Recognition of insolvency proceedings throughout member states and the effects of such recognition

PART 4                                                                                                         

September 2008

Recognition of insolvency proceedings throughout member states and the effects of such recognition

41.48 Recognition of insolvency proceedings and their effects – general

The Regulation sets out provisions to ensure that the insolvency proceedings and the effects of those proceedings are recognised throughout the member states of the EU.

As will be readily appreciated, the speed with which an office holder is able to effect control over the estate of a debtor is often key to the ultimate success of the insolvency proceeding.  Prior to the adoption of the Regulation, office holders had to go through slow and expensive processes to have the proceedings and their authority recognised outside of the jurisdiction of the making of the order, often leading to delay and irreversible dissipation of assets.

 

41.49 Automatic recognition

The general principle of the Regulation is that any judgement opening insolvency proceedings (see paragraph 41.20) handed down by a court (see paragraph 41.13) of a member state is to be recognised in all the other member states from the time that it becomes effective in the state where proceedings are opened.

The rule applies even where insolvency proceedings cannot be brought against the debtor in other member states [note 1] (where, for example, the liabilities of the debtor are below the threshold for the instigation of insolvency proceedings – for example, proceedings would be recognised in England and Wales even where the petition debt was below “bankruptcy level” which is currently set at £750 [note 2]).  

However, a state may refuse to recognise insolvency proceedings where the effects of recognition would be manifestly contrary to that state’s public policy, in particular its fundamental principles or the constitutional rights and liberties of the individual [note 3].  An example of this provision being used (albeit unsuccessfully) was in an unreported case where the French Public Prosecutor argued that a judgement originating in England and Wales should not be recognised, arguing that employment law safeguards in favour of French employees of the insolvent company would be jeopardised.  The court in France ruled that the proceedings should be recognised and accepted undertakings from the administrator that the employees’ rights would be protected.  Another example may be where the debt arises from an illegal act – such as the supply of drugs. 

 

41.50 Automatic recognition – relationship with territorial proceedings

The fact that insolvency proceedings have been opened in a member state and, therefore, recognised throughout the EU, does not preclude the opening of territorial proceedings in another member state (see paragraph 41.26) [note 4].

 

41.51 The effects of recognition

Once main proceedings have been opened in the state of the debtor’s centre of main interests, the insolvency law of that state will automatically apply throughout the rest of the EU, with two exceptions [note 5]:

  • If territorial proceedings are already open, or if secondary proceedings are subsequently opened, then the law of the state where the territorial or secondary proceedings are opened will apply in that state, and
  • Where special provision is made elsewhere in the Regulation (for example the exceptions outlined in paragraphs 41.36 to 41.47.

From the time fixed by the law of the state where proceedings are opened, the judgment opening proceedings produces its effects with equal force in all member states.  The disability of the debtor in dealing with his/her assets, the appointment of the liquidator, the prohibition on individual executions, the inclusion of the debtor’s assets in the estate regardless of the state in which they are situated, and the obligation to return what has been obtained by individual creditors after opening are all effects laid down by the law of the state of the opening of the proceedings, which are simultaneously applicable in all member states [note 6].

 

41.52 The effects of recognition – powers of the liquidator

In addition to the powers given under the general effects of the recognition of proceedings (see paragraphs 41.49 and 41.51), the Regulation provides specific provisions regarding the powers of a liquidator (see definition in paragraph 41.8).

Where main proceedings are opened the liquidator may exercise all the powers conferred on him/her by the law of the state where proceedings are opened, in another member state, so long as no other insolvency proceedings have been opened there nor any preservation measure to the contrary has been taken there further to a request for the opening of insolvency proceedings in that state.

The liquidator may, in particular, remove the debtor’s assets from the member state in which they are situated, subject to any secured claims or claims in respect of retention of title [note 7].  Whilst the Regulation makes it possible for the official receiver to remove assets of a debtor from the member state in which they are situated (to, for example, effect a sale), it is likely to be more effective (in consideration of the costs of transportation) to leave them in place and engage local agents to deal with the sale.  An exception to this general rule may be in respect of financial bonds or share certificates, where the official receiver can use his powers under the Regulation to have them removed to this country for sale or assignment. 

Liquidators must, when exercising their powers, have regard for the general law of the member state in which action is to be taken [note 8].

