The UNCITRAL Legislative Guide - Term Paper Example

 «The UNCITRAL Legislative Guide» Introduction The UNCITRAL Legislative Guide to on Insolvency Law was adopted in June 2004. Its purpose is to lend support and guidance to establishing effective and efficient legal frameworks for addressing debtors’ financial difficulties. It is intended that this purpose will be achieved when the relevant national agencies and legislators refer to the Guide in the drafting and implementation of new laws and regulations or when amending current laws and regulations. In this regard, the Guide functions as “an advisory text”.1 Additionally, the Guide sets out the contents of the UNCITRAL Model Law on Cross-Border Insolvency together with a Guide to Enactment of the Model Law so as to assist in the incorporation of issues arising in cross-border insolvency.2 Mexico amended its bankruptcy laws in the late 1990s and in the “first years of the millennium” so as to incorporate the recommendations contained in the Model Law.3 Mexico passed the Ley de Concursos Mercantiles (Concurso Law) in 2000 for governing cross-border insolvency matters and this law incorporates the UNCITRAL Model Law.4 Ultimately, Mexico’s insolvency laws were designed to bring it in harmony with the US and Canada in compliance with its obligations under NAFTA.5 The extent to which the Concurso Law implements Part One of the Guide will be examined in this research. Therefore this research is divided into two parts. First the important parts of the Guide will be identified and detailed. Secondly, the Concurso will be examined by virtue of a comparative analysis to determine the extent to which Concurso implements an effective and efficient insolvency legal regime as provided for in the Guide. It will be demonstrated that, given the flexibility accorded nations in using the Guide as a reference, Mexico has satisfactorily met the objectives of the Guide. I. UNCITRAL Legislative Guide on Insolvency Law Beginning in 1999, UNCITRAL’s Working Group on Insolvency, building on the success of the Model Cross-Border Insolvency Law, worked on developing a corresponding legislative guide. The Guide provides national law makers with a wide set of principles for governing insolvency matters by setting out the primary substantive issues and present goals, important alternative and makes recommendations. In this regard, the guide is far more flexible than the Model Law which actually sets out the law to be adopted or implemented. Instead the Guide seeks to achieve harmonization of national insolvency laws by focusing on shared principles and “a limited number of alternatives”.6 Part I of the Guide is titled: Designing the Key Objectives and Structure of an Effective and Efficient Insolvency Law.7 The Introduction to the Guide states that: The purpose of the Legislative Guide on Insolvency Law is to assist the establishment of an efficient and effective legal framework to address the financial difficulty of debtors.8 In this regard, the Guide is intended to a reference point for “national authorities and legislative bodies when” implementing/introducing new legislature and regulations or in revising existing statutes, laws and regulations.9 Part 1 of the Guide sets out the key objectives that legislative and relevant authorities should take into account when implementing, revising or introducing insolvency laws. The first key objective is to provide for “certainty in the market to promote economic stability and growth”.10 Insolvency laws should therefore be focused on the “restructuring of viable business” and for efficiently closing insolvent businesses and transferring assets and should attempt to “facilitate the provision of finance for start-up and reorganization of businesses”. 11 The second key objective is the “maximization of value of assets”.12 Accordingly, parties involved in insolvency processes “should have strong incentives to achieve maximum value for assets” because by doing so, creditors will receive greater returns and the insolvency responsibilities are reduced.13 Moreover, all creditors should be treated equally.14 The third key objective is “striking a balance between liquidation and reorganization”.15 To this end, insolvency laws should seek to provide a fair balance between facilitating the collection of “near-term debts” via liquidation and the preservation of the insolvent entity’s business.16 In striking a fair balance, legislators must weigh which course of action has greater value for the society in which the insolvent entity is positioned. For example, in some jurisdictions there may be a greater emphasis on employment protection may very well demand salvaging the organization over focusing on repaying creditors.17 Essentially, the question may simply be whether or not there is greater value in sustaining the business “rather than breaking” it up and disposing of its components “in fragments”.18 The Guide’s fourth key objective is “ensuring equitable treatment of similarly situated creditors”.19 Creditors should not necessarily receive identical treatment, but should be treated fairly in the sense that their claims should be realized in a manner that corresponds with their “relative ranks and interests”.20 Again this objective should not compromise national priorities where social policy sets specific priorities. The general aim is to avoid fraud and preferences, conduct that is more likely to arise during times of economic turmoil. The national laws should therefore aim to ensure that activities and transaction that can compromise “equitable treatment of creditors can be avoided.”21 Providing for the “timely, efficient and impartial resolution of insolvency” is the fifth objective of the Guide.22 In making laws to