UNCITRAL has adopted and published a second model law to promote universalism of restructuring and insolvency. This new model law is now readily available for domestic implementation across the world. The earlier model law has been implemented in only 44 U.S. states since its publication in 1997. This client alert explains the differences between implementation in the UK and the U.S., and highlights barriers to implementation in the UK as well as the lack of an imperative for implementation in the U.S. This alert will be of particular interest to those focusing on the development of cross-border restructuring and insolvency.
How Is UNCITRAL’s New Model Law Affecting Insolvency?
The United Nations Commission on International Trade Law (“UNCITRAL”) has published its final version of ‘The Model Law on the Recognition and Enforcement of Insolvency-Related Judgments’ (“Model Law on IRJ”). The Model Law on IRJ provides a framework for the recognition and enforcement of judgments made in foreign jurisdictions which arise out of insolvency proceedings.
This is the second model law adopted by UNCITRAL which promotes a universalist approach to restructuring and insolvency proceedings. The Model Law on IRJ is drafted as a standalone law but is largely viewed as a supplement to the UNCITRAL Model Law on Cross-Border Insolvency (“Model Law on CBI”), which was adopted by UNCITRAL in 1997.
Much like the Model Law on CBI, the Model Law on IRJ does not have any legal effect until it is implemented domestically. The implementation of the Model Law on CBI has been gradual: only 44 states in total have adopted the Model Law on CBI into their legislative framework since 1997. The Model Law on CBI was introduced in the U.S. in the form of Chapter 15 of the U.S. Bankruptcy Code by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 and in the UK in the form of the Cross-Border Insolvency Regulations 2006 (“CBIR”).
Universalism v Territorialism in Restructuring and Insolvency Proceedings
The principle of universalism in the context of cross-border insolvency is that proceedings in relation to a debtor should be applicable worldwide, thereby necessitating only one primary insolvency proceeding. This obviates the need for multiple proceedings as well as the potential for conflict arising from a territorial approach.
As an instrument, the Model Law on CBI promotes universalism. The U.S. Bankruptcy Court held in 2014 that: “Chapter 15 of the Bankruptcy Code, which adopted the substance and most of the text of the United Nations Commission on International Trade Law’s (‘UNCITRAL’) Model Law on Cross-Border Insolvency, provides a framework for recognizing and giving effect to foreign insolvency proceedings. . . . A central tenet of chapter 15 is the importance of comity in cross-border insolvency proceedings.”
UNCITRAL’s Working Group V has since its 44th session in December 2013 been reflecting on a response to the decision in Rubin (discussed below) and by the 46th session in December 2014, UNCITRAL had given Working Group V “a mandate to develop a model law or model legislative provisions to provide for the recognition and enforcement of insolvency-related judgements.” The 53rd session of Working Group V in May 2018 approved the final text of the Model Law on IRJ, which was adopted by UNCITRAL at its 1080th meeting on 2 July 2018 and published on 18 September 2018.
Ilya Kokorin of Leiden University has stated: “The adoption of the Model Law on the Recognition and Enforcement of Insolvency-Related Judgments is undoubtedly a step in the right direction [as] it has the potential of making cross-border insolvencies more predictable, complete and efficient.”
In the UK, Was the Model Law on CBI Inadequate to Promote Universalism?
In the UK at present, there are two significant impediments to universalism: Rubin and The Rule in Gibbs.
Despite the Model Law on CBI having been in force in the UK since 2007 under the CBIR, the UK Supreme Court in 2012 curtailed a universalist approach to insolvency proceedings with its decision in Rubin v Eurofinance. The court refused to recognise an avoidance order made in a U.S. insolvency proceeding on the grounds that, in the UK, a judgment entered in personam cannot be enforced against a person who has not submitted to the jurisdiction of the court entering the judgment. Since the defendant had not been present in the U.S. at the time the proceedings were issued and had not otherwise submitted to the jurisdiction of the U.S. court, the UK court refused to enforce the judgment, stating that there should be no difference between judgments entered in insolvency cases and non-insolvency cases. The Model Law on CBI made no difference to the issue. As a result, a judgment derived from foreign insolvency proceedings will, under the CBIR, be recognised by the English court only if it could have been granted on its terms in England.
