Cross country

Unfamiliarity with a 2002 EC regulation means European insolvencies remain fraught with difficulty. David Mohyuddin reports

Council Regulation (EC) 1346/2000, which commenced on 31 May 2002, was adopted so that cross-border insolvency proceedings could operate efficiently and effectively – something said to be required for the proper functioning of the internal market.

The EC regulation attempts to do so by providing for the automatic recognition of insolvency proceedings opened in a member state with jurisdiction to do so (Article 16). It further provides for the recognition and enforceability of other judgments that concern the course and closure of insolvency proceedings (Article 25).

Dealing with European insolvencies therefore ought now to be much more straightforward. However, as the commencement of the EC regulation reaches its third anniversary, difficulties still arise as a result of unfamiliarity with the regulation and its effect.

As is well known, for the court of a particular member state to open main proceedings, the debtor’s centre of main interests (Comi) must be located with the jurisdiction of that court.

When dealing with undertakings with establishments or administrative operations in more than one member state, the regulation potentially affords a choice as to where main proceedings are opened.

While forum shopping is to be deprecated, it may be legitimate and possible to show that a debtor’s Comi is within a jurisdiction where there is an advantage to be gained, for example, from the rights of set-off afforded by Rule 4.90 of the Insolvency Rules 1986.

There are now a number of well-publicised decisions in which the High Court has determined the location of a debtor’s Comi and has then gone on to open, or to refuse to open, main proceedings in England and Wales. Examples include BRAC Rent-a-car International Inc (2003), Re Daisytek-ISA Ltd LTL (2003) and KT Skjevesland v Geveran Trading Co Ltd (2003). Although there may be a perceived advantage, seeking to have main proceedings opened by the court of one particular member state can lead to difficulties, especially where the directors or other officers of a company who have relevant information to give may be resident in another member state.

We can assume for present purposes that main proceedings have been opened properly in England, the court having been satisfied that the debtor’s Comi is within its jurisdiction. The regime in question is a compulsory liquidation and the liquidators have started to investigate its affairs and the actions of its directors. A questionnaire has been provided to one particular director who has simply ignored it. The liquidators are pressing for an order under Sections 236 and 237(3) of the Insolvency Act 1986 for the private examination of that director.

On an application by the liquidators, the English court is happy to make an order for the director’s private examination. The director, however, lives overseas and, in this example, in Spain.

Given the provisions of the Regulation (Recital (22) and Articles 3, 16, 18, 19 and 25), there should be automatic recognition of an order under Sections 236 and 237(3), making its enforcement, and obtaining the information wanted by the liquidators, no more complicated than if the director was resident in England or Wales. However, anecdotally, that does not appear to be the position on the ground.

In Spain at least there appears to be no reported decision concerning the EC regulation. In the case giving rise to the present example, that meant that to obtain the assistance of the Spanish judicial authorities more was needed than a simple order from the English court coupled with the supposed effect of the EC regulation. An additional order was needed pursuant to EC regulation 1206/2001, otherwise known as ‘the taking of evidence regulation’.

The need to obtain an order under the taking of evidence regulation, so as to invoke the assistance of the Spanish court, flies in the face of the purpose and objective of the EC regulation on insolvency proceedings.

Insolvency proceedings that are opened in England and Wales are to have the same effect in other member states as they have in their domestic jurisdiction, unless the regulation provides otherwise and as long as no Article 3(2) proceedings are opened (Article 17). Where an order is made under Sections 236 or 237(3), the person to whom the order is directed must attend to be examined before the court. Such an order is enforceable in the usual way. Because of the approach needed in Spain, an additional application was necessitated, incurring additional cost. Even if the application for the order under Sections 236 and 237(3) was made simultaneously with an application for an order under the taking of evidence regulation, further expense would still be incurred and delay imposed.

It seems that even though the EC regulation has been in operation for three years, its effect has not properly been understood. This, in turn, has hindered the achievement of its objective.

The EC regulation has allowed insolvency proceedings to be opened in England and Wales when otherwise that might not have been possible. Perhaps it has not yet eased the course of pan-European insolvencies.

David Mohyuddin is a barrister at Exchange Chambers in Manchester.