17 June 2002
On 31 May 2002, the European Insolv-ency Regulation came into force throughout the EU, with the exception of Denmark. It has been a long time coming. Insolv-ency proceedings were excluded from the 1968 Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters, with the intention that there would be a separate convention relating to insolvency proceedings. In the intervening period, the coordination of cross-border insolvency has been left to the rules of private international law and the local rules of each state involved in a particular case. This has meant uncertainty for creditors and has allowed local assets to be ringfenced to meet claims by local creditors, resulting in potentially unequal treatment of creditors in different jurisdictions.
The regulation is timely. European insolvency is once again on the increase. Compared with 2000, insolvencies in the Western European economic area last year rose by 5.9 per cent. Also, trade between the UK and the other member states is significant, with UK exports and imports to the EU accounting for 54 per cent of the UK's total world trade and 58 per cent of its exports last year. The EU is also set to grow over the next few years with the accession of the Eastern European countries.
So what will the regulation achieve? In broad terms, it allows a liquidator appointed in the EU country where a company has its HQ to exercise powers in the EU. Subject to exceptions relating, for example, to property rights and employment law, the liquidation will be governed by the laws of that main centre. Although the regulation allows for 'secondary' liquidations in other EU states where the company has assets, it seeks by various means to give primacy to the main liquidator.
It is too early to be definitive, as the regulation will need to be tested in EU courts. However, some benefits are apparent. It will be easier for creditors to submit claims. When insolvency proceedings are opened, the court or the liquidator must inform all known creditors in all member states. Creditors may submit claims in the main and in any secondary proceedings. There should be reduced scope for disputes between liquidators and creditors in different jurisdictions, which should lead to faster payment of claims. The main liquidator should also be able to investigate and recover available assets more quickly across the EU. Also, the coordination of cross-border insolvencies facilitated in the regulation should reduce costs, thus increasing creditors' returns. The regulation should also make it more likely that all creditors will be treated equally, regardless of their location, as it will reduce the prospect of local assets of the debtor being ringfenced to meet the claims of local creditors.
It will be clearer to debtor companies which legal regime will apply in the event of insolvency. Directors will benefit from greater clarity on which jurisdiction's laws will govern their liability in the event of insolvency. The regulation should also make a uniform stay of proceedings in EU countries against the debtor company more likely, increasing the prospects of a more orderly wind-down or successful reorganisation.
However, the regulation will not always be useful. It will apply most effectively in straightforward cases where the debtor operates principally in one member state and has done some perhaps significant business in other member states, either directly or through branches, without operating in those other states through a separate corporate entity. The regulation will allow the insolvency practitioner to be appointed in the state where the company operates principally, and if necessary have that appointment recognised in the other member states.
However, branches are not the norm in terms of corporate structure. More usually, a multinational business will operate across Europe through locally incorporated affiliates or subsidiaries. In such circumstances, the regulation would appear to be of little or no direct assistance. In such cases, we can only hope that courts in member states will adopt the rationales underlying the regulation to ensure more coordination in multijurisdictional insolvencies.
It will be interesting to see, given its limitations, how the regulation will be used in practice. However, it at least provides a much-needed framework, which should assist consistency and efficiency in cross-border insolvencies and increase cooperation between insolvency practitioners in Europe.