Summary

The Court of Appeal’s judgment in The Trustees of the Olympic Airlines SA Pension & Life Insurance Scheme v Olympic Airlines SA [2013] EWCA Civ 643 has clarified what is required to fall within the definition of an ‘establishment’ for the purposes of the EC Insolvency Regulation (the Insolvency Regulation).

The Insolvency Regulation provides that once insolvency proceedings have been opened in a member state where the company has its centre of main interests (COMI), secondary insolvency proceedings can only be opened in another member state if the company has an establishment in that member state.

The Court of Appeal held that it is not sufficient for a company to have a branch or office that fulfils no function, other than to assist in the winding up of a company. Instead, there must be a business operation with economic activity that is external and market facing. On the facts, the Court of Appeal (overturning the High Court) held that Olympic did not have an establishment in England and so no secondary proceedings could be opened.

Various UK protection statutes (eg employee claims on the National Insurance Fund and pension scheme entry into the Pension Protection Fund) depend on there being a UK insolvency started over the relevant employers. This decision exposes a big hole in this protection – oddly only applying to companies with a COMI in an EU member state. For companies outside the EU, the problem does not arise. A bizarre effect of the Insolvency Regulation is that the Olympic pension fund is unable to be transferred to the Pension Protection Fund.

While not directly the ratio decidendi of the case, Olympic confirms the decision in Office Metro [2012] EWHC 1191 (Ch), that the relevant time for deciding whether a company has an establishment is the date of the application to court to open secondary proceedings. The decision in Olympic also confirms that the existence of an establishment can disappear rapidly. By analogy it should be possible to set up an establishment (as long as it is non transitory and external, market facing) rapidly as well.

Background

Olympic Airlines (Olympic) was a Greek state-owned airline that commenced operations in December 2003. On 17 September 2008, the European Commission held that it had received illegal state aid from the Greek state. As a consequence, Olympic ceased all commercial operations on 28 September 2009 and entered ‘special’ liquidation in Greece on 2 October 2009. Olympic carried on business in England. It had a head office in London and premises at both Heathrow and Manchester. Olympic employed 27 employees in England, all of whom were members of its pension and life assurance scheme, which had a deficit in excess of £15m.

The pension scheme trustees wished to ensure that the Pension Protection Fund (PPF) assumed responsibility for the scheme so that its members would receive a protected level of pension benefits despite the scheme’s underfunding. Under the Pensions Act 2004 only certain events are classified as ‘qualifying events’ which allow a scheme to enter the PPF. An order for the winding up of a company made by the court under the Insolvency Act 1986 is a qualifying event, but the Greek liquidation does not constitute a qualifying event. As such, the trustees of the pension scheme presented a petition to the High Court in England for a winding up order in respect of Olympic, based on the debt due by Olympic to it and its inability to pay.

As Olympic had its COMI in Greece, the Greek special liquidation proceeding is the main proceeding for the purposes of the Insolvency Regulation. Once main proceedings have been opened, a court in a different member state (such as the UK in this instance) can only open so called ‘secondary’ proceedings. A prerequisite to the opening of secondary proceedings is that the company has an ‘establishment’ in the territory of the member state. Article 2(h) of the Insolvency Regulation defines an establishment as ‘any place of operations where the debtor carries out a non-transitory economic activity with human means and goods’.

At first instance the judge (the Chancellor, Morritt C) concluded that at the time of the pension trustee’s application to court (following Re Office Metro) this is regarded as the relevant date), Olympic had an establishment. He therefore made the winding up order.

The Appeal

Olympic appealed the finding that an establishment was present at the relevant time. It argued that the mere winding down of a business could not amount to an establishment for the purposes of the Insolvency Regulation, but that there had to be more than transitory economic activity which was external and market facing.

Prior to Olympic entering into special liquidation, it had an establishment in the UK. Between the date of the Greek liquidation (October 2009) and the date of the trustee’s petition (July 2010) the operations were wound down:

  • the ticket office at Heathrow was closed;
  • the premises in Manchester were vacated;
  • the Company’s bank in England was instructed to cancel all direct debits and standing orders with immediate effect; and
  • the employment contract of all 27 employees in England were terminated.

Only the English branch’s financial manager and an assistant were re-employed on a short term contract to assist with the liquidation. However, the office still had telephone and internet services until the end of 2010, the branch’s bank accounts were only frozen in August 2010 and the final closure was not until December 2011.

On 6 June, the Court of Appeal overturned the High Court’s decision and found that the London premises were not an establishment for the purposes of the Insolvency Regulation. In doing so, they relied heavily on Virgós-Schmit report on the Insolvency Regulation and its reference in paragraph 71 to ‘economic activity’ being activity ‘exercised on the market (ie externally).’ In giving his judgment, Sir Bernard Rix (with whom the other judges agreed) emphasised that ‘what is being looked for is a location where there is still, at the critical date, a business operation (‘a place of operations’ performing ‘economic activity’) such as will justify secondary proceedings in a state outside the state of the centre of main interests.’ Therefore, when considering the definition of ‘establishment’, it is necessary to identify more economic activity than the mere process of winding up.

