Government Liquidation

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8. Recognition of existing creditor rights and establishment
of clear rules for ranking of priority claims

13. Recognition and enforcement in insolvency proceedings of the differing
rights that creditors had with respect to the debtor and its assets before the
commencement of insolvency proceedings will create certainty in the market
and facilitate the provision of credit, in particular with respect to the rights and
priorities of secured creditors. Clear rules for the ranking of priorities of both
existing and post-commencement creditor claims are important to provide predictability
to lenders, and to ensure consistent application of the rules, confidence
in the proceedings and that all participants are able to adopt appropriate
measures to manage risk. To the greatest extent possible,1 those priorities
should be based upon commercial bargains and not reflect social and political
concerns that have the potential to distort the outcome of insolvency. According
priority to claims that are not based on commercial bargains therefore
should be minimized.

9. Establishment of a framework for cross-border insolvency

14. To promote coordination between jurisdictions and facilitate the provision
of assistance in the administration of insolvency proceedings originating in a
foreign country, insolvency laws should provide rules on cross-border insolvency,
including the recognition of foreign proceedings, by adopting the
UNCITRAL Model Law on Cross-Border Insolvency (see annex III).

C. Balancing the goals and key objectives of an insolvency law

15. Since an insolvency regime cannot fully protect the interests of all parties,
some of the key policy choices to be made when designing an insolvency
law relate to defining the broad goals of the law (rescuing businesses in financial
difficulty, protecting employment, protecting the interests of creditors,
Recommendations 1-5 (paras. 4-14)

1. In order to establish and develop an effective insolvency law, the
following key objectives should be considered:

(a) Provide certainty in the market to promote economic stability and
growth;

(b) Maximize value of assets;

(c) Strike a balance between liquidation and reorganization;

(d) Ensure equitable treatment of similarly situated creditors;

(e) Provide for timely, efficient and impartial resolution of insolvency;

(f) Preserve the insolvency estate to allow equitable distribution to
creditors;

(g) Ensure a transparent and predictable insolvency law that contains
incentives for gathering and dispensing information; and

(h) Recognize existing creditors rights and establish clear rules for ranking
of priority claims.

2. The insolvency law should include provisions addressing both
reorganization and liquidation of a debtor.

3. The insolvency law should recognize rights and claims arising under
law other than the insolvency law, whether domestic or foreign, except to the
extent of any express limitation set forth in the insolvency law.

4. The insolvency law should specify that where a security interest is
effective and enforceable under law other than the insolvency law, it will be
recognized in insolvency proceedings as effective and enforceable.

5. The insolvency law should include a modern, harmonized and fair
framework to address effectively instances of cross-border insolvency.
Enactment of the UNCITRAL Model Law on Cross-Border Insolvency is
recommended.

Part one: I. Key objectives of an effective and efficient insolvency law 15
encouraging the development of an entrepreneurial class) and achieving the
desired balance between the specific objectives identified above. Insolvency
laws achieve that balance by reapportioning the risks of insolvency in a way
that suits a State’s economic, social and political goals. As such, an insolvency
law can have widespread effects in the broader economy.

16. The achievement of that balance in the insolvency law and the integration
of the law with the wider legal regime are vital to maintaining social order and
stability. All parties need to be able to anticipate how their legal rights will be
affected in the event of a debtor’s inability to pay, or to pay in full, what is
owed to them. This allows both creditors and equity investors to calculate the
economic implications of default by the debtor and so estimate their risks.
These issues are discussed in detail throughout the Legislative Guide.

17. There is no universal solution to the design of an insolvency law because
States vary significantly in their needs, as do their laws on other issues of key
importance to insolvency, such as security interests,2 property and contract
rights, remedies and enforcement procedures. Although there may be no universal
solution, most insolvency laws address the range of issues raised by the
key objectives discussed above, albeit with different emphasis and focus. Some
laws favour stronger recognition and enforcement of creditor rights and commercial
bargains in insolvency and give creditors more control over the conduct
of insolvency proceedings than the debtor (sometimes referred to as
“creditor-friendly” regimes). Other laws lean towards giving the debtor more
control over the proceedings (referred to as “debtor-friendly” regimes), while
yet others seek to strike a balance in the middle. Some laws give more prominence
to liquidation of the debtor in order to weed out inefficient and incompetent
market players, while others favour reorganization. The focus on
reorganization may serve a number of different aims, such as enhancing the
value of creditors’ claims as part of an ongoing business concern, providing a
second chance to the shareholders and management of the debtor; providing
strong incentives for the adoption by entrepreneurs and managers of appropriate
attitudes to risk; or protecting vulnerable groups, such as the debtor’s
employees, from the effects of business failure.3 Some laws give particular
emphasis to the protection of employees and the maintenance of employment
in insolvency, while others provide that business can be downsized with
minimum protections afforded to employees.

18. Nevertheless, adopting a reorganization-friendly approach should not
result in establishing a safe haven for moribund enterprises: enterprises that are
2Steps have been taken in recent years towards harmonizing the law on security interests, such
as the United Nations Convention on the Assignment of Receivables in International Trade, the
Unidroit Convention on International Interests in Mobile Equipment (Cape Town, 2001) and work by
UNCITRAL to develop a legislative guide on secured transactions.

3There is not necessarily a direct correlation between the debtor or creditor friendliness of an
insolvency regime, the emphasis on liquidation or reorganization and the subsequent success or failure
of reorganization. While it is beyond the scope of the Guide to discuss these issues in any detail, they
are important for the design of an insolvency regime and deserve consideration. While the rate of
successful reorganizations varies considerably between those regimes classified as creditor-friendly,
research appears to suggest that the assumption that creditor-friendly regimes lead to fewer or less
successful reorganizations than debtor-friendly regimes is not necessarily true.

16 UNCITRAL Legislative Guide on Insolvency Law

beyond rescue should be liquidated as quickly and efficiently as possible. To
the extent that some interests may be regarded as being of lower priority than
others, the establishment of mechanisms outside of the insolvency law may
provide a better solution than trying to address those interests under the insolvency
regime. For example, where as a matter of policy it is decided that
employee claims should rank lower than secured and priority creditors in
insolvency, insurance arrangements can be used to protect

Article Courtesy: http://www.uncitral.org/pdf/english/texts/insolven/05-80722_Ebook.pdf

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