Cross-Border Insolvency Update: UK Insolvency Service Consultation on two new Model Laws adopted by the United Nations Commission on International Trade Law (UNCITRAL)

The Insolvency Service recently published a consultation with respect to the proposed implementation of the United Nations Commission on International Trade Law ("UNCITRAL") Model Law on Recognition and Enforcement of Insolvency-Related Judgments, which concerns cross-border recognition of judgments associated with insolvency proceedings, and the UNCITRAL Model Law on Enterprise Group Insolvency, which would provide a framework for international cooperation in relation to the insolvency of multinational groups. This follows, and is designed to supplement, the UK's adoption of UNCITRAL's Model Law on Cross Border Insolvency, which was implemented through the Cross-Border Insolvency Regulations 2006 ("CBIR").

The consultation closes on 29 September 2022 and invites responses from anyone with an interest in the UK's adoption of these two Model Laws. If the Model Laws are implemented, this would be effected via secondary legislation (without the need for any Act of Parliament).

The Model Law on Recognition and Enforcement of Insolvency-Related Judgments (the "MLIJ")

What is the proposal?

In order to implement the MLIJ, the proposal is to modify the existing Model Law on Cross-Border Insolvency (as adopted in the UK) which provides for recognition of qualifying insolvency proceedings and a framework for co-operation in cross-border insolvency procedures. A provision known as "Article X" would be incorporated into the existing Model Law to enable "recognition and enforcement" of insolvency-related foreign judgments.

Article X and the rule in Gibbs

Article X would give the English Court discretion to recognise judgments, but not require them to. By contrast implementing the MLIJ in full would provide for mandatory recognition and enforcement of foreign main insolvency judgments unless specific grounds for refusal were met and this would effectively override the rule in Gibbs (a long-standing case - Antony Gibbs & Sons v La Société Industrielle et Commerciale des Métaux (1890) LR 25 QBD 399). The rule in Gibbs specifies that an English law governed contract cannot be compromised or discharged by a foreign insolvency proceeding. This means that from an English Court's point of view, a restructuring using foreign insolvency proceedings will not be effective against the debts owed under those English law contracts, unless the affected parties have participated in/submitted to those proceedings. This rule provides significant certainty to contracting parties and is a key contributing factor behind the use of English law as the governing law of many contracts.

The Court's discretion and grounds of refusal

To assist the Court in exercising its discretion, it is proposed that the CBIR will contain a list of "discretionary, illustrative, and non-exhaustive grounds" of refusal, for the Court to consider such as whether:

• a defending party was not given sufficient notice to arrange their defence;
• the judgment was obtained by fraud;
• creditors' rights were not adequately protected;
• the defending party did not submit to the foreign jurisdiction (effectively preserving the rule in Rubin v Eurofinance SA [2012] UKSC 46, which the Insolvency Service has suggested in the consultation will be overridden by the introduction of Article X), and the originating court did not otherwise exercise jurisdiction on a basis that is compatible with UK law.

Additionally, the Court will also be required to have regard to UK public policy (the limits of such ground are unclear), when exercising their discretion.

Modification of the existing law to adopt the MLIJ as proposed would provide the Court with broad discretion to refuse the recognition and enforcement of insolvency-related judgments. At the present time, it is difficult to see, without further specific guidelines and/or case law, how this modification would provide more certainty or be used to override certain existing case law, as the consultation seems to suggest.

The Model Law on Enterprise Group Insolvency ("MLEG")

What is the proposal?

The Insolvency Service's proposal also includes the implementation of the MLEG but, unlike the MLIJ, the proposal is for the MLEG to be fully implemented into the UK law.

As mentioned above, the UK adopted UNCITRAL's Model Law on Cross Border Insolvency through the CBIR. Whilst the Model Law on Cross Border Insolvency focuses on multiple insolvency proceedings for a single company with assets in different jurisdictions, the MLEG aims to deal with situations where two or more companies in the same enterprise group are in insolvency proceedings in different jurisdictions.  The insolvency of one group company can be problematic for other companies within the group, often due to intrinsic links between operations, assets and liabilities, with many groups operating centralised services housed within one group entity. In these circumstances, uncoordinated parallel proceedings may arise. The MLEG aims to provide a framework to reduce the need for multiple insolvency proceedings and to enable co-ordination of a group-wide insolvency via  a 'group insolvency solution'.

How will it work?

Where insolvency proceedings are to be initiated for two or more enterprise group companies, the MLEG can be used to:

• facilitate cooperation and coordination between multiple insolvency proceedings, courts of multiple jurisdictions and insolvency representatives; and
• construct a 'group insolvency solution' for either the whole or parts of the enterprise group through a single insolvency proceeding.

It is envisaged that there will be a single insolvency proceeding for the enterprise group with participating group companies tasked with developing a solution to the enterprise group's financial problems – this insolvency proceeding will be designated the 'planning proceeding'  and will be treated as a main proceeding (i.e. where the relevant company has its centre of main interest). In the UK, planning proceedings are to be launched by application to the English Court under a new process and once initiated, co-ordination of the group companies facilitated by the group representative can commence. The 'group insolvency solution' is flexible and could include a business/asset sale of whole or part and of all or some of the group companies, however, the MLEG does not propose pooling of assets, and liabilities would remain attached to the relevant group entity.

A 'group representative', who shall be authorised to act in multiple jurisdictions, will be appointed to manage and oversee the implementation of the group insolvency solution. The Insolvency Service considers that any group representative appointed should be a qualified insolvency practitioner and any conflicts of interests will need to be managed where it is proposed that an insolvency practitioner be both a group representative and  an officeholder of any group company.

In terms of what constitutes an "insolvency proceeding", the consultation suggests that a scheme of arrangement is unlikely to be considered an "insolvency proceeding" for the purposes of satisfying the requirements to initiate a planning proceeding (although, a scheme could be used as part of any group insolvency solution). As to whether the restructuring plan introduced under The Corporate Insolvency and Governance Act 2020 will fall within the definition of "insolvency proceeding", the Insolvency Service have left this to the English Court to determine.

In theory, the MLEG could provide a useful structured framework for insolvency proceedings of enterprise groups, however, in practice, its application will be limited unless it is adopted by other jurisdictions. To date, we understand no country has adopted the MLEG and the UK could be the first. Within the EU, the Recast Insolvency Regulation already provides for cooperation where there are insolvency proceedings of companies within the same group, and therefore EU states may not see any additional benefit of adopting the MLEG.