Implementing Strategies for the Model Law on Cross-border Insolvency: the Divergence in Asia-pacific and Lessons for Uncitral
| Citation | Vol. 36 No. 1 |
| Publication year | 2020 |
Implementing Strategies for the Model Law on Cross-Border Insolvency: The Divergence in Asia-Pacific and Lessons for UNCITRAL
Wai Yee Wan
Gerard McCormack
The UNCITRAL Model Law on Cross-Border Insolvency ("Model Law") was conceived with the aim of providing a framework for states to obtain consistency in the recognition of foreign insolvency proceedings and granting relief in aid of the foreign courts. The Model Law has achieved moderate success internationally and four states in the Asia-Pacific, namely Australia, Singapore, Japan, and Korea, have enacted legislation based on the Model Law. Scholars agree on the importance of consistent implementation of the Model Law in managing cross-border insolvency to achieve quick, certain, and predictable outcomes.
However, the Model Law's aims have not been completely met and existing accounts point to two reasons for why there is a lack of complete harmonization. First, states have not fully implemented the Model Law in their domestic law. Second, states' judiciaries have not consistently interpreted their legislation enacting the Model Law. This lack of harmony is reflected in the fact that UNCITRAL recently felt the need to promulgate a supplemental Model Law on Recognition and Enforcement of Insolvency-Related Judgments.
In this Article, we examine the divergent implementation strategies of the Model Law in Australia, Singapore, Japan, and Korea, and explain the reasons for the divergence. In the case of Japan and Korea, legal origins have been put forward as a reason for the divergence; as these two jurisdictions are not based
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on common law, they require greater local modification to assure the Model Law will fit into their legal systems. However, we argue legal origins are insufficient reasons for the lack of uniformity. Instead, we argue that where states, like Australia and Singapore, are shifting from a moderately territorialist approach with cross-border insolvency to the modified universalist approach as envisaged by the Model Law, they are more likely to fully implement the Model Law. Where States start from an exclusively territorialist approach (such as in Japan and Korea), they are likely to recognize foreign insolvency proceedings as a broad signal of their international commitment towards adopting global norms, but would demand changes to allow for some room to depart from all of the consequences of recognition of foreign proceedings, even in situations where there may be no real impediment for the implementation of Model Law. However, in Korea, there are signs that judicial attitudes are changing as the judiciary sees the benefits of the Model Law in cooperation and communication, and there may be a greater chance of implementation.
Our study illustrates the limitations of achieving the objectives of the Model Law. We argue that when determining the strategies for uniform implementation of UNCITRAL, in the context of "soft law," we should take into account the importance of the signaling effect and path dependency of the countries, which will have implications for other jurisdictions considering the adoption of the Model Law or the supplementary Model Law on insolvency-related judgments.
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With the rise of multi-state enterprises and complexities in resolving cross-border insolvencies, in 1997, the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency (Model Law)1 was conceived. The Model Law aims to grant foreign courts relief by providing an adoptable, consistent framework for countries to obtain recognition of foreign insolvency proceedings.2 The Model Law promotes cooperation between courts by giving foreign creditors or foreign representatives access to local courts in states where the debtor's assets are located.3 The objective of the Model Law is facilitating, to the maximum extent possible, the optimal management of cross-border insolvency, so as to benefit debtors, creditors, and other stakeholders, as well as the economies in which these stakeholders function.4 The Model Law has achieved moderate success internationally, with major common law jurisdictions including the United Kingdom (UK),5 the United States (US),6 Australia,7 and more recently Singapore,8 having changed their domestic laws on cross-border insolvency cooperation based on the Model
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Law provisions.9 Japan10 and Korea11 have also enacted legislation based on the Model Law, albeit with adaptations and modifications.
