UNCITRAL Working Group I (Micro, Small and Medium-Sized Enterprises) Update by Dr Anne Matthew and J
Report to LAWASIA and UNCITRAL National Coordination Committee, Australia (UNCCA) on Participation at the 33rd Session, UNCITRAL Working Group I Micro, Small and Medium-Sized Enterprises (MSMEs), Vienna, 7–11 October 2019
By Dr Anne Matthew and Ms Jennifer Anderson
11 November 2019
This report from the delegation representing LAWASIA at the 33rd session of UNCITRAL Working Group I details substantive issues arising at the Working Group, contributions from the expert delegates representing LAWASIA and makes observations relevant to LAWASIA’s membership. The focus of the 33rd session was to move expeditiously towards the completion of the Working Group’s second major output – a legislative guide for the formation of a limited liability organisation suitable as a business vehicle for micro, small and medium-sized enterprises (MSMEs). In short, the 33rd session saw the Working Group complete its step by step discussion of the draft legislative guide for the new limited liability entity. It is planned that the 34th session in New York 2020 will see the completion of a full read through of this legislative guide with a view to submission to the UNCITRAL Commission in mid-2020. In the interim, the UNCITRAL Secretariat has requested assistance with its development of model organisational rules suitable for limited liability organisations with single member/managers and multiple members. Such model internal rules will include model alternative dispute resolution clauses. This documentation will be considered at the 34th Session of the Working Group in New York 2020.
The solutions Working Group I develops for MSMEs are potentially relevant to the LAWASIA membership. The Legislative Guide for Business Registries highlights best practice features of modern business registries and may be of interest to members seeking to reflect upon or improve their own system for registration. The Legislative Guide for the UNLLO will be important for all members where the Legislative Guide is adopted or where UNLLOs feature within the business and trade environment.
A Brief History of Working Group I Relevant to the 33rd Session
The present mandate of Working Group I is to reduce the legal obstacles that confront MSMEs throughout their lifecycle.?It is envisaged that this will be accomplished through the production of a series of outputs useful for developing member states to establish a legislative framework for MSMEs. The objective of creating such a legislative framework is to foster a sound business environment encouraging entrepreneurship. A critical feature of such an environment is that it is in the interests of States and of MSMEs that MSMEs ‘operate in the formal economy’.1 The idea is that ‘entrepreneurs that have not yet commenced a business may be persuaded to do so in the formal economy if the requirements for formally starting their business are not considered overly burdensome, and if the advantages for doing so outweigh their interest in operating in the informal economy’.2 Similarly, MSMEs operating in the informal economy may be encouraged for formalise. The Working Group’s outputs aim to facilitate an enabling legal framework for the registration of MSMEs, in a form that is suitable and encouraging of entrepreneurs, innovators and MSMEs generally, and facilitation of options for their access to finance.3 The first of these steps was completed in 2018: The Legislative Guide for Modern Business Registries was approved by the UNCITRAL Commission in mid 2018.4 This was the first major output of Working Group I in pursuance of its present mandate. The UNCITRAL Secretariat has sought assistance from LAWASIA in bringing this Legislative Guide to the attention of its membership. The second step is the development of a legislative guide for the formation of a limited liability organisation suitable as a business vehicle for MSMEs.5 The third step will be a consideration of how to address issues that MSMEs face with access to finance.
Working Group I commenced its work on legal obstacles facing MSMEs in February 2014. This work is ongoing. The latest meeting, the Working Group’s 33rd session, took place between 7–11 October 2019 in Vienna. The group’s Chair was Ms Maria Chiara Malaguti (Italy). The UNCITRAL Secretariat was represented by Ms Monica Canafoglia.6 The delegation from LAWASIA at the 33rd session of Working Group I was comprised of Dr Anne Matthew,7 and Ms Jennifer Anderson.8 The LAWASIA delegation had the opportunity to meet UNCITRAL Secretariat officers and delegates from various member states and observer organisations. The LAWASIA delegates offered all assistance to the Secretariat. The merit and impact of LAWASIA’s participation in UNCITRAL was again noted by the Secretariat. This was also shown in the Secretariat including the LAWASIA delegates in their ongoing work between group sessions, and requesting relevant input in preparation for the 34th Session in New York 2020.
