![Global rules on foreign direct investment](https://www.nortonrosefulbright.com/-/media/images/nrf/nrfweb/knowledge/publications/us_24355_legal-update--fdi-alert.jpeg?w=265&revision=a5124a65-abf9-40e4-8e96-9df39ffdb212&revision=5250068427347387904&hash=96B456347C3246E5649838DF281C5F5D)
Publication
Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
Author:
Mondial | Publication | Q3 2022
On the 25th Anniversary of the UNCITRAL Model Law for Cross-Border Insolvency, Norton Rose Fulbright's Australian chair Scott Atkins, the president of INSOL International, and partner John Martin, the president of the International Insolvency Institute, explain why it reflects a silver lining but not a silver bullet for modified universalism and harmonisation.
Today, 30 May, marks the 25th anniversary since the Model Law on Cross-Border Insolvency (Model Law) was adopted by the United Nations Commission on International Trade Law (UNCITRAL).
This is an important milestone. The Model Law is rightly regarded as one of the foundations of cross-border restructuring and insolvency policy and practice, and has played an instrumental role in facilitating greater recognition, cooperation and coordination in pursuit of modified universalism—one of the core policy underpinnings of insolvency law in which courts seek to ensure the operation of a single insolvency proceeding extending on a worldwide basis (subject to protections for local creditors).
In doing so, the Model Law has helped to centralise insolvency proceedings, avoiding the multiplicity of proceedings opened in different jurisdictions and thereby reducing costs and the prospect of inconsistent judgments, creditor disputes and the piecemeal breakup of a debtor's business.
This has in turn enhanced the prospect of successful restructuring attempts for viable entities, increased creditor returns (whether in the context of a restructuring or a liquidation) and helped to support financial stability and economic growth.
By creating a certain, predictable recognition and cooperation framework based on familiar and well-understood and tested concepts such as a debtor's centre of main interests and establishment, foreign main and non-main proceedings and mandatory and ancillary relief, the Model Law has also incentivised cross-border investment and finance, as creditors can negotiate ex-ante confident of what their rights will be in the event of corporate default.
In the absence of the Model Law—or comparative regional frameworks such as the European Insolvency Regulation recast (EIR 2015)—the common law recognition process based on comity and the civil law exequatur procedure do not provide for consistent and predictable outcomes. Likewise, legislative "aid and auxiliary provisions" (invoked upon the issue of a letter of request by a foreign court) leave cooperation largely to the discretion of individual courts, and this operates as an impediment to the efficient administration of cross-border insolvencies as well as capital and investment flows on a macro level.
To date, the Model Law has only been adopted by 50 states across 54 jurisdictions. Many of the major economies in the world—including most EU nations, as well as China, India, Malaysia, Hong Kong and Indonesia—are yet to adopt it. To create consistent and predictable outcomes for creditors, it is important to continue the strong efforts of UNCITRAL, as well as INSOL International and the World Bank, to encourage greater uptake of the Model Law. Indeed, international regulatory and policy frameworks are only ever as effective as their local implementation. The multilateral framework offered by the Model Law provides consistency and predictability for financially distressed debtors and creditors on a global basis, which is lacking in bilateral treaties that are necessarily confined to a limited geographic area (such as the May 2021 Joint Record of Meeting between Mainland China and Hong Kong).
But the Model Law is only one piece of the puzzle. Indeed, global economic, policy and regulatory settings have now evolved and there are new challenges we must face and adapt to in ensuring a robust, working and effective cross-border restructuring and insolvency framework, which supports the restructure of viable entities, maximises creditor returns and operates as a genuine and indispensable component of economic growth, financial stability and global investment opportunities.
The Model Law can now serve as a launching pad to pursue, in tandem with the further uptake of the Model Law itself, the adoption and implementation of additional international frameworks for both recognition and cooperation in a corporate group setting, and the recognition and enforcement of insolvency-related judgments; the further development and adoption of judicial cooperation and mediation protocols; and clarity on applicable law in an insolvency proceeding.
