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There are enormous variations between how different EU jurisdictions deal with insolvency. These differences can give stakeholders a strong incentive to forum shop in order to maximise their returns and minimise their exposures in any insolvency. One stakeholder's gain is typically another's loss, so this can lead to litigation over where an insolvency should take place. This is exacerbated by the fact that the law governing the insolvency may be neither the law of the country where the debtor is incorporated, nor the law under which the deal was done.
Different rules within Europe
Some of the differences between how various EU jurisdictions deal with insolvency are as follows:
- Different jurisdictions have very different rules for what kind of transactions can be overturned.
- In England, lenders are highly unlikely to be liable to contribute to the debts owed by the debtor to other creditors. In some EU countries, lenders can be found liable on the basis that if they had withdrawn funding sooner, other creditors would not have been drawn in to supplying the debtor on credit.
- English law broadly treats all unsecured creditors equally, whereas some EU jurisdictions subordinate group companies' debts to the debts of external creditors.
- English law largely permits set-off between what an insolvent debtor owes a creditor and what is owed by the creditor to the insolvent debtor. Several EU jurisdictions instead require the creditor to pay what it owes the debtor before receiving whatever dividend may be payable on the debt which the insolvent debtor owes to the creditor.
- Some EU jurisdictions' insolvency procedures enable a debtor to carry on trading during insolvency, with a view to refinancing or a business sale. In others, for practical purposes the only procedure is liquidation, with an immediate cessation of trading and a devastating effect on both creditor value and the supply chain.
- While most countries discourage irresponsible trading, some imprison directors who do not put a company into formal insolvency within days of discovering financial difficulties. This can make it particularly difficult to structure a medium-term workout and refinancing.
Access to forum shopping
For almost as long as the EU has existed, there have been attempts to harmonise insolvency law throughout the EU. We now have Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings. It came into force on 31 May 2002 and applies throughout the EU (except Denmark), with exceptions for various institutions. The regulation does not create a single European insolvency law. Instead, it sets out rules for where in the EU any company should have its main insolvency proceedings and limits what can be done in other EU states. The aim is to promote commercial certainty by reducing the scope for forum shopping within the EU.
The basic rule is that the main insolvency in the EU should be in the jurisdiction where the debtor has its 'centre of main interests' (Comi). Other EU jurisdictions can only open insolvency proceedings in limited circumstances. Even if other proceedings are opened, they are to be secondary to the main insolvency. They can only be liquidations and are specifically to deal with activities within that jurisdiction.
Thus, forum shopping disputes focus on searching for the debtor's Comi. The regulation and its preamble say that a Comi is where the debtor has its registered office "in the absence of proof to the contrary", and that it "should correspond to the place where the debtor conducts administration of his interests on a regular basis and is therefore ascertainable by third parties". This leaves room for debate and the courts of different EU states are taking different approaches.
Italy v Ireland for Parmalat subsidiary
A topical example is Eurofoods IFSC, a subsidiary of Parmalat. The Italian courts have decided that the Comis of various Parmalat international subsidiaries are in Italy, because their ultimate control was in Italy and some of their directors were Italian. In contrast, the Irish courts decided that Eurofoods' Comi was in Ireland, as it was registered in Ireland and its day-to-day administration was conducted by people in Dublin. The Irish courts also relied on evidence that bondholder creditors considered Eurofoods' Comi to be Irish and the fact that the Irish courts had put Eurofoods into provisional liquidation shortly before the Italian insolvency was opened.
This jurisdiction dispute between the Italian and Irish courts is being referred to the European Court of Justice (ECJ). On 27 September 2005, an advocate-general agreed with the Irish courts, saying that one should look at where the company itself is registered and carries on business, not where its parent company is. He also said that, once an insolvency was opened in the Comi, other European jurisdictions did not have the jurisdiction to open a main insolvency. This is not binding on the ECJ, but in more than 75 per cent of cases the ECJ substantively agrees with its advocate-generals.
Meanwhile, in July, the English Court of Appeal decided that a debtor can change its Comi (Malcolm Shierson v Clive Vlieland-Boddy (2005)). This was a personal bankruptcy case, but given that the location of a company's registered office does not necessarily determine where a company has its Comi, similar considerations could apply in corporate insolvency. The Court of Appeal held that a debtor was free to decide where it carried on its activities and that one should decide where that was on the basis of facts as they stood at the time of entry into insolvency, not at the time of entry into earlier transactions. That said, if there were suspicions that the debtor had changed its Comi with a view to changing the insolvency regime that would apply to it, the courts should be careful to check that the change was substantial and reasonably permanent rather than illusory.
The upshot is that, although the regulation has given creditors and debtors some certainty as to which insolvency regime is likely to apply to their dealings and has created a much-needed framework for cooperation between EU states, much uncertainty remains. Particularly given the importance of being the first to open an insolvency, forum shopping will remain an important feature of insolvency practice within the EU.
Justin Westhead is a corporate recovery partner at Reynolds Porter Chamberlain