THE TIME is now ripe for Australia to introduce an international model law on cross-border insolvency to prevent costly jurisdictional disputes that may arise should an economic downturn lead to a rise in bankruptcies, according to insolvency law experts.
The United Nations Commission on International Trade Law (UNCITRAL) adopted a model law on cross-border insolvency in 1997. Since then, only a handful of countries have introduced legislation based on the model law.
The model law includes mechanisms to resolve jurisdictional disputes that arise when courts in two or more countries each apply their own laws to the same insolvent company.
Some say the passage through the US Senate earlier this month of legislation ratifying the model law should see it adopted there by the end of the year, and provide a new incentive to other countries.
“Assuming this does happen then it should prompt other countries to follow and adopt UNCITRAL as a framework for cross-border insolvencies,” said New York-based Edward Tillinghast, head of Coudert Brothers’ global financial restructuring and insolvency group last week.
“It will cut down costs and provide a road map which will both streamline international insolvencies and make the process far more predictable.”
Geoff Sutherland, a partner and insolvency specialist in Coudert Brothers’ Australian office, said the US decision should revive Australia’s interest in the “forgotten” CLERP 8 proposals, released in 2002. These suggested Australia should adopt the model law on insolvency, which the Government accepted, but then failed to introduce any legislation.
Sutherland said increasing globalisation, which meant even small and medium sized firms often had assets in several countries, had made it more important to introduce rules that could resolve cross-border disputes.
“Very easily you can get into a situation where the courts of different countries are claiming jurisdiction over the same dispute,” he said.
“If you don’t have some system like [the model law] in place internationally, you can get into horrendous jurisdictional issues, and the substantive resolution of the financial problems of the company can get swamped for years by lawyers trying to sort out jurisdictional issues.”
He said one of the main reasons why the introduction of the model law may have been delayed in Australia could be its booming economy.
However, if there were to be an economic downturn, and a rise in insolvencies, “the system could get swamped with jurisdictional issues,” he said. “The time for implementing these changes is when you’re not facing crisis.”