The Supreme Court (unanimously dismissing the appeal in Trustees of Olympic Airlines SA Pension & Life Assurance Scheme v Olympic Airlines SA) has held that “economic activity” is central to the definition of “establishment” in the Insolvency Regulation1.

The definition of establishment envisages a fixed place of business. There must be activities which by their nature involve business dealings with third parties. Pure acts of internal administration are not sufficient. The definition of “establishment” cannot sensibly be read as requiring that the debtor should simply be locatable or identifiable by a brass plate on the door.

Olympic Airlines SA (the “Airline”) was already the subject of main liquidation proceedings in Greece.  The Supreme Court held that, whilst some activities which a company in liquidation elsewhere might carry on in the UK (such as carrying on business or disposing of stock in trade on the market) might satisfy the definition of “establishment” (for the purposes of founding jurisdiction to open insolvency proceedings in the UK), where the company has no subsisting business, it is clearly not the case that the mere internal administration of its winding up would qualify. If this were enough to establish jurisdiction then the requirement for economic activities would add little or nothing to the rest of the definition and the definition would almost always be satisfied by a debtor retaining premises in the UK with inevitable outgoings such as rent etc.

Although the Supreme Court declined to draw a precise boundary, the case provides helpful guidance on what is necessary in order for there to be an “establishment” entitling an English Court to wind up a company which has its centre of main interests in another member state of the European Union.

Implications of the decision in practice

The practical result of the Supreme Court’s decision is that any creditor contemplating commencing insolvency proceedings in this jurisdiction (when the company’s centre of main interests is in another member state) should investigate and consider the economic activities which the company is carrying on here at the earliest opportunity in order to determine whether they are sufficient to satisfy the definition of “establishment”. If there is any concern that, over time, such activities may diminish or cease altogether, the creditor should seek advice as to whether promptly to take steps to commence insolvency proceedings  here before any jurisdiction is lost.

Pensions law perspective

In light of the Supreme Court’s decision and given the narrow scope of the Pension Protection Fund (Entry Rules) (Amendment) Regulations 2014 (which seem likely to extend only to the Airline and not to other schemes), the timing of any application for a winding up order in the UK (in respect of a company with its centre of main interests in another member state) for the purposes of establishing a qualifying insolvency event for entry into the Pension Protection Fund (“PPF”) remains critical. Foreign insolvencies are not treated as a “qualifying event” for PPF entry.

The trustees of any scheme with an EU (non-UK) employer in financial difficulty will need to investigate and consider whether the company has an “establishment” in the UK and seek advice quickly - if the company’s economic activities in the UK diminish over time or cease altogether, any jurisdiction which the English Court may have had to wind up the company might be lost. Absent an establishment then further secondary legislation under the Pensions Act 2004 may be the only route to establishing a qualifying event for PPF entry.

Background to the first instance and Court of Appeal decisions2

The Airline was a Greek state-owned airline which commenced operations in Greece in 2003. It f lew to many European destinations, including London Heathrow, and carried on business in England from a head office in Conduit Street, London, which it leased from an associate company. It also had premises at Heathrow and Manchester Airports and employed about 27 employees in England. Most of those employees were members of the Olympic Airlines SA Pension & Life Assurance Scheme (the “Scheme”).

The Trustees of the Scheme applied to the English Court for a winding up Order in respect of the Airline in order to secure entry for the Scheme into the PPF. This was necessary because, absent a winding up order in the UK, no qualifying insolvency event had occurred in relation to the Airline for the purposes of entry into the PPF.

