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After years of speculation, the Recast Regulation has been published in the Official Journal heralding in one of the biggest changes in cross-border insolvency in the past ten years. So what will all this mean in practice for restructuring and insolvency professionals and their clients?
The final text of Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast) (the Recast Regulation) appeared in the Official Journal on 5 June 2015 (OJ L 141/19). The Recast Regulation enters force from 26 June 2015 but only applies to relevant insolvency proceedings from 26 June 2017.
Following extensive three-way discussions between the European Commission, European Parliament and Council, the final text of the Recast Regulation was approved by the European Parliament on 20 May 2015 and published in the Official Journal on 5 June 2015.
The Recast Regulation is effective 20 days after publication in the Official Journal (ie 26 June 2015).
The Recast Regulation has direct effect in each member state (apart from Denmark, which has opted-out) without the need for separate enactment at a national level.
However, the majority of the provisions are not effective until two years after the Recast Regulation came into force (ie from 26 June 2017). This is to allow member states to familiarise themselves with the new pro-visions. The original Regulation will continue to apply to proceedings opened before 26 June 2017 (art 84(2)). It will be interesting though to see if courts now start looking at cases with an eye on the new wording.
The exceptions are:
Relevant proceedings will cover public collective proceedings, including interim proceedings, which:
o are based on laws relating to insolvency, and
o in which for the purpose of rescue, adjustment of debt, reorganisation or liquidation:
◦ a debtor is totally or partially divested of its assets and an insolvency practitioner (IP) is appointed
◦ the assets and affairs of a debtor are subject to control or supervision by a court, or
◦ a temporary stay of individual enforcement proceedings is granted by a court or by operation of law in order to allow for negotiations between the debtor and its creditors, provided that the proceedings in which the stay is granted:
‣ provide for suitable measures to protect the general body of creditors, and
‣ no agreement is reached, are preliminary to one of the proceedings referred to in point (a) or (b)
The introduction of the word 'public' clarifies that certain confidential negotiations are not included, meaning French mandataire ad hoc and conciliation proceedings are not covered. Recital 16 confirms that proceedings are not based on a law relating to insolvency when based on general company law not designed exclusively for insolvency situations. This provides welcome clarification that UK schemes of arrangement (based on the Companies Act 2006, s 885) do not fall within the scope of the Recast Regulation.
Collective proceedings are also defined to mean proceedings including all or a significant part of creditors to whom the debtor owes all or a substantial proportion of its outstanding debts. Recital 14 differentiates between:
The Recast Regulation also covers proceedings triggered by non-financial difficulties (eg loss of a key contract) if a real and serious threat to the debtor's actual or future ability to pay debts as they fall due (ie cashflow) within a period of several months or longer (recital 17).
The recitals clarify that the list of proceedings in Annex A is exhaustive and it is clear that debtor in possession proceedings are included.
The new definition of COMI draws a three-way distinction between:
Special consideration should be given to creditors and their perception as to where a debtor conducts his business. In the event of a shift in COMI, this may require informing the creditors of the new location (eg by drawing attention to the change of address in commercial correspondence or otherwise making the new location public through other appropriate means (recital 28)). For corporate entities, there is no mention of the controversial look-back period initially proposed by the European Parliament.
Courts must actively examine COMI and must set out their reasoning (recital 27). This means a written judgment must be given in all COMI cases-where an IP is entrusted to determine COMI, they must also set out their reasoning.
The new definition of establishment is:
'[...] any place of operations where a debtor carries out or has carried out in the three-month period prior to the request to open main insolvency proceedings a non-transitory economic activity with human means and assets.'
This should help counter abusive forum shopping, particularly in the three months prior to opening proceedings.
The introduction of synthetic secondaries may help the liquidator in main proceedings to avoid secondary proceedings if they provide a unilateral undertaking to treat local creditors as they would be treated under secondary proceedings when distributing those assets or their proceeds. It must specify the factual assumptions made, particularly regarding the value of the assets located locally (at the time the undertaking is issued) and the options available to realise these assets. The law applicable to the distribution of proceeds and ranking of creditors' claims shall be the law of the state where secondary proceedings are opened.
The undertaking must be in writing in the official language of the state where secondary proceedings could have been opened. A balance needs to be struck between the flexibility of the undertaking and the interests of local creditors-somewhat controversially, the undertaking must be approved by the known local creditors based on applicable rules on qualified majority and voting for the adoption of restructuring plans and national law applies for the approval of the undertaking. Where there are different rules for adopting restructuring plans, each member state must designate the relevant specific procedure. However, it is unclear why local creditors should have stronger rights than other creditors and this adds another unwelcome burden and possible delay where the IP in main proceedings needs to act quickly.
Other additions include the requirement on the IP in main proceedings to give local creditors advance notice of any distributions. Local creditors are expressly given the right to apply to the courts where main and secondary proceedings are conducted to ensure compliance with the undertaking or seek provisional protective measures. The IP is expressly liable for any damage caused to local creditors as a consequence of his non-compliance with these requirements.
