9. Flexibility in insolvency proceedings and fairness for stakeholders
Systems that best protect the interests of all stakeholders feature bankruptcy regimes that provide for (i) the appointment of independent administrators in bankruptcy proceedings, (ii) the recognition of the priority of secured creditors and other negotiated preferences and subordination arrangements, (iii) a fair means of proposing and approving restructuring initiatives, and (iv) the ability to challenge pre-insolvency transactions in a manner that accords with international norms.
A suitable framework for bankruptcy will include:
9.1 - A suitable framework for bankruptcy
A rational and predictable bankruptcy regime is essential for ensuring a level playing field for investors, both foreign and domestic. Countries should provide for a suitable framework for bankruptcy, including:
- Recognition of security and a clear distinction between different classes of creditors (e.g., secured, unsecured, preferential or subordinated, and those with fixed or floating charges);
- Rules to ensure a company’s assets are not removed from the reach of creditors upon the onset of insolvency proceedings (e.g., the ‘anti-deprivation principle’ in English law) and a clear system of priority in distribution of assets on insolvency;
- Legal principles that ensure that an insolvency officeholder cannot disregard perfected security interests other than in cases of fraudulent transfers, transfers at undervalue or security interests granted within a preference period;
- Pari passu distribution for unsecured creditors;
- Limited liability for stakeholders in respect of a company’s debts;
- A clear insolvency set-off regime; and,
- The adoption of rules relating to financial collateral similar to the EU Financial Collateral Directive.¹
9.2 - Clear and reciprocal treatment of foreign creditors
- In respect of foreign creditors, countries should have a clear, reciprocal, system of rules for recognition of foreign insolvency procedures and officeholders (e.g., adoption of UNCITRAL Model Law); and,²
- Treat foreign creditors on an equal basis with domestic creditors.
9.3 - Independent administrators and fair proceedings
- A country’s bankruptcy procedures should provide for independent, regulated insolvency officeholders; and,
- To permit the preservation of the value of a business, at least one insolvency process that involves a moratorium on action by creditors, preventing enforcement of security or an action against an insolvent company except with the consent of the officeholder or court approval, such as administration under English law or Chapter 11 of the US Bankruptcy Code.
9.4 - Provisions for additional security for creditors and/or that accommodate restructuring situations
Countries should consider elements of other bankruptcy regimes that provide for additional security for creditors and/or more options in a restructuring situation, including:
- The concepts of fixed and floating charges;
- The ability for stakeholders to reorganise the capital structure through an insolvency procedure; and,
- The ability for secured creditors to have an element of control over insolvency processes in respect of their secured assets (e.g., by appointing a receiver of secured assets or by having a right to choose the insolvency appointee).
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