May 1997, the United Nations Commission on International Trade Law (UNCITRAL or the "Commission") completed and adopted its Model Law on Cross-border Insolvency. The Model Law was designed to deal with the complications of insolvency proceedings that affect more than one country, and it is being considered for adoption by several countries. Four Working Group Sessions, each two weeks long, plus a full two-week Commission meeting, were required to produce the cross-border law, which carefully avoided the labyrinth of domestic insolvency laws. Both H.R. 833 and S. 625 as passed by the 106th Congress contain a U.S. adaptation of the Model Law as proposed by chapter 15 of the Bankruptcy Code.

Proud of its success in the multinational arena and encouraged by constituent countries and intergovernmental financial institutions, UNCITRAL is now considering whether it can help strengthen domestic business insolvency regimes. A new Working Group on Insolvency Law convened in Vienna in December to analyze whether UNCITRAL could perform useful work on domestic insolvency systems and, if its conclusions were positive, to then make recommendations to the Commission for future work.

Delegates and observers from more than 40 countries and international organizations comprised the new Working Group on Insolvency Law. A comprehensive "Note" written in anticipation of the Working Group meeting, entitled "Possible Future Work on Insolvency Law," (A/CN.9WG.V/WP.50), provides a statement of background and source materials. A detailed "Report of the Working Group on Insolvency Law on the Work of its 22nd Session," (Vienna, 6-17 December 1999) (A/CN.9/469) is also available. Both can be found on the UNCITRAL web site, http://www.uncitral.org, under the topic Preparatory Documents.

The formal genesis of the Working Group on Insolvency Law was a proposal presented by Australia (A/CN.9/462/Add.1) at the Spring 1999 meeting of the full Commission. Australia suggested that reports from several international fora, combined with recent regional financial crises, evidenced a need to strengthen insolvency and debtor/creditor regimes. Strong corporate insolvency systems enhance the international financial system by improving the management of financial crises and facilitating restructuring. UNCITRAL, with its universal membership, might be able to facilitate such improvements in national corporate insolvency systems.

The Commission authorized a single Working Group session to consider what UNCITRAL could accomplish and what type of product it would produce. A feasibility proposal would then be presented to the Commission for consideration at its next session in New York beginning on June 12, 2000. The Australian proposal and the Commission decision are reported in the "Report of the United Nations Commission on International Trade Law on the Work of its 32nd Session;" Official Records of the General Assembly, Fifty-fourth Session, Supplement No. 17; A/54/17.

Among the stimuli for the proposed Working Group were projects on insolvency reform begun by the World Bank, the Asian Development Bank, the International Monetary Fund (IMF) and the G-22 Countries. All but the World Bank had published reports on their projects, with the World Bank effort well advanced toward an August 2000 publication of principles and guidelines to address systemic issues and the interplay between credit and insolvency. Because these multinational organizations are sometimes perceived as imposing the agendas of countries with significant economies on other countries with impaired or less-developed economies, reforms to domestic corporate insolvency systems might be more palatable if burnished by the inclusive, deliberative approach of UNCITRAL. The questions were how it might accomplish anything useful or whether it could add value to the work of the World Bank, the IMF and others.

Of the 40 countries that were technically in attendance, a smaller group actively joined in the daily discussions. International organizations turned out in force, including the International Bar Association (IBA), INSOL International, the IMF, the World Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, the Organization for Economic Cooperation and Development, the International Women's Insolvency & Restructuring Confederation, the European Insolvency Practitioners Association and the Group of Thirty (G30). Most were active participants. Opening remarks by the secretariat, delegates and observers generally reiterated the virtues of strong insolvency regimes but failed to yield a vision for realizing the goal. Most agreed that there could be no "one size fits all" insolvency law drafted by UNCITRAL. Less ambitious suggestions ranged from statements of principles and guidelines, knowledge sharing, training and technical assistance to draft model provisions on key issues. The opening discussion also revealed that a surprising number of countries were considering reform of their internal insolvency systems and that the session was fortuitously timely.

With no real idea of its destination but with seven or eight days of session time reserved, the Working Group meandered through the "Key Objectives" and "Core Features" elaborated in the Note. Assembled by the secretariat from the reports of the IMF, ADB and G-22, the key objectives were: maximize the value of assets; strike a balance between liquidation and rehabilitation; treat similarly situated creditors, whether domestic or foreign, equitably; provide for timely, efficient and impartial resolution of insolvencies; prevent premature dismemberment of debtor's assets by creditors by imposing a stay; provide for a procedure that is predictable, transparent and contains incentives for gathering information; and establish a framework for cross-border insolvency, preferably by adopting the UNCITRAL Model Law.

Much of the discussion of these objectives was platitudinous. The U.K.-influenced speakers interjected the distinction between saving the debtor and saving its business. The latter is achievable by a licensed insolvency professional acting for a secured creditor conducting a sale as a going concern. Other countries noted the need to make commencement of proceedings procedurally efficient and expeditious (but not so easy as to be subject to abuse by debtors or creditors). Ironically, many of the countries concerned about speed themselves prolong case commencement by inviting litigation of proof of insolvency. Discussion of staying creditor action illustrated the dichotomy between countries with secured creditor bias and those with a neutral or debtor-favorable approach. There should be reasonable limitations on creditor enforcement upon the commencement of a proceeding, complemented by various exceptions and relief-from-stay procedures. In addition to the list of key objectives contained in the Note, elimination of fraud and establishment of effective debt collection and enforcement procedures were suggested as necessary key objectives.

