Учебный год 2023 / phd

nature of environmental issues.77 This is not only relevant to SSA countries because of environmental issues that arise in the undertaking of business activities, but also because the economies of SSA countries and the investments that are made are largely natural resource-dependent.78 Understandably, this perspective takes account of economic and social costs involved in environmental damage and its adverse impact on the quality of human life and health.79 Other critical issues and challenges addressed under the various policies and governments’ documents include unemployment and job creation as they relate to poverty reduction.80

7.4.3Significance and Implication of the Local Policy Perspectives for Cross-Border Insolvencies

The perspectives emerging from the above analysis of the policies have, albeit indirectly, the potential implication for the formulation of cross-border insolvency regimes for Kenya and Tanzania which, according to Westbrook and others, require a multiplicity of considerations resulting from, for example, ‘the economic system of the respective country, its relationship with particular other countries and the hoped for treatment of its business abroad.’81 Thus, the perspectives provide a useful insight in identifying policy choices that must be made in the legislative process to fit and serve the aspirations of these countries.

Arguably, such perspectives, viewed as a whole, point to the relevance of modified universalism (adopted in the form of a customised and adapted version of the Model Law) as the most appropriate approach. However such perspectives appear to suggest that a special arrangement might be needed to regulate crossborder insolvency involving firstly, member states within a regional integration and secondly, foreign countries that are in a special relationship with the countries under study.

One challenge that emerges is balancing the global insolvency norms with the distinctive national path dictated by the characteristics of the policy perspectives

77Kenya (n 50) 64 and 65

78Tanzania (n 55) 8

79Tanzania (n 47) 7

80Kenya (n 52)

81JL Westbrook and others (n 1) 228 and 229

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which are indicative of the local interests and priorities.82 While negotiating the place of such perspectives during the processes of developing a cross-border insolvency legal framework, the countries under study must take cognisance of the position of the international insolvency benchmarks that discourage construction of insolvency systems based exclusively on social and political concerns, as opposed to commercial bargains.83 This is in addition to the limitations implied by the existing international treaty commitments to the SSA host countries as to, for instance, standards of treatments to be accorded to foreign investors and investments.84

7.4.3.1Private Investments and Economic Growth

Private enterprise and its role in economic growth is a fundamental feature in almost all policy perspectives drawn from the selected national policies.85 The nature of the private sector that is envisaged reflects both domestic and foreign firms. One legitimate expectation of the policy makers is that the facilitation of the private sector leads to a strong and competitive export led private sector which will contribute to the economic growth. The underlying rationale is to reduce poverty and contribute to social equality among the people.

To address this policy objective consideration will have to be had to ‘institutionalising mechanisms that enable a risk-taking enterprise to reap the benefits of any success it is able to achieve.’86 In the event of financial difficulties leading to insolvency of such an enterprise, there should be means which might preserve rather than destroy going concern value of the enterprise. This could be achieved by rescue mechanisms for dealing with enterprises that fail, equitable treatment of all players irrespective of their nationalities and protection of the debtor’s establishment, assets and other interests of creditors. The latter is achievable through granting of a relief that is meant to protect the insolvent estate of the debtor which includes the local assets and interests of

82TC Halliday (n 2) 2; EJ Janger (n 21) 401-44; and TA Sullivan, E Warren and JL Westbrook, ‘The Persistence of Local Legal Culture: Twenty Years of Experience From the Federal Bankruptcy Courts’ (1994) 17 Harv J L & Pol’y 801, 804

83UNCITRAL Legislative Guide on Insolvency Law paras 13 [pg 13] and 68 [pg 60]

84Text to part 4.4, 4.5.1, and 4.6.1 in chapter 4

85See for example text to n 57, 59 and 60

86ED Flaschen and TB Desieno (n 11) 667

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creditors. This may include a stay and restriction on the right to transfer or dispose of any asset. Such a protection is fundamental to a successful rescue and augurs well for the commitments arising from the bilateral investment treaties concluded thus far.87

