‘Establishment’ in EU insolvency—a win for territorialists? (Olympic Airlines)

‘Establishment’ in EU insolvency—a win for territorialists? (Olympic Airlines)

Sebastian Prentis, a barrister at New Square Chambers, discusses the Supreme Court’s judgment in Olympic Airlines SA which examines the correct meaning of the concept of ‘establishment’ in relation to EU insolvency proceedings.

Original news

Trustees of the Olympic Airlines SA Pension and Life Assurance Scheme v Olympic Airlines SA [2015] UKSC 27, [2015] All ER (D) 224 (Apr)

The respondent company was a Greek state-owned airline that had gone into administration. The appellants were trustees of its pension scheme. The trustees presented a petition in England to wind-up the company on the ground that it was unable to meet its liabilities. The Chancery Division granted the petition, but it was overruled by the Court of Appeal. The Supreme Court dismissed the trustees’ appeal. On the proper construction of ‘economic activity’ in the definition of ‘establishment’ of Council Regulation (EC) 1346/2000, art 2(h) (the EU Insolvency Regulation), the company could not, at the date of the petition, be said to have had an ‘establishment’ in the United Kingdom.

What were the jurisdictional issues?

In Olympic Airlines SA the Supreme Court expounds on the meaning of ‘establishment’ in the EU Insolvency Regulation.

The EU Insolvency Regulation applies where a debtor has his or its ‘centre of main interests’ within an EU state (which for these purposes does not include Denmark). Only the courts of that state will have jurisdiction to open main insolvency proceedings. By art 3(2), courts of another member state can open proceedings (which will be ‘territorial’ or ‘secondary’ depending on whether they are opened before or after the main proceedings) only if the debtor has an ‘establishment’ in that state. It is therefore a pre-condition to the opening of secondary proceedings that the debtor possesses an establishment.

‘Establishment’ is defined by art 2(h) as ‘any place of operations where the debtor carries out a non-transitory economic activity with human means and goods’.

How did the matter arise?

Olympic Airlines was the Greek national airline. In 2008 the European Commission determined that it had received illegal state aid and ordered its immediate recovery by the Greek state. On 29 September 2009 Olympic’s flight operations ceased and were transferred to an unconnected company. On 2 October 2009 it was placed into main proceedings special liquidation by the Court of Appeal in Athens. The shortfall is estimated at €500m.

In the UK, by June 2010 there remained a single office in Conduit Street, Mayfair, which was owned by a related company. It contained books and records, and worthless furniture and equipment. There was a van, again owned by a different company, and two bank accounts.

On 17 June 2010 the Greek liquidator told the trustees of the employees’ pension fund that on 14 July 2010 the employment of the 27 remaining staff would be terminated, and payments into the pension fund would cease.

Three staff were retained from 14 July 2010 on ad hoc contracts. They attended the Conduit Street office to reconcile accounts, deal with any post and telephone calls, and dispose of the remaining assets. Olympic continued to make payments for:

  • their services
  • council tax and utility supplies for the office, and
  • repairs after a break in

On 20 July 2010 the trustees presented a winding-up petition to the High Court in London in respect of the estimated shortfall in the fund of about £16m. The trustees were obliged to seek a winding-up order in this country because they wanted to have recourse to the Pension Protection Fund (PPF) and the Pensions Act 2004 had failed to include in its qualifying insolvency events an EU liquidation. By the time of the Supreme Court hearing a statutory instrument had modified this, but effectively only for the trustees.

What is the relevant time for assessing ‘establishment’?

The art 2(h) definition is framed in the present tense, and the relevant time is the date of presentation of the petition (here, 20 July 2010). Before the Supreme Court the trustees argued that a factor tending towards an establishment was that until six days before the relevant date there were 27 employees. This is implicitly rejected in the judgment. No doubt the nature of the activities on the relevant date may be informed by what is occurring on surrounding dates, but it would be detrimental to the notion of certainty to find an establishment on the basis of a fact which no longer subsisted. In any event, it is plain from the judgment that the correct question would be what any employees were actually doing on the relevant date.