The core features delineated in the Note essentially are a checklist of the topics and issues that must be addressed in designing an insolvency regime and lodging it in an institutional framework, such as what types of debtors will be subject to the law, when can insolvency proceedings be commenced, what creditors will be stayed, what will become of contracts with the debtor, what will be the relationship between liquidation and rehabilitation proceedings, what court or agency supervision will be mandated, what discretion will judges and other officials have, and how will professionals be engaged and compensated. Much of the discussion of these features was reportorial of how various countries addressed the issues in their current laws. Problems that are intrinsic to current laws and systems illustrate the difficulties of designing an ideal regime.

For example, some systems have completely separate procedures for liquidation and rehabilitation and no mechanism for a transition from one type of case to another. A failed rehabilitation might result in the dismissal of the case, with no efficient way to invoke liquidation proceedings other than by starting a new, contestable case. A potentially resurrectable debtor may be put into involuntary liquidation with no direct avenue to attempt rehabilitation. Other countries suffer a cultural disconnect with business reorganization. Traditions or laws may irreconcilably preclude the continuation of a business that does not pay all of its debts, may prevent debt for equity conversions and may not accept dilutions of ownership interests.

Many countries require proof of balance-sheet insolvency, in sometimes lengthy litigation heard by courts lacking experience, impartiality or integrity. Proof of insolvency, whether by balance sheet deficit or collective cessation of creditor payments, is usually a prerequisite even for the commencement of a rehabilitation case. Some countries permit filing based on prospective insolvency or on the alleged need for insolvency-type relief. Some systems appoint an expert, to be paid by the petitioner, to determine insolvency. Other countries require the petitioner to assure payment for the cost of the proceedings if the debtor's available assets prove insufficient. Verification of claims for case commencement, voting or distribution can be a difficult process in many countries, pervaded with quandaries about contingent claims, priority claims, fraud and administration costs. One bright spot in the claims area was an excellent report of the New Zealand Law Commission on claim priority which recommends that all unsecured claims ordinarily rank pari passu. Social imperatives would be dealt with in welfare or fiscal legislation, not through claim ranking or treatment (as in the U.S. Bankruptcy Code).

There were at least two sides articulated to most rehabilitation issues, and many were polyhedral. Cases should be commenced while there is still hope of rehabilitating the debtor, but commencement should not be permitted in the absence of insolvency or if it invites abuse by debtors or creditors. Officers and directors should have personal liability for debts incurred while insolvent, but entrepreneurs should not be discouraged. Loans made or credit extended to a debtor in (in contemplation of) proceedings should/should not enjoy priority ahead of general claims. There should be an early determination that rescue is feasible but wasteful litigation and impediments to case commencement should be discouraged. There should be an automatic/discretionary stay of secured/unsecured creditors for a specifically limited/discretionary period. Management should be retained, supervised, supplanted, personally liable or incarcerated for fraudulent trading. Avoidance actions should/should not be available in rehabilitation and may be prosecuted by the debtor/the creditors/licensed professionals. Contracts can/cannot be assumed if there is a bankruptcy termination clause and can/ cannot be assigned if they contain assignment restrictions. A reorganization plan should be prepared by the debtor/an independent professional within a fixed/discretionary period of time which can/cannot modify the capital structure of the debtor. A failed rehabilitation case can/cannot be converted to a liquidation.

The Working Group deliberations of substantive topics were overlaid by considerations of the degrees of court involvement and specialization, qualification, remuneration and liability of liquidators and administrators, degree and methodology of creditor involvement, the role and rules for informal insolvency procedures, the need for effective debt collection and enforcement of security and the development of an effective infrastructure for insolvency administration.

Transcending the obvious complexity of the topic was a consensus that there be a recommendation to the Commission that the Working Group build on the work of the other international organizations and at least produce a definitive statement of key objectives and core features for strong insolvency, debtor-creditor regimes, including out-of-court restructurings, and a legislative guide containing and evaluating flexible, alternative approaches to achieving the critical components. At best, the product might include model legislative provisions.

The IBA, with support from the U.S. delegation, had suggested that the topic of out-of-court restructurings should be included on the discussion agenda as an integral component of a comprehensive insolvency system. The adoption of a uniform approach to large cross-border restructurings of borrowed-money debt would be useful and perhaps more readily achievable than comprehensive law reform. However, the proposal's inclusion of a mechanism to bind minority creditors was resisted by countries and organizations with traditions of creditor dominance. Legislation necessary to bind minorities blurred with full rehabilitation proceedings and seemed antithetical to the desirable informality of out-of-court proceedings. In addition, there was a consensus that out-of-court restructurings worked best "in the shadow" of strong insolvency systems, so that there cannot be a conducive environment for out-of-court restructurings without the backdrop of formal proceedings. Nonetheless, the topic was added to the discussion agenda.

The Commission will consider the recommendation of the Working Group at its next session in New York, beginning June 12, 2000.