Updating the Insolvency and Creditor/Debtor Regimes (ICR) Standard. Task Force Meeting. Insolvency and Creditor/Debtor Regimes.

Transcription

1 Updating the Insolvency and Creditor/Debtor Regimes (ICR) Standard Task Force Meeting Insolvency and Creditor/Debtor Regimes 24 October 2014 Held in Washington DC Rapporteur s Synopsis By Prof. Rodrigo Rodriguez Faculty of Law, University of Bern, Switzerland With the assistance of Francesca Daverio Legal Consultant, Legal Vice Presidency, World Bank 1/8

2 INTRODUCTION Background information In conjunction with the World Bank s Law, Justice and Development Week held in Washington DC in October 2014, the Bank s Legal Vice-Presidency organized a half-day meeting of the Insolvency and Creditor/Debtor Regimes Task Force to discuss the updating of the Insolvency and Creditor/Debtor Rights Standard ( ICR Standard or Standard ). 1 The ICR Standard is one of twelve standards designated by the Financial Stability Board 2 as important for sound and stable financial systems. 3 It is used by the World Bank to assess the legal and institutional framework for insolvency and creditor/debtor regimes in client countries. 4 The assessments are conducted in the form of Reports on the Observance of Standards and Codes (ROSC), evaluating the country s progress in implementing the Standard and offering policy recommendations for future action. 5 The ICR Standard seeks to reflect and articulate the internationally accepted principles against which these country-specific assessments are made. Initially, the World Bank Principles for Effective Insolvency and Creditor Rights Systems ( The World Bank Principles ), adopted in 2001, were the sole source of the Standard. Subsequently, the Standard was revised in 2005 and again in 2011 to integrate and ensure consistency with the recommendations of the UNCITRAL Legislative Guide on Insolvency Law ( LG ). 6 The goal of the October 2014 session was to work on updating the ICR Standard. In particular, the Task Force ( TF ) was convened in order to deliberate on the following three topics: - Receive update on the work regarding the Principles concerning secured transactions (based on papers circulated in advance), - Discuss the proposed revision of the Principle concerning director's and officers' accountability, to align it with the recent recommendations contained in Part IV of the UNCITRAL Legislative Guide ( LG IV ) on Insolvency Law (a draft revised principles was circulated in advance), and 1 Available at: 2 The Financial Stability Board (FSB) was established in April 2009 as the successor to the Financial Stability Forum (FSF). Its mandate is to coordinate at the international level the work of national financial authorities and international standard setting bodies and to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies., see: Above, note 1. 5 Available at: 6 Available at: 2/8

3 - Discuss the issues delineated in a discussion paper regarding the treatment of financial contracts in insolvency (a discussion paper was circulated in advance). The Synopsis that follows summarizes the statements, observations and suggestions that were made in the course of the half-day session. While the summary of the subject matters is ordered according to the chronological order of the session, interventions related to the same topic made at different times are grouped together under their common topical heading. Introductory remarks The meeting began with introductory remarks delivered by Vijay Srinivas Tata 7 and Irit Mevorach 8, both from the World Bank. The history and function of the ICR Standard was explained along with the reasons why it was timely to focus on revising the Standard to incorporate and harmonize it with UNCITRAL s work as well as with the work of other international bodies such as UNIDROIT and the FSB (in particular in the field of financial contracts). It was emphasized that the purpose of having concrete drafts and discussion papers was to enable participants to better focus their observations. With respect to the organization of the meeting, it was explained that the first part of the session was meant to give participants the opportunity to discuss the latest ICR standard revision draft in respect of secured transactions, with the second and third sessions to be devoted to the issues of director's and officers' accountability, and the treatment of financial contracts in insolvency. Purpose of the discussion and follow-up The purpose of the discussion in light of their follow-up will vary depending in the issues. In respect of the secured transactions paper, the comments made will serve as a basis for a further draft that will again possibly together with specific questions sent to the TF members. In respect of the other two issues (director's and officers' accountability, and the treatment of financial contracts in insolvency) the group's observations at this session will essentially serve to establish the final draft of the revised Principles. 7 Chief Counsel of the Legal Advisory Practice Unit in the Legal Vice Presidency at the World Bank Group. 8 Senior Financial Sector Legal Specialist, Finance and Markets Global Practice, World Bank Group. 3/8

