Soft Law Instruments on Restructuring and Insolvency Law: Why They Matter (or Not)

Soft law instruments are increasingly prevalent in the area of restructuring and insolvency law. These instruments, all embodied in legally non-binding texts, often originate from so-called standard-setting organisations. This includes organisations such as the United Nations Commission on International Trade Law (UNCITRAL) Working Group V (Insolvency) and the World Bank, as well as insolvency practitioners’ organisations, such as INSOL International and INSOL Europe. Ambiguity as to what these instruments are and how they relate to hard law has blurred the actual role that these soft law instruments have. This raises questions of how soft law instruments can be (legally) characterised, what advantages and disadvantages they have (compared to hard law), and how they are relevant (if at all) for legislators, policy makers, courts and practitioners in the field of restructuring and insolvency.

The emerging role of soft law instruments in restructuring and insolvency law

In our study, we explore the role that soft law instruments related to matters of restructuring and insolvency play in relation to hard law instruments. We argue that they can (i) complement existing hard law, (ii) be an alternative to hard law, or (iii) conflict with hard law (or even soft law). Soft law instruments are used in multiple ways. International insolvency law practice uses soft law instruments for instance in insolvency protocols dealing with matters of cross-border cooperation and communication. Insolvency protocols have referred, for instance, to soft law instruments, such as the American Law Institute (ALI) Guidelines Applicable to Court-to-Court Communications in Cross-Border Cases (2001), CoCo Guidelines (2007), and the American Law Institute International Insolvency Institute (ALI-III) Global Guidelines for Court-to-Court Communications in International Insolvency Cases (2012).

Several courts have explicitly referred to (international) recommendations made by standard-setting organisations. Soon after the adoption of the ALI-III Global Principles for Cooperation in International Insolvency Cases (2012), they were applied for instance by the Supreme Court of the United Kingdom, in Rubin & Anor v Eurofinance SA & Ors and New Cap Reinsurance Corp Ltd & Anor v Grant and others [2012] UKSC 46, [2013] 1 AC 236. The Supreme Court stated that its position was based on ‘the modern approach… which is that the jurisdiction with international competence is that of the country of the centre of main interests of the debtor (an expression not without its own difficulties)’([13]) and then referred to the Global Principles. Another example is derived from the United States Court of Appeals for the Third Circuit in Re ABC Learning Centres 728 F 3d 301 (3d Cir 2013). In its judgment of 23 August 2013, the court referred to ALI-III Global Principle 1, and cited that ‘the overriding objective [is to enable] courts and insolvency administrators to operate effectively and efficiently in international insolvency cases with the goals of maximizing the value of the debtor’s global assets, preserving where appropriate the debtors’ business, and furthering the just administration of the proceeding’(305). Another part of the Global Principles report was cited, too: ‘“[T]he emphasis must be on ensuring that the insolvency administrator, appointed in that proceeding, is accorded every possible assistance to take control of all assets of the debtor that are located in other jurisdictions.” Id. at cmt. to Global Principle 24’ (305).

There is also extensive case law on the UNCITRAL Model Law on Cross-Border Insolvency (1997, with Guide to Enactment and Interpretation 2013) (Model Law). This Model Law has been adopted in some fifty jurisdictions. The Model Law embraces the use of soft law instruments, in particular for matters of cooperation and communication by courts and insolvency representatives. More innovative is the approach by some legislators to refer to soft law instruments to extend hard law. Exemplary is recital 48 of the European Insolvency Regulation (2015), in force since June 2017, stating that: ‘When cooperating, insolvency practitioners and courts should take into account best practices for cooperation in cross-border insolvency cases, as set out in principles and guidelines on communication and cooperation adopted by European and international organisations active in the area of insolvency law, and in particular the relevant guidelines prepared by the United Nations Commission on International Trade Law (Uncitral).’

Reviewing the pros and cons

Although the realm of soft law instruments has grown steadily, there is limited research on their relevance in the area of international restructuring and insolvency law. In our study, we considered the various pros and cons of using soft law instruments in the field of restructuring and insolvency. The use of such soft law instruments brings various advantages and disadvantages. We showed that soft law instruments on restructuring and insolvency provide for more flexibility compared to hard law. They allow for less politicized compromises and are developed more quickly and at lower cost. Also, soft law instruments are very well suited to developing ethical (and professional) standards, supporting coordinated action where hard law is lacking, and their use does not diminish a states’ (or a court’s) sovereignty.

On the other hand, soft law instruments may be hard to find and it can be particularly difficult to interpret their provisions. Furthermore, soft law instruments are non-binding; they do not usually provide for a revision procedure; and they may risk a lack of due process when, in the absence of a formal legislative process,  the drafting and adoption of soft law instruments is not carefully performed. In addition, it may take considerable time before the impact of soft law instruments becomes visible. Also, soft law instruments usually lack mechanisms for monitoring and resolving conflicts over the content of the instrument. Therefore, they may face the problem of ‘incomplete contracts’.

Concluding observations

Our inventory shows the great diversity of standard-setting organisations active all over the world. Increasingly, regional standard-setting organisation and informal standard-setters have become active in the area of restructuring and insolvency law, and this is contributing to a process of convergence of insolvency laws and practices. Examples include the Nordic-Baltic Insolvency Network’s recommendations (2015) and the Asian Principles of Business Restructuring, currently developed by the Asian Business Law Institute with the assistance of members of III. Much attention has been given to cooperation and communication by judges and insolvency practitioners, such as in the JIN Guidelines (2016) (see also in relation to (preventive) restructuring of distressed companies more generally, the ELI Business Rescue Project (2017)).

For soft law instruments, it remains challenging to study their impact, most specifically due to the practical difficulty of finding them, and of measuring their application. Despite these difficulties, there is increasing attention on soft law instruments dealing with international restructuring and insolvency law. There are now more than fifty such instruments that are also being used by courts, legislators and practitioners. This may signal the development of a new layer of legal norms in international insolvency law.

Gert-Jan Boon is Researcher and Lecturer in insolvency law at Leiden University.

Bob Wessels is Emeritus Professor of international insolvency law at Leiden University.