Wrap Around Study Guide

WRAP AROUND STUDY GUIDE

A Framework for, and Concepts and Instruments of

International Insolvency

2016

Global Insolvency Practice Programme 2016

MODULE A

Session 1: André Boraine

8.30am - 8.40am: Welcome tea and coffee

8.40am - 9.00am: Welcome & Opening Remarks

9.00am - 10.45am: Session One:

“Nature & Sources of International Insolvency Law”

Lecturer: André Boraine

10.45am - 11.00am: Coffee Break

A Framework for, and Concepts and Instruments of,

International Insolvency

HOW TO USE THE WRAP AROUND STUDY GUIDE

The purpose of the Wrap Around Study Guide study guide is to provide the candidates with some basic framework regarding the scope of the work to be covered during the session. The guide therefore includes a summary of the requiredprescribed materials that you should read against the backdrop of the insolvency law framework. (It also contains some cross referencing to the Study Notes which serve as the basic preparatory notes for this part of the course.)

Candidates are urged to read the required prescribed materials in advance, using the Study Notes as the point of departure, in order to prepare themselves for this session. (Please bring a copy of the Wrap Around Study Guide along to this session.)

In this session we will try to establish what international insolvency law is all about, and to assess the general sources, terminology and the broad principles against the backdrop of general features or essentials of insolvency systems. The development of international insolvency law will thus be discussed from the point of view of the development of both cross-border insolvency rules as well as the setting of standards for the development of domestic insolvency law systems.

In order to do so we will consider the essential features of insolvency law, the sources of international insolvency law and some problem areas to be considered when working with cross-border matters.

It must be pointed out that the lecturer of this session does not present all the contents of this guide as his own since it is largely structured around a summary of the prescribed texts and a number of other selected sources in order to make these more accessible for the purposes of the session.

If you have any questions meanwhile please contact me at

OUTCOMES:

SECTION A: GENERAL BACKGROUND

After completion of this section you must know the basics of the following aspects:

The framework and essential features of insolvency law.
Some comparative aspects.
Classification of insolvency systems.
Different classes of creditors.
Core terminology.

SECION B: THE SOURCES AND NATURE OF INTERNATIONAL INSOLVENCY

After completion of this section you must know the basics of the following aspects:

What international insolvency law is.
The sources and nature of international insolvency law.
Basic principles and approaches to cross-border insolvency cases.
Various models and instruments available and in those in the process of being developed in the area of cross-border insolvency law.
Problematic areas in cross-border insolvency law.

SECTION C: THE HARMONIZATION OF NATIONAL INSOLVENCY LAW AND ITS USE IN INTERNATIONAL INSOLVENCY LAW

After completion of this section you must know the basics of the following aspects:

Principles to harmonise national insolvency laws.
Difficult areas for harmonisation, like:

Voidable dispositions;

Labour contracts;

Priorities;

Securities, and

Principles relating to the qualifications of estate representatives.

SECTION D: PRINCIPLES RELATING TO THE QUALIFICATIONS OF ESTATE

After completion of this section you must know the basics of the following aspects:

Appointment and qualifications
Regulation
Remuneration

A.REQUIRED READING

Boraine, André., Wrap Around Study Guide with cross referencing to sources for reading as indicated.
Boraine, A., Insol Fellowship Study Notes (compiled by A Boraine), read sections as indicated in Wrap Around Study Guide.
Omar, Paul., “The Landscape of International Insolvency Law”[Updated version of Omar, Paul J., “The Landscape of International Insolvency. Law”, in: 11 International Insolvency Review 2002, 173ff.]
Wood, Philip R.,Principles of International Insolvency (2007) pp. 1 -30 (General Introduction).

[Note: Follow Wrap Around Study Guide and Class Notes below as a guide]

B.ADDITIONAL READING

Fletcher, Ian F.,Theory and Principle in Cross-Border Insolvency, in: Ian F. Fletcher, Insolvency in Private International Law: National and International Approaches (2005) pp. 3-17.
Fletcher, Ian .F.,The Law of Insolvency(2009, with 2014 Second Cumulative Supplement) Chapters 1 & 2. (Fletcher ‘2’).
Garrido, J.M., The Role of Personal Insolvency in Economic Development in the World Bank Legal Review (2014) Vol 5 pp 111 – 127.
Hatzimihail, NE, “The Many Lives – and Faces – of the Lex Mercatoria : History as Genealogy in International Business Law” (2008) 71 Law and Contemporary Problems at 169.
Levinthal, L., “The early history of bankruptcy law” 1919 University of Pennsylvania Law Review 223.
Wessels, B., International Insolvency Law (2012)
Wessels, Bob and Boon, Gert Jan.,Sources of International Insolvency Law.[Chapter 1 "Introduction to International Instruments: Commentary" from: Wessels, B and Boon, GJ., Cross-Border Insolvency Law. International Instruments and Commentary, 2nd ed Kluwer Law International, (2015), pp. 1 – 134.]

