Mediation and Insolvency, with a focus on developing countries

Debt has been a problem for millennia. The roots of the modern insolvency law are in the “jus mercatorum – merchant law”, which took shape in the North of Italy in the late Middle Ages: in case of financial distress, heavy financial and personal penalties, but also the “fida-safe conduct”, the possibility of setting disputes outside court. 

Contemporary international institutions focused ADRs on commercial disputes for decades, only in the last ten years mediation in insolvency cases. 

In the late ‘90s many developing countries experienced financial distress. In 1999 the World Bank began to analyse the problem and in 2001developed the “Insolvency and Creditor Rights Standards” (ICR Standards). The focus was on judicial proceedings. The possibility of resorting to mediation was regarded as entirely residual. 

The World Bank continued on this path, along with UNCITRAL which -for its turn-, in 2005 developed the “Legislative Guide on Insolvency Law”, entirely focused on court proceeding. Attention was paid to expedited reorganization proceeding, informal voluntary restructuring negotiations, conducted out of court, but always analysed under the court’s supervision.

But international mediation was gaining momentum, a trend perceived by the European Union. Directive on restructuring and insolvency 2019/1023, ”preventive solutions are a growing trend in insolvency law”.

It is since the 2000s, following the 2008 financial, and economic, crisis and the one caused by the Covid pandemic (2020/2021) that insolvency law has also been applied to small and medium-sized enterprises and private individuals. 

The same was true for international organizations, whose papers on insolvency proceedings, at the beginning of the century, were generally focused on the financial distress of companies, especially the large ones. But in 2012 and 2014, World Bank papers analysed consumer insolvency, along with the consequences for poverty and inequality in a developing country. 

The increasing attention paid to mediation since 2015/2016, proved by the Singapore Convention on mediation (2019), led Uncitral to issue a document on the insolvency of small and medium-sized enterprises and in November 2020 a document on the use of mediation in ISDS-Investor State Dispute Settlement.

Mediation is particularly useful if the insolvency situation is not worsened too much, when there are more chances to save the ailing firm. The EWI – Early Warning Indicators will be particularly useful.

In 2016 specific attention was given to the alert index, as pointed out by the European Central Bank in the guidelines for the management (and prevention) of doubtful loans by banks: “… Banks need to develop a suitable set of EWIs (Early Warning Indicator) ”. 

When the EWI – Early Warning Indicator waves the yellow flag, how to move? 

A) Complete assessment of the debtor financial situation, inside the legal framework;

B) Creditor / debtor direct negotiation, based on communication and negotiation techniques: contacts, individual at first and collective later, with the various creditors, based on a shared perspective of the situation;

C) cost benefit analysis of the different options, i.e. Batna / Watna;

D) alternative forbearance approach, based on the formulation of alternative solutions and, than, the analysis of the options feasibility according to objective criteria;

E) ADR proceedings;

F) agreement / legal options.

In other words, mediation in bankruptcy.  

Mediation, moreover, allows for flexible relationship management with creditors, in a differential manner: trying to reach an agreement with the “relevant” creditors and satisfying the others completely.

Easy to be said, much more difficult to be realized. This way of proceeding implies first of all an understanding of the cultural context, in which one operates; than a change of culture. And “To change a law is one thing, but how to change a culture?”.

In Vietnam, mediation has just been introduced into the legal system. The 2010 Law on Commercial Arbitration allows the parties, during the arbitration proceedings, to negotiate and reach agreement with each other to resolve their disputes. The 2015 Civil Procedure Code added a new chapter regarding the recognition results of out-of-court mediation. The Decree 22, on commercial mediation, came into effect in 2017 The Law on Mediation and Dialogue at Court was approved in 2020. Nevertheless, although the resolution of disputes by mediation gradually becomes a trend because of the awareness of Decree 22, in the legal community the use of ADR mechanism for commercial disputes in Vietnam still faces some difficulties and obstacles.

In Tunisia, the legislator adopted mediation as a peaceful method to prevent litigation in many conflicts. Several universities provide the alternative dispute methods as a specific teaching and many professionals discuss its legal aspect. However, the practice is not as developed as it should be in times of crisis. In various regulations, mediation and other conciliation methods prevent harmful situations; however, litigation covers the whole spectrum and is the sole solution for disputants. Anyway, according to the insolvency law, a conciliator can have an important role to provide an amicable settlement in case of economic difficulties; the scope of conciliation here is to reach an agreement to reschedule debts and prevent bankruptcy. 

In general, can mediation help, and how? and what is the main driver of success? and there is a particularly helpful kind of mediation proceeding? Mediation can be useful to prevent / manage insolvency disputes. But in developing countries it seems there still is a long way to go.

P.S. – The EBRD – European Bank of Reconstruction and Development issued the “Insolvency Assessment on Reorganisation Procedures” report in 2022. It provides a comprehensive cross-jurisdictional analysis of business reorganisation tools and stakeholders’ perceptions on business reorganisation in 38 emerging economies, that are part of the EBRD regions, while exploring recent insolvency trends and practices in more advanced markets such as France, Germany, England and Wales, and the United States. Attention is paid to the hybrid procedures at pages 25 and 120, proceedings that “combine the features of both private workouts and formal reorganisation procedures. … the restructuring arrangement is negotiated privately with creditors and is then submitted to the court for its confirmation”. 

ENDNOTES

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Guest contributors

SALMA BEN AYED is assistant professor in private law, Tunis University. She is involved in the academic activity in economic law and criminology. She wrote papers in economic law and shared workshops and webinars in mediation.

TRAN VAN NAM, Ph.D., Associate Professor, currently Dean at the National Economics University (NEU) Hanoi, Vietnam. He participated in the Vietnam International Arbitration Centre (VIAC) as an arbitrator and a mediator, practicing trade law and intellectual property law.

author

Giovanni Matteucci

Giovanni Matteucci is a commercial mediator and trainer. Giovanni Matteucci was born in Rome, Italy, in 1949. He graduated in Law and Economics & Commerce at "La Sapienza" University of Rome (Italy) and earned a "Diploma in Economics" from the University of York (UK). He attended the postgraduate specialization courses in "Alternative Dispute Resolution… MORE

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