As it stands, the Model Law itself is designed to deal with single corporate entities. Yet the pace of globalisation and rapid digitisation and technological change has spurred the continued growth of business conducted across borders—along with complex global corporate group arrangements that often see parent entities and subsidiaries located in different jurisdictions.
In an insolvency context, there is accordingly a need to ensure a framework for recognition and cooperation adapted to the unique needs and circumstances of corporate groups. For that reason, UNCITRAL adopted the Model Law on Enterprise Group Insolvency (MLEGI) in July 2019. The MLEGI draws on the concept of planning proceedings and the appointment of a group representative to develop a group insolvency situation for multiple corporate group members set out in the EIR 2015, and also provides for mutual recognition of planning proceedings and court cooperation to implement solutions designed by a group representative.
The widespread adoption and implementation of the MLEGI would increase the potential for complex corporate group restructuring arrangements to be effectively negotiated and executed in multiple jurisdictions simultaneously, under a guided framework for concentrated insolvency proceedings, creditor cooperation and consultation and negotiated outcomes under legislated and predictable laws. It would also enhance the efficiency of liquidation processes for unviable corporate group entities in a manner that would reduce costs and increase creditor returns. Having in place a clear and recognised framework under the MLEGI would also overcome the need to rely on judicial discretion under synthetic restructuring processes of the kind seen in Re Collins & Aikman Europe SA ([2006] EWHC 1343), the inherent uncertainty of which is a deterrent to financial and capital flows to support complex global enterprises and business structures.
While the Model Law provides a framework for recognition and cooperation concerning restructuring and insolvency procedures, it does not of itself automatically facilitate the recognition of foreign judgments arising out of those procedures.
And yet without a common, predictable framework for the enforcement of judgments, a creditor with security over assets in a foreign jurisdiction critical to a successful restructuring attempt could enforce its rights over those assets outside the scope of a restructuring plan approved by a court in the main proceeding. This risk is real and not merely theoretical—indeed, English courts continue to apply the Gibbs rule, which allows creditors to avoid the consequences of a debt discharge by a foreign restructuring plan if their debts are governed by English law.
To that end, the expanded uptake of the Model Law ought to be pursued along with the adoption and implementation of the further framework adopted by UNCITRAL in July 2018, the Model Law on the Recognition and Enforcement of Insolvency-Related Judgments (MLIRJ). This is a critical underpinning to be able to, in practice, negotiate and implement an effective multi-jurisdictional restructuring plan for viable debtors binding on all creditors.
While the Model Law contemplates court and insolvency practitioner cooperation in articles 25 to 27, the precise means of that cooperation is left for specific protocols outside the Model Law.
To ensure the architecture of the Model Law is in fact implemented in practice, the greater adoption of specific court-to-court cooperation protocols that provide for joint hearings, information sharing and prescribed modes of communication should be encouraged.
The existing protocols developed under the American Law Institute-International Insolvency Institute Global Principles for Cooperation in International Insolvency Cases (2017), the EU-based Communication and Cooperation Guidelines for Cross-Border Insolvency (2007) and Cross-Border Insolvency Court-to-Court Cooperation Principles and Guidelines (2014), as well as the Guidelines (2016) and Modalities (2019) of the Judicial Insolvency Network, provide useful principles to draw on and encourage capacity building initiatives in developing nations, as well as knowledge sharing, training and judicial colloquia among courts on a global basis. It is these direct court-to-court linkages, built upon human connections and familiarity with different legal systems, which can support the development of formal cooperation and communication protocols—one of the keys to an effective and efficient cross-border restructuring and insolvency framework.
Indeed, we have seen the benefit of judicial cooperation—through joint hearings and coordination of substantive insolvency outcomes—in the recent Halifax matter, which involved a joint sitting between the Federal Court of Australia and the High Court of New Zealand in December 2020 in relation to parallel insolvency processes for an Australian parent entity and a New Zealand subsidiary, as well as in the Nortel Networks matter in 2013, in which Canadian and United States courts conducted joint hearings and put in place court coordination and cooperation protocols. In each case, there were significant cost savings for the insolvency estates, maximised creditor returns and a consistent approach to decision-making, which helped to build creditor trust and support for the coordinated administration put in place by the courts.
