The Reform of the European Insolvency Regulation

DisclaimerThis publication has been produced with the financial support of the Civil Justice Programme of the European Union. The contents of this publication are the sole responsibility of Leiden University and/or Nottingham Trent University and can in no way be taken to reflect the views of the European Commission.

Co-funded by theCivil Justice Programmeof the European Union

Co-funded by theInternational Insolvency Institute

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History:

• Treaty of Rome 1957

• Brussels Regulation 1968 Art. 1 Exception

• 1970 Draft (↑substantive and procedural)

• 1980 Draft (↓substantive and procedural)

• CoE Istanbul Convention 1990 (procedural)

• European Insolvency Convention 1995 (proc.)

• European Insolvency Regulation 2000 (proc.)

• Amendments in 2004/06/13 (Acc), 2005 etc. (Am)

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Contents:

• Preamble

• Scope/Application/Definitions

• Jurisdiction

• Choice of Law/Exceptions

• Recognition Rules/Powers of Liquidator

• Conduct of Secondary Proceedings

• Creditors’ Information and Claims

• Transitional Provisions

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Preamble:

• Linked to Four Freedoms/Single Market issues

• Justification for legislation by EU

• Conflicts Problems acknowledged (‘widely differing substantive laws’)

• Modified Universalism Theory (main/secondary)

• Co-ordination Principle paramount

• Benefit for Creditors stressed

• Status of Preamble? Content Issues?

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Scope/Application (Article 1):

• Four Conditions:

• Collective (no individual action)

• Insolvent debtor (no pre-insolvency? CVA?)

• Partial/Total Divestment (DIP?)

• Liquidator appointed (DIP?)

• Application to all Debtors (Natural/Legal) except:

• Insurance Bodies (Directive 2001/17/EC)

• Credit Institutions (Directive 2001/24/EC)

• Investment Bodies (Trust/Pension Funds)

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Scope/Application (Article 1) (cont.):

• Territorial Application:

• 27+1 (Denmark opt-out in Maastricht Treaty)

• European-based Debtors

• International Corporate Groups (with a base in Europe) (Re:BRAC, Daisytek, Enron)

• Application in Time (Arts. 43, 47):

• 31 May 2002 (14)/1 May 2004 (10)

• 1 Jan 2007 (2)

• Relationship with other Instruments (Art. 45)

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Definitions (Article 2):

• Insolvency Proceedings (rescue + liquidation) in Annex A

• Winding Up Proceedings (liquidation) in Annex B

• Liquidator in Annex C

• Court/Judgment (wide reading)

• Time of Opening of Proceedings (effectiveness)

• Member state in which assets are situated

• Establishment (q.v. Brussels Convention 1968)

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Jurisdiction (Article 3):

• Main Proceedings – ‘centre of main interests’ – full effect – rescue and liquidation possible

• Secondary Proceedings – ‘establishment’ – restricted (territorial) effect – liquidation only

• Main usually opened before Secondary

• Secondary can be opened before Main if

• (i) impediment to Main exists

• (ii) creditor’s request/claim related to ‘establishment’

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Jurisdiction (Article 3) (cont.):

• What’s Missing?

• What does COMI mean? No independent definition in Article 2, so resort to domestic rules and possibility of double-jurisdiction and conflict (Eurofoods)

• Virgos-Schmit Report (persuasive interpretation)

• Relationship to establishment definition?

• Shifting COMI? (forum shopping)

• Corporate Groups? (Eurofoods/Daisytek)

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Choice of Law (Article 4):

• Lex concursus (for both Main and Secondary Proceedings) applicable to:

• Debtor’s capacity

• Asset treatment generally

• Debtor-liquidator powers

• Effect on availability of set-off, current contracts, creditors’ execution/enforcement, treatment of claims, proof of debts

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Choice of Law (Article 4) (cont.):

• Also applicable to:

• Priorities and distributions

• Closure and post-closure effects

• Costs and expenses

• Transaction avoidance (acts detrimental to creditors)

• Widest scope of application to procedural and substantive matters, subject to exceptions.

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Choice of Law Exceptions (‘carve-outs’):

• Article 5: rights in rem (security)

• Article 6: set-off (quasi-security)

• Article 7: reservation of title (quasi-security)

• Article 8: immoveables

• Article 9: financial market contracts

• Article 10: employment contracts

• Article 11: registrable rights (land/aircraft/ships)

• Article 12: community patents

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Choice of Law Exceptions (‘carve-outs’) (cont.):

• Article 13: protection of otherwise detrimental acts

• Article 14: protection of third party purchasers of Article 11-type assets

• Article 15: lis pendens

• Carve-outs may require main/secondary jurisdictions to determine foreign law if no proceedings can take place in the carve-out jurisdiction (i.e. no establishment), but will they be enforced?