Westbrook, J., “Locating the eye of the financial storm” (2007) Brook. J Int’l L vol 32:3.
Westbrook, J., “Ian Fletcher and the Internationalist Principle” 2015 (3) NIBLeJ at 30.

C.SOURCE MATERIALS

See Annexures A to E at the end of Study Notes.

D.GENERIC MATERIAL OFTEN COVERING MORE THAN ONE SESSION

Read: Sections of Insol Fellowship Study Notes as indicated in this Study Guide.
Read: Omar, Paul., “The Landscape of International Insolvency Law”[Updated version of Omar, Paul J., “The Landscape of International Insolvency. Law”, in: 11 International Insolvency Review 2002, 173ff.]
Read: Wood, Philip R.,Principles of International Insolvency (2007) pp. 1 -30 (General Introduction)

NOTE: FOR SECTIONS A TO D: FOLLOW STUDY NOTES AND READ COMPULSORY READING MATERIALS

SECTION A: GENERAL BACKGROUND [Read: Study notes pp 9 - 24]

After completion of this study unit you must know the basics of the following aspects:

The framework and essential features of insolvency law.
Core terminology.
The history of insolvency law.
Comparative aspects.
Classification of insolvency systems.
Different classes of creditors.

1FRAMEWORK OF ESSENTIAL FEATURES OF AN INSOLVENCY SYSTEM

[UNCITRAL Legislative Guide:
Different approaches to effective and efficient insolvency law.Most suitable national or local context.]
A.ESSENCE OF INSOLVENCY/ BANKRUPTCY

Collective(versus individual) nature/ procedure
Meaning: insolvency and bankruptcy
Terminology: consider principles
Liquidation of Assets v rescue
History:

-English law and civil law

Insolvency law families

-Individuals & corporate

B.POLICY CONSIDERATIONS etc

Pro creditor
Pro debtor
Traditional English v continental approach

AND
Key Objectives etc

Certainty in market place

Transparent and predictable

Maximization of assets
Balance: rescue and liquidation
Equitable treatment of creditors (and distribution)

Rules for ranking and priorities

Timely, efficient impartial resolution of insolvency
Preservation of estate

Insolvency law should:

Deal with rescue(restructuring) and liq
Recognise rights established outside insolvency (general law) - local and foreign?

–Rights of real security

Harmonised, predictable rules for cross-border

Considerations:
Balancing: interests of creditors, debtor, society …different approaches… policy…
Fresh start… liquidation v rescue culture
Society constantly changing… insolvency not static
Dependent on well-developed commercial system and regulatory framework

Courts and role players … professionals

C.SOURCES

Insolvency legislation (single Act or various pieces of legislation)
Examples:

USA
Germany
Australia
South Africa
England and Wales

General law v Insolvency Law

Legislation, Common law, precedent
CONSUMER
BANKRUPT-CY
-INDIVI-DUALS /

D.COMMON CHARACTERISTICS

(General features)

Liquidation
Debt restructuring

[Liquidation or rescue: result provides more value to creditors] / CORPORATE BANKRUPTCY

E.GATEWAYS AND COMMENCEMENT

(How to open an insolvency proceeding?)

Court?
Other?
Who can apply? (locus standi)

Who not?
Debtor/ creditor
Open access?

When to apply and requirements

Insolvency

Balance sheet
Cash flow
Imminent insolvency

Same basis liquidation and rescue?

