PART 3
September 2008
OPENING OF PROCEEDINGS AND NATIONAL LAWS APPLICABLE UNDER THE EC REGULATION
41.20 Opening of insolvency proceedings
It is important for the court to determine at the outset whether the Regulation will apply to the proceedings and, if so, what type of proceedings are involved (see paragraphs 41.25 and 41.26). For England and Wales, there has been changes to the relevant Rules and Forms to ensure that the matter is considered at the appropriate stage [note 1].
So far as compulsory liquidation and bankruptcy are concerned, the only circumstance where the Regulation will not apply is where the debtor has its centre of main interests (commonly referred to as “COMI”) (see Part 5) in a country that is not in the EU, or is in Denmark, which, though it is in the EU, is not subject to the Regulation (see paragraph 41.7). However, in cases where there is no cross-border dimension the application of the Regulation will have no practical effect.
Please see Chapter 42 for information and advice concerning cross-border insolvencies concerning countries outside the EU.
41.21 Proceedings against foreign registered companies
Under the Regulation any company that has its centre of main interests (see Part 5) in a member state may be made subject to corporate insolvency proceedings in that same member state, regardless of where it is registered. The unpublished case of Enron Directo SA, where a company registered under Spanish law was shown to have its principle headquarters’ functions in London and, subsequently, was subject to an administration order in England and Wales, is an example of this principle. In another case the court in England made administration orders against subsidiaries (based in Germany and France) of an American company on the basis that the companies were managed from the English office. This decision was subject to a series of appeals, largely from France, where attempts were made to open separate proceedings against the French subsidiary. These appeals were rejected despite claims from the French that proceedings ought not to have been opened against the French subsidiary on public policy grounds [note 2].
Similarly, a company incorporated in Delaware, USA was found to have had its centre of main interests in the UK and was subject to an administration order in the High Court [note 3]. The key point demonstrated here is that the Regulation may apply to companies registered outside the EU if it can be shown that the centre of main interests was within the EU.
In practice, this situation is likely to apply to only a small number of companies, as there is a presumption under the Regulation that a company’s centre of main interests is the state in which it has its registered office unless proof to the contrary is produced [note 4]. In another case, the court in England and Wales refused to open proceedings against a company registered in Sweden where the petitioner was unable to provide evidence to refute the assumption of the centre of main interests being the state of registration [note 5].
41.22 Proceedings against foreign nationals
As explained in paragraph 41.21 a company may be subject to main insolvency proceedings in a member state if it can be shown that its centre of main interests was within that state, regardless of the location of its registered office. Similarly, insolvency proceedings may be opened against individuals who have a centre of main interests in the EU, regardless of their nationality (i.e., even subjects of states outside the EU).
See Part 5 for further information and advice regarding the opening of proceedings and the centre of main interests as regards individuals.
41.23 Application of the Regulation within the UK
For the purposes of the Regulation, the UK is one country. Therefore, a debtor’s centre of main interests can only be considered to be within the UK, and not within one of the constituent countries. In order to establish where, within the UK, the proceedings should be opened reference would need to be made to the three domestic legislations (England and Wales, Scotland and Northern Ireland).
As regards England and Wales, the conditions to be satisfied to wind a company up or present a petition for bankruptcy are set out in the Act [note 6] [note 7].
Where a winding-up or bankruptcy order (or equivalents) is made in any part of the UK it is enforceable in any other part of the UK [note 8].
Please see Part 4 of Chapter 42 for further information and advice regarding cross-border insolvencies within the UK.
41.24 Creditors voluntary liquidations (CVL)
For a CVL to be a qualifying proceeding under the Regulation (see paragraph 41.15), it is necessary for it to receive confirmation from the court [note 9]. This is achieved by a non-mandatory procedure provided for in the Rules [note 10].
If the liquidator in a CVL does not obtain the confirmation from the court, the Regulation will not apply to the proceedings and he/she will not be able to exercise his/her powers in other EU member states.
Where a foreign registered company has its centre of main interests in the UK as at the date of the passing of the resolution for winding-up, the EU Regulation may be used to instigate a CVL. This principle may be useful where the CVL procedure is not available in the state where the company has its registered office [note 11].
