Legal Briefing

The EC Commission’s proposal for changes to the EC regulation on insolvency proceedings

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Public Sector | 01 July 2013

The EC regulation on insolvency proceedings1 (the Regulation) was introduced as a directive taking effect in the laws of member states of the European Union, without the need for member states to pass any local law of implementation. It has been part of EU law and the law of the United Kingdom since 31 May 2002. Insolvency laws vary across the member states of the EU, so a framework was needed to allow the patchwork of differing local laws to interact as efficiently as possible. The Regulation applies in all the member states of the EU, except Denmark, which exercised its right to opt out.

The concept of centre of main interests (COMI) of the debtor is at the heart of the Regulation and provides the means of ascertaining in which member state ‘main’ insolvency proceedings must be opened. For corporate debtors, the place of the registered office is presumed to be their COMI but that presumption is rebuttable in the light of evidence. The concept has been developed in case law, which has required that evidence rebutting the presumption must be ‘ascertainable by third parties’. That requirement has been incorporated specifically into the proposed new Recital 13(a).

The law of the member state where main proceedings are opened becomes the law of the insolvency proceedings across all the EU member states, subject to the matters reserved to local law in Articles 5 to 15 of the Regulation. These include, for example, set-off, reservation of title, employment law, the law of land and mortgages and the effect of insolvency proceedings on lawsuits. The proposal does not introduce amendments to any of these provisions. Secondary proceedings may be opened in any member state where the debtor has ‘an establishment’, but the effects of secondary proceedings are limited to the assets in that state.

The Regulation currently only applies to the ‘collective’ insolvency proceedings that are listed in Annex A of the Regulation. The proceedings are listed by country and do not include schemes of arrangement under Part 26 of the Companies Act 2006. That was a deliberate omission on the part of the UK, as schemes can be used for reorganisation purposes generally and are not regarded as purely an insolvency procedure. It will be for the UK government to decide whether schemes are to be included as an insolvency proceeding under the amended Regulation. There is a strong case to be made for schemes remaining outside the scope of the Regulation and we discussthe point in more detail later under the heading ‘scope’.

A major carve-out from the scope of the Regulation is that it does not apply to insurance undertakings and credit institutions. However, cross-border reorganisation and insolvency proceedings relating to insurance undertakings and credit institutions are governed by other EC Directives2, which provide a framework similar to the Regulation, for these specialist markets.

In March 2012, Brussels commissioned consultations and studies resulting 
in the publication of a report and 
proposals for changes to the Regulation based on its perceived shortcomings. Both the report3 and the proposal4 for amending the Regulation on Insolvency Proceedings (the Proposal) were published on 12 December 2012 by the European Commission. The stated aim of the Proposal is:

‘… to establish a more proactive and efficient system of cross-border insolvency law and promote a 
rescue and recovery culture within the EU’.

On 15 April 2013, the Insolvency Service announced that the UK had opted in to negotiations on the amendments to the Regulation and therefore, when the Proposal is eventually passed in Brussels in about two years time, it will automatically become part of UK law.

GENERAL CONTEXT

The Proposal begins with a summary of the effect of the Regulation. It notes that the Regulation establishes a framework for cross-border insolvency proceedings across the member states. It further notes that the Regulation applies in all member states (except Denmark) and:

  • applies where a debtor has assets or creditors in more than one member state;
  • determines which court has jurisdiction to open insolvency proceedings;
  • main proceedings have to be opened in the member state where the debtor has its centre of main interests (COMI); and
  • the effects of those proceedings must be recognised throughout the EU;
  • secondary proceedings can be opened where the debtor has an establishment, but the effects of those are limited to the assets located in the member state;
  • there are rules on the co-ordination of main and secondary proceedings.

Based on consultation with stakeholders and studies commissioned by Brussels, the Proposal indicates that, generally, the Regulation has operated successfully in facilitating the interaction of the various insolvency regimes of the member states but suggests that there is still room for improvement. This article will examine the ‘five main shortcomings’ referred to in the Proposal and which 
the Commission proposes to reform. These are identified as:

  • the scope of the Regulation;
  • the rules on jurisdiction;
  • the relation between main and secondary proceedings;
  • the publication of proceedings and lodging of claims by creditors; and
  • the treatment of groups of companies.

SCOPE

Currently, the Regulation applies to: 
‘… collective insolvency proceedings which entail the partial or total divestment of a debtor and the appointment of a liquidator’5. 
The definition of liquidator is wider than in UK law, and roughly translates to ‘insolvency office holder’. The different types of insolvency office holder are set out in Annex C by reference to each member state and include administrators in the UK. In this article, references to ‘liquidator’ should be read, where appropriate, with the wider ‘insolvency office holder’ meaning as in the Regulation and the Proposal.

