A High Level Summary of the Recast European Insolvency Regulation
On 26 June 2017, Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceeding (the “Recast Regulation”) came into effect. The Recast Regulation replaces in its entirety the EU Regulation (1346/2000) on insolvency proceedings (the “EU Regulation”) and has direct effect in all Member States. The Recast Regulation applies to insolvency proceedings within the EU that are opened on or after 26 June 2017. The EU Regulation shall continue to apply to relevant proceedings opened before 26 June 2017.
By means of brief overview, the Recast Regulation applies to “collective insolvency proceedings which entail the partial or total divestment of a debtor and the appointment of a liquidator”. These proceedings are listed in Annex A to the Recast Regulation. “Main Proceedings” can be opened in the Member State where the debtor’s centre of main interest (“COMI”) is located. This is presumed to be the place of the company’s registered office, in the absence of proof to the contrary. “Secondary Proceedings” can run in parallel to Main Proceedings. Secondary Proceedings can be opened in a Member State where a company has an “establishment”.
This is a short summary of the key changes that are brought into effect by the Recast Regulation. In general, the amendments were aimed at changing the focus away from liquidations and towards restructurings, and were designed to make cross-border insolvency proceedings more efficient.
Key Changes to the EU Regulation brought into effect by the Recast Regulation
1. The Recast Regulation expands the range of proceedings within its scope to include pre-insolvency rescue and restructuring procedures. The Recast Annex A lists 19 new procedures, but Member States can add new procedures as and when they are introduced domestically, such that Annex A should continue to evolve in line with insolvency laws across the EU. Annex A in relation to the UK includes administration, liquidations and company voluntary arrangements, but notably schemes of arrangements are excluded on the basis that they are not technically insolvency proceedings.
2. The Recast Regulation makes changes to the concepts of COMI and establishment. It contains a definition of COMI which is “the place where the debtor conducts the administration of its interests on a regular basis and which is ascertainable by third parties”, thereby codifying current caselaw. The Recast Regulation draws a distinction between “good” and “bad” forum shopping, noting that “it is necessary for the proper functioning of the internal market to avoid incentives for parties to transfer assets or judicial proceedings from one Member State to another, seeking to obtain a more favourable legal position to the detriment of the general body of creditors”, and so includes some safeguards against bad forum shopping. For example, any creditor may challenge the decision to open Main Proceedings on the grounds of jurisdiction. In addition, a new “look back” period has been introduced for determining a debtor’s COMI (3 months for a company); if there has been a change of COMI during the look back period, the presumption that the debtor’s COMI is in its current registered office location is disapplied and the court in the Member State of the earlier location will have jurisdiction to open proceedings. Similarly, the Recast Regulation contains an amended definition of establishment being “any place of operations where a debtor carries out or has carried out in the 3 months period prior to the request to open main insolvency proceedings, a non-transitory economic activity with human means and assets”.
3. The Recast Regulation no longer restricts Secondary Proceedings to winding up proceedings. In addition, Secondary Proceedings can be avoided by the insolvency practitioner (“IP”) in the main proceeding giving an undertaking to distribute assets in the secondary jurisdiction to creditors in that Member State in accordance with local rules, a so-called “synthetic” Secondary Proceeding.
4. The Recast Regulation introduces rules on insolvency proceedings relating to different companies forming part of a group where proceedings are opened in more than one Member State. The policy behind this change is to improve the coordination of insolvency proceedings and to facilitate more efficient group restructurings. The rules on group proceedings are lengthy and complex, but in short: (a) group co-ordination proceedings are voluntary; (b) the general rule is that the first court requested to open group co-ordination proceedings has jurisdiction and any other Member State’s court subsequently requested to open such proceedings should decline; (c) the court requested to open group co-ordination proceedings will, if satisfied they are appropriate, give notice to the relevant IPs who will have the opportunity to make representations to the court if they wish to object to being subject to the group proceedings; and (d) a group co-ordinator will be appointed who has the responsibility of proposing a group co-ordination plan, although adherence to this plan by the IPs is not mandatory.
5. The Recast Regulation introduces specific rules to facilitate and encourage co-operation and communication between IPs and courts, which may involve the conclusion of agreements or protocols and which attempt to co-ordinate the administration and supervision of group members’ affairs where possible.
The Recast Regulation potentially represents a significant change for cross-border restructuring in Europe. The most interesting feature of the Recast Regulation for market participants and practitioners is the introduction of group co-ordination procedures. However, the fact that the new procedure is voluntary, and that many of its features are not mandatory means we will have to wait and see whether IPs take up the opportunity to participate in group co-ordination procedures or not. If they choose not to, it may be a missed opportunity to develop the legal regime in this area.