that legal predictability, not just in respect of Gibbs but in other important areas of law.

These concerns relate to the lack of strict rules regarding the circumstances in which judgments may be enforced and which country’s law should have priority. For example, respondents considered that enforcing foreign judgments concerning the right to set-off debts could cause difficulty for financial market contracts and netting agreements. There would be a possible knock-on effect on the amount of capital banks and investment firms are required to hold to meet regulatory requirements, significantly undermining their profitability. The view was expressed that without additional safeguards, the proposal would create material uncertainty in the wholesale financial markets.

Uncertainty regarding the terms and outcome of corporate restructuring would, it was argued, similarly be a disincentive to foreign investment into the UK.

If Article X is to be implemented, the UK courts will have the discretion to recognise a foreign insolvency-related judgment that applies foreign insolvency law and so, in effect, the UK courts will be able to apply foreign insolvency law. This should only be possible if there are clear choice of law rules as to when the foreign insolvency law should not apply.

Financial Markets Law Committee

There appeared to be only a minority in support of implementing the MLIJ in full, an option that was explored but ruled out in the consultation document. Although doing so would provide greater certainty in one sense, it would exacerbate the other issues outlined in the consultation and by respondents (around Gibbs for example).

Government response

The Government was pleased to see support expressed for the overarching aims of the consultation. We agree with those who argue that recognition of UK insolvency proceedings in other jurisdictions is of great importance for the efficient resolution of cross-border insolvencies. Enhanced cooperation works to the benefit of both the UK and our international partners. It follows that it is important to take advantage of opportunities such as these: to continue to build the framework for international cooperation that will encourage other countries to take part, and to demonstrate the UK’s own ongoing commitment to those principles.

Based on the feedback received, we are of the view that the approach to implementation outlined in the consultation document is in broad terms the correct one, i.e. that it will be most appropriate to enable the recognition of foreign judgments through article X rather than the full MLIJ. However, we note the concerns raised that without clarification on certain other points, the impact may be unpredictable and hence detrimental.

In partially implementing the MLIJ through article X, the Government’s intention is to enable the recognition of foreign judgments in the context of insolvency proceedings in a way that will support – rather than overrule – other principles of UK law. The UK judiciary is rightly highly regarded, and very capable of dealing with complex issues such as these. Notwithstanding that, it is important for the intended effect of any new law to be clear.

In light of the arguments that some respondents made regarding the need for greater clarity, before proceeding to implement the MLIJ we will undertake further work to determine how legal certainty can be maintained. We will consider how to facilitate debate on the surrounding topics such as Gibbs, to enable our implementation of the MLIJ to be clear, effective, and work to benefit the UK.

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?

The overwhelming majority of those responding to this question agreed that it is right to provide guidance to the court, and that it should be provided with a list of factors to take into account when deciding whether or not to recognise a judgment. Some respondents considered that it would not be sufficient to provide a non-exhaustive list in the manner proposed in the consultation, reflecting the concerns regarding legal certainty discussed above. Those responses proposed that less discretion should be offered to the court, and/or that further guidance should be provided on how to resolve conflicts between UK and foreign law. Others suggested that further guidance might be provided on the severability of judgments (as described in article 16 of the MLIJ). This would make it clear that part of a foreign judgment can still be recognised and enforced, where appropriate, even if the court concludes that the judgment as a whole should not be enforced in the UK.

Government response

The Government recognises that the majority of the concerns raised with the proposed approach to guidance are tied to the wider concern regarding legal certainty. We will defer any final conclusion on what guidance the court might require until progress has been made in resolving that underlying issue.

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

A considerable proportion of the responses felt that the legislation should be more explicit than was proposed in the consultation. Most especially, respondents concluded that legislating so that the courts should “have regard to” article X is not enough to ensure that foreign judgments will be recognised in the UK as a form of relief under the CBIR. They proposed that article X should be explicitly included in the law instead.

Some responses suggested that additional protections are needed or would be helpful. This might be accomplished for example by including something similar to the protections that apply to article 20 of the MLCBI whenever a foreign insolvency proceeding is recognised; or by incorporating other elements of the MLIJ (such as the definition of insolvency-related judgment) to provide additional clarity.

Government response

In light of the views expressed on this point, the Government will include article X as an explicit provision, rather than (as had originally been proposed) adding to the list of material to which the court should have regard in making its decisions.

The question of whether other protections are required is dependent on the handling of the wider issue around legal certainty, and so will be deferred.

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?

The majority of responses to this question agreed that updating the list of documents to which the court can refer will be helpful and appropriate. It was considered that doing this would be sensible or even important, to give the court as complete as possible a list of documents to refer to.

Government response

The Government notes the support for the approach in this area. It remains our intention to update the list of documents as proposed in the consultation.

The Model Law on Enterprise Group Insolvency

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?

The majority of responses to the consultation either supported the Government’s proposals to implement the MLEG, considering it to be a positive step, or had no objection.

