On June 26, 2017, the recast EU regulation on insolvency proceedings1 (the Recast Insolvency Regulation) came into force.
Since May 31, 2002, Council Regulation (EC) No 1346/2000 on insolvency proceedings (the Insolvency Regulation), has provided a framework designed to establish common rules on cross-border insolvency proceedings within the EU. It established a system whereby the courts of the member state in which a debtor has its centre of main interests (COMI) has jurisdiction to open “main insolvency proceedings.” The Insolvency Regulation also set out what constituted “insolvency proceedings” for the purpose of the Insolvency Regulation in each member state. The Insolvency Regulation is directly applicable in all EU member states (except Denmark).
What Does the Recast Insolvency Regulation Apply To?
Most of the provisions of the Recast Insolvency Regulation took effect from June 26, 2017, and the new provisions apply to insolvency proceedings opened from that date. The existing Insolvency Regulation continues to regulate proceedings opened before that date.
What Is Changing?
Though not a complete overhaul of the existing Insolvency Regulation, the recast Insolvency Regulation effects a number of notable reforms which corporate debtors, investors, creditors of corporate entities and insolvency practitioners should be aware of:
1. Wider scope of insolvency proceedings
The scope of “insolvency proceedings” has been broadened to include 19 additional insolvency processes across various EU member states. The new list includes certain interim proceedings but doesn’t include English law schemes of arrangement, which will continue to be available to a broad range of companies which have their COMI outside the UK.
2. Changes to COMI
As before, COMI will be presumed to be at the debtor’s registered office unless proved otherwise, but under the Recast Insolvency Regulation this presumption will not apply if the registered office has been moved to another member state within three months prior to the opening of the proceedings. This is intended to safeguard against inappropriate forum-shopping. In addition, the competent court is now required to examine whether it has jurisdiction before opening proceedings, and jurisdictions can be challenged by the debtor or any creditor. For out-of-court appointments, insolvency practitioners will be required to specify the grounds on which jurisdiction is based when opening the proceedings.
3. Group insolvencies/coordination proceedings
A new framework has been introduced with the objective of encouraging and facilitating better coordination and communication between insolvency practitioners and courts across different member states, including the possibility of coordinating a restructuring plan. Further, a court-driven “group coordination proceeding” has been introduced to help coordinate the insolvency proceedings of group entities across different member states, but the respective insolvency practitioners appointed over the various entities will have the opportunity to object to and prevent such entity’s inclusion in any proposed group coordination proceeding.
4. Broader range of secondary proceedings
Under the Recast Insolvency Regulation, “secondary proceedings” (i.e., insolvency proceedings relating to a debtor with its COMI and main insolvency proceedings in another member state) are no longer limited to winding up proceedings and may also include rescue proceedings. It will also be possible for officeholders of main insolvency proceedings, to give undertakings in respect of the treatment of certain assets in a second member state, if approved by a threshold (as determined by the relevant local law) of creditors. This will potentially avoid the need to open secondary proceedings at all. This practice had developed under the previous Insolvency Regulation to minimize the need for secondary proceedings, but was not previously codified in legislation.