On 14 September 2023, we sent a letter to the Secretariat of the United Nations Commission on International Trade Law (UNCITRAL) Working Group V (Insolvency) expressing our concern about the concept of Centre of Main Interest (“COMI”) adopted in the Model Law on Cross-Border Insolvency (“The Model Law”). We noted that the concept of COMI presents various weaknesses. Among others, (i) it creates uncertainty and litigation costs, especially in the context of multinational companies with offices, creditors, operations and employees in several jurisdictions; (ii) it can lead to opportunistic behaviour given that, without providing any safeguards to its pre-existing creditors, a debtor can move its COMI to a jurisdiction that may be detrimental for creditors; (iii) it can increase a firm’s cost of credit because sophisticated lenders will price in the risk of being subject to an undesirable insolvency forum; and (iv) it can hamper the effective reorganization of viable but financially distressed businesses and reduce returns to creditors, especially for companies based in countries without efficient insolvency systems.

As a result, we proposed a better approach—the “Commitment Rule”—for determining the place where a foreign main insolvency proceeding will be initiated. The arguments for the Commitment Rule are laid out in detail in a journal article we posted in January 2014. In short, the Commitment Rule allows debtors to commit, in advance, to a particular insolvency forum. To make this commitment public and binding, the debtor must put it in their company’s constitution. This upfront and observable commitment eliminates uncertainty and opportunistic manipulation. With the adoption of various safeguards that we suggest in our proposal, the Commitment Rule also allows the modification of insolvency forum if circumstances change and debtors and creditors realize they are better off in another insolvency forum.

Despite the desirability of the Commitment Rule, we are aware that such a disruptive change to the Model Law will not be easy. In fact, for various reasons, such as status quo and other biases among lawmakers (and academics), it faces significant obstacles. Yet, as academics, we must do more than simply describe current law. We have a moral and professional obligation to examine legal changes that will make society better off. In our field, that obligation includes recommending regulatory and policy change that can improve financial markets and benefit businesses (especially those in emerging markets), even if those ideas are considered “naïve” (using the term employed by two US academics who criticize our proposal). To ignore policy changes that can improve people’s welfare would be contrary to our fundamental obligations as academics. After all, the success in the move from a territorial system of insolvency laws to today’s modified universalism was driven in large part by similarly ambitious academics striving to improve a system they viewed as less than ideal.

Read more at Singapore Global Restructuring Initiative Blog