The role of the United Nations in shaping international policy on companies in financial difficulty

If an insolvent company goes into liquidation prematurely, in other words, if its assets are sold piecemeal, creditors risk recovering less than they are entitled to. If a very large company defaults, this can sometimes lead to a whole series of cascading bankruptcies, as smaller suppliers and unsecured creditors collapse financially, along with the multinational. The reason why the insolvency of multinational groups needs to be tackled on a global scale is to preserve, as far as possible, the going concern value of companies by helping them restructure in order to protect economic activity and jobs. A coordinated approach would enable all stakeholders to be treated more fairly and equitably.

In collaboration with its member states, the United Nations is currently launching a project to develop model provisions on the treatment of enterprise groups in insolvency [1]. The debate is a complex one, due on the one hand to differing national priorities in favor of restructuring or liquidation, and on the other to the diversity of protections offered by these countries to creditors and other stakeholders. The United Nations Commission on International Trade Law (UNCITRAL) was created to enable UN member states to develop modern, fair and harmonized rules on commercial transactions. Working Group V is responsible for issues relating to insolvency legislation. Over time, through an extensive consensus-building process, this group has produced several key documents; in particular, the UNCITRAL Model Law on Cross-Border Insolvency ("Model Law"), the 2013 Guide to Enactment and Interpretation , and the UNCITRAL Legislative Guide on Insolvency Law [2]. The aim of all these documents is to help countries worldwide develop standards for their national insolvency legislation [3].

Thus, delegations from 45 member states, as well as the European Commission, the World Bank, and the Hague Conference on Private International Law took part in the most recent meeting of Working Group V, in May 2015. Non-governmental organizations (NGOs) such as the American Bar Association and the International Insolvency Institute also participate regularly. Group V's work is a good illustration of the conflicts that can arise between technical expertise, general participatory debate and decision-making. Developed nations, which are often already familiar with insolvency legislation, make their views clearly heard, which raises concerns in emerging countries that the proposed mechanisms are not adapted to their economic structures. There are also conflicts between civil and common law jurisdictions as to the level of codification required. The NGO delegations have a particular interest, as it is they who, as professional bodies, are responsible for implementing the proposed initiatives. While their experience and expertise are appreciated, the creditors they usually work for, and consequently the knowledge on which they base their opinions, represent only a small proportion of the various creditors affected by insolvency cases. According to the study carried out by ProfessorsBlock-Lieb and Halliday, it was found that, of the 43 States and private groups that took part in the debate on the UNCITRAL Legislative Guide between 2001 and 2004, 25% of interventions were made by the four professional bodies, which is vastly disproportionate to their number [4]. UNCITRAL's current efforts to resolve the issue of cross-border insolvency of commercial enterprise groups must be mindful of these dynamics.

The recent Nortel Networks bankruptcy is an example of the complexity underlying UNCITRAL's efforts. Nortel operated through 140 companies in 60 different countries, but its operations were fully integrated, with inter-group guarantees for its principal debt and a consolidated cash flow system. In January 2009, deteriorating market conditions led Nortel to open insolvency proceedings in Canada, the United States and the United Kingdom. In the UK, 19 companies incorporated in Europe, the Middle East and Africa were placed under administration. The initial aim of all these proceedings was to try to restructure the Group on a global scale, but it soon became clear that thiswas not feasible. All parties used UNCITRAL mechanisms to agree on a worldwide sales protocol and process, so that the value of the assets would not be lost. The sale of the various business segments and the residual patent portfolio yielded US$7.3 billion in proceeds. However, the parties had not agreed in advance on how to distribute the proceeds. Once the sale was completed, the bondholders, i.e. the most powerful creditors, had no reason to settle the matter as quickly as possible. Fierce and costly litigation ensued. Of the $7.3 billion earmarked for employees, retirees, small suppliers and bondholders, an outrageous $1 billion was spent on legal and other professional fees. The procedure for apportioning the value of the assets took the form of a joint trial between Canadian and American courts, held by video-conference. In 2015, the two courts delivered their judgments at the same time. Both judges ruled that the $7.3 billion should be shared between the group and its subsidiaries to pay creditors. The courts rejected an approach based on ownership, assets or budget on grounds of justice and fairness, stressing that they had adopted a "pragmatic and principled" approach. The fact that both courts took justice and fairness into consideration in resolving the issues is an important legislative principle, as insolvency, by its very nature, means that the sale of assets will not be sufficient to repay creditors in full.

Resolving the international insolvency of groups of commercial enterprises is still in its infancy. Given the scale of the obstacles, the first step might be to define a set of principles to guide future UNCITRAL debates: the aim is to protect some of the fundamental rights of creditors and other stakeholders, while at the same time trying to promote the idea that tackling the financial difficulties of a multinational group of commercial enterprises in a coordinated way could enable greater maximization of asset value and, in some cases, genuinely preserve the company and its future economic activity

[1] A/CN.9/835 - Report of Working Group V (Insolvency Law) on the work of its forty-seventh session (New York, 26-29 May 2015).

[2] United Nations Commission on International Trade Law.

[3] UNCITRAL Legislative Guide on Insolvency Law (Parts I and II) (2004) ; UNCITRAL Legislative Guide on Insolvency Law (Part III) (2010) ; UNCITRAL Legislative Guide on Insolvency Law (Part IV) (2013); Presentation of the Guide.

[4] Susan Block-Lieb and Terence Halliday "Legitimation and Global Lawmaking" December 2006 at 13.