Court of Appeal guidance on the meaning of 'establishment'

Court of Appeal guidance on the meaning of 'establishment'

Has the Court of Appeal clarified the meaning of ‘establishment’ under the EC Regulation on Insolvency? Kathy Stones looks at the case of Re Olympic Airlines SA [2013] All ER (D) 39 (Jun) which raises the bar for the ‘establishment’ test.

Re Olympic Airlines SA (Olympic) went into liquidation in Greece. Subsequently, the trustees of Olympic’s pension scheme presented a petition to wind-up the company in England. Olympic appealed the judge's finding that it had an 'establishment' in England for the purposes of the EC Regulation on Insolvency, art 2(h). The Court of Appeal allowed the appeal as there was no possible alternative to the conclusion that the definition of 'establishment' had not been fulfilled.

What does ‘establishment’ mean?

The EC Regulation on Insolvency (EC) 1346/2000, art 2(h) defines establishment as ‘any place of operations where the debtor carries out a non-transitory economic activity with human means and goods’.

The Court of Appeal decided that an establishment did not exist in this case and overturned the first instance decision – only two former employees remaining on short term ad hoc contracts for the desultory running down of the business did not constitute the requisite ‘economic activity’.

What is essential is a location where there is still, at the critical date, a business operation (‘a place of operations’ performing ‘economic activity’) such as will justify secondary proceedings in a state outside the state of the centre of main interests.

What is the relevant time for assessing ‘establishment’?

The relevant time for assessing the existence (or otherwise) of an establishment is when jurisdiction is sought (ie when secondary proceedings are commenced). Here, the UK winding-up petition was presented on 10 July 2010.

Although Olympic had previously carried on business in England from a head office in London, leased from an associate company, had premises at Heathrow and Manchester and employed about 27 employees (mostly members of Olympic’s pension scheme), at the time of the petition it only had two ad-hoc employees.

Secondary proceedings which precede the opening of main proceedings need not be winding-up proceedings. It follows secondary proceedings may involve the debtor seeking to trade out of its difficulties, ie a trading company with outward facing market activity. Even a debtor company in liquidation may continue to trade for a while, eg to liquidate its stock. In any case, the question is not so much what the debtor company does in the period after the commencement of insolvency proceedings, but in the period immediately leading up to the commencement of such proceedings.

What is meant by ‘economic activities’?

The Court of Appeal endorsed the summary in the Virgos-Schmit report, para 71 that ‘place of operations means a place from which economic activities are exercised on the market (ie externally), whether the said activities are commercial, industrial or professional’.

This was not satisfied here at the relevant time—the airline had already been in liquidation in Greece for some ten months, had ceased all commercial operations for almost as long, the remaining staff of 27 had been dismissed and paid off with monies which had to be acquired from the liquidator in Greece. Thereafter, only a skeleton and ad hoc staff of two ex-officers was maintained, for the purposes of the winding-up. The London office had no assets of any value—just a van which did not even belong to the airline and some furniture or equipment which had no value. The banking details emphasise the paucity to which the airline’s ‘economic activity’ had been reduced. Nothing which was happening at or beyond that date seems to have any external economic function other than as part of a desultory liquidation. There is no finding that any customer even had any contact with the office during that period.

What are the consequences for the pension scheme in this case?

The pension trustees wanted to commence secondary proceedings in England as this may have transferred responsibility for the pension scheme (which had a deficit in excess of £15 million) to the Pension Protection Fund (the Pensions Act 2004, s 127). Olympic’s liquidation in Greece was not a qualifying insolvency event and as such, the beneficiaries of the pension scheme are likely to be left with a significant shortfall.

What are the wider practical consequences of this case?

This case clearly raises the bar for the establishment test as the court will look for a minimum degree of economic activities being exercised externally on the market, rather than just the running down of the business.

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About the author:
Kathy specialises in restructuring and cross-border insolvency. She qualified as a solicitor in 1995 and has since worked for Weil Gotshal & Manges and Freshfields. Kathy has worked on some of the largest restructuring cases in the last decade, including Worldcom, Parmalat, Enron and Eurotunnel.