Background – As Things Currently Stand
The aim of EC Regulation on Insolvency Proceedings 2000 (the Regulation) is to improve the efficiency of insolvency proceedings with cross-border implications. It provides, within the EU, rules for determining:
- the proper jurisdiction for a debtor’s insolvency proceedings;
- the applicable law to be used in those proceedings; and
- the mandatory recognition of those proceeding in other EU member states.
The primary purpose of the Regulation is to ensure the proper function of the European Market in cross border insolvency proceedings and to deter forum shopping. It applies to all EU Member states except Denmark.
Summary of the Proposed Changes (“the Proposal”)
The goal of the amended Regulation is to rescue companies in distress. Ultimately, the amended Regulation is aimed at changing the focus away from liquidation and towards restructurings, as well as making cross-border insolvency proceedings more efficient – especially for groups operating across multiple jurisdictions. The new rules would also limit the current practice of “forum shopping”, where litigants file their case in the country where they believe they will get the most favourable outcome.
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 taken 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 the business and which is readily ascertainable by third parties.
To avoid forum shopping, the Regulation introduces the principle that the registered office presumption will not apply where a company’s registered office has been moved in the three months prior to the onset of insolvency proceedings. In such cases, in order to determine the COMI, the court/officeholder will have to investigate where the business is actually operated and where its assets are located.
Article 3(1) of the Proposals 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 their COMI within six months of insolvency.
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 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.
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, which has the express aim of reducing forum shopping.
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 main proceedings, the proposal 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 liquidator 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 of avoiding secondary proceedings.
Secondary proceedings do no longer have to be winding-up proceedings (as they are at the moment), where the court is satisfied that a more suitable procedure is available.
The Proposal introduces a flexible framework for co-operation between office holders 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.
Other changes introduced by the Proposal include:
- Integrated and searchable insolvency registers to be established across the EU to produce 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 This Means in Practice?
Some of the amendments proposed pose little more than an extra administrative burden on practitioners whilst some of the amendments may cause practical difficulties, for example, having to investigate and prove COMI where there has been a change within three to six months for a corporate/individual. Other 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 passed by the Council and the Commission, it is anticipated that the European Parliament to adopt the text at its sessions in May or June 2015. The Recast Insolvency Regulation would then come into force two years later in 2017.