The UK is proposing to become an early adopter of the MLEG, which is designed to operate between jurisdictions. Respondents understandably do not expect the model law to create a revolutionary change in the way that insolvencies are handled in the first years following implementation:

• Several responses suggested that there would be little impact until other countries adopt the MLEG into their own law;
• It was noted that the provisions principally apply to complex group insolvencies, which are limited in number and represent a small (if important) fraction of insolvency cases; and
• It was suggested that the MLEG does not add to what can already be achieved in the UK through cooperation agreements and court-to-court protocols.

The new insolvency tools contained in the MLEG could potentially be useful when dealing with complex group structures. We could, however, recall few, if any, practical examples […] as there is already considerable scope for voluntary co-operation between insolvency office-holders, particularly in a UK domestic context, where such co-operation is clearly in the interests of each company.

City of London Law Society

A few responses suggested that as the proposals will add complexity and lengthen the statute book, with only a limited impact domestically, it might be better not to implement the MLEG. The majority of respondents however appeared to accept the Government’s wider aims, and the mutual benefits of encouraging the development of the common framework for managing insolvencies within the international community.

We consider that although it is unlikely to apply in a large number of cases, the implementation of the MLEG will enhance the insolvency regime by adding to the options available where it is applicable

Academic respondents

Government response

The Government agrees with those respondents who highlighted that the MLEG is intended to create an international framework of cooperation, and so in the short term this model law’s impact will be limited, until it is adopted in multiple . The flexible nature of model laws, which allows them to be implemented by each jurisdiction on its own initiative, also creates a dilemma in these circumstances: the first state to legislate will benefit sooner, but will not immediately gain the full benefits of joining a mature network of partners. We believe that the UK, which is well regarded in insolvency matters, is well placed to take the lead in implementing the MLEG and so encourage such a network to develop.

We also concur that most or all of the effects of the MLEG can be achieved in the UK in a bespoke manner. This reflects the UK’s versatile common law legal framework, and the wide leeway that is given to UK courts and insolvency practitioners to manage insolvencies in the way that will provide the greatest benefit. However, the MLEG creates a formal framework for doing these same things in a predictable and internationally recognised form. It is designed to be adopted by multiple jurisdictions and over time become familiar to practitioners in each of them. It provides assurance to an outside observer that certain things can be done in particular ways, and relied upon to work as expected.

Our view remains that while the benefits may be incremental in nature, in the context of the excellent existing insolvency regime in the UK, implementing the MLEG will be a positive step for the insolvency framework. The future impact of increased cooperation with other jurisdictions where such tools are not currently available may be greater, and in that regard the UK is proud to continue to be a world leader in best practice.

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

Responses to this question generally concurred with the Government’s proposed approach, while a number of points and suggestions were made on the detail of the implementation. These included, amongst others:

• Restructuring plans under part 26A of the Companies Act 2006 should be explicitly included in the list of potential planning proceedings under the MLEG. Capturing restructuring proceedings would remove a limit on the beneficial impact of the MLEG.
• Similarly, the definition of “insolvency proceeding” should be amended, if necessary, to ensure that it is wide enough to cover Scottish trust deeds and debt arrangement schemes.
• The reference to a “competent authority” in the definition of insolvency proceeding should be clarified, to indicate whether it will cover (for example) the Accountant in Bankruptcy in Scotland.
• It should be made clearer that officeholders only have to cooperate (under articles 13-15 of the MLEG) to the extent that doing so does not create a conflict of interest.

It was suggested that it will be helpful to implement the MLEG with only limited modifications, as the MLEG is well designed as a standalone instrument that complements the MLCBI.

Government response

We were grateful for the helpful responses to this question and have noted all of the points made, including those not explicitly repeated above.

The Government agrees that it will be most appropriate to implement the MLEG with minimal changes. For this reason we have taken the view that the model law should not be modified where the original text is sufficiently clear. This also means that while (as was argued) the possibility of expanding the model law to include all restructuring proceedings is attractive, we do not propose to do so at present. The MLEG will apply to restructuring proceedings to the extent that they meet the requirements in the model law as it was drafted by UNCITRAL: we remain of the view that adding an explicit statement that restructuring plans should be counted as “insolvency proceedings” for these purposes could prejudice or conflict with the courts’ determination of their status in particular cases.

We consider that the definition of insolvency proceeding in the MLEG, which is a wide definition that is intended to capture proceedings in many different forms in different jurisdictions, is sufficient to cover insolvency proceedings in the UK (including Scottish insolvency proceedings such as trust deeds and debt arrangement schemes). The Accountant in Bankruptcy might be said to qualify as a “competent authority”, as that term is used in the definition of insolvency proceeding, to the extent that it is responsible for overseeing certain types of insolvency. However, this does not assign any obligations or responsibilities under the MLEG. Instead, article 5 of the MLEG indicates which bodies will be responsible for the recognition of planning proceedings and cooperation with courts, insolvency practitioners and others. The Government does not consider that it is presently necessary (and it is not our intention) to include any bodies other than relevant courts within article 5.

