Equal treatment of European creditors
The creditors of a company subject to main and secondary insolvency proceedings under the European Insolvency Regulation are simply creditors of the company. There are not separate bodies of creditors for each insolvency estate. There may be (probably minor) differences between creditors’ rankings (e.g. preferential or subordinated) and there may be certain creditors admissible in some proceedings and not others. However, essentially there is a single body of creditors.
The fundamental principle in the European Insolvency Regulation that creditors are to be treated equally is not simply a principle that is restricted separately to each proceeding. This is clear, for example, from para 171 of the Virgos-Schmit Report:
“The aim of this Article [Article 20 of the Regulation] is to guarantee the equal treatment of all the creditors of a single debtor”.
Moreover, the administrators of the several proceedings have to ensure that the creditors overall are dealt with equally. This is achieved partly through the cooperation and communication requirements of Article 31 of the Regulation:
“Subject to the rules applicable to each of the proceeding, the liquidator in the main proceedings and the liquidators in the secondary proceedings shall be duty bound to cooperate with each other”.
and partly through the provisions of Article 20(2) governing distributions in parallel proceedings:
“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”.
In accordance with Recital 21 of the Regulation:
“..in order to ensure equal treatment of creditors, the distribution of proceeds must be coordinated. Every creditor should be able to keep what he has received in the course of insolvency proceedings but should be entitled only to participate in the distribution of total assets in other proceedings if creditors with the same standing have obtained the same proportion of their claims”.
The effect of Article 20(2) is that a claim is not to be admitted for a distribution until such time as all the other creditors within the same ranking in those proceedings have obtained an equal percentage of satisfaction as that already obtained by the creditor in other parallel proceedings. Whether the ranking is the same depends on the law governing the subsequent proceedings, i.e. the proceedings in which Article 20(2) is applied.
Any “ordinary unsecured creditor” might find his claim restricted in proceedings B if an earlier distribution in proceedings A excluded an individual creditor (for example a state B penalty or fine) that was admissible as a creditor in proceedings B but not in proceedings A. When it came to the distribution by the office holder in proceedings B, he would apply Article 20(2) and first make up the distribution to the state penalty or fine creditor to the level of the earlier distribution in proceedings A. He would then use the remainder of the assets he had available for distribution to distribute to all the creditors admissible in proceedings B. Accordingly, after each distribution, all the creditors admissible in those proceedings will have been treated equally. The imputation process is described in detail in para 175 of the Virgos-Schmit Report.
The European Insolvency Regulation aims at equal treatment of creditors across the main and secondary proceedings.
Date: 8th January, 2014
Articles from this Author
1st November, 2018
Budget 2018 - HMRC preferred creditor in insolvency
23rd March, 2018
20th July, 2017
Recast European Insolvency Regulation
26th June, 2017
The Recast European Insolvency Regulation (the “Recast EIR”)
Contact a Partner
Thinking of outsourcing your business? Want to know the key benefits on why you should outsource the financial func… twitter.com/i/web/status/1…
For the latest Mercer & Hole news, visit our LinkedIn page mercer-&-hole