The UNCITRAL Limited Liability Organisation
The objective of the 33rd Session was to move expeditiously towards the completion of the Working Group’s second major output – a Legislative Guide for the formation of a limited liability organisation suitable as a business vehicle for MSMEs. For the time being the organisation is being called the UNCITRAL Limited Liability Organisation (UNLLO). At the 33rd session the Secretariat brought to the attention of the Working Group that the term ‘UNLLO’ does not translate well in all languages and that this is a matter that should be considered by the Working Group.
It is envisaged that taking the form of an UNLLO will facilitate greater certainty for the MSMEs and the third parties dealing with them, increased participation in the formal economy, and ultimately enhanced economic growth and development. An UNLLO can be understood by consideration of the principles set out in the Draft Legislative Guide for the formation of the UNLLO and its commentary.9 The central tenet guiding the development of these principles is ‘think small first’. This means focusing on the practical requirements of MSMEs. At the 33rd Session the Secretariat reminded the Working Group of the importance of this central tenet, the freedom and autonomy of people to determine the terms upon which they are prepared to join in enterprise, and that the Draft Legislative Guide aimed to create a free-standing legal regime.
The 33rd Session
The Working Group continued its consideration of the Draft Legislative Guide for the formation of an UNLLO.10 Deliberations canvassed a broad spectrum of views reflecting the different policy positions, legal systems and experiences with small organisations of member states and observers. Many delegates referenced simple corporate structures within their jurisdictions or those understood to be successful in other developing member states. Common themes in the discussion were how the UNLLO framework would relate to a state’s existing company law, if any, and whether the UNLLO Recommendations were set standards or created a default position subject to a member state legislating otherwise. In order to support the freedom of people to internally organise the UNLLO in a way that met their own needs, considerable thought was put in to how to create an attractive and minimalist structure offering flexibility. Two interventions were of particular significant impact.
Firstly, the delegation from Italy expressed concern that in the effort to create flexibility the Working Group was leaving so many issues to be determined by states in applying the Draft Legislative Guide that the Working Group was essentially creating a hollow structure. A delegate suggested UNLLO may be an ‘empty box’. The central focus of these concerns was that excessive flexibility of the UNLLO and would militate against legal certainty in general, the operation of the UNLLO in practice, and its credibility. In response it was said that the focus of the regime for the UNLLO set out in the Draft Legislative Guide was to remove barriers to entry into the formal system; it would allow for the creation of a simplified, separate legal entity with limited liability that would cater for the needs of very simple businesses. The Working Group agreed to address the concerns raised in the introductory part of the Draft Legislative Guide by emphasising that the recommended regime be aimed at striking a balance between flexibility and simplicity on the one hand, and the need for legal certainty on the other.
Secondly, Dr Matthew made an intervention leading the consideration of dispute resolution for UNLLOs. Recommendation 28 provides that the adopting State’s law should provide that disputes amongst UNLLO members may be submitted to alternate dispute resolution, unless there are restrictions in the domestic law of that state.11 Dr Matthew intervened to suggest that the Working Group consider making additions to the commentary on Recommendation 28 (para 124) and also to the commentary on recommendation 10. Dr Matthew expressed concern that while flexible, the legal framework put in place by Recommendation 28 would have little practical effect absent agreement between members to resolve disputes via alternative dispute resolution. Thinking small first required consideration of specific issues in this context. Dr Matthew explained the merit of considering the preferred mechanism for resolving disputes between members/members and managers at the point of formation of the UNLLO, rather than leaving it until when a dispute arose, at which point members may not cooperate.