achieve this result, law-makers should ensure that the laws and regulations attempt to avoid the inordinate interruption in the debtor’s business and to ensure that the proceedings’ costs are kept to a minimal. Facilitating an efficient and effective process for insolvency proceedings can be accomplished by laws that are unambiguous and have an identifiable objective. Moreover, the law will have an easy method for “identifying, collecting, preserving and recovering assets” .23 Sixthly, insolvency laws should make provisions for the preservation of the debtor’s assets and the prevention of “premature dismemberment of the debtor’s assets” by collection actions by individual creditors.24 However, legislative provisions should be such that any stay of actions by individual creditors do not compromise the rights of secured creditors. The seventh key objective cautions that insolvency laws should be both “transparent and predictable”.25 Ultimately the law should be such that “potential lenders and creditors” can: Understand how insolvency proceedings operate and to assess the risk associated with their position as a creditor in the event of insolvency.26 As an eightth key objective, insolvency laws should provide for “recognition of existing creditor rights and establishment of clear rules for ranking and priority claims”.27 Priority rankings should as far as possible be based on “commercial bargains” and not “social and political concerns” because the latter can impair insolvency results.28 The ninth key objective is for the facilitation of cross-border insolvency cases and ideally, this can be facilitated by adopting the UNCITRAL Model Law on Cross-Border Insolvency.29 The recommendations contained in the Guide are intended to aid in the achievement of the objectives listed above. Recommendations for the substantive laws applicable to insolvency list a number of initiatives. They include setting a criteria for: a. who may be subjected to insolvency proceedings; b. when insolvency proceedings may be initiated; c. when debtors may remain in control of the insolvent business; d. identifying what assets may be subjected to insolvency proceedings; e. when assets may be protected from creditors’ actions; f. how liquidators may treat debtors’ contracts, “the extent to which set-off or netting rights” are enforceable or can be protected;30 g. how and when liquidators can deal with assets; h. limitations and preparations for reorganization plans where applicable; i. debtor’s rights and obligations; j. the liquidator’s duties and functions; k. creditors and creditor committee functions; l. insolvency proceedings’ costs; m. claim rankings; n. how liquidation proceeds are to be distributed; o. how and when debtors may be discharged; p. and provisions for the “conclusion of the proceedings”.31 Article 28 of Part I of the Guide acknowledges that provisions for reorganization during insolvency are do not follow a “common pattern” globally and therefore recommends that national contain what is characterized as “key or essential elements”.32 These elements include the debtor’s submission to proceedings whether involuntary or voluntary; a stay of actions against the debtor’s assets; continuity in the debtor’s business with “an independent manager or a combination of both”;33a plan for the treatment of creditors and equity holders as well as a plan for the debtor’s treatment; taking account of or voting on accepting the creditors’ plan; “possibly” obtaining the “approval or confirmation of an accepted plan and implementing the plan.34 The Guide acknowledges that proceedings for liquidation are more common and there is a discernible pattern globally. This pattern reflects initiating the process by virtue of applying to a court or some other competent authority on the part of either the debtor or creditors. This is usually followed by a liquidation order or judgment. Next a neutral party is appointed to manage the liquidation. The business is then closed if the business is not sold “as a going concern” and “owners and management” powers and employees are all terminated.35 Debts are realized or the assets are sold . Creditors’ claims are adjudicated next and this is followed by the “distribution of available funds to creditors.”36 Finally, the debtor is discharged.37 II. Mexico’s Insolvency Laws Mexico’s social and economic priorities are reflected in its Concurso process which provides for two “consecutive stages” for insolvency proceedings.38 To begin with, there is the conciliation stage which has as its primary aim the facilitation of the reorganization of the insolvent entity’s business. The second option is the liquidation stage which has as its aim the termination of the business with the sale of assets the proceeds of which are used to discharge the debtor’s debts and for the provision of equity.39 It would therefore appear that in Mexico the reorganization is the first choice for insolvent or financially distressed entities. Liquidation appears to be a second choice and may not arise unless reorganization is not possible. This two stage process appears to be consistent with Articles 1(4) and 3(6) Part I of the Guide which essentially allows for reorganization over liquidation where social priorities may be more conducive to reorganization. Mexico does not preclude the possibility of liquidation which suggests that a fair balance is struck in that liquidation is an alternative where reorganization is not possible. Mexico’s Concurso Law also makes provision for cross-border insolvency proceedings inaccordance with Article 9(14) by adopting the Model Law.40 In this regard, the Concurson Law Recognizes the insolvency proceedings of other countries and therefore courts from overseas are at liberty to