Notification

NB: Importance of commencement of formal insolvency, i.e. bankruptcy

F.EFFECTS

F.1. AUTOMATIC STAY

(Moratorium on individual collecting and execution procedures)

Extent of moratorium
Exceptions?
Uncitral Insolvency Guide of 2004 (UIG) 95

-Exempt and excluded assets
-Matrimonial dispensations /

F.2.ESTATE/ ASSETS

Identification of estate assets: the estate

Local and foreign

Protection ad preservation(control):

Liquidation v rescue

Level of control retained by debtor

Limitations

Position of regulator/ insolvency representative
Tracing of assets
Position: un/encumbered assets
Third party owned assets [UIG 77; 110]
Foreign assets
Pre-post commencement transactions [UIG 79]

F.3.a. Rights, duties, liabilities and limitations of debtor as an individual /

F.3. PERSONAL CONSEQUENCES AND LIABILITY

/ F.3.b.Rights, duties, liabilities and limitations of directors and officers

F.4. EXECUTORY CONTRACTS[UIG 119]

General powers of estate representative
Maximising estate value
Acceleration and termination clauses
Special cases: i.e. labour contracts?[UIG 70]
Effect of consumer protection in consumer insolvency

Same principles/considerations in liquidation and rescue?

F.5. SET-OFF AND NETTING

(PRE-AND POST COMMENCEMENT)
[UIG 70]

F.6. AVOIDABLE DISPOSITIONS[UIG 71; 135]

Fraudulent conveyance (undervalued)
Preference

[-rule or standard-]
Commencement (relevant time)

[Conversion rescue to liquidation UIG 152]

G.ADMINISTRATION

Regulator (Structure: court or otherwise)
Court involvement (special court/ other body?)
Insolvent Estate Representative (qualifications etc.?) [fees UIG 63; 174; 176, EBRD principles]
Proof of claims and verification

Types of claims, subordinated claims
Ranking – see H below

Meetings of interested parties
Creditors [creditor committees; monitoring UIG 190]
Position of debtor
Tracing of assets
Examinations
Post commencement contracts [UIG 131]
Realisation of the assets [UIG 109]

Mode of sale
Un/encumbered
Burdensome, no-value... relinquish?
H.DISTRIBUTION

Classes of creditors
Types of claims [UIG 251]

Secured
Priorities [UIG 266]

Administrative
Other

Concurrent

Special cases [UIG 273]

[Employee claims]
Related persons (subordianted)

Owners and equity holders

I.COST OF ADMINISTRATION

Who must fund?
Estate
Creditors
Public office

J.REHABILITATION [AND DISCHARGE]

J.a. DISCHARGE
Process? /

On what policy is the system based?
Pro debtor or pro creditor?
Problem to determine which procedure:
Liquidation or rescue?

/ J.b. CORPORATE/
BUSINESS RESCUE [UIG 28]
-Discharge: cram down or consent
Conclusion of Proceedings

Individual
Corporate: rescue – liquidation
[UIG 222]

Reorganisation/ Rescue plan

Debtor in Possession (?)
Discharge
Creditors’ committees(?)
Conversion to liquidation

Formal arrangement
Pre-pack

Informal v.
Formal: (statutory) repayment plans /

K.ALTERNATIVES

Creditors’ workouts [UIG: 22]

London approach
Insol Guidelines
Pro’s – cons?
Voluntary arrangements; v.
Statutory regimes

L.CROSS-BORDER DISPENSATIONS [UIG 41, 69, 70]

-Some systems: no collective procedures for individuals,
except traders
-NINA [see I. above] /

M.SPECIAL DISPENSATIONS

/ Like:

Groups [UIG 276]

Court discretion
Consolidation

Administrative processes [UIG 32]
Banks, financial institutions and groups of corporations
SME’s
SOE’s
Sovereign debt

1.1BACKGROUND TO ABOVE FRAMEWORK

Important sources:

UNICTRAL legislative Guide to Insolvency Law, (Part 1 and 2) 2004 – [The narrative in the Study Notes pp 9-22, is based on this document]

(Part 3) 2010 – Enterprise groups

(Part 4) 2013

2001 UN Convention on the Assignment of Receivables
2007 UNCITRAL Legislative Guide on Secured Transactions
2010 UNCITRAL Legislative Guide on Secured Transactions: Supplement on IP Rights (2010)
World Bank Principles

1.2LEGEND(NARRATIVE) TO FRAMEWORK: Wood; Fletcher (2); Garrido; Annexure E to Study Notes pp 61 et seq]

[Note: Follow cross referencing to the above Framework. The narrative in the Study Notes is largely based on theUNICTRAL legislative Guide to Insolvency Law, (Part 1 and 2) 2004, accessible on the UNCITRAL website, and read summary in the Study Notes, pp 9 - 25.]