 

41.53 Proof of the liquidator’s appointment

Although the appointment and powers of the liquidator are automatically given under the Regulation (see paragraph 41.52), it is likely that, from a practical point of view, it will be necessary for him/her to prove his/her credentials.  The Regulation states that the liquidator’s appointment shall be evidenced by a certified copy of the original decision appointing him/her (for example, the winding-up or bankruptcy order) or by any other certificate issued by the court that has jurisdiction.

A translation into an official language of the state in which the liquidator intends to act may be required [note 9].

Official receivers may use the services of WordTrans for the translation of documents (see paragraph 32.3.39 of Chapter 32 – Employment of Agents for further details).

 

41.54 Actions by creditors after the opening of proceedings

With the exception of secured creditors or creditors with a retention of title, a creditor who, after the opening of proceedings, obtains through any means total or partial satisfaction of his/her claim through realisation of the debtor’s assets is required to return what has been obtained to the liquidator [note 10] [note 11] [note 12].

 

41.55 Equal treatment of creditors

In order to ensure equal treatment of creditors a creditor who has, in the course of insolvency proceedings, obtained a dividend on his claim shall share in distributions made in other proceedings only where creditors of the same ranking or category have, in those other proceedings, obtained an equivalent dividend [note 13].

The EC Regulation confirms that the rights of creditors to lodge claims are extended to those including tax authorities and social security authorities of member states [note 14], thereby ending (so far as EU members are concerned) the long-standing principle that foreign tax judgements and foreign revenue laws are unenforceable [note 15].  For information, this principle was repealed so far as countries outside the EU are concerned by the provisions of the Cross-Border Insolvency Regulations 2006 (see Chapter 42). 

 

41.56 Publication of notice of the opening of proceedings

(amended January 2010)

There is no requirement in the EC Regulation for advertisement of the opening of proceedings.  The law of the state of the opening of the proceedings must be followed in this regard (see Chapter 5 for regarding the procedure for publication of insolvency information in England and Wales).

There is provision in the EC Regulation for the publication of the opening of the proceedings in any (other) Member State should the liquidator request it.  The publication would then be in line with the publication procedures provided for in that state.  It is advisable for the official receiver when acting as liquidator or trustee to effect such publication in states in which it is thought that the debtor has an interest to assist in the protection of the estate [note 16].

Any member state in which the debtor has an establishment may require mandatory publication and, in this event, the liquidator is required to take all necessary measures to ensure such publication [note 17].

The costs of publication are regarded as an expense in the proceedings [note 18].

 

41.57 Registration in a public register

The rules regarding registration of the proceedings in a public register run parallel to those regarding publication (see paragraph 41.56) – i.e., this is voluntary unless requested [note 19].  An example of such a public register in England and Wales would be that which is maintained by HM Land Registry for the registration of land and property interests.

The costs of such registration are an expense in the proceedings [note 20].

 

41.58 Provision of information for creditors (amended May 2009)

As soon as insolvency proceedings are opened in a member state, the court of that state having jurisdiction, or a liquidator appointed by it is under a duty to inform known creditors who have their habitual residences, domiciles or registered offices in other member states by individual notice of the circumstances and rules under which they may lodge claims [note 21].

There are also rules regarding language requirements of the notice [note 22].

There is a form available on document production [note 23] that the official receiver should send to all creditors in other member states at the initial notices stage.  Currently, the document production form does not contain the title in all the official languages of the EU (as required by the Regulation) so, before issuing, official receivers should replace the produced front sheet with the one attached to this chapter as Annex A.  Please see Chapter 42 for information on notices to foreign creditors in non-EU states.

 

41.59 Claims by creditors

Any creditor who has his/her habitual residence, domicile or registered office in a member state other than the state where proceedings are opened, including the tax authorities and social security authorities of member states, shall have the right to lodge claims in the insolvency proceedings in writing [note 24].

The creditor is required to send copies of any supporting documents to their claim and shall indicate the nature of the claim, the date on which it arose as well as whether he/she is claiming preferential status, secured status or retention of title and what assets are covered by the claim [note 25].

 

[Back to Part 3 – Opening of proceedings and national laws applicable under the EC Regulation] [On to Part 5 – Centre of Main Interests and bankruptcy petitions presented by citizens of other European Union nations]