What did the Supreme Court find is meant by ‘economic activity’?

The Supreme Court determined that ‘economic activity’ required business dealings through market activity with third parties, and not mere acts or payments referable to internal administration. The trustees’ appeal was therefore dismissed.

That is a lot to unpack from two words. The Virgos-Schmit Report (3 May 1996, OJL 6500/96) was described by the Supreme Court as ‘much the most useful source of guidance’ (albeit it is directed at the earlier draft Insolvency Convention which became the EU Insolvency Regulation). It describes ‘establishment’ as one of the most debated provisions, being subject to a battle between universalists wanting a single insolvency procedure within the EU, and territorialists wanting local procedures based on the presence of business assets. The final concept was a compromise which rejected both absolutist positions. The Virgos-Schmit Report goes on to describe a place of operations as ‘a place from which economic activities are exercised on the market (ie externally), whether the said activities are commercial, industrial or professional’.

The other main guidance comes from the Court of Justice of the European Union (CJEU) in Interedil Srl v Fallimento Interedil Srl: C-396/09 [2011] All ER (D) 195 (Oct), in which it said that to promote certainty an establishment should be determined in the same way as a centre of main interest (COMI), namely on the basis of objective factors ascertainable by third parties.

In a ringing phrase, Lord Sumption said that the art 2(h) definition of establishment must be ‘read as a whole, not broken down into discrete elements, for each element colours the others’. In that way the ambit of the concept becomes apparent. First, the words of the definition themselves require an active business operation. Secondly, the relevant objective factors are not just the existence of a manned office in Conduit Street, but the economic activities being carried out from there—Lord Sumption rejects a mere brass-plate test. Thirdly, as it was an argument for the trustees, one can add that the purpose for seeking the opening of secondary proceedings has no bearing on the meaning. ‘Establishment’ is a threshold which applies whatever the nature of any main proceedings, whatever the nature of the desired territorial or secondary proceedings, whoever is the applicant, and whatever is their ultimate purpose. To return to Interedil, certainty is key.

Is there guidance on other aspects of ‘establishment’?

In saying that ‘establishment’ must be read as a whole and not broken into its elements, Lord Sumption is not saying that each element does not require to be met: it does, but it contributes to a definition which is not limited by its parts.

That duality is especially pointed when looking at ‘non-transitory’, the meaning of which was a separate ground of appeal which did not in the event require answering. Although placed next to ‘economic activity’ in art 2(h), it can also be seen as colouring each part of the definition, as well as the overall quality of the alleged establishment.

What does this mean in practice for pension scheme trustees seeking to assert English jurisdiction in order to gain access to the PPF?

Whether there is an establishment is a matter of the particular facts of each case. As noted by the Supreme Court, even if a company is in liquidation that does not mean that it cannot have an establishment: the liquidator may, for example, trade on or realise stock. As a general rule, any applicant or petitioner should seek to open proceedings as soon as they are able simply because the longer the liquidation or administration or other insolvency procedure continues, the more likely it is that market activity will have ceased.

Any further points of interest?

First, it may be noted that a similar definition of establishment is also adopted by the UNCITRAL model law on cross-border insolvency.

Secondly, it is anticipated that the recast EU Insolvency Regulation will come into force in 2017. The art 2(h) definition is expected to remain, albeit that ‘goods’ will be replaced by ‘assets’ (which is how it is read anyway). Importantly, though, art 3(2) will be altered to permit an applicant to demonstrate the existence of an establishment either at the date he seeks to open secondary proceedings, or at any time within the three months prior to the opening of main proceedings. One senses an adjustment in favour of the territorialists.

Sebastian Prentis specialises in modern Chancery, with a particular emphasis on insolvency (both corporate and personal) and, increasingly, on shareholder disputes. In Olympic Airlines SA Sebastian was junior counsel for the respondent.

Interviewed by Kate Beaumont.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

 Further Reading

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EC Regulation on Insolvency 1346/2000—overview

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First published on LexisPSL Restructuring and Insolvency

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