A. Systems and Essentials and B. Policy Considerations

Wood:

–Pro-creditor

–Pro-debtor

–Not interested

[Advantage of creditors?]
Essentials:

–Pooling of assets (universal concept)

–Creditors are paid pari passu (?)

–Initiation process

–Administrator

–Publication (notification)

–Powers of administrator

–Creditors participation

–Supervision

–Culture: rescue - liquidation

Sealy and Hoolley:

–Individuals – protect, fresh start/ discharge

–Corporations – preserve business or viable parts

–Pari passu – except priorities

Fletcher:

–Common denominator – collectivity

Distribution rules: Wood:

–Super-priority

–Priority creditors

–Pari passu creditors

–Deferred or subordinated creditors

•Contract

•Statutory

•Equitable (by court)

–Expropriated creditors

F.1. AUTOMATIC STAY

(Moratorium on individual collecting and execution procedures)

Extent of moratorium
Exceptions?

–Court or RP approval

–Encumbered asset not needed

–Low value

–Perishable goods

F.6. AVOIDABLE DISPOSITIONS [UIG 71; 135]

Transactions after inception financial crisis
Fraud/ with or w.o. adequate value

–Fraudulent conveyance law/ Actio Pauliana

Preferences

–Defences: varied but good faith and lack of knowledge (debtor and/ or creditor), ordinary course business (subjective and objective)

Time period: fixed or discretionary (maximum)
Suspect periods
Presumptions: insolvency
Related persons
Who to initiate?
Before or after commencement
[Rule or standard: cost and fairness]
The same in liq and rescue?

–Commencement - relevant time (Conversion rescue to liq UIG 152)

D. DISTRIBUTION

TYPES OF CLAIMS

Types of claims [UIG 251]

–Secured

–Priorities [UIG 266]

Administrative
Other

CORPORATE/BUSINESS RESCUE [UIG 28]

Discharge: cram down 22

Essentials (UIG):

Submission to proceedings
Automatic stay
Continuation of business by existing management or independent manager or both
Formulation of Plan:

–Save viable part of business

–Better return creditors

–Rights of stakeholders

–Discharge ?

Consideration of, voting on, and acceptance of plan
Some instances, judicial approval/ confirmation
Implementation
Closure

Creditor-work out (Insol Principles)

8 Insol principles for a global approach to multi-creditor workouts, 2000:

P1 Financial distress, all creditors must co-operate
P2 Not take individual actions, standstill
P3 Debtor also not take action
P4 Coordinating committees (coordinated response)
P5 Debtor provide full information (P7 confidential)
P6 Proposal, position of creditors at standstill
(P7 confidential)
P8 New credit - priority

M. Special rules

Groups [UIG 276]

Court discretion (factors indicating operated as a single entity)
Consolidation (statutory)

Administrative processes [UIG 32]

Initiated by governments or regulators:
How to deal with corporate debtors by banks for instance in case of financial crisis
Sweden

Sovereign debt

Buckley “The Desperate Need for a Global Sovereign Bankruptcy Regime”

IMF Principles for Sovereign Debt Restructuring Mechanism (SDRM)

Problem twofold: not timely restructuring process;

and

only available mechanism is default – highly disruptive.

SDRM to address these:

Krueger:

Imposition of a standstill.
Temporary foreign exchange and capital control standstills.
Collective action provisions – 75% majority acceptance.
Seniority for new lending.
IMF assurance of good conduct by debtor that will assure creditors the debtor will pursue policies that protect asset values and restore growth.
Subsequent IMF financing limited to rebuilding reserves and paying for essential services and imports.

Subsequent amendments:

More control to debtor and super-majority creditors.
Contracts re collective action clauses in bonds and statutory approach.

[Global Bankruptcy Court?]

