The reform of the European insolvency regulation (EIR) comes into force in mid-2017. Inter alia, it will alter the rules on which jurisdiction is competent to open insolvency procedures.

Legal Background

If a debtor needs to file for insolvency, there are two main ways of manipulating the existing legal competence rules:

  • modifying the centre of main interests (COMI) shortly before the insolvency application
  • carrying out an ‘enterprise burial’ by selling shares of the nearly insolvent enterprise to an impecunious company, which has its company headquarters in the preferred jurisdiction. Afterwards, a person who is either unaware of the company’s condition or not willing/capable of running the business becomes the manager. The filing then occurs where the competent courts are known to be ‘lax’ regarding examining the requirements for the opening of insolvency proceedings; or attempted manipulation.

The Reform

Art. 3 EIR will now be reformed with a view to preventing this type of forum shopping.

According to Art. 3 para 1 EIR (as revised) the courts located at the debtor’s COMI are competent for insolvency proceedings. There is still a presumption that its COMI is the place of its registered office. However, it will now be the case that if the debtor moved the location of its registered office to another jurisdiction (or individuals with no enterprise, their habitual residence) within the last three (for individuals, six) months prior to the request for the opening of insolvency proceedings, such presumption does not apply.

Additionally, pursuant to Art. 5 EIR (as revised) either the creditor or the debtor may now contest a decision regarding the opening of insolvency proceedings.

Comment

  • The proposed amendments enhance a key aim of insolvency law: the protection of creditors and the assertion of their rights. The envisaged changes limit debtor opportunities to manipulate the EIR and cross border insolvency rules
  • The system still relies on the courts to review application papers accurately. However, pursuant to Art. 5 EIR, creditors will now be empowered to challenge decisions.