Moreover, he held that economic activity has to be ‘exercised on the market (ie externally)’. A dormant branch, one which has not yet started economic activities or one which has fallen into economic inactivity (such as here) will not suffice. At the time of the presentation of the petition, only a skeleton operation remained for the purposes of winding up. Most importantly, nothing which was happening at the relevant date seemed to have any external economic function other than as part of a desultory liquidation.

For that reason, the Court of Appeal found that Olympic did not have an establishment in England, and there was therefore, under the Insolvency Regulation no jurisdiction to order a winding up.

Comment

Meaning of establishment

The judgment has expanded on the definition of ‘establishment’ set out in the Insolvency Regulation and as interpreted by the courts.

In Interedil SRL (in liq) v Palimento Interedil SRL (C-396/09) [2011], the European Court of Justice (ECJ) held that for there to be an establishment there must be ‘a minimum level of organisation and a degree of stability necessary for the purpose of pursuing an economic activity’. In that case, the presence of goods alone did not meet the definition. In Interedil the ECJ also held that an establishment must be determined on the basis of objective factors which are ascertainable by third parties (as is the case in the determination of COMI).

The Court of Appeal has now taken this further and has introduced the requirement that the economic activity must also be exercised on the market, ie externally. In doing so, the Court of Appeal relied on the Virgós-Schmit report which the Court accepted as authoritative commentary on the Insolvency Regulation. It is interesting that the English courts have adopted this slightly higher test and it will be interesting to see if other member states will adopt the same approach.

Relevant date

There are multiple points in time when the court could decide whether an establishment is made out. These are the date of:

  1. a particular transaction (this was argued but expressly rejected in Re Office Metro);
  2. the opening of the main proceedings;
  3. the application to court for secondary proceedings; or
  4. the court hearing to determine whether to open secondary proceedings.

It is clear that the outcome of the determination can be very different at each of those dates. In the current case, had (2) been the relevant date, Olympic’s London office would have been likely still to satisfy the establishment test. However, following the case of Re Office Metro (and Interedil in relation to the date for the determination of a company’s COMI) both the Chancellor and the Court of Appeal found it to be common ground that the relevant date is the date when the request for the opening of proceedings is lodged.

However, the Insolvency Regulation is in the process of being revised and the draft text that is currently with the European institutions for discussion will change this position. The draft text states that:

‘where insolvency proceedings have been opened in accordance with paragraph 1, any proceedings opened subsequently in accordance with paragraph 2 shall be secondary proceedings. In such a case, the relevant time for assessing whether the debtor possesses an establishment within the territory of another member state shall be the date of the opening of the main proceedings’.

Had the draft text been in force now, the outcome for the Olympic pension fund would probably have been different. It is likely that a winding up order could have been made and that the fund would have been transferred into the PPF.

Taking the time of the opening of the main proceedings as the relevant date also avoids a race to the court – with a pension fund often needing to file quickly on becoming aware of main proceedings being opened, so as not to risk the loss of economic activity.

Given that the relevant date is one particular date and not a period of time, it is clear that the existence of an establishment can change from one day to another. One day an establishment could be in the process of being set up (but not yet classified as such because not yet engaged in market facing activities), while the next day it could be fully operative and classified as an establishment (as long as its operations are non transitory). A sudden wind down of operations could however make the establishment disappear within days. This analysis must also hold true for the determination of a company’s COMI.

Unnecessary secondary proceedings

The simplest answer to this problem would be if the Pensions Act 2004 included as qualifying events (for PPF entry) main proceedings that have been opened in other EC member states and which are afforded automatic recognition under Articles 3 and 17 of the Insolvency Regulation. In this case, the Greek special liquidation would then have been sufficient for the PPF to assume responsibility for the pension scheme. A similar change would also resolve the issue in relation to claims by employees on the UK National Insurance Fund (where generally, under the Employment Rights Act 1996, a UK insolvency is also needed).

This approach would have been not only in line with the aim of the Insolvency Regulation (and, indeed, the proposed draft new Insolvency Regulation) to avoid multiple insolvency proceedings which are disruptive and value destructive but also would have given Article 17 of the Insolvency Regulation its proper meaning. Article 17 states that a judgment opening main insolvency proceedings:

‘shall, with no further formalities, produce the same effects in any other Member State as under this law of the State of the opening of proceedings… ’.

Given the fact that the coming into force of the reformed text of the Insolvency Regulation (if the final version of the draft includes the new reference to the relevant date) is some way off yet, an amendment to the pensions (and employment) legislation would be the quickest (and indeed, most appropriate) fix for the current situation to avoid a race to the court to open (potentially entirely unnecessary secondary proceedings).