assume jurisdiction over assets as well as the business of any foreign entity located in Mexico. Similarly, the Concurso Law also recognizes the authority of representative and creditors from abroad who have rights that are the same as Mexican creditors.41 Creditor rankings in Mexico are prioritised in such a way as to give priority to wages over the two years prior to the insolvency declaration and employees’ indemnification claims. These claims are given priory over any other types of creditors.42 In other words, employee/labourer creditors are allotted a higher ranking or priority in insolvency proceedings in Mexico. Again this type of creditor ranking is perfectly permissible pursuant to the Guide. Recommendation 1-5 (4-14) of the Guide merely provides that among the requirements for establishing and developing insolvency legal frameworks, legislators should: Recognize existing creditors rights and establish clear rules for ranking of priority claims.43 However, Mexico may be prioritizing creditors’ claim based on social or political considerations which appears to be inconsistent with what UNCITRAL intended. Article 8(13) of Part I of the Guide clearing cautions that ranking priorities should as far as possible be based on commercial bargains and should not “reflect social and political concerns that have a potential to distort the outcome of insolvency”.44 Since the Guide only requires that creditor ranking be based on commercial bargains as far as it is possible to do so, Mexico has a wide discretion in this regard. Moreover, Article 4(7) of the Guide advises that creditors be treated equitably which means that any ranking priority should reflect the “different bargains” that creditors have with their respective debtors.45 Essentially the Guide recognizes that social policies may modify equitable treatment.46 Therefore Mexico is at liberty to rank the claims of employees above any other creditor as a result of social policies which may have an interest in social protection above all others. Huailyu explains why employee claims are a legitimately priority claim in insolvency proceedings. To start with, in a jurisdiction where reorganization is the preferred first step for the financially distressed business, financing institutions and employees are equally important for sustaining the business. Financial institutions provide funding to rescue the failing business and employees actually ensure that the business operates.47 However, financing institutions typically have secured relationships with their debtors when employees have no such arrangements. It is therefore fitting that employees are accorded this measure of protection particularly in a market where the labour market is developing or is a priority.48 Having established the absolute priority of employees, Mexico’s Concurso Law provides that the next order of priority is the expenses realized in administering secured assets. After this priority is taken care of, secured creditors are taken care of out of the sales realized on “mortgaged or pledged assets”.49 In the event the assets fall short of satisfying the outstanding debt, secured creditors are then treated as unsecured creditors. Non-commercial creditors are entitled to have their debts discharged from any funds remaining.50 Based on these provisions under the Concurso Law, Mexico has established a clear and efficient method for creditor ranking in a manner consistent with the Guide. The rankings follow a clear hierarchy, provides for contingencies and ensures that priorities are based on equitable treatment as advised by the Guide. Unsecured creditors such as employees are vulnerable to lose the most if they are not taken care of and the business is vulnerable to absolute failure if employees are not available to run a business that can be salvaged. Tax claims are also provided with a greater priority in Mexico’s insolvency laws over the claims of unsecured creditors. Tax claims are paid after secured creditors are paid however.51 Tax claims are therefore decided and distributed by virtue of Mexico’s administrative courts. These claims are segregated on the basis that taxes are regarded as forming pivotal roles in the company’s operation.52 However, Mexico’s insolvency laws will not permit a tax claim to interrupt an on-going insolvency process. Article 69 of the Concurso Law provides that if a claim is lodged by tax collectors, that claim will be stayed until such time as insolvency process is finalized.53 Mexico’s prioritizing of creditors is entirely consistent with the Guide. The Guide acknowledges and recognizes that insolvency laws in general must be such that they are consistent with the social and legal considerations and norms in the jurisdiction promulgating insolvency laws.54 For Mexico, labour rights are a significant social achievement and has an important social value.55 In addition, the social significance of labour protection have been fortified by the Mexican Constitution which mandates that the rights and protections of labourers are fundamental.56 Although Mexico is at liberty to give labourers an absolute priority pursuant to the flexibility permitted under the Guide. This type of priority ranking could be counterproductive to Mexico’s reorganization incentive. The fact is, aware that labourers have an absolute priority, financing institutions may not be so willing to finance the reorganization of a failing business.57 Pursuant to Recommendation 7(2)(j) Mexico’s reorganization plan in the event of reorganization provides for the preparation of the reorganization plan and how it can be improved and implemented. However, Mexico’s insolvency law has legal requirement for approving a plan to such an extent that its secured creditors may not be “crammed down”.58 Article 160 of the Concurso Law 2000 mandates that where secured creditors do not approve a Plan, they are entitled to enforce their respective guarantees except where the Plan makes provision for them to have their debts fully discharged pursuant to their respective contracts.59 Failure to provide for a cramdown plan however is not inconsistent with the Guide as it only instructs that a plan be in place for the purposes of reorganization and who and how it should be authorized. Mexico chose, as it was entitled to, not to enable an authorization process that forces reorganization on creditors. Moreover, cramdown plans can backfire as it puts the debtor and the creditor at odds and can turn hostile in nature and as Wagner warns can be unduly long and expensive.60 Since the Guide specifically calls upon states to use the Guide as a reference for the effective and efficient resolution of insolvency issues, Mexico’s failure to incorporate a cramdown plan which can delay insolvency proceedings and incur undue expenses, is consistent with the purpose and intent of the Guide. Pursuant to Recommendation 7(20) (c), Mexico’s Concurso Law makes provision for the “extent to which the debtor should be allowed to retain control of the business” after insolvency processes begin and the role of the neutral party.61 Under the Concurso Law, debtors may continue to occupy the business, however a conciliator is appointed who is responsible for monitoring the debtor’s conduct of the business. Moreover, the Conciliator is at liberty to approach the court to have the debtor removed if it is deemed necessary for the protection of the assets.62 In making the distinction between reorganization and liquidation as required for under Recommendation 7(2)(c), Mexico’s Concurso calls for the appointment of a receiver once liquidation takes place. In such a case, the debtor is removed and the Received takes over the debtor’s liquidation.63 Mexico’s insolvency laws have come a long way. Up to 1999, Mexico’s insolvency laws were as they were in 1940 and were characterized as rigid and formal and were so antiquated that they were rarely followed.64 However, at the turn of the millennium, Mexico’s insolvency laws were revised so as to bring it into harmonization with its NAFTA obligations.65 The adoption of UNCITRAL Model Law also ensured that perceptions of Mexico’s insolvency laws as antiquated were dispelled. Mexico’s insolvency laws are at the very least consistent with its NAFTA partners, the US and Canada, although there are some minor differences.66 Conclusion Having adopted the UNCITRAL Model Law, Mexico has at the very least adopted the cross-border insolvency provision of the Guide. It not only demonstrates that Mexico has revised and introduced insolvency laws that are consistent with the Guide’s purpose relative to cross-border insolvency issues, but that Mexico has modernized its insolvency laws pursuant to the Guide’s general intent. The Model Law is set out so as to offer assistance to nations for incorporating insolvency laws that are “modern, harmonized and fair” for responding effectively to cross-border issues.67 The fact is the Model Law reflects the most efficient insolvency systems68 and by adopting it, Mexico has obviously met the mandate of the Guide which is to assist states in promulgating efficient and effective insolvency laws. The Guide is flexible and makes allowances for states to enact laws that are consistent with their own economic and social realities. In this regard, Mexico, while modernizing its insolvency laws have taken account of its own social and economic values and realities and has therefore implemented its insolvency laws in a manner that takes note of the key objectives and structures of the Guide for an effective and efficient insolvency law. Bibliography Textbooks Goode, R. Principles of Corporate Insolvency Law, (Sweet and Maxwell 2006). International Monetary Fund, Current Development in Monetary and Financial Law, Vol. 4 (IMF 2006). Nee, V. and Swedberg, R. On Capitalism. (Stanford University Press, 2007). Omar, P. International Insolvency Law: Themes and Perspectives. (Ashgate Publishing 2008). Rowat, M. and Astigarraga, J. Latin American Insolvency Systems: A Comparative Assessment. (World Bank Publications 1999). Segal, E. Social Welfare Policy and Social Programs: A Values Perspective, (Cengage Learning 2009). Wessels, B. International Insolvency Law. (Kluwer Law International, 2006). Wood, P. Principles of International Insolvency, (Sweet and Maxwell 2007). Articles/Journals Beavers, E. ‘Note: Bankruptcy Law Harmonization in the NAFTA Countries: The Case of United States and Mexico’. (2003) 3 Colum. Bus. Law Review, 965-1006. Graham-Canedo, J.‘Comparative Analysis of Bankruptcy Legal Provisions from Mexico and the United States: Which Legal System is More Attractive?’ (Fall 2007) 6 DePaul Business and Comparative Law Journal 19-32. Huaiyu, W.‘An International Comparison of Insolvency Laws.’ OECD Meeting held on 27-28 April 2006 Corporate Affairs Division, Directorate for Financial and Enterprise Affairs. 1-13. Sainz, A. and Ruiz-de-Chavez, M. ‘A Practical Insight to Cross-Border Corporate Recovery and Insolvency’ cited in The International Comparative Legal Guide to: Corporate and Insolvency. (ICLG 2007). Wagner, ‘A Practical Insight to Cross-Border Corporate Recovery & Insolvency’. Cited in The International Comparative Legal Guide to: Corporate Recovery and Insolvency (ICLG 2007). Willems, M. UNCITRAL Model Law on Cross-Border Insolvencies, (Kluwer Law International 2006). Statutes Concurso Law 2000 Constitution of Mexico 1917 (as Amended). UNCITRAL Model Law on Cross-Border Insolvency 1997. UNCITRAL Guide on Insolvency Law 2004. Read More