The goals of the Model Law are certainty, predictability, and speed in obtaining recognition of foreign insolvency proceedings and coordination of those proceedings, so as to protect the debtor's assets for maximum distribution to the creditors.12 By having a uniform framework, the Model Law "provides a well-understood framework for foreign parties and reduces the need for foreign representatives to have to seek advice on domestic law,"13 thereby reducing transaction costs. However, despite the ostensible adoption of the Model Law among the participating states, the academic literature has documented several reasons for why there lacks complete harmonization of insolvency assistance and enhanced cooperation.14 First, since the Model Law is "soft law" (does not operate by way of a treaty), states have not implemented all of the Model Law provisions consistently in their domestic law, even though the Guide to the Enactment and Interpretation of the UNCITRAL Model Law on Cross-border Insolvency (Guide) recommends there be as few deviations as possible.15 Second, despite the existence of the Guide, the courts in the adopting states have
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not interpreted the legislation enacting the Model Law consistently.16 The divergence of the implementation strategies of the Model Law raises the question of whether the Model Law promotes the goals of achieving a quick, certain, and predictable outcome in cross-border insolvency proceedings.17
In this paper, we examine the extent to which the Model Law has been enacted and implemented in four economically significant Asia-Pacific jurisdictions: Australia, Singapore, Korea, and Japan—with the former two being common law countries and the latter two being civil law countries. In making the comparison, we take into account the theory of "functional equivalents" in comparative law which holds that a rule which takes a positive legal form in one system may be expressed in other legal systems in a different fashion.18 Further, we examine how the domestic legislation implementing the Model Law has been interpreted in Australia, Singapore, and Korea.19 We seek to assess whether the Model Law's goals of speed, certainty, and predictability are met, the reasons behind the divergent implementation and interpretation of the Model Law, and the future of the jurisprudence on the Model Law.
Various theories have been put forth to explain the divergence in approaches respecting the enactment and interpretation of the Model Law. On a general level, one can argue this divergence merely reflects how insolvency policies and procedures differ substantially between states. Lord Millett observed that "no
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branch of the law is moulded more by considerations of national economic policy and commercial philosophy."20 More specifically, with respect to the adoption of the Model Law by civil law jurisdictions in Asia, scholars like Yamatomo argue that different legal origins explain why Korea and Japan have different strategies for implementing the Model Law. Korea and Japan follow the civil law, distinct from the common law tradition.21
As attractive as the legal origin explanation appears, at least two issues exist with this explanation. First, while some provisions in the Model Law might pose difficulty for civil law countries to adopt unequivocally, such as provisions relating to the conferment of judicial discretion, the scholarly literature on Japanese or Korean jurisprudence does not suggest that the reasons for not adopting the provisions lies in the constraints found in civil law traditions. In fact, the evidence shows the contrary. For example, Korea and Japan's decision not to adopt the Model Law's automatic stay following the recognition of foreign main proceedings does not lie in the constraints found in their civil law traditions.22 Further, Korea has not adopted, in full, the judicial cooperation and coordination in the Korean Debtor Rehabilitation and Bankruptcy Act in 2006 (DRBA),23 the legislation that implements the Model Law, and yet the recent Memorandum of Understanding entered into by the Korean courts with the Singapore and New York courts, both common law countries, signals a willingness to cooperate.24
Drawing from the four jurisdictions, however, we argue that legal origins provide only a partial explanation for the divergence in implementation. Instead, the explanation is based on a dichotomy in how states approach cross-border insolvency: universality and territoriality.25 The universalist principle is premised on the view that only the courts of the bankrupt's "home jurisdiction" have control of, and may administer, the bankrupt debtor's assets and that there should only be one governing law. In contrast, the territorialist principle is one
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where each country has jurisdiction over the portion of the bankrupt debtor's assets within its territory only. Thus, there will be multiple proceedings if the debtor's assets are located in multiple jurisdictions, and there is no obligation to recognize proceedings in the other jurisdictions. There are also many combinations and variations between the two dichotomies in practice.26 It is beyond the scope of this article to discuss the advantages and disadvantages of either approach.27 Mervorach has argued that...
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