The IP in the main proceedings is given the right to judicial review of the opening of any secondary proceedings. However, overall the benefits of the undertaking and synthetic secondaries as originally proposed have been significantly watered down.
This is a two-step process:
The information must be published as soon as possible after the opening of proceedings. The following 'mandatory information' must as a minimum be made available:
Additional information may also be included in the national registers (eg directors' disqualifications). Although the mandatory information must be available free of charge, member states may charge for any additional information or documents. The Commission must submit a study on the cross border issues in directors' liability and disqualifications by 1 January 2016.
It remains to be seen how accurate the central European database will be and how the issue of searching in different languages will be resolved.
Liquidators of (and courts involved with) group companies will be obliged to cooperate and communicate. However, this is subject to conflicts of interest, any procedural rights of the parties and any confidentiality issues. The costs shall be regarded as costs and expenses in the respective proceedings. IPs and courts should take best practices for cooperation into account as set out in the UNCITRAL guidelines on cooperation in cross-border insolvency cases.
A single IP can be appointed over several group companies, subject to local qualification and licensing issues.
Where a group is involved, an IP has various rights to facilitate the administration of proceedings:
A new concept called 'group coordination proceedings' is introduced. Any IP appointed over a group company may request the opening of group coordination proceedings by filing a request containing the information below at any court having jurisdiction over the insolvency proceedings of any group company:
In general, the court first seised of a request to open coordination proceedings has jurisdiction and other courts must decline jurisdiction. As soon as possible, the court first seised will give notice to all other group members if it is satisfied that:
This may well lead to a race to the courts to take control of the new group coordination proceedings. The criteria for opening proceedings takes no account of which member state is conducting main proceedings for the parent company. However, at least two-thirds of all IPs appointed in insolvency proceedings of group companies may agree in writing that another court has exclusive jurisdiction.
IPs of the other group companies may object within 30 days to either:
The objecting IP will still be subject to any local requirements to get approval from his creditors' committee or local court (if required by the law where his proceedings have been opened) before taking the decision whether to participate or not in the coordination proceedings.
However once an IP has objected, he will not be included in the coordination proceedings. He may later request to opt-in to the coordination proceedings (subject to the group coordinator being satisfied the criteria for jurisdiction still exist or all IPs involved agree). However this, together with the fact that any IP is not obliged to follow the group coordination plan (though must give his reasons to the coordinator and any persons or bodies he reports to under his national law), severely reduces the strength of coordination proceedings and results in unpredictability for creditors and other stakeholders.
The group coordinator has various powers to:
The coordinator also has the power to request a stay of any insolvency proceedings for any group member of up to six months if it:
Unfortunately consolidation of the proceedings or various estates is expressly prohibited (in contrast with the US powers of substantive consolidation).
The coordinator must give notice to the participating IPs if there is a significant increase in costs or costs exceed 10% of estimated costs. In the absence of any objections, participating IPs must pay within 30 days or file an objection with the court which opened the coordination proceedings-which may lead to delay and uncertainty.
The coordinator must communicate with the IPs (and courts) in either any language agreed with them or, failing that, the official language of the proceedings opened for that group member.
The court which appointed the coordinator may revoke his appointment if he acts to the detriment of creditors of a participating group member or fails to comply with his obligations.The Commission must present a report on the application of group coordination proceedings by 27 June 2022.
Welcome clarification is given on the location of various assets:
(i) registered shares (in companies other than those referred to in (ii))-the member state where the company which issued the shares has its registered office
(ii) financial instruments (where title is evidenced by entries in a register or account maintained by or on behalf of an intermediary (book entry securities))-the member state where the register or account in which the entries are made is maintained
(iii) cash held in accounts with credit institutions:
◦ with an International Bank Account Number (IBAN), the assets are situated in the mem-ber state indicated in the account's IBAN
◦ without an IBAN, the assets are situated in the member state where the credit institution has its central administration or, if the account is held by a branch, agency or other establishment, the member state where that branch, agency or other establishment is located (this is in line with the Eurasian Patent Organisation (EAPO) proposals)
(iv) property and rights registered in other public registers-the member state under the authority of which the register is kept
(v) European patents-the member state for which the European patent is granted
(vi) copyright and related rights-the member state within the territory of which the owner of the rights has its habitual residence or registered office
(vii) tangible property (other than (i)-(iv))-the member state where the property is situated
(viii) claims against third parties (other than relating to (iii))-the member state where the third party required to meet the claim has their COMI as determined by art 3(1)
Forum shopping through abusive COMI relocation had previously been identified as one of the main short-comings of the existing regime.
New recitals specifically set out the safeguards aimed at preventing forum shopping, which include:
Abusive COMI relocation is discouraged, though it seems to leave the door open for consensual COMI relocations that do benefit the general body of creditors. The Commission must submit a study on abusive forum shopping by 27 June 2020.
The annexes have been revamped as follows:
Kathy Stones, solicitor in the Lexis®PSL Restructuring & Insolvency team.
0330 161 1234