On 20 May 2015 the recast EC Regulation on Insolvency Proceedings (2015/848) (Recast Regulation) was adopted and will apply to insolvency proceedings opened after 26 June 2017 in Member States (other than Denmark). Broader in scope than the original Regulation (1346/2000) (Regulation) it replaces, the Recast Regulation introduces new rules on centre of main interests (COMI) and secondary proceedings as well as a framework for coordinating group insolvency proceedings and better communication. Helen Anderson considers the changes of most interest to banks and other lenders.
What is its purpose?
As the name suggests, the Recast Regulation is a reworking of the original Regulation (which will continue to apply to insolvency proceedings opened before 26 June 2017). The main purpose, of harmonising Member State insolvency laws to promote the proper functioning of the internal market and deter forum shopping, has not changed.
Where a debtor has operations in more than one Member State, the Recast Regulation provides a revised set of procedural rules on jurisdiction, recognition, coordination and applicable law for a relevant insolvency proceeding. As before:
- substantive insolvency law remains a matter for each Member State;
- there will be only one main proceeding with universal scope, opened in the Member State of the debtor's COMI; and
- other insolvency proceedings where the debtor has an "establishment" will be secondary proceedings dealing with local assets.
A fundamental change is the shift in focus from liquidation towards the restructuring of distressed economically viable businesses and a second chance for entrepreneurs. To this end, the scope of insolvency proceedings covered by the Recast Regulation has been extended:
- main proceedings: now include certain pre-insolvency rescue proceedings and debtor in possession types of proceedings; and
- secondary proceedings: are no longer limited to liquidation but may include rescue proceedings.
An exhaustive list of these insolvency proceedings is in Annex A, so the types of proceedings available for main and secondary proceedings are now the same under the Recast Regulation. Confidential insolvency proceedings, such as special mediation (mandataire ad hoc) and conciliation proceedings in France, are excluded from the scope of the Recast Regulation.
Proceedings based on general company law not designed exclusively for insolvency situations are also outside its scope. This means UK schemes of arrangement are excluded and remain a flexible tool for lenders to use in international restructurings, as "sufficient connection" may be a lesser hurdle to satisfy than COMI.
Who has jurisdiction – COMI and establishment?
The new rules on COMI and establishment are more prescriptive, aimed at certainty of jurisdiction to open insolvency proceedings and deterring "bankruptcy tourism" and other abusive forum shopping. In particular:
- Rebuttable presumption: the presumption that a debtor's registered office is its COMI will not apply if the debtor has moved its registered office in the three-month period prior to a request being made to open insolvency proceedings. A similar restriction applies to an individual who has moved his principal place of business (extended to a six-month period for individuals who are not running a business).
- Examination/evidence: the court or insolvency practitioner must actively examine whether the debtor's COMI or establishment is located in its territory. This means a written judgment or an insolvency practitioner's written reasons.
- Challenge: the debtor or any creditor may challenge that decision on grounds of lack of jurisdiction.
The new rules should not prevent legitimate COMI shifts but evidence demonstrating the location of COMI or establishment may come under the spotlight. This will be another pre-appointment issue for lenders and insolvency practitioners to add to checklists. What else? Increase in costs? Potential legal opinions or indemnities to office holders? A delay to the opening of insolvency proceedings, particularly out-of-court administration appointments?
Virtual secondary proceedings
The Recast Regulation recognises that secondary proceedings may not be conducive to the effective administration of the insolvency estate and includes a concept of "virtual" proceedings. As a means of avoiding the opening of secondary proceedings, insolvency practitioners in main proceedings may provide an undertaking to creditors to respect local distribution and priority rules, i.e. local creditors will be treated as if secondary proceedings had been opened. This may not be straightforward, as it requires approval by a qualified majority of known local creditors and the court can still open local secondary proceedings if it is not satisfied that the undertaking protects creditors.
Better communication and cooperation
Provisions requiring communication and cooperation between insolvency practitioners appointed in main and secondary proceedings have been boosted, including protocols and other restructuring tools. These have been supplemented by provisions requiring cooperation and communication between courts and between courts and insolvency practitioners to the extent that it is not incompatible with local procedural rules.
This increased transparency and cooperation should benefit lenders.
Group coordination proceedings
A new chapter in the Recast Regulation introduces a framework for dealing with group insolvency proceedings, focusing on coordination, as well as cooperation and communication. Insolvency practitioners will be able to coordinate a joint restructuring plan and, subject to conditions, seek a stay of asset realisation measures in relation to another group company. As the insolvency practitioners can opt in or out of the group proceedings at various stages, it is unclear whether this new tool will be of significant practical benefit.
Location of cash and other assets
The location of various assets is clarified in a list, which includes book entry securities and cash at bank, as well as resolving potential conflicts where the place of registration differs from the physical location of the asset.
Insolvency registers and standardised claims
In order to improve the flow and timing of information to relevant creditors and courts and prevent the opening of parallel proceedings, Member States must publish relevant information in cross-border insolvency cases in a publicly accessible electronic register from 26 June 2018. National insolvency registers are to be interconnected and accessible via the European e Justice Portal from 26 June 2019.
Once up and running, these registers may prove a useful diligence tool for lenders whether structuring or closing a new deal or in distressed scenarios.
Information in claim forms across Member States must also be standardised, with a minimum of 30 days for creditors to lodge claims. Lenders may find it easier to claim in foreign proceedings.
How and when does it happen?
The Recast Regulation has direct effect in the UK and other Member States (apart from Denmark), although consequential rules are likely to be implemented in the UK to ensure consistency. As noted above, the majority of the Recast Regulation's provisions apply from 26 June 2017. The exceptions are the description of national insolvency law and procedures, which must be provided by each Member State from 26 June 2016, and the later measures relating to the electronic insolvency registers.