Cross Border Insolvency – European Union

Cross Border Insolvency – European Union

February 2009

Cross-border insolvency is a complex area of law and this part is intended to give a general overview only and must be read in conjunction with Technical Manual Chapter 41- Cross- Border Insolvency – European Union.

Chapter 41 gives more detailed advice and information relating to the legislation concerning insolvencies of entities and individuals whose interests straddle national and international borders.

No action should be taken unless instructed by the examiner.

Introduction

1. What is the point of the Regulation?

The EC Regulation on Insolvency Proceedings (the Regulation) came into force throughout the European Union (EU), with the exception of Denmark, on 31 May 2002.

The main purposes of the Regulation are to set rules governing where in the EU, insolvency proceedings should be opened, which country’s laws would apply to those proceedings and to ensure that the proceedings and the effect of the proceedings are recognised throughout the EU. The overall effect of these rules is to make it easier to deal with the affairs of an insolvent who has affairs in more than one EU country.

Generally speaking, the Regulation applies to any insolvency proceedings opened in the EU and, therefore, applies to all bankruptcies and compulsory liquidations in England and Wales.  That said, unless the debtor has assets or liabilities in an EU country outside of the UK the Regulation will have no practical effect on the official receiver or his/her duties in respect of the insolvency.

2. Have the incidences of insolvency proceedings involving nationals of other EU countries increased?

Whilst it is still relatively uncommon for official receivers to deal with insolvents who have affairs outside of England and Wales, the increasing level of international trade and the incidence of immigration and emigration of individuals would suggest that this type of insolvency will become more common.

Recent developments in international law have improved the position in respect of the recognition of foreign insolvency proceedings which may lead to this type of insolvency becoming more common. Currently, the laws for dealing with insolvency vary from country to country within the EU. So for example, in personal insolvency proceedings in Germany the debtor is not normally released from the proceedings for a minimum of seven years and in Ireland the proceedings may last up to 12 years. It is these differences in law that motivates people to declare bankruptcy in a country that may have insolvency legislation more favourable to that person’s circumstances. Currently it is from Germany that most nationals are seeking the protection of courts in England and Wales.

Where debtors seek to open proceedings in a country having more favourable insolvency legislation it is referred to as “forum shopping”. The regulations attempt to stop forum shopping by requiring that the main proceedings be opened in the member country where the debtor’s “centre of main interests”, referred to as COMI, is situated. Paragraph 6 below explains further the COMI.

3. Brief history and background to the European Commission(EC) regulation

A Regulation made under an EC Treaty is binding in its entirety and directly applicable to member countries.

The purpose of the Regulation is to improve the efficiency and effectiveness of cross-border insolvency proceedings within the EU, by simplifying or removing formalities concerning the recognition and enforcement of insolvency orders.

The Regulation takes effect where the insolvent’s “centre of main interests”, referred to in this part as “COMI”, is within the EU.

4. Which are the member countries of the EU?

There are 27 members of the EU as follows :

Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark (but see below) Estonia, Finland, France ,Germany, Greece, Hungary, Ireland (Eire),Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom

For the purposes of the Regulation the United Kingdom is comprised of England, Wales, Scotland, Northern Ireland and Gibraltar as a single state.

The Isle of Man is not included as an EU member nor are the Channel Islands.

Denmark is a full member of the EU but negotiated special exemption from the legislation of the EC Treaty and therefore the Regulation has no effect in Denmark and that country can be treated as a country outside the EU for this purpose.

5. Who may be subject to proceedings under the Regulation?

Generally speaking, under the Regulation any company that has its centre of main interests in a member country may be made subject to corporate insolvency proceedings in that same member country, regardless of where it is registered. 

Similarly, insolvency proceedings may be opened against individuals who have a centre of main interests in the EU, regardless of their nationality.

6. Definition of centre of main interests (COMI) in bankruptcy

Currently, there is no definition of COMI in the Regulation. The explanatory notes to the Regulation (known as the “Recitals”) states:

“The ‘centre of main interests’ should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties”.

7. Centre of main interests (COMI) in bankruptcies (October 2009)

In broad terms this will be the country in which the debtor mainly carries out their trade, profession or (self) employment. Where the debtor does not trade or carry on a profession, the country in which he/she habitually resides is considered to be the COMI. Where the debtor resides in one country but trades in another, it is the country in which the trade is carried out that is considered to be the COMI.

Where a person’s only connection with a country is that they work there on a non self-employed basis) (perhaps, commuting from a neighbouring country), then the COMI is will generally be in the country in which they live and consequently pay bills, operate a bank account and buy items, etc.