Since these policy aspects also envision the aspiration of encouraging foreign investments, any rescue mechanism to be formulated must take that policy consideration into account together with other relevant legislation for promotion and protection of investment that is already in place.88 This means that the law should clearly articulate the scope of its approach in cross-border insolvency cooperation from the perspective of a country that would ordinarily face the challenge of deferring to foreign proceedings, given the current pattern of global trade and flow of investments.89 Alongside, the formulation of such a law must be mindful of achieving a high degree of efficiency, predictability, and certainty to reduce transaction costs and enhance availability of credits to investors. The implication of the implementation of rescue procedures in respect of a multinational enterprise is that the business of such an enterprise can be rescued with the possibility of continuing its operation in the countries under study and providing jobs to the people.

In support of the rescue mechanism, consideration could be given to the suitability of and the scope to be accorded to prioritisation of governments’ tax claims which is one of the thorny issues in cross-border insolvency.90 Such a consideration has to be taken in light of the theory that advocates against prioritisation of tax claims as it runs counter to the policy underlying business rescue. The underlying rescue policy seeks, wherever possible, to preserve the debtors’ continued existence as a viable entity, protecting jobs and reducing damages to the economy.91 Consistent with this theory is the view that the

87Text to part 4.5.2.4 in chapter 4

88It is to be noted that most of the investment promotion and protection legislation enacted by SSA countries guarantees fair and equitable treatment, national treatment and most favoured nation treatment to foreign investments.

89F Tung (n 39) 576 and 577

90JL Westbrook (n 4) 877; and JM Weiss (n 27 ) 295 and 299-303; and UNCITRAL Legislative Guide on Insolvency Law para 71[pg 271]

91A Davis (n 31 ) 149; and JM Weiss (n 27) 295

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potential harm to other creditors of having government tax priority and thereby failing to recover their claims may cause substantial hardship and precipitate additional insolvencies.92 In fact, the loss to the government of one company not paying taxes could be minimal, while the potential harm to other creditors of the company of having a tax priority is often large.93 Above all, it is understandable that government normally has other means of enforcing its claims, such as imposing penalties and high interest rates, or using statutory liens.94A successful business rescue means continued existence of a business as a viable undertaking, which leads to protecting jobs and avoiding unemployment related cost being incurred by the government while ensuring continued payment of the government taxes.95 However, any decision as to the treatment of tax claims need to take account of the local circumstances.96 Uganda is one of the countries in SSA that has given consideration to the abolition of tax claim priority.97 However, taking account of the local circumstances, the Ugandan Law Reform Commission recommended that:

‘[Foreign experiences] cannot be adopted without caution being taken. Government and public stand the risk of being cheated by unscrupulous directors who will collect the government tax and pocket it well knowing that in the event of insolvency, the company will be absolved from passing on tax collected to Government. For example a company that has been collecting PAYE from its employees for a long time before insolvency sets in is left to go away with it. The primary victim shall be the employees whose wages were deducted. [It is thus recommended that only] taxes collected by the insolvent as a quasi-agent of the state should be recovered as preferential debts while taxes directly payable by the insolvent should be treated as ordinary debts.98

Notably, no consideration has so far been given on cross-border implications of tax claim priority.99

Further consideration may need to be given as to whether some actors within the private sectors can be accorded special protection under the priority systems and

92A Davis (n 31 ) 149; and JM Weiss (n 27) 295

93BK Morgan (n 31) 466 & 467; and JM Weiss (n 27) 295

94Ibid

95A Davis (n 31) 149

96See n 31 above

97Similar consideration seems to have recently been made in literature in respect of the Kenyan reform initiative. For this consideration see text to n 115 in chapter 6

98Uganda Law Reform Commission (n 26) Para. 2.2.15; Cf text to n 115 in chapter 6

99UNCITRAL Legislative Guide, para 71[pg 271-272]

