CERIL

CERIL UNCITRAL WG V Committee

The UNCITRAL Working Group V (WG V) insolvency meetings at its 65th session - from 16 to 20 December 2024 - covered the two running projects of (i) Asset Tracing and (ii) Applicable law in insolvency proceedings. The Working Group succeeded in making relevant progress on both projects. In addition, the secretariat also reported that its work on updating the 2009 UNCITRAL Practice Guide on Cross-Border Insolvency Cooperation is ongoing and heard proposals for future work. More detail on each of these topics is described below.

I. Asset tracing

Subject to the amendments discussed by Working Group V, the documentation on asset tracing and recovery in insolvency proceedings has now been broadly agreed, with a view to adoption in July 2025.
The draft documents, which comprise the toolkit and background notes, will be finalised as a single document. The formal title will be:

“Asset tracing and recovery in insolvency proceedings: toolkit and background notes”.

Two discussion points to note were:

• Although the document applies to civil asset tracing, it was considered unnecessary to include the word “civil” in the title of the document; rather the title of Chapter 4 would be clarified as “Related criminal proceedings”; and
• The need for coordination with UNIDROIT developments in relation to enforcement.

Once available, the next version will be circulated to States for comments, prior to the consideration by the Commission in 2025. The Working Group agreed to consider the revised document along with any comments by States in the 66th session.

II. Applicable law in insolvency proceedings

The order of discussion focused on outstanding issues of disagreement in the document and much progress was made on narrowing the gap of disagreement, but more work is needed to come to an agreed text. Specific consideration was given to (i) close-out netting, (ii) treatment of secured creditors (with rights in rem), (iii) set-off and (iv) arbitration agreements. In addition, the Working Group considered the relation of this text with other UNCITRAL instruments.
It was generally agreed that the law applied in exception to the lex fori concursus should have some logical connection to the right to apply such an exception. For example, in cases where the language in the exception appeared to be overly broad (i.e. “and there is no other reasonable basis for applying that law”), this language was deleted.

Exception for close-out netting (Chapter II B exception 3)

This exception relates to close-out netting outside payment, clearing and settlement systems, regulated financial markets or other multi-lateral trading facilities.
It was agreed that this should remain an exception to the lex fori concursus, but that the language, and definition of a financial contract would be further refined to ensure the scope of the exception was narrowly tailored. The text will be revised for further discussion at the next session.

Exception for treatment of secured creditors (Chapter II A para 1(j))

The issue is whether the lex fori concursus should apply to the treatment of secured creditors. It was agreed that there should be some exception to the lex fori concursus in cases where the debtor could not provide some form of ‘adequate protection’ to the secured party for continued use of the secured property. 
A broad consensus was reached on the following wording to be added as a new paragraph (para 5):

• Notwithstanding paragraph 1(j), the treatment of a right in rem in respect of the debtor’s assets shall be governed by the lex rei sitae if the lex fori concursus puts the holder of the right in rem at a substantial disadvantage as compared to the treatment under the lex rei sitae [adequate protection]
• The lex fori concursus shall be deemed to put a right holder at a substantial disadvantage if it:
  (a) impairs the right holder’s entitlement to the value of the encumbered asset under the lex rei sitae; or
  (b) unduly interferes with the right holder’s right to timely liquidation of the right in rem under the lex rei sitae.

While this concept was broadly agreed, there were certain considerations that were left outstanding, such as distinctions between immovable and movable property and potential superior rights of privileged creditors. It was also recognised that there are some outstanding matters and that Chapters II (rules on the law that governs the commencement, conduct, administration and closure of insolvency proceedings and their effects) and III (recognition of the effects of the lex fori concursus and other laws applied by a foreign court) will need to be linked to the UNCITRAL Model Law on Cross-Border Insolvency (MLCBI). This will now be taken forward for discussion in New York in May 2025.

Exception for avoidance actions (Chapter II A para 1(g) and para 3)

The application of the lex fori concursus to avoidance provisions in (g) required further work as there was no consensus as to whether the exception should be deleted or retained. Concerns were raised regarding the finality of transactions on the one hand and recovering assets for the insolvency estate on the other.

Two options will be taken forward for further discussion: (i) allowing courts to apply the insolvency law of the debtor’s COMI at the time of the transaction giving rise to avoidance if considered necessary to protect the legitimate interests of the parties (including in case of COMI shifts); and (ii) “The court shall protect the legitimate expectations of a third party at the time of the transaction with respect to the law applicable to insolvency of the debtor”.

Exception for set-off (Chapter II A para 1(i) and para 4)

There were concerns that the exception to the application of the lex concursus to set-off in (i) interfered with States' substantive insolvency rules. Two options will be taken forward for further discussion: (i) an amended version of the para 4 exception “where the law applicable to the debtor’s claim provides for the right of creditors to demand the set-off of their claims against the claims of the debtor in the relevant case, insolvency rules of that law [may] [should] [shall] apply unless it has no substantial relationship to the claim and there is no other reasonable basis for applying it”; and (ii) allowing courts to apply the insolvency law of the debtor’s COMI at the time of the transaction giving rise to avoidance if considered necessary to protect the legitimate interests of the parties.

Exception for the treatment of arbitration agreements (Chapter II A para 1(h))

Following a discussion with the Chair of the UNCITRAL WG on Arbitration, it was clear that issues with arbitration agreements remain in terms of the application of the automatic stay to arbitration proceedings. It was concluded that States should consider the issues relating to arbitration at a local level to find potential solutions.
The use of plain English as opposed to Latin terminology was recommended by the Arbitration Chair, on the basis that there is no consensus as to what is meant by Latin terms relating to arbitration, causing uncertainty (e.g. lex arbitri; lex loci arbitri). The use of Latin will be discussed at a later date.

Chapter III and its relation to Chapter II and existing UNCITRAL texts

As mentioned above, Chapters II and III need to be developed to link them to the MLCBI.
Following a detailed analysis of some potential issues arising from the current drafting presented by the delegate from the Netherlands (including a lack of decision harmony), it was concluded that further discussion was needed as to how decisions and judgments of foreign courts reflect on proceedings in Chapter II.

III. Update of the Practice Guide

The Working Group was informed that the Secretariat’s work on the update the 2009 UNCTRAL Practice Guide on Cross-Border Insolvency Cooperation is expected to be completed by 2026 and in parallel with this work, is preparing training sessions in the six official languages of the United Nations covering the entire UNCITRAL cross-border insolvency framework, for use by the UNCITRAL secretariat and other interested organisations in their judicial and other capacity-building programmes in the area of insolvency law. The training program is available here: https://uncitral.un.org/en/onlinecourses.

IV. Potential future topics for WG V

The Working Group also discussed possible future topics, including:

1. A proposal for an update of the Guide to Enactment and Interpretation of the Model Law (Australia).
2. A proposal for work on insolvency and environmental issues/climate change (France).

These proposals were generally welcomed and supported.