The COMI is determined at the date the petition is presented and not where, historically, the relevant activity was carried out. Therefore, the location of creditors and the country in which debts were incurred are not material issues in determining a COMI.

8. Centre of main interests (COMI) in companies

In the case of a company, the place of the registered office is presumed to be the centre of main interests (in the absence of proof to the contrary).

9. Does the official receiver need to make initial enquiries into the COMI?

In cases where the official receiver is dealing with:

  • bankruptcy proceedings commenced by a debtor in England and Wales as main proceedings under the EC Regulation
  • the debtor is a foreign national who appears to have been resident in the UK for a period of less than 12 months
  • all the debts disclosed are to creditors based outside the UK,

the official receiver should seek further information to assess whether investigation of the COMI should be carried out. The information sought could, for example, include documentary evidence of a domestic life in the United Kingdom, inspection of an accommodation address or obtaining a certificate of registration of residency. Full details of the enquiries to be made can be found in Technical Manual Chapter 41 paragraphs 41.69 – 41.76. The Initial Contact Form Supplement (ICON(ECS)) may be used for this purpose.

If, as a result of his/her enquiries the official receiver is concerned that proceedings opened in England and Wales ought to have been opened in another member country of the EU he/she may follow the guidance in Technical Manual Chapter 41 paragraphs 41.64 and 41.77 and seek a review of the bankruptcy order.

10. Which country’s law would apply to proceedings opened under the Regulation?

The basic principle of the Regulation is that the law and the effects of the insolvency proceedings of the member country in which main proceedings are opened will automatically apply and are recognised throughout the EU member countries from the time that it becomes effective in the country where proceedings are opened. (See Technical Manual Chapter 41 paragraphs 41.36, 41.49 and 41.51 for exceptions)

11. What action should the official receiver take once proceedings have been opened? (October 2009)

Once the official receiver is satisfied that insolvency proceedings have been opened correctly the official receiver must administer the estate in the usual way. Technical Manual Chapter paragraphs 41.37 to 41.47 covers some more complex areas such as rights of set-off, retention of title and contracts of employment and the effect that the Regulation has on these matters.

The official receiver is under a duty to inform known creditors who have their habitual residences, domiciles or registered offices in other member countries by individual notice of the circumstances and rules under which they may lodge claims. There are also rules regarding language requirements of the notice.

There is a form available on document production that meets the relevant requirements and the official receiver should send this to all creditors in other member countries at the initial notices stage (form NORD1EU). 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 Technical Manual Chapter 41.58 at Annex A.

12. Does the official receiver need to advertise the opening of the proceedings?

There is no requirement in the EC Regulation for advertisement of the opening of proceedings in member counties other than that in which the proceedings are opened but consideration should be given to advertising the bankruptcy order in a local newspaper, for the creditors, based on the debtor’s last address in a member country, outside of England and Wales. Any publication would be in line with the publication procedures provided for in that country.

Any member country 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.

The costs of publication are regarded as an expense in the proceedings.

13. Can proceedings be opened in countries other than that in which the debtor has their COMI?

Proceedings opened in the country where the debtor has their COMI are known as the “main insolvency proceedings” and these are the only proceedings that have effect throughout the EU.  There cannot be more than one main insolvency proceeding.

Where, however, the debtor has a trading premises (this is known as an “establishment” in the Regulation) in a member country of the EU, but the COMI is elsewhere, a creditor based in the country of the trading premises might open proceedings against the debtor in that country.  Those proceedings can only be used to deal with assets in that country.  Proceedings of this type opened prior to the main insolvency proceedings are known as “territorial proceedings”, whereas those opened after are known as “secondary proceedings”.

Where the official receiver is dealing with main insolvency proceedings and secondary or territorial proceedings are open, he/she will have no duty to deal with assets in the country where those other proceedings are opened.  See Technical Manual Chapter 41 paragraphs 41.25 to 41.34 for more information on this.

 

Where can I find out more?

(For details of the relevant articles of the regulations please see the Notes attached to Technical Manual Chapter 41)

Insolvency Act 1986, sections 117, 265, 267 and 426

The EC Regulation on Insolvency Proceedings 2000

Cross-Border Insolvency Regulations 2006

Technical Manual

Chapter 41 – Cross-Border Insolvency – European Union

Technical Notices

T53-08 – Cross-Border Insolvency

Forms to be used

ICON(ECS) - Initial Contact Form Supplement 

NORD1EU – Notice of order (version for EU creditors)