“Disputes between members are a fact of life in small, closely–held entities, but dispute resolution is generally far from their minds at the time of formalizing the business – when their relationship is positive and cooperative. Building–in the possibility of alternative dispute resolution is one of the key features of the UNLLO that stand to make it attractive, functional, affordable for unsophisticated parties, and distinctive from many other limited liability entities. So, it is important that the Working Group turns its mind to how Recommendation 28 can achieve its objective in practice. Paragraph 124 acknowledges that when disputes arise in small, closely–held entities the relationship between members may have completely broken down and become uncooperative and distrustful. Perhaps the commentary should add that at the time of formation of the UNLLO, members should consider how disputes between them will be resolved. Then in Part C ‘Organisation of the UNLLO’, consideration could be given to including reference to a dispute resolution agreement in paragraph 54, or alternatively, adding a comment in paragraph 56 to the effect that if members wish to resolve disputes between them via alternative dispute resolution, this is one of the matters that it would be in the best interests of members to record.”12
This intervention struck a chord with the Working Group and shaped subsequent discussion of Recommendation 28. It was immediately supported and discussed in the interventions from a number of Member States.13 Some of these interventions considered the backdrop of the seminal role UNCITRAL has made in the area of dispute resolution, it’s relevance to unsophisticated parties, legal frameworks requiring agreement consenting to alternative dispute resolution and practical issues associated with flexibility and autonomy to choose the dispute resolution mechanism appropriate to their needs. The Working Group agreed to add to the Draft Legislative Guide that UNLLO members should consider how they will agree to resolve disputes when they are forming their organisational rules. The guidance will stipulate that if there is nothing in the organisational rules, then unless there is cooperation at the time of the dispute such that there is an agreement to arbitrate, there will be no prospect of arbitrating the dispute. The Working Group also agreed that the matter will be included in the draft model organisational rules. Dr Matthew has been asked to provide the UNCITRAL Secretariat with links to potentially suitable dispute resolution clauses that might be useful to include in Model Organisational Rules.
In addition, the Working Group focused on a range of matters attracting substantial discussion and numerous interventions, including:
The issue of the quantum for decision-making where different views were expressed as to whether decisions reserved to the UNLLO members as members should require unanimity or qualified majority. Concerns were raised that decisions by qualified majority could result in minority oppression. There was wide support for particular fundamental matters to be decided unanimously, for example formation of the UNLLO’s organisational rules, as this approach was considered to be suitable for members of MSME. Other decisions would be resolved by vote of a majority of members. Further the Working Group agreed that the Secretariat’s Commentary on quantum should discuss the pros and cons of the decision-making approach based on unanimity or on qualified majority and should highlight that adopting states may opt for either option.
What decisions should be reserved to members as members. The Working Group agreed to revise draft Recommendation 11 to clarify this point. At a minimum such decisions were to include decisions on amendment of its organisational rules, management structure and its modification, members share and contribution, restructuring or conversion and dissolution.
Distributions to UNLLO members, particularly whether distributions could be made if the UNLLO was unable to meet its debts “in the ordinary course of business”. It was noted this language was taken from the cessation of payments test that appeared in the UNCITRAL Legislative Guide on Insolvency Law. While there was wide agreement that the two UNCITRAL texts should be harmonised to the extent possible it was also noted that the cessation of payments test as presented in the Insolvency Guide was used in the context of a commencement standard for insolvency proceedings whereas draft Recommendations 20 and 21 pertained to the establishment of a clawback regime for improper distributions. After discussion and presentation of various suggestions in the context of distributions it was agreed the element of foreseeability should replace “in the ordinary course of business”.
Record keeping, inspections and transfer of rights of membership.
Clarity on organisational rules was identified as an issue in the context of discussion on particular matters. For example, in the context of draft Recommendation 18 the Working Group considered how members could agree to the type, timing and value of contributions in their organisational rules and that unless these were stated otherwise the contributions would be equal in value. This raised concern that a formal document would be required which may affect the flexibility of the UNLLO. It was noted that such issues will be better informed once a draft form of model organisation rules is prepared.
The Secretariat indicated that as the Legislative Guide component of the group’s work is rapidly approaching conclusion, an important final element of the work is to draft model organisational rules for the UNLLO. The Secretariat informed the Working Group that it would draft model organisational rules for the Working Group to consider once the draft Legislative Guide had been completed. Model Organisational Rules would be annexed to the final version of the Legislative Guide. A number of delegates and observers participating in the meeting, including Dr Matthew and Ms Anderson, have been approached to assist the Secretariat in gathering samples to be considered in the Secretariat’s drafting of such model rules.