In the wake of the Eurozone crisis, harmonisation of European insolvency law has been firmly on the political agenda. In December last year, the European Commission proposed amendments to the European Insolvency Regulation (EIR). The UK has until 10 April 2013 to decide whether to opt in. Luci Mitchell-Fry and Sarah Lawson consider the proposed amendments of most interest to banks and other lenders.
Include schemes of arrangement (Schemes)?
The European insolvency proceedings currently subject to the EIR are listed in Annex A to the EIR. Schemes are not among them. Under the proposed amendments, this may change.
Schemes have become a popular restructuring tool for overseas companies. The threshold for the English court’s jurisdiction to sanction a scheme over an overseas company is, broadly, whether there is a "sufficient connection" to England. Recent cases show this test is met where the rights varied under the Scheme arise under English law governed facilities.
The Scheme jurisdiction is therefore distinct from, and wider than, the COMI jurisdiction under the EIR (on which, see below). Amending the EIR to include Schemes may mean that English Schemes cannot be used so widely for restructuring overseas companies.
We do not consider that Schemes should be subject to the EIR for the following reasons:
- Schemes are not a traditional collective insolvency procedure: a Scheme can apply to only some of a company’s creditors.
- Schemes are creatures of the Companies Acts rather than insolvency legislation, and are often used in solvent situations (e.g. returning capital to shareholders).
- Schemes can be recognised overseas without including them in Annex A. The Brussels Regulation enables courts in other member states to recognise, and debtors to enforce, Schemes against overseas creditors.
Despite this, we expect there will be significant pressure from other member states to bring Schemes within the scope of the EIR, not least to claw back some of the restructuring work which has been lost to the English jurisdiction.
Include pre-insolvency proceedings?
The amendments suggest including pre-insolvency proceedings in Annex A. It is not clear what this means. It will be for the UK Government to decide which UK proceedings it wants to include. There may be more obvious pre-insolvency proceedings in other European jurisdictions, notice of which could help banks when restructuring Europe-wide groups.
Clarity on COMI
The question of which Member State has jurisdiction to open insolvency proceedings under the EIR is based on the debtor’s centre of main interests (COMI). The meaning of COMI has kept domestic and European courts occupied since the advent of the EIR. The amendments propose a new, "clear" definition of COMI, based on these cases, which is welcome but will inevitably still lead to judicial interpretation.
Office holders or the court will have a new duty to examine a debtor’s COMI, to show grounds for jurisdiction, BEFORE appointment. Foreign creditors will have the right to challenge a COMI filing. Office holders must tell foreign creditors of the proposed filing. The result? Increased cost, and potential delay to out of court administration appointments.
Publicity, communication, and co-ordination: good news for banks
Under the proposed amendments, secondary proceedings will include rescue as well as liquidation
proceedings. They also provide for more communication and co-operation between courts and officeholders in these cases, which is to be welcomed.
The proposed amendments create a framework for dealing with insolvent multi-jurisdictional groups. Officeholders will be required to communicate and co-operate with a view, where possible, to:
- choosing a lead officeholder for the group; and
- developing a group-wide reorganisation plan.
Discovering whether there has been an insolvency filing outside of the UK is sometimes difficult. The amendments provide for the compulsory publication of Europe-wide insolvency events, comprising a national register feeding into a Europe-wide register of insolvency proceedings. Lawyers and banks alike will welcome the certainty this provides, when closing transactions as well as in distressed situations. The cost of implementing the register could be prohibitive in practice however.
It is also proposed that claim forms in Europe-wide insolvencies be standardised. This should make life easier for banks claiming in foreign proceedings.
What should the UK government do?
If the United Kingdom opts out of the negotiations for an amended EIR, there is a risk that the EIR in its current form may also no longer apply to the UK, resulting in the loss of the competitive edge that COMI filings and migrations give to the UK finance market.
While the amendments and altered procedures may result in some increased costs and delays, the benefits of participation in the EIR, for creditors and debtors alike, far outweigh the disadvantages. Ultimately, however, the decision is in the Government’s hands and therefore dictated by the UK’s wider European policy.