By Mylene Chan

The United Nations Commission on International Trade Law adopted a simplified insolvency regime that recommends mediation to resolve disputes between financial sector creditors and small debtors during its 54th Session. 

The move sets out a path where mediation can be a help to debt-plagued businesses in developing and emerging countries.

Last Friday, UNCITRAL closed its 54^th Session in Vienna, which began June 28. During this session, Working Group V on insolvency law finalized legislative recommendations for a simplified insolvency regime for micro and small enterprises, or MSEs, and UNCITRAL adopted it. 

UNCITRAL mandated this project in 2013 because the insolvency rules generally applicable to mid-sized and large business enterprises do not accommodate micro and small businesses, which are the driving economic force for many countries. Gregor Baer, 14:2 Insolvency and Restructuring Int’l 64 (Sept. 2020) (available at https://bit.ly/3B1peox).

As part of the United Nations’ sustainable development goals, UNCITRAL has also asked its  Working Group I, on micro, small and medium enterprises, to make recommendations to reduce legal obstacles faced by micro and small businesses in developing countries. Id.

The drafting of the simplified insolvency regime has been coordinated with the World Bank Group because the Financial Stability Board designated both the World Bank and UNCITRAL as standard setters in the field of insolvency. Financial Stability Board, Insolvency and Creditor Rights Standard (Jan. 20, 2011) (available at https://bit.ly/36EKqTi).

In light of the significant negative impact of Covid-19 on MSEs, several member states of Working Group V have expressed an urge to expedite the drafting of the simplified insolvency regime. UNCITRAL, Capital Markets Intelligence, “International Insolvency & Restructuring Report 2020/21” (available at https://bit.ly/2VBeg8P).

Ironically, because many member states have implemented insolvency-related legislative measures to address difficulties faced by MSEs during the health emergency, the pandemic has created valuable experiences that could help improve the text of the simplified insolvency regime.

The simplified insolvency regime addresses major characteristics of small debtors, such as having a non-diversified creditor, supply, and client base. See Note by the Secretariat,  “Insolvency of micro, small and medium-sized enterprises: Draft text on a simplified insolvency regime” (Sept. 28, 2018) (available at https://bit.ly/3ie53Ll).  

Other distinguishing features of small debtors covered by the simplified insolvency regime include the access to credit being subject to the grant of personal guaranties, encumbrance of physical assets, and unencumbered assets with minimal value.  In addition, the simplified insolvency regime considers small debtors’ frequent poor or nonexistent records, overlapping ownership control and management, and “concerns over stigmatisation.” See UNCITRAL, Capital Markets Intelligence, International Insolvency & Restructuring Report at 10, linked above.

The simplified insolvency regime focuses on mechanisms to bring micro and small business debtors into a formal insolvency system that provides rehabilitation and a reasonable payment plan.  Through reduced complexity of insolvency procedures, lowered costs, and more favorable conditions for a prompt discharge, small debtors could hope to have a fresh start.  See Note by the Secretariat at page 7, linked above.

Member states have proposed endorsing out-of-court and hybrid procedures to develop workable alternatives to formal insolvency processes amicable to MSEs. Report of Working Group V (Insolvency Law) on the work of its 54th session (Vienna, 10–14 Dec. 2018) p. 22 (Dec. 20, 2018) (available at https://bit.ly/3z29MGR).  

During previous drafting stages, some member states explained that certain preconditions should exist for out-of-court and hybrid procedures to be effective, such as incentives for financial institutions to negotiate debt restructuring and to suspend the debt.  Those procedures, however, were generally more suitable for large and medium-sized enterprises.

Other member states explained that in some jurisdictions, positive tax impacts of debt forgiveness are available as incentives for financial sector creditors to negotiate debt restructuring with small debtors. In other jurisdictions, administrative out-of-court procedures and mediation have yielded positive results.

In previous negotiation stages, some national delegations and development-focused non-governmental organizations suggested non-punitive rehabilitation of small debtors to promptly restore their economic productivity. See Baer, linked above.

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In this month’s session, Working Group V adopted the following commentaries in the simplified insolvency regime to provide guidance that mediation could be helpful in resolving disputes relating to MSEs:  

To avoid delays and at the same time to ensure transparency and predictability, this [text] recommends that a simplified insolvency regime should provide for the default procedures and treatment that can be overridden by the decision of the competent authority on its own motion or upon request of any party in interest. The competent authority may modify the proceedings by introducing, for example, a mandatory mediation stage or displacing the debtor- in-possession with an independent professional.

Note by the Secretariat, “Draft text on a simplified insolvency regime” 38, ¶ 75. (Feb. 16, 2021)  (available at https://bit.ly/3id8IJw).

Mediation and conciliation services may also be helpful for resolution of disputes between MSE debtors and creditors and among creditors.

Note by the Secretariat, “Draft text on a simplified insolvency regime Addendum” 38, ¶ 75. (Feb. 16, 2021)  (available at https://bit.ly/3raOQKU).

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The simplified insolvency regime is expected to appear as Part V of UNCITRAL’s Legislative Guide on Insolvency Law.

Developing and emerging countries, where MSEs may drive the economies, are among those hit hardest by the economic contraction spurred by the Covid-19 pandemic. Small debtors’ insolvency affects job preservation and the supply chain.

On July 16, the final day of the 54^th session, Caroline Nicholas, Senior Legal Officer of UNCITRAL, commented on technical assistance activities focusing on MSEs recovery from the effects of the pandemic:  

What is really interesting to hear is the experience in three continents, in Africa, Latin America, and Asia. We have some emphasis on exactly the same points, the need for agility, the need for syndicated simplified measures and the need for speed in supporting MSEs so that they are receiving the financial and other support.

As the world is gaining control over the Covid-19 virus, mediation emerges as a potential solution to help ease the recovering path for struggling segments by bringing creditors to negotiate with small debtors. 

With the help of mediation and incentivized policies for creditors to suspend or forgive debts, perhaps many MSEs can recover their economic productivity and help developing and emerging countries restore economic and social welfare after the pandemic. 

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The author, an LLM candidate at Yeshiva University’s Benjamin N. Cardozo School of Law in New York, has covered UNCITRAL’s 54th Session proceedings as a 2021 CPR Summer Intern.

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