INSOL protocol aims to reduce costs and administration by enabling recognition across borders

Alan Bennett, partner at Ashfords LLP, assesses the legal effect of the Protocol (the protocol) published by the International Association of Restructuring, Insolvency & Bankruptcy Professionals (INSOL) for international recognition of insolvency proceedings affecting natural persons, its main proposals, and how it interacts with other insolvency provisions.

Original news

INSOL has published a new ‘protocol for international recognition of insolvency proceedings affecting natural persons’. The protocol was developed by INSOL Small Practice Issues Committee. INSOL expects the protocol will be useful for policymakers and legislators reviewing the long-term development of consumer insolvency legislation in their respective countries. The protocol can be viewed here.

What is the legal effect of the protocol?

The protocol consists of a series of proposals which serve as recommendations and broad principles for jurisdictions around the world that are looking to revise either their personal insolvency regime as a whole, or specifically cross-border elements of that regime. It therefore has no legal effect, and does not delve into specific mechanics. Rather it states anticipated outcomes in various aspects of cross-border personal insolvency, and allows individual jurisdictions to establish the mechanisms required to achieve that outcome.

It should be noted that many of the recommendations are based on existing law in various jurisdictions (including England and Wales). The protocol is an attempt to standardise best practice across jurisdictions. It is envisaged that this will provide clarity to debtors and creditors alike, and reduce costs and administration for all parties.

Who is the protocol aimed at, and when is it suggested it should be used?

The protocol is aimed at legislators as a framework to follow in revising the personal insolvency regime in their respective jurisdiction. It also provides guidance to national trade bodies (like R3 Association of Business Recovery Professionals in the UK) that may be assisting legislators. It is not aimed at individual insolvency practitioners, although it will be of interest to them if more jurisdictions apply the content.

How does the protocol interact with the United Nations Commission on International Trade Law (UNCITRAL) model law on insolvency and the Recast Regulation on Insolvency (EU) 2015/848?

The UNCITRAL model law on insolvency functions as the most influential cross-border insolvency law. However, it does have a number of limitations, particularly with regard to low-value personal insolvency as costs can be prohibitive. With increasing numbers of cross-border personal insolvencies, the protocol is intended to refine and complement the Model Law in these specific circumstances through the development of each individual jurisdiction’s regime.

The Recast Regulation on Insolvency is primarily focussed on cross-border recognition of insolvency procedures within the European Union. With a similar aim, the protocol should also dovetail with the Recast Regulation on Insolvency for proceedings in Member States, and in fact has very similar effect.

What are the main proposals in the protocol?

The proposals are extensive, but the underlying theme is to reduce costs and administration by enabling recognition across borders. The individual proposals reflect this, from international recognition of insolvency proceedings between jurisdictions to allowing debtors in a different jurisdiction to vote and participate where the creditor has entered proceedings elsewhere.

The protocol also proposes which law should determine which claims, with the general focus being the lex concursus (or law of the court in which proceedings have been brought) unless there is security, in which case the lex sitae (law where the asset is situated) would apply.

The proposals are:

  • initiation of proceedings—there should be one collective proceeding for a debtor led from one jurisdiction
  • centre of main interests—bankruptcy tourism should be discouraged by requiring a debtor to be in the jurisdiction for six months prior to filing (there would still be access to the court by interested parties if they considered there had been abuse of process)
  • stay of proceedings—all creditors worldwide should be notified immediately when a process commences and that there be a worldwide stay of proceedings at this point
  • voting—all creditors, both domestic and foreign, should have the opportunity to participate in the insolvency process and vote on the proposals
  • ring fencing—ring fencing of assets for local creditors should be considered as inappropriate
  • exempt assets—the rules in the main proceedings relating to exempt assets should apply to all worldwide assets
  • disposal of assets in non-main jurisdiction—all assets should be pooled in the main proceeding
  • repayment plans—where there are repayment plans or income payments, the rules applicable in the main proceedings should apply
  • claims administration—all creditors, regardless of jurisdiction, are able to file claims in the proceedings and the rules applicable in the main proceedings should apply
  • costs of proceedings—in every jurisdiction practitioners remuneration should be paid in priority irrespective from which jurisdiction the money is received
  • tax authorities/government debt—all preferential creditors should be bound by the lex concursus of the jurisdiction where the proceedings are commenced
  • discharge of debt—when a proceeding is opened and there is recognition, all non-main jurisdictions should recognise the discharge in accordance with the provisions in the main proceedings

What does this mean in practice for insolvency practitioners (IPs) dealing with individuals who have assets in several jurisdictions?

Currently, this has a minimal effect in practice. However, as further jurisdictions subscribe to the protocol and reform their insolvency regimes accordingly it should significantly assist IPs in the future in these situations. In light of the increase of multi-jurisdictional personal insolvency, this will be welcomed in the long term, especially as it can only be thought that the number of these cases will rise in the future.

Interviewed by Susan Ghaiwal

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

If you are a LexisPSL Subscriber, click the link below for further information:

Recast Regulation—personal insolvency and COMI

Recast Regulation—main, secondary and territorial proceedings

When does UNCITRAL (implemented by the Cross-Border Insolvency Regulations) apply and what are the effects?

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