4 Subject 1: SUBSTANTIVE LAW ISSUES IN THE LAW OF SECURED TRANSACTIONS Adolfo Rouillon (Senior Consultant, World Bank Group) introduced the documents sent to the TF members analyzing Principle A of the Standard on security rights. These documents reflected the suggestions/comments made during and after the previous year s TF meeting. However, it was emphasized that this still constitutes a draft that can be modified and improved. He recalled that the works on this topic focuses on the World Bank Principles (not on the UNCITRAL Recommendations in the Legislative Guide on Secured Transactions). In this regard, he reminded the group that the scope of the Principles is to assess (and identify areas for improvement if appropriate) the creditor debtor rights system mostly in countries where the level of the system s sophistication is not very high. For this reason he recalled the necessity of maintaining the Principles flexible and not too prescriptive. Adolfo Rouillon provided an update and brief explanation of the current state of the work on the revision of the secured transactions Principles. He explained that he revised draft contains some changes (essentially a "rephrasing exercise of current principles") with important, but not substantial changes, but also some (highlighted) substantial changes or additions to the current version of the Principles, the latter to be considered more carefully by the TF members. While currently the corresponding section comprises 5 principles, under the draft these are extended to 8 principles. However, no new substantial principles will be added to the current version (the division of the existing principles is for purposes of clarity). Adolfo Rouillon suggested that a list of questions and a summary with proposed changes would be sent out to the TF members shortly, and their responses would be taken into account when establishing the final draft. Further deliberations may take place with relevant TF members e.g. through a conference call meeting. Subject 2: DIRECTORS AND OFFICERS' ACCOUNTABILITY Introduction The second issue discussed at the meeting was the revision of the Standard (specifically Principle B2) on directors' and officers' accountability. Irit Mevorach first provided some background about the Standard and its division intro four parts ("Part A" on Legal framework and creditors rights. "Part B" on Risk management and Corporate workouts; "Part C" on The Legal framework for insolvency, and "Part D" on implementation: institutional and regulatory frameworks). Directors obligations are related to part B of the Standard (specifically, Principle B2). 4/8

5 The starting point of the revision is the general conviction that Principle B2 is too general, short an outdated, particularly if compared to the UNCITRAL Legislative Guide on Insolvency Law ( LG ), and should therefore be amended and aligned with part IV of the UNCITRAL LG ( LG IV ) that was recently added to the LG. Through revising the Principle, including adding sub principles, matters such as the obligations of official directors and factual directors, the extent of liability, remedies and the funding of actions, could be addressed. In this context, Jenny Clift (UNCITRAL) also informed the TF on the work that UNCITRAL is doing in the field of directors obligations in insolvency in the enterprise group context. Discussion Following some introduction and background, the TF was informed of the written submissions that had been made regarding this topic and the suggested revision. The oral contributions during the TF meeting focused on the following issues: - The role of the "business judgment" rule and whether it should be more clearly highlighted when assessing a director's responsibility, particularly in view of the fact that restructuring a business may lead to more exposure to a liability than liquidation. If restructuring was to be encouraged, the risks of that approach are to be taken into account as part of the "business judgment rule". - The "imminence of insolvency" was considered by some TF members to be too late a point in time. However, reference was also made to the explanation of the term in the LG that provided some flexibility, and the fact that the Principles (consistent with the LG) referred to a point in time before actual insolvency. - Several remarks as to the wording and the structure were made. However, many of the concerns were addressed by reference to the discussion of the recommendations in the LG and the commentary to the LG, which, in view of its function, was deemed a more appropriate place for clarification than the Principles. - An inconsistency between the Principles and the LG IV was noted, since the Principle contained no reference to other measures apart from the civil liability for the breach of the obligation. It was agreed that a note should be added to the Principle to clarify that sanctions other than civil liability are not precluded, in accordance with LG IV Rec The new draft would take this suggested amendment on board, as well as some further observations on the wording (the need to add the words extent of before insolvency in one of the sub-principles, to make the principle clearer). 5/8