Timeline of events:

  • On 2 October 2009, following the decision of the European Commission that the Airline had received illegal state aid from the Greek State, it entered “special” liquidation in Greece. This “special” liquidation constituted “main proceedings” for the purpose of the Insolvency Regulation.
  • In November 2009 the ticket office at Heathrow was closed.
  • On 24 March 2010 the Greek liquidator gave instruction for the disposal of the Airline’s assets at its branches outside Greece.
  • In May 2010 the premises in Manchester were vacated and their contents moved to the Conduit Street office.
  • On 24 June 2010 the bank manager reported to the English branch’s financial and planningmanager that he had insufficient funds to pay the Airline’s English employees under the BACS payroll mechanism.
  • On 29 June 2010 all standing orders and direct debits from the English branch were cancelled.
  • On 2 July 2010 the Greek liquidator wrote to all of the Airline’s employees in England terminating their employment from 14 July 2010. Final salary payments to English employees down to 14 July 2010 were funded by a remittance from the Greek liquidator. The English branch’s financial and planning manager and former general manager were both retained on short term contracts which continued after 14 July 2010.
  • The retained managers paid suppliers and utility bills, reconciled bank statements, copied and sent relevant documents and records to the liquidator in Athens and dealt with other instructions or requests from the liquidator.
  • The Trustees of the Scheme presented a petition  to wind up the Airline in England on 20 July 2010 which, if successful, would result in the Airline suffering a qualifying insolvency event and the Scheme being eligible to enter the PPF.

At first instance, the High Court decided that it had jurisdiction to issue a winding up order on the Trustees’ petition on the basis that the Airline had an establishment in England on 20 July 2010 within the meaning of the Insolvency Regulation. The Airline appealed that decision on the basis that the Insolvency Regulation’s definition of establishment required  more than what had been identified by the High Court and in particular required some more than transitory economic activity which was external and market facing. It argued that the desultory running down of a business did not count.

The Court of Appeal noted its regret that its conclusion would leave the beneficiaries of the Scheme unprotected by the PPF. It is against this backdrop that the Secretary of State for Work and Pensions  drew up The Pension Protection Fund (Entry Rules) (Amendment) Regulations 2014 (the “Amendment Regulations”).  Pursuant to the Amendment Regulations, an additional qualifying insolvency event was prescribed for the purpose of s121 Pensions Act 2004 enabling the Scheme to qualify for the PPF. Notwithstanding the Amendment Regulations, the Trustees of the Scheme pursued an appeal to the Supreme Court for technical reasons relating to the exercise of “claw back” powers by a liquidator in respect of any overpaid benefits.

The Judgment of the Supreme Court

The Supreme Court unanimously dismissed the Trustees’ appeal.

Court held that the definition of “establishment” in Article 2(h) of the Insolvency Regulation (being any place of operations where the debtor carries out a non-transitory economic activity with human means and goods) should be read as a whole and not broken down into discrete elements, for each element colours the others. The relevant activities must be economic, non-transitory, carried on from a place of operations and using the debtor’s assets and human agents. This suggested to the Supreme Court that what was envisaged was a fixed place of business. It also suggested to the Court a business activity consisting  in dealings with third parties and not pure acts of internal administration.  The Supreme Court concluded the definition could not sensibly be read as requiring that the debtor should simply be locatable or identifiable by a brass plate on the door. It referred to the character of economic activities. There must be activities which by their nature involve business dealings with third parties. 

Some activities which a company might carry on in liquidation (such as carrying on business or disposing of stock in trade on the market) may satisfy the definition. However, where the company had no subsisting business, it was clearly not the case that the mere internal administration of its winding up will qualify. Such activity would not be “exercised on the market” (as suggested by the Virgos-Schmit Report).  If it were enough to establish jurisdiction then the requirement for economic activities would add little or nothing to the rest of the definition.  Indeed the definition would almost always be satisfied by a debtor retaining premises in the UK with inevitable  outgoings such as rent etc.

However, the Supreme Court found that it was unnecessary in the present case to undertake the difficult task of drawing a precise boundary between these extremes because on any meaningful view the facts of this case fell on the wrong side of it.

Comment

The Supreme Court’s guidance will have broad implications for pension schemes, insolvency practitioners and creditors alike. The ruling will help creditors and insolvency professionals by providing greater clarity at Supreme Court level on what will be required for EU companies with a presence here to enter into insolvency proceedings in this jurisdiction.

For company pension schemes, the decision provides a timely reminder that when an employer is based in the EU but is providing UK final salary pension schemes, it remains difficult to benefit from PPF protection. It may prove crucial, once the local EU proceedings are underway, to start appropriate English insolvency proceedings as quickly as possible – the key action point is for trustees to take advice promptly on this.