Cooperation “to the maximum extent possible” is clarified by article 15 of the MLEG, which states that it may be implemented by “any appropriate means”. We do not consider that cooperation that created a conflict of interest could be found to be appropriate. This view is reinforced by paragraph 92 in the text of the UNCITRAL Model Law on Enterprise Group Insolvency with Guide to Enactment, which is clear on this point.

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?

Most responses agreed that funding this work should or can be left for discussion between the interested parties in each case.

A few of the responses suggested that the lack of detailed rules on costs might prove a barrier to the use of the MLEG, in the event that it proves difficult to estimate in advance the direct and indirect costs of doing so. This also applies to court-to-court cooperation on costs, which might likewise fail in the absence of any guide to how allocation should proceed. However, other responses suggest that where there is a clear advantage to a group insolvency solution, the parties who stand to benefit from it may be willing to bear the cost. It was noted that it would be difficult for the UK to draft effective, unilateral rules on funding, when the MLEG process is designed to be applied between jurisdictions.

Government response

We agree that it would be difficult for the UK to apply funding rules to the MLEG unilaterally, as any restrictions or requirements could only apply to the group members operating within the UK. This could affect the ability of the group members as a whole to reach agreement on a plan, and so compromise the effectiveness of the MLEG.

We will proceed without setting any hard rules in this area, as proposed in the consultation document. Funding should therefore be resolved between the various parties on a case by case basis.

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?

A small number of responses had no comments to make in this area and considered that no further protections were needed. It was noted that the MLEG already includes safeguards, including to safeguard public policy (article 6). Reflecting the response to question 6 above, it was suggested that it would be preferable not to depart from the model law by building in additional safeguards.

A concern raised in several responses was that, as with the proposed implementation of the MLIJ, the MLEG lacks any choice of law rules. This gives rise to similar concerns around the protection of creditor rights, and in particular the preservation of the rule in Gibbs. One response suggested that, subject to adequate safeguards to address these issues, it would be helpful for the UK implementation of the MLEG to clarify that the relief available under the MLEG does include the recognition and enforcement of judgments and orders originating in the planning proceeding. Another proposed explicit protection for dissenting minority creditors.

It was noted that there is no hard limit to the length of a stay on the realisation of assets that can be granted under the MLEG (article 20). As an indefinite stay can be detrimental to creditors, it was suggested that some time limit could be introduced, perhaps mirroring the six month provision in article 60 of the EU’s insolvency regulation (EU 2015/848).

Government response

It is evident (para. 124 of the UNCITRAL text) that the relief provisions in the MLEG were drafted with an understanding of the differences of interpretation that have grown up around the relief available under the MLCBI, and that relief under the MLEG is deliberately non-prescriptive as regards the import of foreign law into the enacting jurisdiction. This allows the implementation of the MLEG in jurisdictions which do not allow for the recognition of judgments in the existing framework, without requiring that the related issues (as have been raised in respect of implementing the MLIJ) first be resolved.

We consider that this is a sensible approach to the MLEG, and we do not believe that it is necessary for the available relief to include the recognition of a foreign judgment in order for it to be effective:

At its core the MLEG creates a voluntary framework under which the group members can come to an enforceable agreement, to resolve the insolvency of one or more members to their mutual benefit. It does not override any group member’s or insolvency practitioner’s judgement as to what action to take unless they first agree to the group insolvency solution. The relief available is directed principally towards managing the affairs of the participating members, and intended to support and enforce the agreement. This places the available relief within the context of what can be legally agreed between the parties. From a UK perspective, the MLEG on the face of it (that is, without the recognition of foreign judgments) does not extend significant new powers to the group members, or the court, or change what can be done in the UK within the law: as has been commented elsewhere, what is permitted under the model law can already be achieved in other ways.

Therefore, while we agree that it would be helpful for relief under the MLEG to permit the recognition and enforcement of a foreign judgement, as that might avoid the need for separate applications in some cases, it is clear from the discussion around the MLIJ that the recognition of judgments should only be available in the UK if the related issues can be resolved. For now, in order to provide certainty on this point, the implementation of the MLEG will clarify that relief under article 20 does not presently encompass recognition of judgments.

It also follows from the voluntary nature of the MLEG that the protection for minority creditors (or shareholders) affected by a group insolvency solution is not within the model law, but in the law relating to the conduct of insolvency proceedings and/or corporate governance. Should a creditor consider that an insolvency practitioner’s decision to participate in a group insolvency solution will lead to an unacceptable delay in asset realisations, for example, the rules governing the insolvency set out what steps can be taken to challenge that decision.

Annex A: List of Respondents

• City of London Law Society
• Evelyn Partners LLP
• Financial Markets Law Committee
• Insolvency Lawyers’ Association
• Institute of Chartered Accountants in England and Wales
• Law Society of Scotland
• R3

(Names of individuals responding to the consultation have been omitted.)