57. Other methods of protecting third parties dealing with companies with
minimum or no capitalization was linked to the issues outlined in paragraph 52
above, and were said to have been especially effective in developing States. Rather
than establishing ex ante requirements which could impose costs on companies, the
State could instead intervene ex post in order to discipline fraudulent behaviour or
irregular use of the company. In addition, it was observed that certain ex ante
requirements could also be effective in preventing such behaviour from occurring,
and that insolvency procedures could also be invoked to assist third parties.
58. The Working Group was reminded that the size of the informal economy in
States that were members of the Organization for Economic Cooperation and
Development was quite modest in comparison to figures available on the size of the
informal economy in developing countries. It was said that bringing actors in the
informal economy into the formalized system was therefore mainly a problem in
developing countries, and it was suggested that providing a scheme for simplified
business incorporation presented one option for enterprises wishing to make the
transition into the formalized economy.
59. It was further observed that the Working Group may wish to take note that not
all third parties dealing with the enterprise could be protected in the same way. It
was noted that high standards of public disclosure in terms of an enterprise’s
finances might be sufficient to protect voluntary creditors of a company, but that
such mechanisms may not sufficiently protect involuntary creditors, nor may
minimum capital requirements or obligatory capital reserves. It was suggested that
in such cases, States may wish to establish better mechanisms for satisfying the
claims of involuntary creditors so as to avoid putting an unnecessary burden on the
business.
Dispute resolution
60. It was noted that issues in respect of dispute resolution did not only concern
the resolution of disputes among partners or as between partners and managers of
the business, but related also to conflicts arising between the business and
third parties, such as creditors or clients. In the case of the former, it was noted that
conflicts involving business partners and managers were often resolved in courts,
which could be problematic in developing States due to a lack of experience in
dealing with such matters, expensive court fees and overburdened court dockets.
One method of dealing successfully with this problem in both developing and
developed countries had been to establish special courts to deal with such disputes.
61. In respect of disputes involving the business and third parties, several
delegations highlighted the need for micro and small businesses to have access to
fast and inexpensive dispute resolution mechanisms rather than dealing with the
formal court system. Experiences were shared by various delegations as to their
approach in resolving disputes concerning micro and small businesses and in
providing consumer protection. Several examples concerned the establishment of
specialized institutions for the resolution of disputes resulting from financial claims.
In one case, it was observed that the institution could not render binding decisions,
but relied on voluntary compliance by the financial intermediary at fault; cases of
non-compliance were publicized, resulting in a strong negative effect on the
commercial reputation of the party at fault.
62. It was also suggested that there was a need to address conflict arising between
MSMEs and third parties in situations of financial distress of the business. This was
said to require a simplified regime of insolvency that would meet the needs of
MSMEs, a matter currently being considered in UNCITRAL’s Working Group V.
One State provided an example of an expedited regime that it had for micro and
small business, aimed mainly at encouraging refinancing arrangements. The
Working Group agreed on the importance of providing simplified and low-cost
dispute resolution procedures to MSMEs, with a particular focus on methods such
as arbitration and mediation, including online dispute resolution.
Governance issues
63. The Working Group next considered the issue of the internal governance of
enterprises. It was generally agreed that freedom of contract should be the guiding
principle in terms of establishing the internal organization of a company, although it
was noted that very unsophisticated micro and small businesses could find resort to
this principal a challenge in setting up their businesses. Two examples of possible
exceptions to absolute freedom of contract in this regard were said to be rules
regarding the prevention of conflicts of interest of managers of the company and
certain rules relating to the law of agency. It was noted that freedom of contract was
a desirable goal, but that micro and small businesses might have difficulty with the
transaction costs of establishing their own internal governance and of complying
with it, and that standard forms could also be useful in this regard.
64. It was also noted that some forms of business association were quite rigid and
required certain information in the articles of association from which there could be
no deviation. It was said that such rules were necessary for very practical reasons,
for example, to establish how revenues of the company should be distributed.
Moreover, very strict rules were also required for some publicly-traded companies
in order to prevent instability that could damage the economic system.