Background

As things currently stand

The aim of the EC Regulation on Insolvency Proceedings (1346/2000) (Regulation) is to improve the efficiency of insolvency proceedings with cross border aspects. It provides, within the European Union (EU), rules for determining:

  1. the proper jurisdiction for a debtor’s insolvency proceedings;
  2. the applicable law to be used in those proceedings; and
  3. the mandatory recognition of those proceeding in other EU member states.

The primary purpose of the Regulation is to ensure the proper functioning of the European market as it relates to cross border insolvency proceedings and to deter forum shopping. It applies to all EU member states, except Denmark.

Summary of the changes

The Regulation is now in the process of being amended and the goal of the amendments is to facilitate the rescue of companies in distress.  Ultimately, the amendments are aimed at changing the focus away from liquidation and to focus on restructurings, as well as making cross-border insolvency proceedings – especially of groups operating across multiple jurisdictions – more efficient. The new rules will also limit the current practice of “forum shopping,” where litigants file their case in the country where they believe they will obtain the most favourable outcome.

  • COMI

The test to determine the Centre of Main Interest (COMI) of a debtor is at the heart of the changes. The COMI of a debtor determines ‘whether the Insolvency Regulation applies to a debtor and its insolvency proceedings’ and ‘where the debtor’s main insolvency proceedings within the EU are to take place.”  Whilst COMI is not defined, the location of the company’s registered office is presumed to be the COMI of that company (the registered office presumption), unless this can be rebutted by evidence proving to the satisfaction of the Court that the company’s COMI is elsewhere. Under Article 3, the COMI of a debtor will be the place where the debtor principally conducts the administration of its business and which is readily ascertainable by third parties. To avoid forum shopping, the amended Regulation introduces the principle that the registered office presumption will not apply where a company’s registered office has been moved during the 3 months prior to the filing of the insolvency proceedings. In such cases, in order to determine the COMI, the court or officeholder will have to investigate where the business was actually operated and where its assets were located. Article 3(1) of the amended Regulation also makes provision for determining the COMI of business/professional individuals, whose COMI is deemed to be their place of business, whilst the COMI of consumers is their habitual residence. Similar rules on forum shopping apply to individuals as to companies, and the deemed COMI of an individual will have to be investigated if that individual has changed its COMI within 6 months of insolvency.

  • JURISDICTION

If a court opens insolvency proceedings, it must specify the grounds on which it believes it has jurisdiction. If there is no court involvement, the officeholder must determine whether the amended Regulation applies and whether the COMI test is satisfied.  In either case, steps must be taken to ensure all creditors are aware of the decision to open insolvency proceedings to enable them to challenge the decision if appropriate. Article 3(b)(3) of the amended Regulation provides that every foreign creditor will have to be informed about, and will have a right to challenge, the opening of the main proceedings, which has the express aim of reducing forum shopping.

  • GROUP PROCEEDINGS

The amended Regulation introduces a flexible framework for co-operation between officeholders and courts dealing with the insolvency of a group of companies in different member states. A new procedure is being introduced to allow for coordination of the insolvencies of groups of companies, permitting group members to opt out of the procedure if they wish.

  • SECONDARY PROCEEDINGS

If main proceedings have been opened in the member state where the debtor has its COMI, secondary proceedings may be opened in any other member state where the debtor has an establishment. Because this may obstruct or hinder the administration of the main proceedings, the amended Regulation introduces the ability of the court in certain situations to postpone or refuse the request to open secondary proceedings (Article 29 (a)). In addition, if the insolvency practitioner in the main proceedings has given an undertaking that the distribution and priority rights of the local creditors will be the same as if secondary proceedings had been opened, this undertaking can also be relied upon as a basis for avoiding secondary proceedings. Secondary proceedings no longer have to be winding-up proceedings (as they are at the moment), if the court is satisfied that a more suitable procedure is available.

  • OTHER CHANGES

Other changes introduced by the amended Regulation include:

  • Integrated and searchable insolvency registers to be established across the EU to create a database of insolvency proceedings with member states.
  • Pre-insolvency rescue proceedings in various member states will fall within the scope of the amended Regulation (included in Annex A of the amended Regulation). However, the English Scheme of Arrangement under the Companies Act 2006 will not be included.

What does this mean in practice?

Some of the changes pose little more than an additional administrative burden on practitioners whilst others may cause practical difficulties, for example, having to investigate and prove COMI where there has been a change within 3 or 6 months for a corporation or an individual, respectively. Others changes will be welcomed, for example the insolvency database which will help to identify whether there are existing insolvency proceedings in place before opening proceedings in any EU jurisdiction. Now that the proposed amendments have been approved by the Council, the Commission and the Parliament, the Recast Insolvency Regulation will be published in the Official Journal and will then come into force in 2017.