Does the EC Regulation on Insolvency apply to just and equitable winding-up?

Does the EC Regulation on Insolvency apply to just and equitable winding-up?
Can the EC Regulation on Insolvency Proceedings apply to a just and equitable winding-up, or must insolvency be proved?  The case of Re Arm Asset Backed Securities SA [2013] EWHC 3351 (Ch), [2013] All ER (D) 107 (Nov) looked at this.

The Court decided the UK court had jurisdiction under Council Regulation 1346/2000, both to wind up the company and, as was sought on the application, to appoint provisional liquidators. Further, on the evidence, a provisional liquidator would be better placed than the existing directors for an orderly realisation of the company's assets.

What did the court decide?

Mr Justice Richards decided that:

  1. it's arguable that the EC Regulation 1346/2000 on Insolvency Proceedings (the EC Regulation on Insolvency) doesn't apply to just and equitable winding up and insolvency must be proved
  2. the views of parties other than the creditors (eg agents and professional advisors) may be relevant to determining the centre of main interests (COMI)
  3. provisional liquidators may be appointed, even if the company's assets are not in jeopardy

How did the problem arise?

The company had its registered office in Luxembourg and its sole business was to issue bonds to investors and then invest those moneys by purchasing life insurance policies in the US, held through a US trust. The US trustee paid the premiums under the policies and collected the sums due under the policies, remitting the net proceeds to the company to enable it to service the bonds.

The company operated for several years without a license from the Luxembourg regulator, but it was later advised that it should apply for one. However, the Luxembourg regulator refused to grant a license and the business was paralysed as it was unable to issue any further bonds. At this point, the directors applied to wind up the company on the just and equitable ground.

Where is the COMI?

The following facts arose in this case:

Luxembourg UK
Location of registered office Residence of two of the three directors (the third being in the Republic of Ireland)
Some board meetings held here Agents operating in London run the day to day business of the company
License application made to Luxembourg Regulator, but refused
Ernst & Young (Luxembourg) appointed as supervisory commissioner of the company (with a monitoring, rather than management function)
Bonds governed by Luxembourg law

The court applied the test in Re Eurofood (as emphasised by Re Stanford International Bank) that 'COMI should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties'. Applying this test, the judge noted the directors' evidence that it had never had a place of business in Luxembourg and concluded that the decisions that governed the administration and management of the company were taken in London. Accordingly, the presumption in favour of the registered office was rebutted and COMI was in England.

Interestingly, the judge found that the persons with whom the company primarily deals were its agents and professional advisors. He was satisfied that not only were the relevant decisions taken in England, but also this was clear to third parties with whom the company deals. It is interesting that he looked at the views of the agents and advisors, rather than the creditors/bondholders.

Does the EC Regulation on Insolvency apply to just and equitable winding up?

The reason why the petition was presented on the just and equitable ground (rather than the more usual insolvency ground) is that the bonds contained limited recourse provisions, meaning the bondholders could recover sums due to them only to the extent the company had available funds and also that the bondholders couldn't attach assets nor apply for winding-up themselves.

The judge found this raised a question as to whether the company was insolvent as although it has insufficient funds to meet all its liabilities at their face value, its ultimate liability will be restricted to the funds available to it (ie resulting in zero net assets, rather than negative net assets). However, he decided that 'as a matter of ordinary language [...] if a company has liabilities of a certain amount [...] which exceed the assets available to meet those obligations, the company is insolvent, even though the rights of the creditors to recover payment will be, as a matter of legal right as well as practical reality, restricted to the available assets and even though [...] the obligations will be extinguished after the distribution of available funds'. The judge also found it helpful to look at the amounts which bondholders would submit proofs for in the liquidation—they would prove for the face value of those bonds and the interest payable on them.

The judge found that it wasn't entirely clear whether the EC Regulation on Insolvency only applies where the company is insolvent as 'insolvency proceedings' are applied by referring to Annex A. For the UK, Annex A includes 'winding up by or subject to the supervision of the court', but companies may be wound up by the court on grounds other than the insolvency ground (eg just and equitable grounds).

Given the urgent nature of the application, the judge couldn't reach a final decision on this point in the time available, so gave leave to amend the petition to rely on insolvency.

However, it seems at least arguable that the EC Regulation on Insolvency only applies to petitions based on insolvency, as:

  1. the EC Regulation on Insolvency, recital 7 refers to insolvency proceedings relating to the winding up of insolvent companies being excluded from the Brussels Regulation (which has been succeeded by the Judgments Regulation), which may suggest that the winding-up of solvent companies is not excluded, and
  2. Re Eurofood states that the EC Regulation on Insolvency applies to collective proceedings based on the debtor's insolvency

Can provisional liquidators be appointed even if the company's assets are not at risk?

The judge noted that although provisional liquidation tends to be used where the company's assets are in jeopardy and urgent steps must be taken to secure them, the jurisdiction to appoint provisional liquidators is not limited to those circumstances.

Here, there was no suggestion that the directors were not properly fulfilling their duties to safeguard the assets. However, the judge relied on the Court of Appeal decision in Revenue and Customs Commissioners v Rochdale Drinks Distributors that 'the power to appoint a provisional liquidator is therefore a broad and general one in the sense that, provided the conditions in the section 135(1) and (2) Insolvency Act 1986 are met, the section imposes no limitations upon, nor does it prescribe the criteria to be adopted by the court when considering such an application'.

What does this mean in practice?

Although the point was not ultimately decided, and this case was uncontested (although notice was given to the Luxembourg prosecutor and regulator) it seems at least arguable that just and equitable winding-up doesn't fall within the EC Regulation on Insolvency. Therefore, if faced with a choice of grounds upon which to petition for winding-up, it will be safer to rely on the insolvency ground if cross-border recognition may subsequently be required.

It will also be interesting to see how much weight courts attach to the views of persons other than the creditors, such as the company's agents and professional advisors (as here) when assessing COMI.

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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.