Liquidation Com

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LIQUIDATION and INSOLVENCY

Continued...

3. Although country approaches vary, there is broad agreement that effective
and efficient insolvency regimes should aim to achieve the key objectives
identified below in a balanced manner. Whatever design is chosen for an
insolvency law that will meet these key objectives, the insolvency law must be
complementary to, and compatible with, the legal and social values of the
society in which it is based and which it must ultimately sustain. Although
insolvency law generally forms a distinctive regime, it ought not to produce
results that are fundamentally in conflict with the premises upon which laws
other than the insolvency law are based. Where the insolvency law does seek
to achieve a result that differs or fundamentally departs from that other law
(e.g. with respect to treatment of contracts, avoidance of antecedent acts and
transactions or treatment of the rights of secured creditors), it is highly
desirable that that result be the product of careful consideration and conscious
policy in that direction.

1. Provision of certainty in the market to promote
economic stability and growth

4. Insolvency laws and institutions are critical to enabling States to achieve
the benefits and avoid the pitfalls of integration of national financial systems
with the international financial system. Those laws and institutions should
promote restructuring of viable business and efficient closure and transfer of
assets of failed businesses, facilitate the provision of finance for start-up and
reorganization of businesses and enable assessment of credit risk, both domestically
and internationally. The following key objectives of an insolvency law
should be implemented with a view to enhancing certainty in the market and
promoting economic stability and growth.

2. Maximization of value of assets

5. Participants in insolvency proceedings should have strong incentives to
achieve maximum value for assets, as this will facilitate higher distributions to
creditors as a whole and reduce the burden of insolvency. The achievement of
this goal is often furthered by achieving a balance of the risks allocated between
the parties involved in insolvency proceedings. The manner in which
avoidance provisions treat prior transactions, for example, can ensure that
creditors are treated equitably and enhance the value of the debtor’s assets by
Part one: I. Key objectives of an effective and efficient insolvency law 11
recovering value for the benefit of all creditors. At the same time, the treatment
afforded those transactions can undermine the predictability of contractual
relations that is critical to investment decisions, creating a tension between the
different objectives of an insolvency regime. Similarly, a balance has to be
struck between rapid liquidation and longer-term efforts to reorganize the
business that may generate more value for creditors, between the need for new
investment to preserve or improve the value of assets and the implications and
cost of that new investment on existing stakeholders, and between the different
roles allocated to the different stakeholders, in particular the discretion that can
be exercised by the insolvency representative and the extent to which creditors
can monitor the exercise of that discretion to safeguard the proceedings and
ensure the maximization of value.

3. Striking a balance between liquidation and reorganization

6. The first key objective of maximization of value is closely linked to the
balance to be achieved in the insolvency law between liquidation and reorganization.
An insolvency law needs to balance the advantages of near-term debt
collection through liquidation (often the preference of secured creditors)
against preserving the value of the debtor’s business through reorganization
(often the preference of unsecured creditors and the debtor). Achieving that
balance may have implications for other social policy considerations, such as
encouraging the development of an entrepreneurial class and protecting
employment. Insolvency law should include the possibility of reorganization of
the debtor as an alternative to liquidation, where creditors would not involuntarily
receive less than in liquidation and the value of the debtor to society and
to creditors may be maximized by allowing it to continue. This is predicated
on the basic economic theory that greater value may be obtained from keeping
the essential components of a business together, rather than breaking them up
and disposing of them in fragments. To ensure that insolvency proceedings are
not abused by either creditors or the debtor and that the procedure most appropriate
to resolution of the debtor’s financial difficulty is available, an insolvency
law should also provide for conversion between the different types of
proceedings in appropriate circumstances.

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

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