41.25 Main insolvency proceedings
As outlined in paragraph 41.20, the courts of the member state within the territory of which the centre of the debtor’s main interests (see Part 5) is situated shall have jurisdiction to open insolvency proceedings. These proceedings are termed “main proceedings” [note 12].
The main proceedings are the only proceedings that have effectiveness throughout the member states of the EU, and no parallel proceedings may be opened in another member state, save in the specific and limited circumstances detailed in paragraphs 41.26 to 41.33.
41.26 Territorial insolvency proceedings (amended July 2010)
Where the debtor’s centre of main interests (see Part 5) is situated within the territory of a member state, the courts of a different member state have jurisdiction to open proceedings against that debtor only if the debtor possesses an establishment (see paragraph 41.14 and 41.29) within that territory.
Proceedings of this type opened in advance of main proceedings (see paragraph 41.25) are known as ‘territorial proceedings’. The effects of these territorial proceedings are restricted to the assets of the debtor situated in the territory of the state where territorial proceedings are opened.
Annex C is a template letter explaining to an enquiring creditor why proceedings have been opened in the UK.
41.27 Opening of territorial (secondary) proceedings subsequent to main proceedings
Where main proceedings (see paragraph 41.25) have already been opened, it is possible to subsequently open territorial proceedings. These proceedings are known as “secondary proceedings” and must be winding-up proceedings (see paragraph 41.11) [note 14].
41.28 Opening of territorial proceedings in advance of main proceedings
Territorial proceedings may only be opened in advance of main proceedings where:
41.29 ‘Establishment’ in the context of the decision to open territorial (secondary proceedings) (amended September 2013)
As outlined in paragraph 41.14, ‘establishment’ is defined as a place of operations where the debtor carries out a non-transitory (that is, permanent) economic activity with human means and goods.
Although the wording of the Regulation requires the current possession of an establishment (not an historical possession), it has been held in an un-reported Estonian case [note 12a] that if a debtor had an establishment in the past and there were assets/chattels, etc that were related to the operation of that establishment left behind, that should be considered sufficient for the opening of territorial (secondary) proceedings. This is intended to avoid a debtor ‘abandoning’ an establishment in the face of insolvency proceedings.
Further, the Court of Appeal has held that the definition of ‘establishment’ in the Regulation is clearly intended to lay down a rule that the mere presence of an office or branch at which the debtor was located is insufficient. To meet the definition it had to be a place of current operation – this judgment somewhat disagreeing with the Estonian case [note 12b].
The presence of assets (unconnected with a place of operation) in a member state ought not to be, own its own, sufficient basis for the opening of territorial (secondary) proceedings in that state.
41.30 General points regarding secondary proceedings (amended February 2010)
Secondary proceedings may be opened by the liquidator (see definition in paragraph 41.12) in the main proceedings or any other person with the power to do so in that state [note 16]. The liquidators in both proceedings have a duty to cooperate and communicate with each other [note 17].
Official receivers may make use of Annex D, which is a letter to the insolvency administrator appointed in relation to secondary proceedings opened in another country. The letter sets out the official receiver’s position in relation to those proceedings and should be relevant to the majority of cases.
41.31 Creditor’s rights in relation to secondary proceedings (amended June 2009)
All creditors have a right to lodge a claim in both main and secondary proceedings. Additionally, the liquidators in the main and any secondary proceedings are required to lodge claims already received by them in any other proceedings, subject to the rights of the creditor to oppose or withdraw that lodgement. The claim may be in any of the official languages of the European Union (see http://ec.europa.eu/education/languages/languages-of-europe/doc135_en.htm), but must be headed with “Lodgement of Claim” in (one of) the official languages of the state in which the claim is being lodged. [note 18a].
Annex J is a document listing the relevant phrase in all 23 official languages of the European Union – with each language identified.
The liquidator in either proceeding has the power to participate in the other proceedings on the same basis as a creditor (by, for example, attending a meeting of creditors) [note 18b]. Whilst there is noting specific on the point in the Regulation, it is considered that this provision would give a liquidator the right to submit a claim for his/her own expenses in the main proceedings.
41.32 Secondary proceedings – stay of liquidation
The liquidator in the main proceedings may apply for a stay of proceedings in the secondary proceedings, with the stay being for a period of up to three months. It may be continued or renewed for similar periods [note 19].
