European Update - Recast European Insolvency Regulation in Effect

Recast European Insolvency Regulation (2015) came into effect on 26 June 2017

Background

The recast European Insolvency Regulation (“EIR”) came into effect on 26 June, 2017, reforming the Council Regulation (EC) No 1346/2000 on insolvency proceedings (the “EC Regulation”). The EIR has direct effect in all member states except for Denmark (which opted out), and will apply to all insolvencies commencing on or after 26 June 2017 (the EC Regulation will still apply to insolvencies commenced before that date). The EC Regulation was implemented to provide a framework of common rules on cross-border insolvency proceedings within the EU, establishing a system whereby the courts of the member state in which a debtor has its centre of main interests (“COMI”) has jurisdiction to open “main insolvency proceedings”.

Whilst insolvency law is a matter for each EU Member State (and that concept has not been diluted by the EIR), the objective is for the EIR to strengthen the framework of recognition and cooperation of the EC Regulation.

The key amendments to the EC Regulation introduced by the EIR are summarised below.

1.  Scope

The EC Regulation prescribed what constituted “insolvency proceedings” for the purpose of the EC Regulation in each member state. Pursuant to the EIR, the automatic recognition across member states has been extended from formal insolvency proceedings to include pre-insolvency rescue and rehabilitation proceedings. 

It is noted however that the EIR still excludes receivership, members’ voluntary liquidation and schemes of arrangement.

2.  COMI

The EC Regulation stipulated that main proceedings could only be opened in the jurisdiction where the company has its COMI, subject to a rebuttable presumption that the location of the company's COMI would be the jurisdiction in which the company has its registered office.

The EIR provides a new definition of COMI being “the place where the debtor conducts the administration of its interests on a regular basis and which is ascertainable by third parties”. This definition was intended to restrict forum shopping, and the court is now required to investigate and identify whether a debtor's move to a new jurisdiction before filing for insolvency is genuine and not an abusive attempt to open proceedings in a favoured jurisdiction. Jurisdictions can also be challenged by the debtor or any creditor and the EIR expressly prohibits forum shopping where it can be established that the principal reason for filing insolvency proceedings in the new jurisdiction is to “materially impair the interest of creditors”.

A further way in which the EIR attempts to limit forum shopping is by stating that the presumption that the COMI is the place of the registered office of the company will not apply if the registered office has been moved to another member state within three months prior to the opening of the proceedings (the period of investigation is six months for individuals).

For out-of-court appointments, insolvency practitioners will be required to specify the grounds on which jurisdiction is based when opening the proceedings.

3.  Secondary proceedings

The concept of main and secondary proceedings was maintained (meaning that if main proceedings have been opened in the member state where the debtor has its COMI, then further proceedings may be opened in any other member state where the debtor has an establishment) but amendments have been included to allow for better coordination between the two. Further, the types of secondary proceedings have been extended and can take the same form as the main proceedings in a different jurisdiction as long as the debtor has an establishment there (previously secondary proceedings were limited to winding up only, the concept now applies to any of the proceedings listed in Annex A to the EIR (which includes pre-insolvency rescue proceedings)). The purpose is to assist the main proceedings and facilitate the rescue process.

Where main proceedings are already underway, a court in another member state may refuse or postpone (for up to three months if there is a temporary stay in the main proceedings and provided that suitable measures are in place to protect the interests of local creditors) a request to open secondary proceedings at the request of the officeholder in the main proceedings. Alternatively, in order to avoid the need for secondary proceedings whilst still protecting creditors, the main officeholder can (with the support of the requisite number of local creditors (as determined by the relevant local law)) offer to give an undertaking that he will distribute assets in accordance with the distribution and priority rules in the jurisdiction where secondary proceedings could have been issued.

4.  Cooperation and coordination of insolvency proceedings for group companies

The EIR introduces a new mandatory framework for cooperation between office holders and courts dealing with the insolvency of a corporate group of companies where individual proceedings are already taking place in respect of each member of the group in the separate jurisdictions. Where insolvency practitioners have been appointed as officeholders to two or more members of the same group of companies, the insolvency practitioners are obliged to “cooperate and communicate”. The same obligation is also imposed on courts with jurisdiction in relation to the relevant proceedings.

Any insolvency practitioner appointed over one member may propose "group coordination proceedings" in connection with which the insolvency practitioner must put forward a coordination plan, a nomination for who should act as coordinator, and the likely costs of the proceedings. Group coordination proceedings will only be opened where appropriate to facilitate the effective administration of the various insolvency proceedings and there must be no financial disadvantage to any creditor or group member. The coordinator can also request, if necessary, a stay of the proceedings that are opened in respect of any member of the group so that he or she can ensure the proper implementation of the plan. The respective insolvency practitioners appointed over the various entities will have the opportunity to object to and prevent such entity’s inclusion in any proposed group coordination proceeding and proceedings are only effective when the individual insolvency practitioner voluntarily agrees to be part of them.

5.  Insolvency registers

In order to address problems which have previously arisen relating to the rules on publicity of insolvency proceedings and the lodging of claims, an additional obligation has been included requiring the member states to create insolvency registers (coming into force 26 June 2018). Interconnected insolvency registers will therefore be searchable across the European Union in all official languages of the European Union. The objective of this measure is to allow creditors to access easily the insolvency registers of other member states.

Comment

Although the practical impact of the changes introduced by the EIR have yet to been seen (for example, critics have queried whether the voluntary nature of the new communication and co-operation group insolvency measures means that the mechanism will not in fact be implemented in situations unless there is a strong desire for collaboration and coordination) they appear to be sensible and welcome amendments, aimed at clarify existing legislation and facilitating the efficiency of cross-border insolvencies. Further, the broadening of the scope of the EC Regulation is a helpful reflection of the more general trend of favouring early intervention and a preference for restructuring as a opposed to formal insolvency.