The Proposal envisages the expansion of the scope of the Regulation by revising the definition of insolvency proceedings in Article 1 to include what the Commission refers to as ‘hybrid’ (debtor in possession) and ‘pre-insolvency’ (restructuring) proceedings. The revised definition states that the Regulation:

‘… shall apply to collective judicial or administrative proceedings… based on a law relating to insolvency or adjustment of debt… for the purpose of rescue, adjustment of debt, reorganisation or liquidation’ 
in which a liquidator is appointed: 
‘… or the assets and affairs of the debtor are subject to control or supervision by a court’.

In essence, the Commission wants to broaden the definition of insolvency proceedings so that a wider range of restructuring techniques can come within the umbrella of the Regulation. This is generally welcomed as a positive step, which will further facilitate cross-border restructuring. The new Recital 10 is worth noting in this context, it states: 
‘Insolvency proceedings do not necessarily involve the intervention of a judicial authority; the expression “court” in this Regulation should be given a broad meaning and include a person or body empowered by national law to open insolvency proceedings.’

In the UK there is one exception to this general point – schemes of arrangement under Part 26 of the Companies Act 2006 (schemes). UK stakeholders have expressed concern that bringing schemes within the scope of the Regulation would actually be detrimental to cross-border rescue culture. Currently, schemes enable companies to modify the rights of financial creditors, even if they do not have an establishment in the UK. This is because the courts in England are permitted to take jurisdiction and to sanction a scheme, even where the scheme company is incorporated in another jurisdiction, provided that the company has a sufficient connection with the English jurisdiction. This usually means having a branch business in England but it can be sufficient that key contracts provide for English law to apply and the English courts to have jurisdiction. However, if schemes were to be brought within the Regulation, then companies wishing to take advantage of them would have to move their COMI to England. Such a requirement would limit the use of schemes and would have a detrimental effect on the ability to restructure a range of businesses of the type that have benefitted from Companies Act schemes until now.

On a separate but related point, the Commission confirmed that it will not examine national law to require non-notified types of proceedings to be included in Annex A of the Regulation. That means that it will remain the decision of member states as to which proceedings are to be within the scope of the Regulation and, specifically in the case of the UK, it will be the UK’s own decision as to whether to include schemes within the scope.

JURISDICTION

The concept of COMI is retained. The Proposal notes that the COMI approach has been chosen as a jurisdictional standard by the United Nations Commission on International Trade Law (UNCITRAL) in its model law on cross-border insolvency. Article 3 itself will have an expanded definition of COMI as: 
‘… the place where the debtor conducts the administration of his interests on a regular basis and which is ascertainable by third parties’. 
The stated presumption that the place of the registered office of a company is the COMI, in the absence of proof to the contrary, is retained.

The COMI concept has been developed in case law, including decisions of the European Court of Justice (ECJ) in Eurofood [2006], and Interedil [2011], as well as the courts of the member states. Recital 13 is proposed to be replaced by expanded words based on these decisions and to refer in a general way to circumstances giving rise to the possibility of rebutting the presumption that the location of the registered office is the company’s COMI.

The Proposal requires the court hearing an application to open insolvency proceedings to examine whether or not it has jurisdiction to open the proceedings. Once the court reaches the decision to open the proceedings, it must specify the grounds on which it believes it has jurisdiction. If insolvency proceedings are commenced without court involvement, then it is the duty of the liquidator to carry out the relevant examination. The court or the liquidator must inform all known creditors of their decision to open proceedings and provide them with sufficient time to challenge it.

The proposed Article 3(b)(3) provides that every foreign creditor will have to be informed about and will have a right to challenge, the opening of the main proceedings. The purpose of this proposal is to avoid forum shopping (aka bankruptcy tourism) and the report refers to ‘cases of abusive relocation of COMI of individuals.’ However, the report also notes that companies have sometimes relocated to another member state ‘in order to benefit from more sophisticated restructuring mechanisms’ and that such corporate relocations have a legitimate purpose and have been accepted by the ECJ.

The proposal also introduces, to Article 3(1), a more comprehensive provision for determining the COMI of individuals. Business and professional debtors are deemed to have their COMI at their place of business, while the COMI of consumers is their habitual residence.