The court can terminate the stay of proceedings at the request of the liquidator in the main proceedings, of its own motion, on the application of a creditor or on the application of the liquidator in the secondary proceedings if the measure no longer appears justified [note 20].
41.33 Assets remaining after closure of secondary proceedings
If there are assets remaining in the secondary proceedings after payment of all claims in those proceedings, the liquidator appointed in those proceedings is required to transfer those assets remaining to the liquidator in the main proceedings [note 21].
41.34 Law applicable to the conduct of insolvency proceedings - general
Once the decision has been taken that proceedings may be opened under the Regulation, the question arises as to the law by which the proceedings themselves and any issues arising in those proceedings shall be decided.
It is currently the case, and is likely to remain so for the foreseeable future, that harmonisation of the insolvency laws of the various member states of the EU is not practicable. Not only are there significant differences in matters of detail, but also there are key differences in the principles and attitudes governing the setting of policy in respect of insolvency law.
As there is no uniformity of law within the EU, the Regulation provides rules setting out which law or set of laws is applicable for the conduct of insolvency proceedings.
41.35 Law applicable to the conduct of the insolvency proceedings – basic rule
The basic principle of the Regulation is that the law and the effects of the insolvency proceedings of the member state in which proceedings are opened will apply. Where territorial or secondary proceedings (see paragraph 41.26) have been opened, the law of the state where the territorial or secondary proceedings are opened takes precedence in those proceedings. The law of the relevant state determines the conditions for the opening of the proceedings, their conduct and their closure [note 21a]. The Regulation gives examples of the matters for determination by the law of the state where proceedings are opened [note 22].
There are, though, exceptions to this basic rule, and these are detailed in paragraphs 41.36 to 41.47.
41.36 Law applicable to the conduct of the insolvency proceedings – exceptions to basic rule
Unless otherwise stated, the law applicable to the proceedings is that of the member state within the territory of which the proceedings are opened. However, to protect expectations and the certainty of transactions in member states other than that in which proceedings are opened, provision is made for a number of exceptions to this general rule [note 23]. These exceptions are set out in paragraphs 41.37 to 41.47.
The Regulation provides that the rights of secured creditors in respect of tangible or intangible, moveable or immovable assets – both fixed and floating – belonging to the debtor which are situated within the territory of another member state at the time of the opening of the proceedings are not affected by those proceedings. This means that the law of the state in which the asset is situated, and not the law of the state where proceedings are opened, will determine the secured creditor’s rights [note 24].
This is qualified, however, by the provision in the Regulations that the exemption shall not preclude any actions under the law of the state where proceedings are opened to recover voidable transactions detrimental to all creditors [note 25].
The right of set-off of a creditor who is also a debtor of the insolvent is governed by the law of the state where proceedings are opened. However, where the right of set-off is denied under the law of the state where proceedings are opened, creditors may demand the set-off where such a set-off is permitted by the law applicable to the insolvent debtor’s claim [note 26]. In the UK set off is a mandatory process (see Chapter 40 Part 7) but in other EU countries it may only be applied in limited circumstances. The outcome for a creditor who is also a debtor can therefore be very different depending on the law of the state of opening proceedings.
This is qualified, however, by the provision in the Regulations that the exemption shall not preclude any actions under the law of the state where proceedings are opened to recover voidable transactions detrimental to all creditors [note 27].
41.39 Reservation or retention of title
The Regulation provides that the opening of insolvency proceedings against the purchaser of an asset shall not affect the seller’s rights based on a reservation of title where, at the time of the opening of the proceedings, the asset is situated within the territory of a member state other than the state where proceedings are opened [note 28]. There is some uncertainty as to the effect of this provision. The implication is that the rights in the contract itself and, therefore, the law relating to that contract are to be considered alongside the rights given under the law of the member state in which the asset happens to be located.
Where, conversely, it is the holder of the retention of title (i.e., the unpaid seller) who is subject to insolvency proceedings, the Regulation provides that the opening of insolvency proceedings, after delivery of the asset, shall not constitute grounds for rescinding or terminating the sale and shall not prevent the purchaser from acquiring title where at the time of the opening of proceedings the asset sold is situated within the territory of a member state other than the state where proceedings are opened [note 29].
