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This chapter examines specific challenges faced by MSMEs. These challenges arise from factors such as size, lack of available collateral, undiversified nature, and lack of suitable external governance mechanisms, all of which contribute to a high MSME failure rate. As such, it is crucial for insolvency regimes to be responsive to MSMEs’ particular requirements. The chapter then discusses the need for cost-effective insolvency regimes tailored to these requirements, and the problems inherent in the development of such regimes. Cost-effective insolvency proceedings can encourage non-viable distressed firms to exit the market and efficiently recycle their assets to new uses, provide viable distressed firms with the chance to reorganize their operations and liability in order to continue in business, provide higher returns to MSME creditors and thereby incentivize lending in this sector, and encourage greater entrepreneurial activity and new firm creation. Ultimately, an effective MSME insolvency regime can alleviate the downside risk of a venture, in turn increasing the number and variety of people pursuing entrepreneurial activities.

This introductory chapter provides an overview of the Modular Approach to the insolvency of micro, small, and medium enterprises (MSMEs). The Modular Approach shares with standard insolvency regimes the core objectives of preserving and maximizing value in the insolvency estate, ensuring distribution over an appropriate period of time of the highest feasible proportion of that value to those individuals and entities entitled to it, providing due accountability for any wrongdoing connected with the insolvency, and enabling discharge of over-indebted natural persons. The Modular Approach differs from standard processes, however, in the way it pursues these objectives. Its basic assumption is that the parties to an insolvency case are best placed to select the tools appropriate to that case. The role of the legal regime should be to make these tools available to the parties in a maximally flexible way, while creating the correct incentives for their deployment.

The English Bankruptcy Act of 1542 and subsequent 17th century legislation served as the model for early personal insolvency laws upon white settlement in Australia. In 1840 the colony of New South Wales, Australia’s first colony, passed an Absent Debtors Act and the following year an Act for Giving Relief of Insolvent Debtors. A number of the colonies passed insolvency legislation in the period leading up to Federation in 1901. Under the Australian Constitution from 1901 the Federal Parliament has had power to ‘make laws for the peace, order and good government’ with respect to bankruptcy and insolvency. The Federal Parliament used this power in 1914 to create its first Bankruptcy Act and there were new Acts in 1924 and 1966. The present legislation is the Bankruptcy Act 1966 (Cth) which had major amendments in 2002 and 2004.

Belgian insolvency law was completely modernised some 10 years ago. Under the former legislation, bankruptcy (faillissement/faillite) was almost entirely conceived as a remedy in the interests of creditors. The legal means to rescue enterprises with financial difficulties were minimal. In 1997 two legislative Acts were adopted in order to achieve a more balanced approach to insolvency and to take into account the interests of the employees and of the economy in general.

The second annex offers an example of how one jurisdiction identified the policy needs for reform of the treatment of the insolvency of MSMEs by working with individuals on the ground to develop ideas for a fairer and more effective system. In Canada, it is generally acknowledged that the insolvency system works relatively well, particularly for consumer debtors and large enterprises. However, as in other jurisdictions, regulators have had questions as to whether the system adequately serves MSMEs. A study commissioned by the Industry Canada Marketplace Policy Branch of the Canadian Government resulted in Janis Sarra conducting a study on MSME insolvency in Canada in 2015 and 2016, with the goal of identifying challenges that MSMEs face within the existing Canadian insolvency regime. Part of Sarra’s methodology was to undertake a survey of more than sixty practitioners who deal on a daily basis with MSME insolvency, including insolvency professionals and loan officers.

Article 4 EIR talks about the examination regarding jurisdiction under the EIR. It imposes an obligation on the court or other body opening insolvency proceedings to review its jurisdiction decision without a request by the parties and to specify the reasons for its decision on jurisdiction in writing. It also aims to avoid abusive forum shopping by the movement of COMI to another jurisdiction that profits from a more beneficial insolvency regime. The commentary talks about the preparatory work conducted by the European Commission in connection with the revision of European Insolvency Regulation of 29 May 2000 (EIR 2000), which revealed that the procedural framework for determining jurisdiction in some Member States was deficient. It emphasises the obligation on the court to verify its jurisdiction of its own motion, which makes it easier to facilitate subsequent judicial review.