Insolvency proceedings in Europe

Registrar Stephen Baister explains the detail of major new insolvency laws

It is almost trite to note that insolvencies in recent years have increasingly taken on an international dimension.

At one end of the scale cases such as the winding up of BCCI have demonstrated this, while at the other end many bankruptcies involve assets abroad, most commonly second homes, to say nothing of the well-established patriotic tradition of putting money 'off-shore' so as to avoid or evade tax.

Traditional methods of coping with such international dimensions have frequently proved to be cumbersome, costly and time-consuming.

The Council of the European Union Regulation on Insolvency Proceedings (No 1346/2000) aims to overcome or at least simplify some of the problems which have been encountered in the past.

The regulation comes into force on 31 May 2002 and applies to all proceedings commenced (or 'opened') after that date but it is not retrospective.

It applies in all EU member states except Denmark and takes direct effect as domestic law.

The types of proceedings to which the regulation applies - broadly defined as 'collective insolvency proceedings which entail the partial or total divestment of a debtor and the appointment of a liquidator' (article 1(1)) - are set out in annexes.

As far as the UK is concerned, it applies to winding up by the court, creditors' voluntary winding up (subject to court confirmation), administration, voluntary arrangements and bankruptcy (annex A).

'Liquidator' includes a liquidator, supervisor of a voluntary arrangement, administrator, the official receiver and a trustee in bankruptcy (article 2(b) and annex C).

It follows that receiverships, members' voluntary liquidations, schemes of arrangement under the Companies Act 1985 and windings-up purely on the just and equitable ground fall outside the scope of the regulation.

Other provisions exclude it applying to insurance undertakings and credit and investment undertakings (article 1(2)).

Main and secondary proceedings

The regulation aims to apply a standard set of rules governing jurisdiction and the law applicable to the insolvency proceedings it covers.

To this end, two types of proceedings are envisaged, main and secondary (or territorial) proceedings.

Main proceedings are proceedings brought in the 'centre of a debtor's main interests'.

Generally, for companies, this is presumed to be 'the place of the registered office', but this is subject to 'proof to the contrary' (article 3(1)).

Main proceedings are universal in their effect.

Secondary proceedings may be brought in the place where the debtor has an 'establishment' (defined as 'any place of operations where the debtor carries out a non-transitory economic activity with human means and goods' (article 3(2))).

The effect of secondary proceedings is limited to assets within the territory of the proceedings.

There are restrictions on the ability of a party to open secondary proceedings (see article 3(4) and chapter III).

Furthermore, they can only be for winding up, not for rescue or rehabilitation (article 3(3) and annex B).

It follows that it may no longer be possible to wind up a foreign corporation as an unregistered company or bankrupt an individual on the basis of his personal presence in the UK on the day of presentation of the petition or his having a place of residence here as it has been in the past.

Rather, the creditor will be forced to seek his remedies in the state where the debtor's 'main interests' lie.

Applicable law

The place where proceedings are opened will in future determine the applicable law, so that the national law of the relevant member state will determine the conditions governing the 'opening, conduct and termination' of the insolvency proceedings.

However, there are exceptions to the general rule.

These relate, broadly, to security rights and other rights in rem; set-off and retention of title; contracts concerning immovable property; matters relating to payment systems and financial markets; matters relating to contracts of employment; certain matters concerning movable property rights subject to registration (ships, aircraft and the like); matters concerning EU patents and trade marks; proceedings relating to antecedent transactions (preferences and transactions at an undervalue, etcetera); and finally, matters concerning the effect of insolvency proceedings on pending actions (articles 5-15).

The law applicable to secondary proceedings will be that of the territory in which they have been opened.

Recognition

The regulation makes a major change - and a major improvement - in providing for the automatic recognition within member states of insolvency proceedings opened in other member states without formality (chapter II).

Therefore, it will no longer be necessary for an office-holder in the UK to engage in cumbersome proceedings to obtain recognition of his status in other EU states.

However, the powers of a liquidator remain subject to restrictions: provisions in the regulation allow him to remove assets from one member state to another (article 18(1)) and to bring actions in the interests of creditors to set aside transactions (article 18(2)); but he is still subject to territorial law and restricted, in particular, in his ability to use 'coercive measures' or to rule on disputes (article 18(3)).

The regulation gives precedence to main proceedings, but it also imposes on liquidators duties of co-operation and communication (article 31).

It also allows creditors to prove in the main and secondary proceedings as well as allowing the liquidators to prove themselves or on behalf of creditors (article 32).

The liquidator of secondary proceedings must account to his counterpart in main proceedings for any surplus (article 35).

Some practical effects

The impact of the regulation is likely to be considerable.

The UK's domestic laws will in future have to be construed in the light of the regulation's provisions, whether or not they are amended.

There will be changes in prescribed forms to give effect to the new jurisdictional regime.

Secondary legislation is being passed and will soon be available at: www.insolvency.gov.uk

Practitioners and the courts will have to approach questions of jurisdiction in a fresh manner and be conscious of the fact that our traditional universal approach to insolvencies will in future be compromised.

We will all need to become familiar with new terms and definitions.

'Opening' proceedings, for example, means obtaining a judgment rather than presenting a petition; 'court' may be a court, but can also mean 'any other competent body...empowered to open insolvency proceedings or to take decisions in the course of such proceedings'.

The language of the regulation (which is not felicitous) is itself likely to give rise to problems of construction.

Finally, practitioners and the courts are likely to find that they need to know more than ever before about the insolvency regimes of the other EU states.

Stephen Baister is a bankruptcy registrar at the Royal Courts of Justice and a member of the Association of District Judges