In Europe each year there are an estimated 200,000 corporate insolvencies. More than half of the companies set up do not survive their first five years of trading and more than 1.7 million jobs are lost every year as a result. One in five of those companies will have international operations that cross national borders.
The European Union (EU) has sought to introduce an element of harmonization across its Member States, to facilitate the effective operation of cross-border insolvencies.
Following a comprehensive review by the European Commission, the European Parliament on February 5, 2014, voted overwhelmingly in favor of implementing the European Commission’s recommendations for reforming the current system, to promote the rescue and recovery of distressed corporate entities across the EU. The next step for the proposals to become law is for the Member States of the EU in the Council to approve the proposals, which is expected to occur around June 2014.
The key recommendations were the expansion of the legislation to capture a broader range of reorganization proceedings, including out of court proceedings, the promotion of greater co-operation and communication between Member States, and a simplification of the process for dealing with debtors that have operations in multiple Member States and owe money to creditors across the EU.
Since 2002 the 27 Member States of Europe (all apart from Denmark) have been subject to the European Union Regulation (EC) No 1346/2000 on insolvency proceedings (Regulation). The Regulation sets out important rules that help resolve conflicts of jurisdiction and conflicts of laws between the various Member States. The Regulation introduced the concept of “centre of main interests” (or COMI) for determining where an entity is truly based and applies whenever a debtor has assets or creditors in more than one Member State of the EU.
The Regulation was implemented with the goal of coordinating insolvency proceedings opened in several Member States. The application of the Regulation, however, created a series of difficulties that led to certain distressed businesses being liquidated instead of reorganized. In addition, to enhance efficiency and predictability, many large cross-border reorganizations were managed out-of-court, outside of the realm of the Regulation.
In 2012 the European Commission undertook a comprehensive consultation and review of how the Regulation had operated during its first 10 years. The Commission sought the views of various restructuring professionals in Europe on their respective insolvency system and how to improve such systems. The conclusion was that, at a high level, the Regulation was operating satisfactorily but there was plenty of scope for improvement. The report made several key recommendations including:
- The focus of the rules needed to be on giving viable businesses a second chance with the aim of safeguarding jobs;
- The emphasis of the rules should move from liquidation to rescue and recovery; and
- There needs to be greater co-ordination and co-operation across Member States, with the ability to use secondary proceedings to be more strictly limited.
With these goals in mind, the European Commission proposed various amendments to modernize and improve the operation of the Regulation.
- The extension of the scope of the Regulation to include hybrid and pre-insolvency proceedings, removing the current limitation to formal liquidation proceedings.
- The concept of COMI to be clarified, so as to make identification easier.
- The restriction of use of secondary proceedings, limiting their use to only when they are absolutely necessary to protect the interest of local creditors. There is a tacit acceptance that the system of secondary proceedings (which, currently, can only be liquidations) is open to abuse and can be counterproductive to the implementation of an efficient cross-border insolvency.
- The creation of a system of free, web-based, public insolvency registers in each Member State, to improve the flow of information about corporate insolvencies across the EU, with the aim of eventually having a single point of enquiry for the whole of the EU.
- Co-ordination of the rules relating to insolvency of groups of companies. Some Member States feel the Commission did not go far enough on this issue and would have preferred to see a system that allowed for a single pan-European appointment – for example, an insolvency practitioner appointed over the parent company in one jurisdiction would then have powers to deal with all subsidiaries, wherever based. The Commission shied away from this “compulsory co-ordination” approach to dealing with multinational groups and preferred to continue with an “entity-by entity” approach. The new rules will, however, place stronger obligations on insolvency practitioners and the courts in each Member State to co-operate and communicate effectively with their counterparts in other Member States.
It should be noted that the European Parliament voted in support of a modified proposal excluding out-of-court proceedings from the scope of the Regulation and proposing a three-month look-back period for companies who may have shifted their COMI but would remain subject to the laws of the originating Member State.
While we will have to wait until June to see the draft law proposed by the Council, there does appear to be some real impetus to introduce the amendments swiftly.
As the inexorable march towards corporate globalization continues unabated, it is vital that the legislation keeps pace with the rapidly changing corporate environment. Companies are not constrained by national boundaries and it is vital that the law provides an effective, efficient system for rescuing distressed businesses operating in multiple jurisdictions. We welcome the proposed amendments and support their goals but it remains to be seen whether the detail in the legislation will live up to the rhetoric surrounding the recommendations.