The appointment of a mediator is one of the ways in which the cooperation framework set out in articles 25 to 27 of the Model Law may be implemented in practice—working alongside judicial communication protocols.
Indeed, mediation can operate in strong partnership with the Model Law to enhance the prospect of restructuring for large and small enterprises alike. The pursuit of mediation as a genuine institutional quasi-insolvency process is a novel and feasible option in creating the flexibility needed to achieve effective cross-border insolvency outcomes. Indeed, mediation can assist courts and insolvency practitioners to narrow and resolve creditor disputes and can encourage creditors to engage and negotiate together towards a restructuring plan while minimising the need for court intervention.
As we celebrate the fundamental change the Model Law effected to achieve greater recognition, cooperation and harmonisation in cross-border restructuring and insolvency proceedings, it is important to now look to leverage the Model Law's architecture to create new ways to ensure optimal insolvency outcomes for debtors, creditors, economies and communities.
While providing for an effective and consistent approach to procedural outcomes in cross-border restructuring and insolvency matters, the Model Law does not directly facilitate harmonisation in substantive insolvency laws involving different jurisdictions. Currently, different approaches have been taken by courts globally on the extent to which the law of the state where the insolvency proceedings are opened (lex fori concursus) applies to all aspects of the insolvency proceedings. These differences create the potential for fragmentation, creditor disputes and increased costs that deplete working capital essential for the restructure of viable entities, as well as the value of the insolvency estate available for distribution in a liquidation context.
Drawing on the EIR 2015, in which the expectation is that the lex fori concursus ought to apply to all aspects of the insolvency proceedings with very limited exceptions, UNCITRAL's Working Group V (Insolvency) is currently seeking to develop draft legislative provisions that will set that same expectation on a global basis (so that, unlike the EIR 2015, it is not limited to EU-specific insolvencies).
The incorporation of these provisions, once finalised, in domestic legislation ought to be encouraged along with the further adoption and implementation of the Model Law, the MLEGI and the MLIRJ, as well as the judicial cooperation and mediation protocols referred to above. This will ensure a consistent and harmonised approach to both procedural and substantive legal processes and insolvency approaches that will create predictable outcomes for creditors, maximise the prospect of a successful restructuring for viable businesses and ensure the most efficient liquidation process possible for unviable entities.
On this milestone anniversary, we should celebrate the transformation the Model Law has effected in the cross-border restructuring and insolvency policy and regulatory framework, and the contribution it has made to more predictable, efficient insolvency outcomes for debtors and creditors—maximising corporate and business rescue and creditor returns and benefiting the economy, the financial system and cross-border investment and financial flows.
But in the years ahead, the achievement of modified universalism and the harmonisation of cross-border insolvency and restructuring processes depends on the adoption and implementation of other instruments and protocols concerning recognition, enforcement, judicial cooperation, mediation, applicable law and the unique circumstances of complex corporate group structures which extend across borders. In pursuing these outcomes, insolvency and restructuring laws and policies can become a key part of building stronger economies and communities across the globe as we look to, in every sense, "build back better" from the pandemic and help prepare businesses for the challenges ahead in the world.
This article first appeared in the May 30, 2022 edition of Global Restructuring Review and is reprinted with the permission of Law Business Research.
Publication
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
Publication
Artificial intelligence (AI) raises many intellectual property (IP) issues.
Publication
We are delighted to announce that Al Hounsell, Director of Strategic Innovation & Legal Design based in our Toronto office, has been named 'Innovative Leader of the Year' at the International Legal Technology Association (ILTA) Awards.
Subscribe and stay up to date with the latest legal news, information and events . . .
© Norton Rose Fulbright LLP 2023