The facts of Rubin related to an avoidance action but it is generally thought that the reasoning in Rubin would equally extend to a restructuring plan sanctioned by a foreign court (as well as potentially other scenarios) - a creditor not subject to the personal jurisdiction of a foreign court is able to object to the plan endorsed by the foreign court if enforcement is sought generally or against a creditor personally, in the UK.
The Rule in Gibbs:
The ‘Rule in Gibbs’ has formed an integral part of English common law since the 19th century. The rule provides that a debt governed by English law cannot be discharged or altered by a foreign law (including a foreign insolvency proceeding). The modern-day application of the rule receives widespread criticism, being described as ‘anachronistic and Anglo-centric’ and worse. U.S. courts have on numerous occasions enforced foreign judgments which alter debts or claims governed by U.S. law, including judgments made by courts in the UK. Nevertheless, it continues to be applied in UK courts and some commentators suggest that it would require legislative intervention before it is overturned.
If Implemented in the UK, Will the Model Law on IRJ Address the Rule In Gibbs and Rubin?
Yes and maybe.
The Rule in Gibbs would be overridden by the Model Law on IRJ owing to the mandatory obligation, as set out in Article 12, to recognise and enforce insolvency-related judgments.
If Rubin was reheard in the UK applying the Model Law on IRJ, there is still some question as to whether an English court would consider it has discretion not to enforce the judgment. Article 14(g) specifies circumstances in which the court has discretion to refuse recognition and enforcement of a foreign insolvency-related judgment, in dispensation of the mandatory obligation to do so set out in Article 12. Article 14(g) is drafted so that the discretion to refuse recognition and enforcement arises if none of the specified sub-paragraphs concerning jurisdiction are satisfied:
(i) the party against whom the judgment was issued consented to jurisdiction of the foreign court;
(ii) the party against whom the judgment was issued submitted to the jurisdiction of the foreign court by arguing on the merits of the case without objecting to jurisdiction;
(iii) the court exercised jurisdiction on a basis on which the [English] Court could have exercised jurisdiction; and
(iv) the court exercised jurisdiction on a basis not inconsistent with English law.
In Rubin, neither (i) nor (ii) nor (iv) would have applied. The principal concern is that the thing about which the court ‘exercised jurisdiction’ in paragraph (iii) is not specified. So it is unclear whether the thing against which jurisdiction was exercised is limited to some or all of: the debtor; a creditor; creditors generally; or some other relevant person, or perhaps the thing has some other meaning. If it is limited, it is then not possible to say whether the precedent set by Rubin will be overturned by the Model Law on IRJ. However, if it is unlimited in its application to the debtor, a creditor, creditors generally, or some other relevant person, then a defendant in an avoidance action will likely be an ‘other relevant person’ and therefore the judgment in Rubin would be enforced in the UK.
Implementation in the U.S. and the UK
In the UK, implementing the Model Law on IRJ will be resisted by those who see value in maintaining the Rule in Gibbs. There are many who consider that the Rule in Gibbs is popular with investors who choose English law for their finance documents for the very reason that it cannot be impacted by the laws (including insolvency laws) of other jurisdictions. There is, as mentioned above, a heavy body of those with the contrary view. In any event, the implementation of the Model Law on IRJ is unlikely to be presented for legislative consideration until after planned reforms of UK insolvency law which the UK government proposes to implement.
In the U.S., it seems to us as though there are fewer impediments to implementing the Model Law on IRJ, and yet less imperative to do so than in the UK. That situation could well beg U.S. legislators to scrutinise why they would introduce the law, for which an answer may not be forthcoming for some time yet.
 In re Rede Energia S.A. 515 BR 69 (Bankr. SD NY, 2014)
 UNCITRAL Working Group V report on cross-border recognition and enforcement of insolvency-related judgments delivered at 48th session, A/CN.9/WG.V/WP.135.
  UKSC 46.
 Re OJSC International Bank of Azerbaijan  EWHC 59 (Ch), which is listed for appeal in late October 2018.
 We should point out that there are a number of brackets and options which are TBC for each state when implementing the Model Law on IRJ. Note also that UNCITRAL will shortly publish a Guide to Enactment for the Model Law on IRJ, which may bear upon its interpretation.
 Articles 14(g)(i)-(iv) respectively, Model Law on IRJ.