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Is having a registered office fatal to creating an establishment in that jurisdiction?
Burgo group SpA v Illochroma SA (in liquidation) C-327/13  All ER (D) 114 (Sep)
The Court of Justice of the European Union (CJEU) gave a preliminary ruling on the interpretation of the EC Regulation on insolvency proceedings 1346/2000, arts 3, 16 and 27 to 29 (the EC Regulation on Insolvency). The request was made in proceedings between Burgo Group SpA (Burgo) and Illochroma SA, in liquidation (Illochroma) and Maître Theetten (as liquidator of Illochroma) concerning the opening of secondary insolvency proceedings in Belgium relating to the assets of Illochroma.
Italian company, Burgo, was owed money by Belgian company, Illochroma. Burgo (as creditor) requested the opening of secondary insolvency proceedings in Belgium, relating to the assets of Illochroma.
The relevant chronology is as follows:
Illochroma is a company with two establishments in Belgium, where it is the owner of a building, buys and sells goods and employs staff.
The CJEU confirmed that it is apparent from the very wording of the EC Regulation on Insolvency, art 3(1) (ie the place of the registered office is presumed to be the centre of its main interests (COMI), in the absence of proof to the contrary) that the COMI may, for the purposes of applying that regulation, be different from the place of its registered office.
The decision in Interedil v Fallimento Interedil Srl C-396/09  All ER (D) 195 (Oct) demonstrates that the fact that the definition links the pursuit of an economic activity to the presence of human resources means a minimum level of organisation and a degree of stability are required. It follows that, conversely, the presence alone of goods in isolation or bank accounts does not, in principle, satisfy the requirements for classification as an establishment.
It is not disputed that there is no reference in the definition of establishment in EC Regulation on Insolvency, art 2(h) to the place of the registered office of a debtor company, or to the legal status of the place in which the operations in question are carried out. The wording of that provision does not, therefore, rule out the possibility that, for the purposes of that provision, an establishment may possess legal personality and be situated in the member state where that company has its registered office—provided it meets the criteria set out in that provision.
Recital 12 states that the opening of secondary proceedings is permitted to protect the diversity of interests. Recital 19 adds that, besides the protection of local interests, secondary proceedings may serve different purposes. Any other interpretation would deny protection to local creditors—local interests (including the interests of creditors established in that member state) would be denied the protection of secondary proceedings which may be opened in that member state.
In general, it seems likely that local interests worthy of the protection may indeed be present in the member state in which the debtor's registered office is situated, even if the COMI is situated in another member state.
Such interests include the legitimate expectation of a creditor to be able to request the enforcement of a right in rem in respect of the debtor assets or to be granted other preferential rights—in accordance with the rules applicable in the member state where that establishment is situated—since those rules were foreseeable for the creditor when the business relationship was established with the debtor. Any other interpretation may give rise to discrimination against creditors in the member state where the registered office of the debtor company is situated, compared with creditors in other member states in which the debtor may have other establishments.
Therefore, the CJEU concluded that secondary proceedings may also be opened in the member state in which the debtor company's registered office is situated and in which it possesses legal personality.
Illochroma argued that the right was restricted to creditors in the member state of the court considering the application for the opening of secondary proceedings, since the sole purpose of such proceedings is to protect local interests. Therefore, the CJEU was asked to consider whether:
The EC Regulation on Insolvency, art 29(b) provides that, in addition to the liquidator appointed in the main proceedings, any other person or authority empowered to request the opening of insolvency proceedings under the law of the member state within the territory of which the opening of secondary proceedings is requested may request the opening of secondary proceedings. It is therefore clear from that provision that the right to request the opening of secondary proceedings must be assessed, in the first place, on the basis of the national law in question.
The purpose of secondary proceedings is to mitigate the effects of the universal application of the law of the member state where the main proceedings have been opened, by permitting, under certain conditions, the opening of secondary proceedings to protect the diversity of interests—including interests other than local interests.
Only territorial proceedings have limits on which creditors can apply to open them, being limited to creditors who have their domicile, habitual residence or registered office within the member state in which the relevant establishment is situated, or whose claims arise from the operation of that establishment (see Procureur-Generaal Bij Het Hof Van Beroep Te Antwerpen v Zaza Retail BV C-112/10, para ). Those limitations do not apply to secondary proceedings.
Therefore, the CJEU concluded that the question as to which person or authority is empowered to seek the opening of secondary proceedings must be determined on the basis of the national law of the member state within the territory in which the opening of such proceedings is sought. The right to seek the opening of secondary proceedings cannot, however, be restricted to creditors who have their domicile or registered office within the member state in whose territory the relevant establishment is situated, or to creditors whose claims arise from the operation of that establishment.
Applying Bank Handlowy w Warszawie SA v Christanapol sp zoo C-116/11  All ER (D) 300 (Nov), the EC Regulation on Insolvency does not require the opening of secondary proceedings, but merely provides for such an option. If the creditor seeking the opening of secondary proceedings has failed to lodge their claim in the main proceedings within the period prescribed, their interest in lodging it in the secondary proceedings may be accepted only where they have not been duly notified of the opening of the main proceedings in accordance with the EC Regulation on Insolvency, art 40.
The type of main proceedings opened is irrelevant—the opening of such proceedings is possible both where the main proceedings have a protective purpose and where the main proceedings are winding-up proceedings (see Bank Handlowy, para ).
The court requested to open secondary proceedings has no discretion to consider whether they are appropriate—here that is a question for the Belgian court. However, it cannot distinguish between creditors based on their place of residence—EC Regulation on Insolvency, recital 12 and art 27 simply permit the opening of secondary proceedings, at the request of the persons identified in art 29, but do not expressly confer on the courts which have jurisdiction (irrespective of the national law applicable) discretion relating to whether factors demonstrating appropriateness are to be taken into account. Further, while the EC Regulation on Insolvency, Ch III (entitled secondary insolvency proceedings) contains a number of provisions concerning the duty of the liquidators appointed in the main proceedings, and any ongoing secondary proceedings, to cooperate with each other, it does not contain the slightest indication as to any criteria relating to appropriateness which should be taken into account by the court considering the opening of secondary proceedings.
The question whether that court enjoys discretion (eg enabling it to take account of factors demonstrating appropriateness) is governed by the national law of the member state within the territory of which the opening of secondary proceedings is sought.
The court considering the opening of secondary proceedings must have regard (when applying its national law) to the objectives underlying the possibility of opening such proceedings, as set out above.
After the opening of secondary proceedings, the court that has opened those proceedings must have regard to the objectives of the main proceedings and take account of the overall scheme of the EC Regulation on Insolvency, in keeping with the principle of sincere cooperation (see Bank Handlowy, para ).
The CJEU concluded that the court considering the opening of secondary proceedings may take account of criteria as to appropriateness in accordance with its national law. However, when establishing the conditions for the opening of secondary proceedings, member states must comply with EU law and, in particular, its general principles, as well as the provisions of that regulation.
This case provides welcome clarification on the meaning of establishment and recognises that registered office may not always correspond to where COMI is located and that the location of the registered office in a member state will not preclude the existence of an establishment in that jurisdiction. Creditors wishing to protect local assets will also welcome this decision as it confirms that the pool of creditors able to request the opening of secondary proceeding is not limited by virtue of where they are located.
Kathy Stones, solicitor in the Lexis®PSL Restructuring & Insolvency team.
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Practice Note: Main proceedings, secondary and territorial proceedings. (Subscriber access only)
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First published on LexisPSL Restructuring and Insolvency
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