UNLAWS Update: Report from Working Group 1 (MSMEs)

Report of UNLAWS Attendance at the UNCITRAL Working Group 1 (MSMEs)

27TH Session (Vienna, 3-7 October 2016)

Written by: Catherine Qu

During the 3-7 October 2016, Kayleigh Smith, and I were given the opportunity to attend the Working Group 1 session in Vienna as delegates of LawAsia.  During this week, we were given an insight into the process of drafting recommendations aimed at developing and harmonizing international trade laws.

An interesting part of the experience was simply to witness the procedural workings of UNCITRAL working group in action.  The room is set in a parliamentary style, with the delegates from each country on the floor, and the elected chair, rapporteur and secretary seated at the bench. Each delegate raises their flags to speak, and the chair attempts to establish a general consensus.  It was also a great networking opportunity to meet distinguished lawyers and academics worldwide.

Working Group 1 (MSMEs[1]) is currently working on creating global legal guidelines for the regulation of micro, small, and medium sized enterprises.  This session was allocated to discussing the developments made to the Draft Legislative Guide on an UNCITRAL Limited Liability Organization.   The Secretary began by explaining the aims and main principles of the Recommendations to be discussed and then each recommendation was discussed chronologically.

We aimed to discuss the entirety of the 27 Recommendations, however due to the complexity of the issues in the brief time we had, we only managed to discuss Recommendations 1-13.  While some of the recommendations were easy to reach a compromise, others often resulted in a deadlock of positions.  After this experience, I appreciated the difficulties of creating neutral regulations which are innovative, yet could accommodate to existing national legal systems and traditions.

Part A: General Provisions

We discussed recommendations 1-6 from Monday morning until Tuesday afternoon.  There were several key issues that came out of this.

The most contentious and recurring issue was whether the recommendations should be ‘delinked’ to existing local legislation in the place where it would be implemented.  While the states from civil law countries emphasized the difficulties of implementing a law that was entirely disconnected from the existing legal system, others preferred to adopt a neutral, innovative document disconnected from existing legal traditions.

The second issue was whether the law should cover only entities engaged in commercial activities or also not-for-profit activities.  The consensus was that non-for-profit activities should be regulated by other principles as the main purpose of this was to encourage entrepreneurial growth.

There was also considerable debate about the inclusion of terms which derived from particular legal systems.  For example, civil law jurisdictions opposed the reference to ‘piercing the corporate veil’ as an exception to separate legal personality, as it is a common law concept.

Finally, the issue of whether there should be a minimum capital requirement divided the wealthier nations from the developing nations.  The developed nations argued that a minimum capital requirement would ensure better credit-worthiness and security to investors, whereas the developing nations were more concerned of encouraging those to move from the informal to formal economy, where a minimal capital would disincentive many from this.

Part B: Formation of the UNLLO

On Tuesday afternoon, we finished Part A and moved onto Part B, ‘Formation of the UNLLO’.

This part did not cause too much difficulty.  The first points related to terminology, as some delegates did not think it was clear enough, particularly for jurisdictions with underdeveloped legal systems.  To mitigate any uncertainty, a universally understandable drafting was revised.

A substantive issue was whether there should be a limitation on the maximum number of members, or if legal persons could not be a member of an UNLLO.  Many viewed it as unnecessary or a hindrance to the growth of the UNLLO for states to impose a maximum number of members.  After some debate, the chair established a consensus to delete this paragraph.  However, this issue was reopened the following day, and again during the revision of the minutes on Friday, as some objected to the reporting of where the consensus ended up.

The minimum information requirements for the formation of an UNLLO was another contentious issue.  The goal was to strike a balance between not placing too much of a burden on the MSMEs, yet provide enough protection for the government and third parties dealing with the UNLLO.  The delegations of the states of the Americas expressed concern that the requirements were still too burdensome for MSMEs. The term ‘formation information’ was also replaced by ‘formation document’, to ensure greater clarity of meaning for civil law traditions.

While some issues involved minute changes of wording, Recommendation 10[2]  was deleted entirely.  Many delegates expressed concern of this recommendation, as they believed that it should be the members not the managers that should be able to amend the formation document.  These delegates stated that it should be optional for the law to require this.

Part C: Organisation of the UNLLO

This part was by far the most difficult part of the recommendations.  Recommendation 12[3] was one of the most contested recommendations, along with recommendation 13.  Certain delegates voiced their concerns of having a default member-managed MSME, as this could create later problems if the entity grows from a single member entity to a multi member entity, and it would not be practical for managerial duties to be shared across members.  It was suggested that the default should be a manger-managed entity.

The opposing view emphasized the ‘think small first’ approach of the Working Group, and that in this context, the recommendation should remain as it is stated, that the default rule is that all members of the UNLLO should share equally the management.  The minutes documented that the prevailing view was to retain the current recommendation, as there was insufficient support for the change.  The issue was raised again multiple times during the discussion of recommendation 13, the following day.  However, the chair was firm to state that the discussion was closed.

Recommendation 13[4] was the most time-consuming, as it commenced on the Wednesday afternoon and carried over the entire Thursday.  This discussion followed from the debate regarding the previous recommendation, on whether the default rule should be that the UNLLO would be manager managed, or member managed.

One innovative proposal was to separate the concepts of management and control, included in the recommendation into two distinct recommendations.  It was further proposed to shift recommendation 12, to Section D ‘Managers’ and leave that section to deal with all rules regarding the daily management of the company, and to rename Section C to ‘Organisation and Control of the UNLLO’.

Additional issues were raised which were listed in the records, however these were further debated on Friday afternoon during the revision of the minutes of the session.

 

Footnotes

[1] Micro, small and medium sized enterprises

[2] The law should provide that the formation information may be amended by any manager, unless otherwise agreed by the members.

[3] The law should provide that the UNLLO is member-managed by all members, unless otherwise agreed.

[4] The law should provide that, unless otherwise agreed:

(a) The members of the UNLLO have equal rights to manage the UNLLO;

(b) Any difference arising between members as to matters in the ordinary course of the activities and affairs of the UNLLO shall be decided by simple majority; and

(c) Any difference arising between members as to matters outside of the ordinary course of the activities and affairs of the UNLLO shall require unanimous consent.

 


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