Opinion
12 Feb 2015

The EU insolvency consultation: two years on

On 4 December 2014, the EU Council reported that it had endorsed a compromise agreement reached with the European parliament on the proposed regulation amending Council Regulation (EC) 1346/2000 on insolvency proceedings, aka the insolvency regulation. The announcement came after more than two years of evaluations, reports and ongoing discussions with the legislating bodies of the EU; it marks the final chapter in a drive to reform the insolvency regulation

The original proposal for an amending regulation published by the EU Commission in December 2012 addressed a number of known deficiencies in the insolvency regulation. The proposal was refreshingly moderate and simply designed to increase certainty in cross-border cases and to move the insolvency regulation away from liquidation proceedings, thus allowing distressed businesses the opportunity to restructure, while protecting creditor’s rights and improving the outcome for them.

However, the EU’s legislating bodies insisted on introducing changes. After much to-ing and fro-ing between the Commission, the EU Council and parliament, a compromise was reached after two years.

The EU Council is due to formally adopt the amending regulation as a recast of the insolvency regulation at its first reading in March 2015, with European parliament approval following (without amendments) in April or May this year. Once published in the Official Journal of the EU, most of its parts will enter into force after 24 months.

Scope of application

The amending regulation extends the insolvency regulation’s scope to include certain pre-insolvency and hybrid-proceedings.

The proposed new wording does arguably apply to English law schemes of arrangement. If they were included, the sufficient connection test under English law would then no longer suffice to establish the jurisdiction of the English courts. Instead, a company would have to demonstrate that its centre of main interest (COMI) was in England or Wales, something that La Seda de Barcelona, Tele Columbus or Rodenstock would have struggled with.

On the other hand, schemes would enjoy automatic recognition throughout the EU. However, it would appear that annex A remains the ultimate test: if a procedure is not listed there, it is not deemed an insolvency procedure in the context of the amending regulation.

The concept of COMI and jurisdiction for opening insolvency proceedings

As we are all aware, the insolvency regulation did not contain a definition of COMI, save for a presumption in favour of a corporate debtor’s registered office or an individual’s habitual residence. Identifying a debtor’s COMI is of pivotal importance to determine the international jurisdiction for insolvency proceedings and the law to be applied. Moreover, the absence of a definition of the term COMI has, arguably, opened the door to alleged abusive COMI relocations or migrations, and caused high levels of litigation.

The amending regulation now introduces a formal definition of the term ‘COMI’ and incorporates the wording of recital 13 of the insolvency regulation into the operative text of the amending regulation. The new wording also clarifies that the jurisdiction of the courts opening insolvency extends to hearing avoidance and similar actions. It further introduces certain safeguards against what some call ‘bad forum shopping’: if a debtor moves to a new area before filing for insolvency or bankruptcy – whichever the case may be – the courts will now have the ability to investigate and identify if the move was genuine and not abusive.

Importantly, the amending regulation introduces a ‘look-back’ test in relation to a debtor’s COMI: it is presumed to be at the corporate debtor’s registered office, always provided that it has not been moved to another member state within the three months prior to the request for the opening of proceedings In bankruptcy matters, the presumption is in favour of the debtor’s place of business or habitual residence and the proposed “look back” period is three months for business professionals and six months for individuals.

Secondary insolvency proceedings

The amending regulation establishes new duties for liquidators in the main and secondary proceedings to cooperate and coordinate proceedings and, importantly, abolishes the requirement that secondary proceedings must always be winding-up proceedings.

It also introduces additional measures to ensure that secondary proceedings do not hinder a potential restructuring being put in place by the main proceedings and enables an insolvency court to refuse or postpone the opening of secondary proceedings if this is not necessary to protect the interests of local creditors.

The insolvency practitioner in the main proceedings will enjoy notification rights and the right to challenge the decision to open secondary proceedings.

Insolvency of groups of companies

The amending regulation contains new provisions for the coordination of insolvency proceedings opened in respect of groups of companies. The focus is to create a greater chance for the group of companies to be saved as a whole.

At the same time, the requirement that each individual company has to enter into its own insolvency proceedings remains unchanged and each set of proceedings will require an evaluation of where the COMI of that individual company is located. However, the amending regulation introduces an obligation upon the courts and the practitioner to coordinate the insolvency proceedings and to communicate and cooperate with each other. Also, each insolvency practitioner will have standing in the proceedings concerning another member of the same group and the right to request a stay or to propose a reorganisation plan.

Reflection

We will have to wait another two years before the amending regulation comes into effect, but the new rules are a positive, if ponderous, step in the right direction to bring the insolvency regulation up-to-date.

But there remains a lack of clarity. Some of its provisions appear at odds with other rules contained in the amending regulation and it will be interesting to see how these rules are supposed to interact.

The introduction of the look-back period in article three of the amending regulation will be controversial. The term ‘bad forum shopping’ is misleading as there may be very genuine reasons why a debtor wishes relocate to another EU member state. If the goal is to prevent liquidations and encourage the restructuring of corporate debtors then, arguably, it should be accepted that a debtor may make use of all the restructuring tools at its disposal, even if that means a restructuring under the application of a foreign law.

It is also not quite clear how the look-back period will work. The goal is clear enough but the new article three only removes the presumption in favour of a corporate debtor’s registered office or a bankrupt’s place of business or habitual residence. It means the normal COMI-test applies and that being so, one may ask how this has improved matters.

Of course, we have not seen the finished article yet; the text of the amending regulation has been referred to legal linguistic experts for finalisation and some of the question marks may yet disappear. Time will tell, as always, but better not to hold your breath.


Frank Tschentscher LL.M. is a dual qualified German lawyer and solicitor of England and Wales and a partner of cross-border insolvency and restructuring with specialist law firm Schultze & Braun


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