SECONDARY PROCEEDINGS

Despite the fact that ‘main’ proceedings under the Regulation have effect throughout the EU, it is still possible to open secondary proceedings in another member state where the debtor has an establishment.

Clearly, this may obstruct the court and/or the liquidator in the main proceedings from administering the 
debtor’s estate efficiently. The proposal outlines various factors which the courts must take into account when hearing an application to open secondary proceedings. This is to ensure that secondary proceedings do not have a destabilising effect on the main proceedings. Under the new Recital 19(a) and Article 29(a), the liquidator may request the court to postpone or refuse opening secondary proceedings if they are not necessary to protect the interest of local creditors. Furthermore, under Article 29(a)(2), the court shall refuse or postpone the opening of secondary proceedings if the liquidator in the main proceedings has given an undertaking that the liquidator will respect the distribution and priority rights of the local creditors in the same manner that the liquidator would have had if the secondary proceedings had been opened.

Communication and co-operation between the liquidator and the courts is strongly encouraged in order to reduce costs and improve the chances of business rescue. Revised Articles 3(3) and 27 abolish the requirement for secondary proceedings to be winding-up proceedings, where the court is satisfied that a more suitable procedure is available.

PUBLICITY OF PROCEEDINGS AND LODGING OF CLAIMS

In order to improve the efficiency of cross-border insolvency law, the Commission proposes that minimum information should be published in electronic registers in each member state. Article 20 provides that this information should be available to the public free of charge. The Commission aims to connect the national insolvency registers through 
the European e-Justice Portal. The purpose of the registers is to reduce the risk of having two separate ‘main’ proceedings being opened in different member states.

Creditors will be able to lodge their claims by using standard forms and these can be lodged by electronic (or other) means of communication. The requirement to have legal representation when lodging a claim form will be dispensed with. The court or the liquidator still has a duty to notify all known creditors who are based in other member states of the opening of insolvency proceedings. The creditors then have 45 days after the publication of the notice to lodge their claims.

GROUPS OF COMPANIES

One measure of the success of the Regulation since its implementation in 2002, is to consider that without it, in the insolvency of a group of companies with branches across the member states, it would have always been necessary to have opened insolvency procedures in each of the member states. Each company in the group would have been administered according to the local law of the member state of its incorporation. In some groups, the COMI of each group company is the head office from which the group was effectively managed and run. The Regulation has allowed an efficient restructuring of such groups under the same law – the law of the main proceedings. The report notes that following the decisions of the ECJ in Eurofood and Interedil, it is still possible to open proceedings over a subsidiary in the member state where the parent has its registered office but only if all factors to be taken into account permit that, which will be the case only in ‘very integrated companies’. The proposal specifically states that it does not intend to prevent this existing practice

The report notes that a similar effect has been achieved by appointing the same insolvency practitioner to each group company or (referring to the restructuring of Nortel Networks) appointing insolvency practitioners who have previously worked together. The latter strategy depends on good co-operation between the practitioners and the judges of the various courts.

The Proposal provides various provisions which set out new requirements for co-ordinating insolvency proceedings where companies that are part of a corporate group, enter insolvency proceedings. The approach that each insolvent company should be administered as a separate entity in separate insolvency proceedings will remain unchanged. It is also proposed that courts should co-operate by exchanging information and co-ordinating the appointment of insolvency office holders. The requirements for co-operation and co-ordination between liquidators and the courts in multiple proceedings for group companies are similar to the proposals for main and secondary proceedings. In general, we consider that these changes will lead to greater efficiency and enhanced benefits for creditors and other stakeholders.

ENACTMENT AS LAW

We gather that the proposed amendments to the Regulation are generally welcomed among restructuring specialists, 
insolvency practitioners and lawyers in 
the UK. The next phase is for the Proposal to pass through the European Parliament and the Council of the EU to finalise the legislative process, including the negotiation of its contents, before it is enacted. Following enactment there will 
be the standard two-year delay before 
the majority of the amended Regulation 
takes effect.

By Richard Baines, partner, 
and Yana Davies, trainee solicitor, 
Druces LLP.

E-mail: r.baines@druces.com; 
y.davies@druces.com.

Notes


  1. Council Regulation (EC) No 1346/2000 on insolvency proceedings.
  2. Directive 2009/138/EC for insurance and reinsurance and Directive 2001/24/EC on reorganisation of and winding up of credit institutions.
  3. COM (2012) 743 final.
  4. COM (2012) 744 final.
  5. Article 1(1) of the Regulation.
  6. New Recital 13(a) and 13(b) of the Proposal.