Breaking down the barriers

The harmonisation of insolvency laws across Europe remains uncertain, write Howard Morris and Katharine Theobald. Howard Morris is a partner and Katharine Theobald a solicitor at Denton Hall.

The idea of a European Convention on Insolvency Proceedings to harmonise substantive insolvency laws across Europe was first explored in 1960. On 23 November 1995, the convention was signed by all member states, except the UK, the Republic of Ireland, and The Netherlands. It was to be left open for the remaining signatures until May 1996. But then came the BSE crisis. The UK – as part of a policy of non-co-operation – declined to sign up.

It may be too much to hope for this position to be rectified soon. If the convention were to be resurrected, what would its essential elements be? Would it provide for a workable cross-border system? The harmonisation of substantive insolvency laws across Europe is a tall order. Although liquidation and reconstruction procedures are broadly similar, the approach and relative strengths of secured and unsecured creditors are very different.

The convention gave up attempts to harmonise the substantive insolvency laws and regimes of member states. Instead, it sought to establish a regime to recognise and enforce judgments in insolvency proceedings, and a system of conflict of law rules to determine which substantive law applied.

Of enormous significance for the UK, the convention would not provide for recognition of receivers, who, while not insolvency office-holders in the true sense, are a key component of the UK insolvency regime.

The convention would apply to “collective insolvency proceedings which entail the partial or total disinvestment of a debtor”, meaning the loss of the debtor's capacity to manage and dispose of its estate. It provides for the commencement of insolvency proceedings by the courts of the state where the debtor's “main interests” are situated. Those main insolvency proceedings would have universal effect in all EU states in which the debtor had assets, with immediate EU-wide recognition of the liquidator's rights and powers to collect and administer assets within the EU.

Such universal effect would be displaced by secondary proceedings – that is, restricted to winding up rather than rescue. However, proceedings could commence in any territory in which the debtor had an “establishment”, irrespective of whether the debtor could otherwise be made subject to insolvency proceedings in that state. Establishment is defined as any place where the debtor carries out a “non-transitory economic activity with human means and goods”. Proceedings would be governed by local law, and restricted to assets of the debtor situated within that state.

English courts have a discretion to assume jurisdiction to wind up foreign companies. As regards the recognition of foreign insolvency proceedings, the English courts again tend to look on the matter as one involving the exercise of judicial discretion, enabling the court to co-operate with a foreign insolvency office-holder. But there is no automatic recognition; the foreign office-holder may be required to bring proceedings in England in order to establish his authority to deal with assets present in this country; or he may need to seek to initiate ancillary winding up proceedings, again through the English courts.

Recent mega-insolvencies have increased co-operation between courts, but English insolvency office-holders still face huge problems getting recognition in Europe. In the absence of any unified cross-border insolvency system, the fundamental problem is the lack of harmonisation of substantive laws and the underlying insolvency philosophy of each member state. Perhaps a single currency will be the spur.