This is qualified, however, by the provision in the Regulations that the exemption shall not preclude any actions under the law of the state of the opening of the proceedings to recover voidable transactions detrimental to all creditors [note 30].
41.40 Contracts relating to immovable property
Generally, the Regulation provides a basic principle that the law of the state where proceedings are opened determines the effects of insolvency upon current contracts to which the debtor is a party [note 31]. There is, however, an exception where the contract relates to a right to acquire or make use of immovable property. In this case, the Regulation states that the effects of the insolvency proceedings upon contracts of this nature shall be governed solely by the law of the member state within the territory where the immovable property is situated [note 32].
41.41 Payment systems and financial markets
The effects of insolvency proceedings on the rights and obligations of the parties to a payments or settlement system (such as banking systems) or to a financial market (such as stock or commodity exchanges) is governed solely by the law of the member state applicable to the relevant payment system or financial market [note 33].
Unlike many of the other provisions relating to exceptions to the basic rule (see paragraph 41.36), any action to recover voidable transactions are also to be taken under the law relating to the relevant payment system or financial market [note 34].
It is likely that an employee would have accepted a contract of employment based on his/her knowledge of the laws of the state of his/her employment. Consequently, it would be unfair for the employee to be unexpectedly subject to a different and unfamiliar set of rules and laws in the event of the insolvency of their employer. As a result, in order to protect the rights and interests of employees the Regulation provides that the effects of insolvency proceedings on employment contracts shall be governed solely by the law of the member state applicable to the contact of employment [note 35].
Employees’ claims for outstanding wages or the rights to claim under any available system such as that run by the UK’s Redundancy Payments Service will be dealt with by the law of the state where the employee habitually works [note 36].
41.43 Rights subject to registration
Most countries operate a system of registration of rights over immovable property – the related register of which a party interested in the property can inspect. An example in the UK would be the Land Registry for the registration of property rights. Typically, systems are also in operation for some types of moveable property such as ships or aircraft. In this respect the Regulation provides that where immovable property, a ship or an aircraft is subject to registration in a public register, the effects of the insolvency proceedings shall be determined by the law of the member state under the authority of which the register is kept [note 37].
41.44 EU patents and trade marks
Within the EU there is a system in place for the registration (and consequent protection) of intellectual property rights throughout the EU. The Regulation makes a special case of these EU rights with the provision that they can only be dealt with under insolvency proceedings opened as main proceedings [note 38].
See also Chapter 31.10, Part 2 for further information on EU registered intellectual property,
41.45 Avoidance of transactions
The general rule [note 39] provides that the rules relating to voidness, voidability or unenforceability of legal acts detrimental to the general body of creditors to be followed are the rules of the state where proceedings are opened. However, the Regulation further provides [note 40] that where the person who benefited from the act can prove that the act was carried out under the law of a member state other than the state where proceedings are opened and that that law does not allow any means of challenging that act the general law shall not apply. This affords protection to parties who have reasonably relied on the law of their own state to ensure the validity of a transaction.
41.46 Protection of third-party purchasers
Member states have different ways of dealing with the situation where a debtor disposes of property for consideration and in good faith after the opening of insolvency proceedings. The general rule under the Regulation [note 41] that the law of the state where proceedings are opened takes precedence may cause difficulties where the purchaser has relied on information in a public register of assets in one member state before the opening of insolvency proceedings in a another member state has been recorded on that register.
The Regulation recognises this with provisions that state that the law to be applied in respect of:
is that of the state within the territory of which the immovable asset is situated or under the authority of which the register is kept [note 42].
The Regulation states that the effects of insolvency proceedings on a lawsuit pending concerning an asset or a right of that forms part of the estate shall be governed solely by the law of the member state in which the lawsuit is pending [note 43].
This does not apply to individual enforcement actions such as distress, execution and attachment, the effects of insolvency on which are governed by the law of the state where proceedings are opened [note 44].
[Back to Part 2 – Overview of the EC Regulation on Insolvency Proceedings] [On to Part 4 – Recognition of insolvency proceedings throughout member states and the effects of such recognition]