Introduction

• Author: United Nations Commission on International Trade Law
• Pages: 39-45

39

Commentary to the UNCITRAL Legislative

Recommendations on Insolvency of

Micro- and Small Enterprises

I. Introduction

A. Purpose of part ve

1. Micro, small and medium-sized enterprises (MSMEs) constitute the majority

of businesses in economies around the world. ose in the micro- and small part

of the spectrum (MSEs), in most economies, take the form of sole proprietorships

or small partnerships whose founders, owners or members do not enjoy limited

liability protection and thus are exposed to unlimited liability for business debts

of MSEs. Where MSEs operate as limited liability entities, limited liability protec-

tion is usually illusory for MSE owners because they are oen expected to secure

MSE business debts using their personal assets as collateral. MSEs tend to be rela-

tively undiversied as regards creditor, supply and client base and heavily depend

on payments from their clients. As a result, they oen face cash-ow problems and

higher default risks that follow from the loss of a signicant business partner or

from late payments by their clients. MSEs also face scarcity of working capital,

higher interest rates and larger collateral requirements, which make raising nance,

especially in situations of nancial distress, dicult, if not impossible. As a conse-

quence, they may be prone to business failure more oen than larger enterprises.

MSEs in nancial distress may themselves be the clients of other MSEs that would

share the same characteristics, with the consequence that business failure of one

MSE may cause business failures in the MSE supply chain.

2. Standard business insolvency processes may be unavailable for MSEs. Where

they are available for MSEs but costly, complex, lengthy and procedurally rigid,

they may be prohibitive or unsuitable for MSEs. Burdened by unresolved nancial

diculties and old debt, MSEs may be discouraged from taking new risks, may

become trapped in a cycle of debt or may be driven to the informal sector of the

economy.