6 Issue 3: FINANCIAL CONTRACTS Introduction and Presentation The third and last part of the meeting focused on World Bank Principles C, in particular C10 (Contracts). As part of an introduction to the issue and to the drafts, the most recent developments and discussions held on this topic, in particular by UNCITRAL Working Group V ( WG V ) were recalled (Irit Mevorach/Edward Janger). It was recalled that UNCITRAL had decided not to prioritize at this stage the issue of the treatment of financial contracts in insolvency, as a result of a lack of resources. As a consequence, focus has shifted to the revision of the World Bank Standard. The discussion was preceded by a general presentation of the issues at hand, i.e. the general rules applying in insolvency in terms of stay, set-off and avoidance, and on the exceptions to that rule applying to financial contracts. Discussion In the course of a very lively discussion that included observations by virtually all participants in the TF meeting, several important points were raised, including written observations by several members that were read out during the meeting (the following list summarizes the points that were shared by several participants and/or led to discussions and conclusions): - Several interventions pointed out the practical need of reviewing the current provisions. The current implementation of financial contracts exceptions to the general rule in certain jurisdictions was criticized as being far too wide and opening the door to abuse, particularly where they could apply to contracts that had nothing to do with financial institutions and even less with systemic risk. Accordingly, proposals advocating for the requirement of at least one financial institution being involved found wide support. - Several interventions recalled the different function that the Principles had to fulfil in comparison with other instruments (UNCITRAL LG, UNIDROIT Principles or FSB Key Attributes) and that any alignment of the World Bank Principles with other instruments would have to take into account the Principles particular function. Accordingly, the Principles would have to be formulated in an open manner in order not to openly contradict other standards, but generally favoring the approach of the more recent and more restrictive standards (UNIDROIT, FSB KA). However, it was also noted that any standard would have to be flexible enough to adapt to ever evolving best practices. - A controversy arose about whether the TF was the appropriate body to make recommendations or determinations in relation to the question of what was to be considered a systemic risk (and relatedly, on the scope of the exceptions). The general view was that 6/8

7 the TF was in a position to make the necessary general determination with an eye on their consistency with other bodies work. - The justification for the special financial contracts regime was questioned in many interventions: while some advocated limiting the scope of its application, other highlighted the importance of the principle of equal treatment and the need for a very strong justification of any exceptions to it. Some views recalled that special provisions for financial contracts had neither avoided nor contributed to minimize losses in the financial crisis. Others noted that given the growth of financial contracts and their use across all industries (beyond financial institutions) in the decade since the 2004 LG, we now have far more information and experience on which to base a more carefully crafted safe harbor that better advances underlying public policy goals. A concern was also expressed that bail in mechanisms designed to better allocate risk among stakeholders (such as those contemplated in the FSB KAs) could be thwarted by potential abuse of overly broad safe harbors. - The issue of the short stay (addressed in the working paper) raised a number of questions and proposals. In the course of the discussion, the need for clarification became evident. The short stay was only to apply to cases where within that (generally two-days) stay the distressed contract was to be transferred to another party (and under the conditions provided for in the FSB KA, that were not fully reflected in the working paper). That stay was to be separated from the general stay provided for under insolvency terms as well as from other consequences such as avoidance. While many more observations focused on further differences and inconsistencies between different sources, it was recalled that the main question to be addressed was whether the current Principles were to be revised or not. The following answers as well as the earlier observations clearly implied a positive answer. As to how to be revised, the general view was that, in view of their particular function, the World Bank Principles were to be updated and, as to their substance, aligned with the best practices as evidenced in instruments that were more recent than the UNCITRAL LG such as the UNIDROIT Principles and the FSB KA. However, while helping to provide guidance to the best practices, the Principles should remain open and flexible enough not to openly contradict (and thereby sanction the implementation) of any of the existing multinational standards. Concluding remarks The session concluded with an invitation to TF members to send any supplementary suggestions they might have with respect to the revision of the Standard. In respect of all three issues, it was reiterated that these would be further revised if necessary and feasible with the assistance of TF members in the following weeks on the basis of the comments during the TF meeting. 7/8

8 Further deliberations regarding the Secured Transactions Principles may take place with relevant TF members e.g. through a conference call meeting. It was considered that the further revision of Principle B2 regarding directors obligations may not require an additional TF meeting. The Principle will be revised in accordance with the discussions at this meeting, and subject to any further written comments. The next step would then be seeking its internal approval in accordance with World Bank processes. The revision of Principle C10 regarding financial contracts is likely to require an additional TF meeting. The World Bank with experts assistance will first produce a redrafted version of the Principle and will submit it for TF members comments. The World Bank will then seek approval of a redrafted version of the Principle at a subsequent TF meeting. 8/8