What's the latest on reforms to the European Regulation on Insolvency?

What does the political agreement between the European Council and European Parliament on the reforms to the European Regulation on Insolvency means in practice?

Original news

New EU insolvency rules follow a ‘rescue and recovery’ approach which aim to give viable businesses a second chance when facing cross-border financial difficulties. Ministers on the EU Justice Council reached agreement on 4 December 2014 on modernised rules to make it easier for businesses to restructure and for creditors to get their money back, and to ensure procedures for cross-border insolvencies are effective and efficient.

When will the reforms be effective?

Following extensive three-way discussions between the European Commission, European Parliament and Council throughout November and December, the latest draft of the reforms to the European Regulation on Insolvency (EC) 1346/2000 was published by the Council on 4 December 2014. It will be known as the Regulation (EU) of the European Parliament and of the Council on insolvency proceedings (recast). References to articles in this analysis are references to articles and recitals of the recast regulation.

The text of the agreement will be revised by the legal linguists and the Council is due to formally adopt the recast regulation in March 2015. It will then be passed to the European Parliament in April or May 2015 with a view to an approval by the plenary, without amendments in second reading, meaning the text above should be in near-final form. The recast regulation will be effective upon publication in the Official Journal (expected around May 2015).

Once adopted as a regulation, it will have 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 will not be effective for another two years (ie around 2017) after the recast regulation comes into force. This is to allow member states to familiarise themselves with the new provisions. The original regulation will continue to apply to proceedings opened before the recast regulation comes into force (art 84(2)).

The exceptions are:

  • the description of national insolvency law and procedures to be provided by each member state (particularly the matters governed by the law of the main proceedings under art 7(2)) which shall apply 12 months after the recast regulation comes into force (arts 86 and 91(2)(a))
  • the establishment of national insolvency registers, which shall apply 36 months (ie three years) after the recast regulation comes into force (arts 24(1) and 91(2)(b))
  • the interconnection of national registers, which shall apply 48 months (ie four years) after the recast regulation comes into force (arts 25 and 91(2)(c))

What will the recast regulation cover?

Proposed reform

Relevant proceedings will cover public collective proceedings, including interim proceedings, which:

  • are based on a law relating to insolvency, and
  • for the purpose of rescue, adjustment of debt, reorganisation or liquidation:
    • the debtor is totally or partially divested of his assets and an insolvency practitioner (IP) is appointed
    • the assets and affairs of the 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 his creditors, provided that the proceedings in which the stay is granted:
      • provide for suitable measures to protect the general body of creditors, and
      • are preliminary to one of the proceedings referred to under points (a) or (b) if no agreement is reached
Rationale

The introduction of the word 'public' clarifies that certain confidential negotiations are not included (recital 12), meaning French mandataire ad hoc and conciliation proceedings are not covered. Recital 15 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 13 differentiates between:

  • liquidation/cessation of business—which should involve all creditors
  • rescue—which may not include all creditors

The recast regulation may cover 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 16).

Recital 9 clarifies that the list of proceedings in Annex A is exhaustive and it is clear that debtor in possession proceedings are included. However it is unclear whether netting agreements are covered as a prior carve out extending art 6 to them does not appear in the recast regulation.

How is centre of main interests (COMI) defined?

The new definition of COMI in art 3(1) draws a three-way distinction between:

  • companies and legal persons—where the place of the registered office is presumed to be the COMI in the absence of proof to the contrary (however, the presumption will only apply if the registered office has not been moved to another member state within a period of three months prior to the request to open proceedings)
  • individuals exercising an independent business or profession—where the place of the principal place of business is presumed to be the COMI in the absence of proof to the contrary (however, the presumption doesn't apply if the principal place of business is moved in the prior three months), and
  • any other individuals—where the COMI is presumed to be the individual's habitual residence in the absence of proof to the contrary (however, the presumption doesn't apply if the habitual residence is moved in the prior six months)

Special consideration should be given to creditors and their perception as to where a debtor conducts his business (recital 27). 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 on an invoice or otherwise making the new location public through other appropriate means). For corporate entities, there is no mention of the controversial look-back period proposed by the European Parliament.

