Court battles

Two years on since new EU-wide insolvency laws were introduced, cherry-picking your jurisdiction for insolvency is increasingly tough. By Cary Kochberg and Laurence Crowley

More than two years on from its introduction and the European Insolvency Regulation can clearly be seen to have had an impact on cross-border insolvencies, sometimes pitting courts in various member states against each other.

The regulation provided, for the first time, a system of recognition and priority throughout the EU for insolvency proceedings. It allows insolvency practitioners appointed in the EU country where a company has its “centre of main interests” to exercise powers across the EU. The insolvency is governed by the laws of that main centre, although laws in other jurisdictions will still be relevant, for example in the areas of real estate and employment. The regulation allows for secondary liquidations in other EU states where the company operates, but gives primacy to the practitioner in the main proceedings. The need for the regulation was highlighted by a number of high-profile and complex international insolvencies, such as BCCI, which had operations in a number of European jurisdictions (although ironically as a financial institution BCCI would not have been covered by the new regulation).

The regulation in practice
Prior to the regulation, there was an appetite in some EU jurisdictions to control the proceedings, or at the very least to control local assets to ensure the protection of local creditors. Although the regulation was intended, in part, to address this problem, it is unsurprising that this has remained an issue in some insolvencies over the last two years.

The regulation requires that the decision of the first court to open main proceedings takes priority and cannot be disregarded by other courts, even if they disagree. It is taking a while for the courts of different member states to accept this. At first instance, the French and German courts rejected pre-existing main proceedings in the UK over companies incorporated in France and Germany and allowed conflicting proceedings to be opened in these countries. However, on appeal, the pre-existing UK proceedings were recognised, as required by the regulation, and the French and German proceedings were dismissed.

However, the problem continues elsewhere in the EU. Two sets of conflicting main proceedings are now ongoing in relation to a Parmalat subsidiary incorporated in Ireland, because the Irish and Italian courts disagree as to where the subsidiary’s centre of main interests is located. As a result, the Irish court has recently referred some issues to the European Court of Justice for authoritative determination. But although the system of priority imposed by the regulation has not yet fully bedded down, things are certainly moving in the intended direction, with most courts eventually showing deference to each other and cooperation becoming more commonplace. It is worth noting that the principle of priority, when respected, gives great power to the first court to open main proceedings. In circumstances where there is room for argument about where a company’s centre of main interests lies, it will be highly advantageous for petitioners to try to initiate main proceedings quickly in the jurisdiction they perceive as most favourable to their interests.

The regulation does not set out precisely how to identify the location of a company’s centre of main interests, although it does suggest that it should be where the administrative headquarters is located. The lack of precision is unfortunate given that it is this that determines where main insolvency proceedings over the company can be opened. However, the preamble to the regulation indicates that it should be capable of identification by third parties, such as creditors. It will be a question of fact for the courts to look at in each case.

The English courts have taken a welcome and pragmatic approach in dealing with the regulation. In the well-known case of Re BRAC Rent-A-Car International, the relevant company was incorporated in Delaware. Despite the presumption under the regulation that the centre of main interests will be where a company has its registered office, in Re BRAC the English court held that, because the centre of the company’s main interests was as a matter of fact in England, main proceedings under the regulation could be opened there. Before Re BRAC, there was some doubt whether the regulation would apply at all to a company incorporated outside the EU. The case has important implications for offshore companies that operate within the EU but are incorporated in a jurisdiction outside the EU with which they have little real connection. On the other hand, where the centre of main interests of a company is outside the EU, the English courts have confirmed that the regulation will not apply at all, and courts will instead look to their own domestic and international law principles in dealing with the company.

A practical benefit of the regulation is the greater control afforded to the main insolvency practitioner over a company’s assets throughout Europe. This facilitates, where appropriate, a pan-European restructuring rather than a series of competing local liquidations with no one in overall charge. So where the main proceedings are UK proceedings, the spirit of the Enterprise Act, with its greater focus on business recovery, can now be more readily applied to an organisation operating across Europe.

The verdict so far
The regulation has only been in force for a little over two years, but has been a qualified success. While it appears that the courts of all member states have yet to become entirely comfortable with the allocation of jurisdiction under the regulation, the signs are broadly positive. There is more cooperation between the courts of member states. Debtors, creditors and insolvency practitioners can identify with greater certainty the legal regime that will apply in an insolvency.

The regulation has also reduced the opportunity for ‘forum shopping’, where a debtor or creditor seeks to put a company into insolvency in a jurisdiction where the laws and/or practice might be particularly beneficial to that party, but which may have little real connection with the company’s main business. However, the principle of priority for the first court to open proceedings still leaves the forum shop open for limited business. It remains in the interests of creditors to move quickly to bring proceedings in the most favourable jurisdiction that has a sufficient connection with the company to enable an argument to be made that its centre of main interests is located there.

Cary Kochberg and Laurence Crowley are partners at Lovells