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how such protection may influence cross-border insolvency approaches. One way of doing this is allowing the foreign creditors to enjoy the protection accorded by the local priority system. This may help foreign companies having investment in the countries under study to get finances from international lenders in anticipation that in the event of insolvency they will be able to claim locally and benefit from the existing priority system.100 It is important that this strategy be considered and weighed against the stipulation of the existing international insolvency benchmarks. Accordingly, as far as the Model Law is concerned the minimum protection that a country may accord to foreign creditors is to treat them in a distribution at least as well as a general, unsecured creditor.101 Indeed, the treatment in relation to the distribution can be even ‘lower than the general non-preference claims if an equivalent local claim (e.g. claim for a penalty or deferred-payment claim) has a rank lower than the general non-preference claims.’102 This is particularly important as the policy perspectives envisage that protection of local interests should not be pursued in a manner that affects foreign enterprises, although there is a clear intention of nurturing the locally owned small scale business enterprises.103 Understandably, the treatment of foreign creditors in a local distribution is different from the equality of treatment of creditors regarding commencement of proceedings in the local court.104

100Notably, the majority of foreign companies that operate in Tanzania and Kenya for example are not run as branches of their foreign parent countries abroad but as separate entities incorporated under the laws of the respective countries in which they have operations. However, a company will still be categorised as foreign by virtue of majority foreign shareholding. In Tanzania the law is explicit that a foreign company can also access credit in local financial institutions. See Tanzania Investment Act 1997 (Tanzania) s 25

101JL Westbrook, ‘Multinational Enterprises in General Default: Chapter 15, The ALI Principles, and the EU Insolvency Regulation’ (2002) 76 Am Bankr LJ 1, 16; Model Law art 13(2); Guide to Enactment of UNCITRAL Model Law on Cross-Border Insolvency Para 104 [pg 331]

102An alternative provision which a country may consider incorporating to replace art 13(2) is to the effect that: ‘Paragraph 1 of this article does not affect the ranking of claims in a proceeding under [identify laws of the enacting State relating to insolvency] or the exclusion of foreign tax and social security claims from such a proceeding. Nevertheless, the claims of foreign creditors other than those concerning tax and social security obligations shall not be ranked lower than

[identify the class of general non-preference claims, while providing that a foreign claim is to be ranked lower than the general non-preference claims if an equivalent local claim (e.g. claim for a penalty or deferred-payment claim) has a rank lower than the general non-preference claims’

103See text to n 60-65 above

104UNCITRAL Model Law on Cross-Border Insolvency art 13(1); and Guide to Enactment of UNCITRAL Model Law paras 103-105

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The rescue mechanism discussed above is one form of providing the contemplated protection to small local enterprises during insolvencies or financial difficulties and it could certainly help viable yet insolvent local small businesses to be nursed back to business in appropriate cases. As some of these local businesses are increasingly engaged in international business transactions, they are likely also to have foreign liabilities arising from their meagre international trade operations. Consideration of participation of foreign creditors in the local insolvency proceedings as above stated is thus inescapable.

As already discussed, such small local enterprises could be potential claimants in insolvency proceedings including cross-border insolvency proceedings. It would appear that some form of protection can be achieved by accommodation of some local industries, small and medium scale enterprises that represent legitimate local interests in the systems of priority of distribution of the countries under study. Such favourable treatment will protect them against any potential harm that might result from failure of claims recovery. However, this should, if at all necessary, be confined to sectors considered exceptionally important to the economy. As it has rightly been pointed out in the policies, as far as Tanzania is concerned, this pursuit may involve making decisions on types of the local enterprises to be protected, together with the rationale and costs of protection.105 A lesson could be learnt from the special protection accorded in the US to grain producers and fishermen, who, alongside consumers, ex-spouses and children, enjoy priority over general creditors in special cases.106 However, care must be taken since such policy choices may put the whole system at risk of being regarded as inefficient and unfriendly to foreign investors.

