Insolvency

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Designing the key objectives
and structure of an effective and
efficient insolvency law
I. Key objectives of an effective
and efficient insolvency law
A. Introduction
1. When a debtor is unable to pay its debts and other liabilities as they
become due, most legal systems provide a legal mechanism to address the
collective satisfaction of the outstanding claims from assets (whether tangible
or intangible) of the debtor. A range of interests needs to be accommodated by
that legal mechanism: those of the parties affected by the proceedings including
the debtor, the owners and management of the debtor, the creditors who
may be secured to varying degrees (including tax agencies and other government
creditors), employees, guarantors of debt and suppliers of goods and
services, as well as the legal, commercial and social institutions and practices
that are relevant to the design of the insolvency law and required for its
operation. Generally, the mechanism must strike a balance not only between
the different interests of these stakeholders, but also between these interests
and the relevant social, political and other policy considerations that have an
impact on the economic and legal goals of insolvency proceedings. To the
extent that it is excluded from the scope of such legal mechanisms, a debtor
and its creditors will not be subject to the discipline of the mechanism, nor will
they enjoy the protections provided by the mechanism.
2. Most legal systems contain rules on various types of proceeding (which
are referred to in this Legislative Guide by the generic term “insolvency proceedings”)
that can be initiated to resolve a debtor’s financial difficulties.
While addressing that resolution as a common goal, these proceedings take a
number of different forms for which uniform terminology is not always used
and may include both what might be described as “formal” and “informal”
elements. Formal insolvency proceedings are those commenced under the
insolvency law and governed by that law. They generally include both
liquidation and reorganization proceedings. Informal insolvency processes are
not regulated by the insolvency law and will generally involve voluntary
10 UNCITRAL Legislative Guide on Insolvency Law
negotiations between the debtor and some or all of its creditors. Often these
types of negotiations have been developed through the banking and commercial
sectors and typically provide for some form of restructuring of the insolvent
debtor. While not regulated by an insolvency law, these voluntary negotiations
nevertheless depend for their effectiveness upon the existence of an
insolvency law, which can provide indirect incentives or persuasive force to
achieve reorganization.

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

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