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European Insolvency Regulation

Amendment Proposals from the European Commission and the European Parliament

Proposals and Amendments

The Commission’s proposals issued on 12 December 2012 were broadly accepted in the UK.

The Parliament’s JURI committee (Committee on Legal Affairs) under the chairmanship of Klaus-Heiner Lehne, MEP for North Rhine-Westphalia and a partner in Taylor Wessing, drafted 62 amendments and 28 supplemental amendments in September and October 2013. These were reduced to 69 in the report submitted to the Parliament on 20 December 2013.

All but one of those amendments were adopted by the Parliament on 5 February 2014.

Rejected Parliamentary Amendment

The notable rejection was of a change to the definition of “court”. As the proposals now stand, in Article 2c

‘ "court" means in all articles except Article 3b(2) the judicial body or any other competent body of a Member State empowered to open insolvency proceedings, to confirm such opening or to take decisions in the course of such proceedings’.

The JURI committee’s proposed amendment had been to delete the words “or any other competent body of a Member State”. This would have taken out of court proceedings, such as CVLs and administrations out of court, outside the Regulation and was clearly unacceptable to the Parliament.

Residual Parliamentary Amendments

Not entirely unsurprisingly for a legislative process, we now have a mish-mash of proposals. Some of the Parliament’s amendments further cohesive development of the Regulation, but in several areas more amendment will be required.

Scope

Limiting in Article 1(1) the scope of proceedings subject to the Regulation to exclude those based on a law relating to adjustment of debt and including only those based on a law relating to insolvency seems helpful from a UK perspective, because it would appear to remove any possibility of Companies Act Schemes of Arrangement being in Annex A and therefore subject to the Regulation.

Jurisdiction

A significant Parliamentary amendment has been the introduction of an apparently arbitrary 3-month relation back period for the determination of COMI (Article 3(1)) and for the identification of an establishment (Article 2(g)), apparently in an attempt to avoid forum shopping. Regrettably, it ignores the fundamental principle of freedom of movement, which enables a debtor to move its COMI and should not be restricted if to do so does not harm the interests of creditors generally (“good” forum shopping), and it fails to address “bad” forum shopping, where the COMI-shift is harmful to creditors generally.

The current provisions, which the Commission did not seek to change, provide far more legal certainty in this respect and the amendment, which indiscriminately disadvantages debtors seeking to move between Member States, should be reversed, in my view.

Secondary Proceedings

The Commission having introduced a proposal to amend Article 18 to allow the liquidator in main proceedings to give an enforceable and binding undertaking to recognise the distribution and priority rights that local creditors would have had if secondary proceedings had been opened, a Parliamentary amendment proposes (Article 29a(2c)) that the court seised of a request to open secondary proceedings may appoint a trustee with limited powers (including of petitioning the court in the main proceedings) to ensure that the undertaking is duly performed and to “participate in its implementation”. This additional layer of non-judicial supervision not only adds cost and complexity, but flies in the face of the principle that all officeholders in main and secondary proceedings act in the interests of all the debtor’s creditors (to the extent that they are recognised in each officeholder’s jurisdiction). Any undertaking given to a group of creditors (for example from a jurisdiction that may be susceptible to the opening of secondary proceedings in relation to the debtor) in the interests of creditors generally will be enforceable through the court that opened the main proceedings. This would be likely to be at significantly lower cost to the estates than through the additional involvement of the secondary jurisdiction court and a trustee.

Groups

The introduction of group coordination proceedings is another controversy introduced by the JURI committee, allegedly to strengthen the restructuring of a group and/or its members without being binding on the individual proceedings. There is no readily available evidence about the experience of the members of the JURI committee in international group insolvencies, but it is a little surprising – and very definitely not in the interests of creditors – that the legislature should seek to introduce such a significant additional layer of cost and unnecessary complexity.

The complexity and risk of costly argument in different courts is highlighted by the amendment proposals (Article 42da) requiring courts to assess “the most crucial functions” on various bases such as economic significance and the taking and enforcement of decisions of strategic relevance, with the proviso that a race to the courts could prevail if that determination is too difficult! This does nothing to encourage the cooperation and communication on which the Regulation has been based and which is widely recognised throughout the insolvency profession, the relevant judiciary and academia as central to international coordination of insolvency proceedings.

Next Steps

During the next few months all these issues, and others, will be considered by the European Council (the governments of the Member States), which will then seek to agree the proposed legislation with the Parliament (the MEPs). Various groups, including a UK stakeholder group led by the Insolvency Service and BIS, are endeavouring to steer the legislature to a constructive and workable conclusion to this exercise. The likely timing of any implementation is not yet clear.

If you are interested in more detailed commentary or discussion of the Regulation and its amendments (or if you simply need help with a European cross-border insolvency matter) please contact me at chrislaughton@mercerhole.co.uk.

 

 

 

Date: 10th February, 2014
Author: Chris Laughton

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