Indeed, some of these local creditors could be small suppliers to some foreign businesses that may have operations in the countries under study. In the context of a cross-border insolvency involving a business having operations and assets in the countries under study, there could be legitimate concerns about small, local creditors which undoubtedly include suppliers and employees. It is common knowledge that ‘these creditors cannot be expected to be sophisticated in

105See for example Tanzania (n 47) 10

106Text to n 39 above

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planning for insolvency risks or able to protect themselves in distant proceedings.’107 As such, one policy option available, especially where deference to foreign main proceedings is preferred, is providing for local processing of the local claims.108 Such claims or specific category of such claims could thus be paid locally ‘…. in full from local assets before the assets are transferred to the main proceedings.’109 The local processing for the benefit of the local creditors can well be achieved by having provisions for protection of creditors, avoiding acts detrimental to creditors as well as through concurrent proceedings as provided for under the Model Law.110 Understandably, the relevant provisions of the Model Law could be adapted in the manner that suits the local circumstances as reflected in the policy perspectives. Indeed, this kind of protection of certain category of local creditors will potentially add towards poverty reduction efforts as discussed subsequently because it will help minimise the potential harm to, for instance, small local supplier creditors which could otherwise have led to substantial hardship and possibly insolvency.

7.4.3.2Increasing Participation of Local Enterprises in the Global Market and Access to International Finance

As mentioned above, in a bid to ensure the countries under study attain sustainable economic development, the policies endeavour to facilitate transformation of identified sectors that characterise local enterprises. The transformation is with a view to making them more competitive and enabling them to participate in the global market; access global commercial capital; benefit from transfers of technology; and engage in joint economic venture arrangements in order to benefit from the operations of the multinational enterprises. As far as Kenya is concerned, this pursuit is regarded as the most important strategic priority for the future of local enterprises.111 On the part of Tanzania, this involves strategic identification of the local enterprises to be

107JL Westbrook (n 4) 876-877. See also PJ Omar, ‘The Landscape of International Insolvency Law’ (2002)11 Int’l Insolv Rev 173, 177. Notably, participation by creditors in foreign proceedings depends on the availability of knowledge and information, their ability to be diligent and to overcome procedural obstacles.

108JL Westbrook (n 4) 876-877; and JL Westbrook (n 6) 515

109JL Westbrook (n 4) 876-877; see also UNCITRAL Model Law on Cross-Border Insolvency, arts 28-32

110UNCITRAL Model Law on Cross-Border Insolvency, arts 22-23 and arts 28 - 32

111Kenya (n 50) 25

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protected, the rationale and costs of protection, and the maximum duration for the protection.112 This policy strategy reinforces the participation of the small local enterprises in the global market and hence the potential for being exposed to cross-border insolvencies in either of the following two ways.

Firstly, it could be by virtue of the local enterprises themselves being insolvent while indebted to foreign creditors. This brings in policy choices to be made as to participation of foreign creditors in local proceedings and in particular their treatment in the local priority system as above discussed. It must however be added that enabling local enterprises to access international capital requires predictability and certainty in the treatment of foreign creditors in the local insolvency proceedings. Indeed, efficiency of insolvency systems and their crossborder insolvency regime is one of the factors that international finance considers in funding projects, especially those being executed in developing economies, such as those of the countries under study.

And secondly, it is by virtue of having claims against an insolvent foreign enterprise that does not necessarily have assets or an establishment locally. This brings in the trouble that such local enterprises may encounter in their attempt to enforce their claims at a distance. Much as the provision for local processing of local claims is ideal, its effectiveness largely depends on the presence of local assets and the ability of local jurisdictions to restrict transfers of assets at least for a while which could also be achieved under articles 22 and 23 of the Model Law as above discussed or any adapted version of the measures stipulated in such provisions of the Model Law. The possibility of lack of local assets raises an issue that requires the countries under study to consider if they really require adopting a system that strictly favours local processing of assets for it is not always that an insolvent foreign debtor will have sufficient amounts of assets, if any, in the local jurisdiction. The issue also links to a consideration of having an arrangement with a foreign country that provides for mutual treatment of debtors and creditors from each country and one that provides appropriate protection for the interests of debtors and creditors from either of the jurisdictions within the

112 Tanzania (n 47) 10

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arrangement. Such arrangements could, in appropriate cases, save time, cost and inconvenience associated with litigations involving determinations of several issues that may arise, such as, whether interests of creditors and other interested parties are adequately protected in the relevant foreign proceedings. The challenge is that it is not all countries that may have incentive to conclude such an arrangement based on the reciprocity.