Courts must actively examine COMI (recital 26 and art 4(1)) and must set out their reasoning. 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 (art 4(2)).

What changes are made to secondary proceedings?

The new definition of establishment is set out at art 1(2)(10):

'[...] any place of operations where the debtor carries out or has carried out in the three months 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 (recital 40 and art 36). 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 (art 36(3)). 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 (art 36(5)). Recital 42 clarifies that 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 (art 36(7)). 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 (arts 36(8) and 36(9)). The IP is expressly liable for any damage caused to local creditors as a consequence of his non-compliance with these requirements (art 36(10)).

The IP in the main proceedings is given the right to judicial review of the opening of any secondary proceedings (art 39). However, overall the benefits of the undertaking and synthetic secondaries as originally proposed have been significantly watered down.

What about the new registers?

This is a two-step process:

  • creating national electronically searchable databases, and
  • linking them up to create a central European database

The information must be published as soon as possible after the opening of proceedings (art 24(1)). The following 'mandated information' must as a minimum be made available (art 24(2)):

  • the date of the opening of proceedings
  • the court and any case reference number
  • the type of proceedings in Annex A and sub-type of any insolvency proceedings opened (where applicable)
  • which article jurisdiction for opening proceedings is based upon (art 3(1) (main proceedings), art 3(2) (secondary proceedings) or art 3(4) (territorial proceedings))
  • for companies—the company's name, registration number, registered office or if different, postal address
  • for individual debtors—their name, any registration number and postal address (or where that is protected, their place and date of birth—as a compromise to deal with data protection concerns, where the individual does not exercise an independent business or professional activity, this information either:
    • need not be published in the registers provided that know foreign creditors are informed of the information, or
    • may be subject to supplementary search criteria (eg conditional on a request to the competent authority and/or conditional on verification of a legitimate interest in the information) (recital 75 and art 24(4))
  • the name, postal address or email address of any IP appointed
  • any time-limit for lodging claims or the criteria for calculating time limits (recital 74 suggests hyperlinks could be added to link to the criteria for calculating those time limits)
  • the date of closing main proceedings, if any
  • the court before which decisions to open proceedings can be challenged and the applicable time limits (or the criteria for calculating the time limits)

Additional information may also be included in the national registers (eg directors' disqualifications) (see recital 73 and art 24(3)). Although the mandated information must be available free of charge, member states may charge for any additional information or documents (art 27). The Commission must submit a study on the cross-border issues in directors' liability and disqualifications by 1 January 2016 (art 89(3)).

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.

How are group companies affected?

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 (recital 49 and arts 56–58). The costs shall be regarded as costs and expenses in the respective proceedings (art 59). 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 (recital 45).

A single IP can be appointed over several group companies, subject to local qualification and licensing issues (recital 47).

Where a group is involved, an IP has various rights to facilitate the administration of proceedings:

  • to be heard in any proceedings opened regarding another group company (art 60(1)(a))
  • to request a stay (of up to three months, extendable to six months) of any measure relating to the realisation of assets of another group company if (recital 56 and art 60(1)(b)):
    • a restructuring plan for all or some group members has been proposed and has a reasonable chance of success
    • the stay is necessary to ensure proper implementation of the plan
    • the plan would benefit creditors in the proceedings for which the stay is requested
    • neither the insolvency proceedings where the IP has been appointed nor the proceedings over which the stay is requested are subject to group coordination proceedings

What are group coordination proceedings?

