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Executive summary

E1 In this report we consider whether the United Nations Commission on International Trade Law’s (UNCITRAL) Model Law on Cross-Border Insolvency (the Model Law) is a suitable framework for New Zealand to adopt to deal with cross-border insolvency issues. Only recently has the understanding that a bankruptcy system is central to fundamental economic reform risen to an international level, focusing attention on the problem of cross-border insolvency. As Professor Westbrook has pointed out:

Just as automotive enthusiasts rarely rave about radiators, bankruptcy is not often a major topic in the discussion of economic development and globalization – until the engine boils over. Recent developments, in particular the adoption of a Model Law on Cross-Border Insolvency by the United Nations Commission on International Trade Law . . . , demonstrate a dramatically increased awareness of this problem and provide a stimulus to look ahead to the next evolution. (Westbrook 1998, 28)

E2 This report:

• First, introduces the issues which arise in a cross-border insolvency and examines factors which influence a state’s approach to the determination of such issues (chapter 1).
• Second, considers current New Zealand domestic law in the context of cross-border insolvency issues (chapter 2).
• Third, considers factors in favour and against reform of cross-border insolvency law with a view to determining whether New Zealand should or should not adopt the Model Law (chapter 3).
• Fourth, provides information on how the Model Law came into existence and then considers the provisions of the Model Law both in the context of the New Zealand legislative environment and the global and trading environment in which New Zealand operates (chapter 4).
• Fifth, considers discretely the question whether registered banks should be subject to the provisions of the Model Law (chapter 5).

E3 We have identified three factors in favour of reform which we consider in this report. Those factors are:

• Globalisation factors: these factors arise from the need to synthesise international commercial law given the nature of the global markets in which trading entities operate.
• Fiscal factors: these factors impinge upon policy reasons for not discriminating against foreign investors or lenders.
• Efficiency and fairness factors: these factors go to the process by which relief can be sought when cross-border insolvency issues arise.

E4 We have identified two factors which militate against reform:

• Adequacy of existing legislation: if our existing legislation is adequate, there may be no need to reform the law.
• Sovereignty factor: this factor goes to the question whether it is appropriate for New Zealand to adopt an international regime rather than a domestic regime which may better suit or protect its citizens.

E5 As Kenichi Ohmae notes in the preface to The Borderless World, “Nothing is overseas any longer” (Ohmae 1990, viii). A borderless economic world has developed which, at present, must be regulated by states whose jurisdiction is limited by their sovereign territorial boundary. It is necessary to strike a balance between the need for sovereign states to regulate economic activity within their territorial boundaries and the need to create a stable environment in which international trade and commerce can operate. This need for New Zealand to respond to global trade issues has been highlighted recently in our report Electronic Commerce Part One: A Guide for the Legal and Business Community (NZLC R50) and in the 1998 paper issued by the Ministry of Commerce, “The ‘Freezer Ship’ of the 21st Century: Government Statement on Electronic Commerce”.

E6 A cross-border insolvency arises when an insolvent entity is placed in a form of insolvency administration in one state but has assets or debts in other states. The domestic insolvency laws of each state are likely to be different. Nevertheless, the administrator of the formal insolvency regime has a duty to realise assets of the insolvent entity for the benefit of all creditors of that entity, subject to any applicable domestic insolvency laws to the contrary.

E7 New Zealand has a high degree of foreign investment (both equity and debt) and is heavily dependent upon exports for income. Thus, at a practical level, it is likely that New Zealand entities will become more and more embroiled in cross-border insolvencies. In our view, it is preferable for the government to enact modern cross-border insolvency laws before major problems occur.

E8 Economic analysis stresses the need for fair treatment of foreign creditors (Bebchuk and Guzman 1998, 19–23). One of the issues that an investor must address before making a major investment overseas is the ability, if things turn sour, to recover money. If the state in which the investment is made allows its creditors to be given preference over foreign creditors or, alternatively, makes or appears to make it difficult for foreign creditors to receive a just dividend, the investment may not proceed or, if it does, the price to be paid by way of interest may be inflated.

E9 The Model Law seeks to provide uniformity of approach to the initiation of cross-border insolvency proceedings while allowing for flexibility of approach, on a case-by-case basis, to the finding of solutions. For instance, local parties are given the option of retreating to the familiar territory of a local proceeding: this was seen as a political necessity, accepted as part of the UNCITRAL process, to accommodate concerns about potentially over-intrusive foreign proceedings dominating local insolvency systems (Glosband and Tobler 1998, 12).

E10 We have come to the view that the factors in favour of reform outweigh those against adoption. We have also come to the view that the Model Law, representing the accumulated wisdom of experienced practitioners who have been involved in major cross-border insolvency proceedings, represents the appropriate way to reform New Zealand law and should be adopted accordingly. We have summarised our reasons for reaching these conclusions in the main text of this report (see para 112–117).

E11 We do, however, recommend that registered banks which are subject to the statutory management procedure established by the Reserve Bank of New Zealand Act 1989 should be excluded from the Model Law’s application. In our view statutory management of a registered bank should only be commenced when there is potential systemic risk to the New Zealand financial system. Such a problem should be dealt with within New Zealand alone. A minor amendment has been recommended to s 118 of the Reserve Bank of New Zealand Act 1989 (see chapter 5).

E12 We also recommend that when a public policy issue is raised as a reason to refuse assistance to a foreign representative, the High Court (being the court we consider should have jurisdiction) should, before refusing relief, consider whether it is necessary to serve the Solicitor-General with the proceedings. By serving the Solicitor-General with the proceedings, the court will be able to receive argument on the public policy point and, perhaps more importantly, will have a party before it who can provide relevant evidence on the public policy objection.

E13 The draft legislation which we have prepared provides that the Act will come into force on a date to be appointed by the Governor-General by Order-in-Council. It is envisaged that the draft Act will not be brought into effect until such time as the New Zealand Government is satisfied that the Model Law has been or is about to be enacted by a number of states with which New Zealand has major trading relationships. This is appropriate because:

• first, enactment per se of the Model Law will show that New Zealand is committed to an international approach but,
• second, it will be unnecessary to repeal existing legislation until such time as the new legislation can be invoked in an international setting.

E14 We recommend that the Model Law be enacted in terms of the draft legislation we have set out. We have provided an appropriate commentary to our draft legislation. That commentary should be read in conjunction with the commentary contained in the UNCITRAL Secretariat’s Guide to Enactment of the Model Law which is reproduced in the appendix to this report using the same paragraph numbers used in the Guide. We have also provided a reference table so that readers can identify precisely what portions of the report deal with specific articles in the Model Law (see reference table on page xvi).