7.4.3.3Poverty Reduction through Continuation and Protection of Businesses and Employment

Fighting poverty is central to the reviewed policies. Job creation and ensuring that those who are in employment continue to keep their jobs are considered as strategically important in reducing poverty. Adoption of a rescue system, as above noted would contribute to poverty reduction in a number of ways. Firstly, a successful business rescue prevents or at least limits the job losses caused by a business failure. Thus, it will enable some people who would otherwise lose their jobs in liquidation to keep their jobs. Secondly, continuation of the business through implementation of the business rescue system will also contribute to economic growth and the potential for further creation of more jobs. And thirdly, encouraging risk taking and further creation of businesses from both local and foreign entrepreneurs. This will add towards facilitation and promotion of private investments which under the policies are an engine of economic growth and the consequent creation and saving of jobs.

It is well known that ‘[w]here insolvency strikes an employer, there will almost invariably be employees to whom money is owed by way of unpaid salary or other obligations arising under the employer/employee contract that have not yet been paid by the employer.’113And perhaps the most drastic consequence is that such employees stand to lose their jobs which can have a devastating effect on them and their families.114 Special protection of employment claims in distribution of the proceeds of an insolvent estate is therefore another obvious option to ensure that such claims are met before those of some other creditors to

113JL Westbrook and others (n 1) 183

114R Goode, Principles of Corporate Insolvency Law (4th edn Sweet & Maxwell, London 2011)

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reduce poverty.115 Although such protection is to a certain extent provided in the existing laws,116 it is very limited and perhaps inadequate compared to the position in other countries, inclusive of the developed ones.117 Consideration of improving the nature and scope of such special protection might be worthwhile to pursue. This is critical on account of the peculiar socio-economic circumstances of the countries under study that mandate different standards at least for a short run. In the context of cross-border insolvency, it will be absurd that a poor employee of a SSA country whose salary and other dues remain unpaid should have to wait and pursue his claims with the general body of creditors of a foreign jurisdiction in a foreign proceedings of a company that had assets or an establishment in the local jurisdictions of the countries under study.118 However, while care must be taken not to render an insolvency system to serve the functions of other laws such as social security legislation, the position of the countries under study could (in light of the international insolvency benchmarks) be treated as exceptional until such time as when these countries have comprehensive welfare systems.119

Indeed, failure to address the above issue, which is directly linked to the lack of an adequate social welfare system, would mean that there might be potential threats for social order as a result of unemployment and a lack of funding for the same.120 This could potentially thwart successful rescues and prevent the

115JL Westbrook and others (n 1) 184 stating inter alia that ‘[t]here can be little doubt that the overall effect on employees and their families is qualitatively far worse than it is on other creditors….[U]nlike other creditors [they] are severely undiversified.’ Undoubtedly the situation is even worse in SSA where in most instances the wages are low and there are no welfare states.

116See text to n 25 above

117JL Westbrook and others (n 1) 188-190. This is particularly the case if for instance one takes account of indirect forms of employees’ related priorities like pension claims. More so if considered in the context of the requirement of protection of employees’ rights in the event of a transfer of undertaking which enacts a principle of automatic transfer of contract of employment.

118JL Westbrook (n 4)

119For a more or less similar reasoning, though with respect to China, see, RW Harmer,

‘Insolvency Law and Reform in the People's Republic of China’ ( 1995-1996) 64 Fordham L Rev 2563, 2565 and 2566; R Parry and H Zhang, ‘China’s New Corporate Rescue Laws: Perspectives and Principles’ (2008) 8 J Corporate L Stud. 113, 132; R Parry, ‘Underlying Factors and Legal Cultures Influencing the New Chinese Bankruptcy Law’ in B Wessels and PJ Omar (eds),

Insolvency Law in the United Kingdom: The Cork Report at 30 Years (INSOL Europe, Nottingham 2010) 103

120 RW Harmer (n 119) 2565 and 2566; R Parry and H Zhang (n 119) 132; R Parry (n 119) 103

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