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Recognition Principles:

• Article 16: principle of recognition (comity/full faith and credit/Brussels Convention 1968)

• Article 16 does not prevent opening of secondary proceedings

• Article 17: full effect given to main proceedings elsewhere and to effect of secondary proceedings limited to territorial assets

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Recognition Principles (cont.):

• Article 18: full powers for main liquidator, limited extra-territorial powers for secondary liquidator (no coercive powers can be used);

• liquidator must comply with domestic law for realisation of assets

• Article 38: temporary liquidator may ask for interim/preservation measures elsewhere

• Article 19: no formality for recognition of liquidator other than proof of appointment

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Recognition Principles (cont.):

• Article 21: general publicity for proceedings and appointments

• Article 22: publicity through registration for particular assets

• Article 23: costs imputable to proceedings

• Article 24: pre-publication transactions with debtor protected; constructive notice rule

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Recognition Principles (cont.):

• Article 25: recognition of further judgments and orders following Article 16 recognition (exception for postal secrecy and personal freedom)

• Article 26: public policy avoiding recognition altogether (pari passu rule and the problem of priority: Re: MG Rover España SA; Re: HIH Casualty and General Insurance Limited)

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Recognition Principles (cont.):

• Effect on creditors:

• Article 20(1): creditors must return seized assets to liquidator, subject to security

exception (Articles 5 and 7)

• Article 20(2): creditors can not claim in distributions unless acknowledging distributions from other proceedings

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Conduct of Secondary Proceedings:

• Article 27: where main proceedings exist, secondary proceedings can be opened without ‘insolvent’

requirement

• Article 28: applicable law is that of secondary jurisdiction (see Article 4 for list)

• Article 29: main liquidator and any party permitted in secondary jurisdiction may apply for opening

• Article 30: security for costs may be required

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Conduct of Secondary Proceedings (cont.):

• Article 31: liquidators’ duty to co-operate and communicate (CoCo Guidelines; JudgeCo Project; ALI- III Project)

• Article 32: liquidators will lodge known claims in other proceedings/participate on same footing as

creditor

• Article 33: stays in secondary proceedings at request of main liquidator (subject to it being in the interest of creditors)

• Article 34: main liquidator may propose end to secondary proceedings

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Conduct of Secondary Proceedings (cont.):

• Effect on creditors:

• Article 32: right to prove debts/claims in all proceedings

• Note also Article 20(2): creditors can not claim in distributions unless acknowledging distributions from other proceedings

• Article 35: surplus from secondary proceedings may be transferred to main proceedings (subject to Article 26?)

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Conduct of Secondary Proceedings (cont.):

• Where secondary opened before main:

• Article 36: once main proceedings opened, secondary proceedings to comply with rules in Articles 31-35

• Article 37: secondary proceedings may be converted from rescue to liquidation

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Creditors:

• Article 39: right to prove debts/claims in all proceedings (see also Article 32 for secondary proceedings)

• Article 40: duty to inform known creditors

• Article 41: content of proof of debt

• Article 42: notice to creditors in language of proceedings/headnote in all official EU languages;

• creditors’ proof in any language of state of residence

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Reform Perspectives:

• Review by 1 June 2012 and 5-yearly intervals thereafter (Art. 46)

• Pressure for early review (since in force!) to change:

• COMI Definition seen as urgent (ECJ in Eurofoods)

• Race to the Court (pending petitions)

• Forum-shopping to be discouraged

• The Problematic of Corporate Groups

• Secondary proceedings = liquidation?

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Reform Perspectives (cont.):

• Central Insolvency Register

• Communications Guidelines/Int’l Best Practices to flesh out Art. 31

• Commentaries/Articles/Books

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•2012-2014 Cursus

•Assessment: Vienna-Heidelberg Report

•Commission Draft 12.12.12

•Main Themes:

Scope/Jurisdiction/Art 25

COMI-Shifts/Synthetic Secondaries

Group Insolvencies and Coordination

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•EP Responses

•Group of Experts

•National Responses

•Questions:

Content/Coverage

Scope/Jurisdiction/Annexe A

General Coordination/Cooperation

Group Dynamic/UNCITRAL WG V Work

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•Reform Process (cont.):

•More EP Amendments

•Final Council Text

•Enactment 2015? In force 2016/7?

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The Future?

• A Wider European Legal Order:

• Unifying texts in insolvency jurisdiction

• Fitting into corporate migration issues (Centros/Uberseering/Inspire-Art)

• Time to think about substantive change?

• Convergence process/Regulatory arbitrage

• Fresh Start/Wrongful Trading initiatives

• What substantive/procedural rules? INSOL Europe Rep

• Commission Recommendation of 2014