The UK Insolvency Service’s New Consultation on the Adoption of Two Insolvency-Related UNCITRAL Model Laws

On July 7, 2022, the UK Insolvency Service, an executive agency of government responsible for a variety of roles in administering the UK insolvency regime, published a consultation on the UK’s proposed adoption of two UNCITRAL Model Laws on insolvency, inviting responses (the “Consultation”).

The Model Law on Recognition and Enforcement of Insolvency-Related Judgments (“MLIJ”) deals with cross‑border recognition of judgments associated with insolvency proceedings, whilst the Model Law on Enterprise Group Insolvency (“MLEG”) deals with insolvency affecting two or more of a group of related enterprises, where the affairs of the group’s members are interlinked (together, the “New Model Laws”).

The UK may well be the first jurisdiction to implement the New Model laws and would be an expression of a UK commitment to maintaining its dominant position as a leading global restructuring and insolvency destination.

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

The UK implemented the original UNCITRAL Model Law on Cross-Border Insolvency (“MLCBI”) by the Cross‑Border Insolvency Regulations 2006 (the “CBIR”). The CBIR enables the efficient recognition of foreign insolvency procedures and makes the process of handling assets across jurisdictions more predictable for insolvency practitioners. However, the MLCBI, and thus the CBIR, do not explicitly regulate how foreign insolvency judgments are to be recognised and enforced. MLIJ aims to improve on this by producing a straightforward and harmonised procedure for recognising and enforcing insolvency judgments in a predictable way.

The MLIJ aims to provide (amongst other things):

• A clear process for the recognition and enforcement of insolvency-related judgments originating from foreign jurisdictions.
• The option for the court to provide interim relief (for example, 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.
• Severability: where only one element of a multi-part judgment can be recognised and enforced, that element will still be recognised and enforced in isolation from the rest of the judgment.

The UK, presented by the MLIJ with the choice, wishes only to implement the MLIJ in part, in the form of the MLIJ’s “Article X”, rather than full implementation. The primary difference in adopting Article X as opposed to the full MLIJ is that relief granted would be at the discretion of the UK courts, whereas, the full MLIJ would (broadly speaking), require mandatory recognition of insolvency-related judgments. Therefore, the recognition of insolvency-related judgments becomes a form of assistance that can be granted under the MLCBI. Article X adoption of the MLIJ, means that the UK proposal respects the judgment of Rubin v Eurofinance, the key Supreme Court decision of 2012, which held that the CBIR do not extend to the recognition of a foreign insolvency-related judgments, while allowing the court to exercise a discretion to do just that, recognise a foreign insolvency-related judgment. We can only guess whether and to what extent the courts will use their new discretion to ignore a decision of the Supreme Court. The reason for the MLIJ is that it is not the UK alone that does not accept that the original Model Law, the MLCBI, mandates the recognition of foreign insolvency‑related judgments.

The Model Law on Enterprise Group Insolvency

Unlike the qualification to the adoption of the MLIJ, the Consultation proposes the adoption in full of the MLEG. The MLEG is focused on insolvency proceedings involving multiple debtors from various jurisdictions that are members of the same enterprise group. As such, in contrast to the traditional approach of insolvency law dealing with debtors on an entity-by-entity basis, the MLEG attempts to streamline this through a group insolvency proceeding—a “group insolvency solution”.

The MLEG will provide the following:

• A legal framework facilitating international cooperation in managing the insolvency of enterprise groups.
• A method of coordinating multiple insolvency proceedings affecting various group members through developing and implementing an appropriate group plan.
• Cross-border recognition of the implemented group plan within each relevant jurisdiction where the enterprise group may be operating.
• An avoidance of unnecessary insolvency proceedings due to legally enforceable undertakings to creditors.

The rationale of the MLEG lies in economic reality rather than traditional legal formalism. With the collapse of large multinational corporations in recent decades (i.e. Lehman Brothers in 2008), it is clear that there was little individual insolvency regimes could do to deal with the complexity of multiple insolvency proceedings taking place simultaneously across a number of jurisdictions in a single group enterprise.

The MLEG introduces the concept of “planning proceedings”, which would coordinate the management of the insolvency between the members of the group, and associated group insolvency solutions. If a planning proceeding is commenced in the UK, the enterprise group would need to apply to a UK court under a new process to initiate the planning proceeding alongside a qualifying UK insolvency proceeding. Once a UK court orders initiation of the planning proceeding, the enterprise group can begin coordinating across its group members and dealing with the business of the group at large to produce a greater return for all the creditors. In doing so, the enterprise group can appoint a person to develop and implement the group insolvency solution, and this person need not be a court appointed individual nor an insolvency practitioner.

Takeaways on the proposed adoption of the New Model Laws

The partial implementation of the MLIJ by adopting Article X, avoids the Rubin problem, while not affecting the Rule in Gibbs. The consultation is explicit on this point; the intention is to keep Gibbs and avoid any other unintended consequences to English law that would result from full implementation.

The MLEG poses some complex questions in its own way, despite the UK Insolvency Service seeming to pass quickly over the details and propose a full adoption of this Model Law. In adopting the MLEG in full, the following should be borne in mind:

1. The MLEG will have a limited impact on group insolvencies; it won’t introduce the pooling of assets of the participating enterprise group members, or creating a priority mechanism for the intra-group creditors.

2. The planning proceedings in the MLEG are not formal insolvency proceedings, and are not drafted on the basis of reciprocity, which may make the recognition of a group proceeding difficult to obtain in other jurisdictions. Considering the fact the MLEG has not been formally implemented by any country, it is questionable how the adoption of the model law will be of substantive help without explicit recognition in other jurisdictions.

3. The EU already has provisions on coordination and cooperation in relation to insolvency proceedings of members of group of companies (Regulation (EU) 2015/848 on insolvency proceedings (Recast Insolvency Regulation)). The EU may have little incentive to adopt the Model Law in the same way, further making a UK-based planning proceeding potentially redundant in substance vis a vis the EU.

4. The nature of the MLEG is broad in aim and complex in relation to the detail required to coordinate insolvency proceedings across a large enterprise, raising further concern as to the unforeseeable consequences that could arise from adopting an ambiguous legislation in the realm of insolvency law.

It is worth questioning what brings the UK Government to try to position itself at the forefront of adopting these Model laws. The Rule in Gibbs, which attracts a lot of criticism, is deliberately left untouched. The Rubin decision is left in a state of uncertainty. The beneficiary of a foreign insolvency-related judgment will have to decide whether the cost of bringing recognition proceedings in the UK is worthwhile, certainly until there has been enough judicial consideration of the new discretion to recognize to provide clear guidance. There is an idiosyncrasy to the approach proposed by the government that might be critiqued as wanting to appear rather more universalist and open to international cooperation than is in fact the case.

Neither Model Law initiative seem especially critical in these times. The Model Laws are only useful when adopted widely or otherwise influential in shaping behaviour. The UK has lost the benefits of the Recast European Insolvency Regulation, enabling the recognition and the primacy of insolvency proceedings in one EU state to be recognised in all the others, and adoption of the New Model Laws will be no substitute. As the economy faces a downturn, and soaring costs and inflation are bound to affect businesses, these proposals are not critical to enabling more companies and jobs being saved.

The UK Government Consultation on the New Model Laws currently has no prescribed date for when the consultation closes. 

Sakshi Rai and Femi Omisore, London Trainee Solicitors, contributed to the drafting of this alert.