Liquidation World

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LIQUIDATION and INSOLVENCY

4. Ensuring equitable treatment of similarly situated creditors

7. The objective of equitable treatment is based on the notion that, in collective
proceedings, creditors with similar legal rights should be treated fairly,
receiving a distribution on their claim in accordance with their relative ranking
and interests. This key objective recognizes that all creditors do not need to be
treated identically, but in a manner that reflects the different bargains they
have struck with the debtor. This is less relevant as a defining factor where
there is no specific debt contract with the debtor, such as in the case of damage
claimants (e.g. for environmental damage) and tax authorities. Even though the
principle of equitable treatment may be modified by social policy on priorities
and give way to the prerogatives pertaining to holders of claims or interests
that arise, for example, by operation of law, it retains its significance by

12 UNCITRAL Legislative Guide on Insolvency Law
ensuring that the priority accorded to the claims of a similar class affects all
members of the class in the same manner. The policy of equitable treatment
permeates many aspects of an insolvency law, including the application of the
stay or suspension, provisions to set aside acts and transactions and recapture
value for the insolvency estate, classification of claims, voting procedures in
reorganization and distribution mechanisms. An insolvency law should address
problems of fraud and favouritism that may arise in cases of financial distress
by providing, for example, that acts and transactions detrimental to equitable
treatment of creditors can be avoided.

5. Provision for timely, efficient and
impartial resolution of insolvency

8. Insolvency should be addressed and resolved in an orderly, quick and
efficient manner, with a view to avoiding undue disruption to the business
activities of the debtor and to minimizing the cost of the proceedings. Achieving
timely and efficient administration will support the objective of maximizing
asset value, while impartiality supports the goal of equitable treatment.
The entire process needs to be carefully considered to ensure maximum efficiency
without sacrificing flexibility. At the same time, it should be focused on
the goal of liquidating non-viable and inefficient businesses and the survival
of efficient, potentially viable businesses.

9. Quick and orderly resolution of a debtor’s financial difficulties can be
facilitated by an insolvency law that provides easy access to insolvency proceedings
by reference to clear and objective criteria, provides a convenient
means of identifying, collecting, preserving and recovering assets and rights
that should be applied towards payment of the debts and liabilities of the
debtor, facilitates participation of the debtor and its creditors with the least
possible delay and expense, provides an appropriate structure for supervision
and administration of proceedings (including both professionals and the institutions
involved) and provides, as an end result, effective resolution of the
debtor’s financial obligations and liabilities.

6. Preservation of the insolvency estate to allow
equitable distribution to creditors

10. An insolvency law should preserve the estate and prevent premature dismemberment
of the debtor’s assets by individual creditor actions to collect
individual debts. Such activity often reduces the total value of the pool of
assets available to settle all claims against the debtor and may preclude
reorganization or the sale of the business as a going concern. A stay of creditor
action provides a breathing space for debtors, enabling a proper examination
of its financial situation and facilitating both maximization of the value of the
estate and equitable treatment of creditors. Some mechanism may be required
to ensure that the stay does not affect the rights of secured creditors.

Part one: I. Key objectives of an effective and efficient insolvency law 13

7. Ensuring a transparent and predictable insolvency law
that contains incentives for gathering and dispensing information

11. An insolvency law should be transparent and predictable. This will enable
potential lenders and creditors to understand how insolvency proceedings
operate and to assess the risk associated with their position as a creditor in the
event of insolvency. This will promote stability in commercial relations and
foster lending and investment at lower risk premiums. Transparency and predictability
will also enable creditors to clarify priorities, prevent disputes by
providing a backdrop against which relative rights and risks can be assessed
and help define the limits of any discretion. Unpredictable application of the
insolvency law has the potential to undermine not only the confidence of all
participants in insolvency proceedings, but also their willingness to make
credit and other investment decisions prior to insolvency. As far as possible,
an insolvency law should clearly indicate all provisions of other laws that may
affect the conduct of the insolvency proceedings (e.g. labour law; commercial
and contract law; tax law; laws affecting foreign exchange, netting and set-off
and debt for equity swaps; and even family and matrimonial law).
12. An insolvency law should ensure that adequate information is available in
respect of the debtor’s situation, providing incentives to encourage the debtor
to reveal its positions and, where appropriate, sanctions for failure to do so.
The availability of this information will enable those responsible for administering
and supervising insolvency proceedings (courts or administrative
agencies, the insolvency representative) and creditors to assess the financial
situation of the debtor and determine the most appropriate solution.

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

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