Insolvency refers to a state where a company is unable to pay its debts, constituting a ground for winding up.
Inability to pay its debts would be a case where, a company’s entire capital is lost, no accounts are prepared and filed and no business is done for a period of at least one year.
In Rwanda, insolvency issues are regulated by Organic law No. 03/2009 of 26/5/2009 regulating commercial recovery and settling of issues arising from insolvency. This law introduces checks on poorly performing companies that can not meet their liabilities and gives them the option to reorganize or shut down.
Cross border insolvencies pose threats to economic integrations in Africa and the rest of the world. This is attributed to the lack of multilateral insolvency treaties to curtail cross border insolvencies. Countries embodied in regional blocs tend to rely on domestic insolvency laws which do not cater for cross border insolvency of corporations and credit institutions.
This results in inadequate and inharmonious legal approaches, which hamper the rescue of financially troubled businesses.
Cross border insolvencies complicate insolvency proceedings because the choice of law and choice of jurisdiction cannot be ascertained. Many subsidiary companies registered abroad remit profits to parent companies back home.
This leaves their creditors in a dangerous situation when they run bankrupt. Creditors have the right to sue the parent company situated in another country but this entails a rigorous legal process. In Europe, cross border insolvencies are regulated by the European Council Regulation on Insolvency Proceedings of May 29, 2002.
It provides a comprehensive set of conflict of law rules for cross-border insolvencies within the Member States of the European Union. This EC Directive has played a big role in resolving cross-border insolvencies occurring within the EU Member States.
It provides that courts of the Member State where the debtor has its “centre of main interest” will have jurisdiction to open the main proceeding.
The main proceeding will have universal effect, regarding any assets of the debtor, no matter where they are located, with the exception of assets located in a jurisdiction where a secondary insolvency proceeding has been opened.
In insolvency issues, it is sometimes hard to determine which country actually has jurisdiction over the insolvency proceeding. There are four different sources of jurisdiction: the law of the creditor’s country of residence, the law of the debtor’s country of residence, the law of the country where the transaction occurred, and the law of the country with subject-matter jurisdiction over the assets.
The basic tenets of corporate insolvency can be classified as: restoring the debtor company to profitable trading where it is practicable; to maximize the return to creditors as a whole where the company itself cannot be saved; to establish a fair and equitable system for the ranking of claims and the distribution of assets among creditors, and to provide a mechanism by which the causes of failure can be identified and those guilty of mismanagement brought to book; placement of the assets of the company under external control; avoidance of certain transactions and fraudulent conveyances, dissolution and winding up etc.
The international community has also failed to a draft binding legislation for a uniform procedure dealing with cross border insolvencies. However, several efforts to coordinate multinational insolvencies have been put in place.
The most promising of these efforts to date on a global level is the United Nations Commission on International Trade Law (UNCITRAL) model law on cross border Insolvency, May 30, 1997.
Happy Eugene Mukama is a lawyer