A new concept called 'group coordination proceedings' is introduced in art 61. Any IP appointed over a group company may request the opening of group coordination proceedings by filing a request (art 61(1)) containing the information below at any court having jurisdiction over the insolvency proceedings of any group company:

  • the name of the proposed coordinator (details of eligibility, qualifications and consent to act)—note they cannot be an IP appointed over any of the existing group companies and must have no conflict of interest regarding the group members, their creditors and the IPs appointed over any group companies (art 71(2))
  • an outline of the proposed group coordination and why the court has jurisdiction
  • a list of the IPs appointed over all group members and (where relevant) the names of all courts and competent authorities involved
  • an outline of estimated costs and the share to be paid by each group member

In general, the court first seised of a request to open coordination proceedings has jurisdiction and other courts must decline jurisdiction (art 62). As soon as possible, the court first seised will give notice to all other group members if it is satisfied that:

  • coordination proceedings are appropriate to facilitate the effective administration of the insolvency proceedings relating to different group members
  • no creditor of any group member anticipated to participate is likely to be financially disadvantaged by its inclusion in group coordination proceedings
  • the proposed coordinator fulfils the relevant requirements (art 63)

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 (art 66).

IPs of the other group companies may object within 30 days to either:

  • the inclusion of their company in the coordination proceedings or
  • the identity of the proposed coordinator (art 64)

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 (art 64(3)).

However once an IP has objected, he will not be included in the coordination proceedings (art 65). 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 (art 69)). Although 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:

  • recommend coordinated conduct of the insolvency proceedings
  • propose a group coordination plan
  • be heard and participate in any creditors' meetings of the group companies
  • mediate any dispute between IPs
  • request information from IPs to help identify coordination strategies (art 72)

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:

  • is necessary to ensure implementation of the group coordination plan, and
  • it would benefit the creditors of the proceedings for which the stay is requested (art 72(2)(e))

Unfortunately consolidation of the proceedings or various estates is expressly prohibited under art 72(3) (in contrast see Practice Note: US 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 (recital 55 and art 72(6)). 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 (art 77)—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 (art 73).

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 (art 75).

The Commission must present a report on the application of group coordination proceedings within five years (art 89(2)).

What are the new rules on location of assets?

Welcome clarification is given on the location of various assets (art 1(2)(9)):

(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 IBAN, the assets are situated in the member 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)

The new wording assists in cases where an asset falls within two or more categories (eg a ship is tangible property which also must be registered, so falls within categories (iv) and (vii)). The recast regulation clarifies that the asset is located in the member state under the authority of which the register is kept.

What’s the impact on forum shopping?

Forum shopping through abusive COMI relocation had previously been identified as one of the main shortcomings of the existing regime.

New recitals 5 and 28–31 specifically set out the safeguards aimed at preventing forum shopping, which include:

  • presumptions as to COMI are rebuttable (and do not apply if the registered office/principal place of business/habitual residence is moved in the relevant period before the request to open proceedings), and the court should carefully assess whether COMI is genuinely located in that member state
  • in all cases, where the circumstances give rise to doubts regarding the court's jurisdiction, the court should ask the debtor to supply additional evidence to support his assertions and give creditors an opportunity to present their views (where the applicable law allows)

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 within three years (art 89(4)).

What do the new annexes cover?

The annexes have been revamped as follows:

  • Annex A—extra proceedings included (the Commission says around 19 new national procedures will benefit from the wider scope of the recast regulation). Recital 9 confirms the annexes are definitive on whether the regulation applies to a particular type of proceeding
  • Annex B—list of insolvency practitioners (old Annex B listing winding up procedures is replaced)
  • Annex C—lists the historical amendments to the EC Regulation (old Annex C listing liquidators is replaced)
  • Annex D—is a destination (or correlation) table showing where the old articles can be found within the recast regulation

Further reading

If you are a LexisPSL Subscriber, click the links below for further information:

Reforms to EC Regulation on Insolvency 1346/2000 proposed by the European Commission

European Parliament proposes significant changes to reform the EC Regulation on Insolvency

European Council's views on reforms to EC Regulation on Insolvency 1346/2000.

Not a subscriber? Find out more about how LexisPSL can help you and click here for a free trial of LexisPSL Restructuring and Insolvency.

First published on LexisPSL Restructuring and Insolvency

Kathy Stones, solicitor in the Lexis®PSL Restructuring & Insolvency team.

Relevant Articles
Area of Interest