2 CORE TERMINOLOGY

SOURCE: EXTRACT GLOSSARY OF TERMS FROM UNCITRAL INSOLVENCY GUIDE OF 2004

(a) “Administrative claim or expense
(b) “Assets of the debtor”:
(c) “Avoidance provisions
(d) “Burdensome assets (e) “Cash proceeds”:
(f) “Centre of main interests”: the place
where the debtor conducts the administration
of its interests on a regular basis and that is
therefore ascertainable by third parties;
(g) “Claim”:
(h) “Commencement of proceedings”:
(i) “Court”:
(j) “Creditor”:
(k) “Creditor committee”:
(l) “Debtor in possession”:
(m) “Discharge”:
(n) “Disposal”:
(o) “Encumbered asset”:
(p) “Equity holder”:
(q) “Establishment”:
(r) “Financial contract”:
(s) “Insolvency”:
(t) “Insolvency estate”:
(u) “Insolvency proceedings”:
(v) “Insolvency representative”: / (w) “Liquidation”:
(x) “Lex fori concursus”:
(y) “Lex rei situs”:
(z) “Netting”:
(aa) “Netting agreement”:
(bb) “Ordinary course of business”:
(cc) “Pari passu”:
(dd) “Party in interest”:
(ee) “Post-commencement claim”:
(ff) “Preference”:
(gg) “Priority”:
(hh) “Priority claim”:
(ii) “Protection of value”:
(jj) “Related person”:
(kk) “Reorganization”:
(ll) “Reorganization plan”:
(mm) “Sale as a going concern”:
(nn) “Secured claim”:
(oo) “Secured creditor”:
(pp) “Security interest”:
(qq) “Set-off”:
(rr) “Stay of proceedings”:
(ss) “Suspect period”:
(tt) “Unsecured creditor”:
(uu) “Voluntary restructuring negotiations”:

3 HISTORICAL DEVELOPMENT AND SOME COMPARATIVE ASPECTS [Read Study Notes pp 23 – 25]

3.1General

Roman law:

Cessio bonorum(debtor)
Distractio bonorum(creditor)
Remission and dilatio(composition)

–Cross-border insolvency (CBI)

Lex mercatoria

–Only merchants (companies)

–Common law – civil law influence

[See in general Fletcher(2); Levinthal; Wood]

3.2Some comparative aspects

England

Cork report of the 1980’s

Insolvency Act of 1986 (Unified At)
Insolvency Act 2000 and Enterprise Act 2002
Common Law; s 426, Ins R 2006(Model Law), EU Ins R

America

Review commission 1973
1978 Bankruptcy Code (Unified Act)
Fresh start
Reform late 1990’s –
2005 Amendments: chapter 15 –CBIL (adopted version of UNCITRAL Model Law on Cross-Border Insolvency)
Bankruptcy Code of 1978.

Straight bankruptcy (liquidation) – chapter 7;
Municipalities – chapter 9;
Reorganisation(rescue) – chapter 11;
Family farmer – chapter 12;
Rescheduling – chapter 13.
Review Commission of the 1990’s;
Reforms of 2005: Inter alia “means testing” and new Chapter 15, i.e. adoption of UNCITRAL Model Cross-Border Insolvency Law.

The Netherlands

Faillissementswet of 1897
Fresh start – Shuldsaneringsregeling
Insolvency Reform

Africa

South Africa (mixed legal system)

Insolvency Act of 1936

Not unified Act and Mixed legal system

Reform

Dual CBI law system (CBIL)

Western Africa: OHADA

Australia

Harmer Report
Not single unified Act
CBI: 2008 Model CBIL

ASIA

China: 2006 PRC Bankruptcy Law
Asian Development Bank (ADB)
Hong Kong: English insolvency laws:

Personal: amended in 1996

Companies: under review

SECTION B: THE SOURCES AND NATURE OF INTERNATIONAL INSOLVENCY: Read Study Notes pp 25 to 48; Omar.

Sources: Fletcher (1);Wessels and Boon(Chapter 1); Omar (4); Wood (7).

After completion of this study unit you must have a sound knowledge of:

What international insolvency law is.
The sources and nature of international insolvency law.
Basic principles and approaches to cross-border insolvency cases.
Various models and instruments available and in the process of being developed in the area of cross-border insolvency law.

4. What is Int Ins law/ CBIL ?:

In its simplest forms, a transnational insolvency involves an insolvency proceeding in one country, with creditors located in at least one additional country.” In the most complex cases, it involves multiple proceedings, subsidiaries, affiliated entities, assets, operations and creditors in dozens of nations” - Sandy Shandro, Freshfields.

•No universal set of laws

–National legal systems differ-

•Bankruptcy/ insolvency and

•The general law (rights)

•Wessels: insolvency rules which cannot be fully enforced…

•Fletcher: …insolvency that transcends a national legal system… regard to other systems than domestic

•Quest: predictability

5. Notes regarding cross-border insolvency

Context –

Introduction:

–Recognition of foreign judgments & PIL

–Economic affairs with foreigners