Scope of application of the Council Regulation 1346/2000

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1 Scope of application of the Council Regulation 1346/ Universality and territoriality are the two main principles that inspire the States insolvency legislation. The Territoriality principle applied in his strictest form entails that insolvency proceedings only affect assets situated in the State where the proceeding has been opened. The Universality principle starts from the opposite assumption. It entails that the effects of the insolvency proceeding affect all the debtor s assets wherever they are located. The view of insolvency proceedings as a manifestation of the exercise of a State's sovereign powers - in particular where the opening of an insolvency proceeding is regarded as resulting in a general attachment on the debtor's assets - is central to the territoriality principle. A court and the officials appointed by that court can only exercise their powers within the territory where the court has jurisdiction. The effects of the opening of an insolvency proceeding and notably the powers of the administrator appointed in the proceeding will not extend to States that apply the territoriality principle. This inevitably leads to the opening of multiple - parallel - insolvency proceedings in respect of the same debtor, if the debtor's entire estate is to be included in the realization of the estate and the distribution of the proceeds among his creditors. In the universality model, insolvency proceedings are seen as unique proceedings reflecting the unity of the estate of the debtor. The proceedings should involve all of the debtor s assets, wherever in the world these assets are located. Under this approach, the whole estate will be administered and reorganised or liquidated on the basis of the rules established in the law of the country where the debtor has his domicile (or registered office or similar reference location) and in which country the proceedings have been opened. The applicable law for the proceedings and its legal and procedural consequences is the law of the state in which the insolvency measures have been undertaken. This law is referred to as lex concursus or lex forum concursus ( forum law ), being the law (lex) of the country where a court (forum) has opened insolvency proceeding (dealing with concurrent claims of creditors: concursus) and which court is (or has been) charged with hearing, conduct, and closure of the proceeding. The liquidator (or administrator) in this approach is charged with the liquidation (or reorganisation) of the debtor s assets anywhere in the world of which the debtor himself (partly) has been divested; respectively, he is charged with the supervision of the administration of the debtor s affairs. The lex concursus determines all consequences of these proceedings, e.g., with regard to current contracts, the powers of an administrator, and the bases and system for distributing dividends to creditors (Bob Wessels). In the theory all European States legislation is inspired to the Universality principle, but as matter of fact all States must recognize that they don t have jurisdiction out of their borders. States generally take this approach with respect to the effects of insolvency proceedings opened within their jurisdiction. To what 1

2 extent this approach, which essentially is nothing more than a claim for universal effect, indeed has the desired result, will depend on the private international law of the States where the effects of the insolvency proceeding are invoked. The application of the universality principle in this context entails the extension of the effects that an insolvency proceeding has under the law of a foreign State where a proceeding has been opened (lex concursus) to a State where assets are situated, without the possibility of opening local proceedings. As matter of fact the universality principle needs the cooperation of the State where the assets are located. Only if this State will recognize the jurisdiction of the other State, the universality principle will operate, but if this condition will be accomplished, the insolvency proceeding will regulate also the assets situated abroad. So the universality principle indicates that in some way the assets in a particular country can be affected by the opening of an insolvency proceeding abroad. Recognition of (the effects of) an insolvency proceeding may for example depend on court approval and the court may be called upon to issue orders determining how the foreign proceeding should be given effect. The European Regulation established a compromise between the two opposite principles. The Regulation does not provide a comprehensive regulatory framework for all cross-border aspects of insolvency proceedings within the European Community. The scope of application of the Insolvency Regulation is limited in time, in respect of the types of debtors and insolvency proceedings covered and the extent to which it regulates the cross-border effects of proceedings that fall within its ambit. This goal is accomplished providing two different types of proceedings: the main and the secondary proceedings. The first, according to the twelfth recital of the Regulation, has universal scope and aim at encompassing all the debtor s assets. The secondary proceedings are aimed to protect the diversity of interests with effects limited to the assets located to a State where the assets are situated ruled by this State s law. The eleventh recital says that as a result of widely differing substantive laws it is not practical to introduce insolvency proceedings with universal scope in the entire Community. Art. 4 of the Regulation says that the applicable law shall be the law of the State in the territory of which such proceeding is opened. In these limits the Regulation applies the Universality principle. Secondary proceeding may be opened only when in the country there is an establishment of the debtor s enterprise. The establishment definition according to Regulation art. 2 is any place of operations where the debtor carries out a nontransitory economic activity with human means and goods. The regulation provides for several exceptions to application of the lex concursus (see articles 5 15, Reg). These exceptions include third parties rights in rem and reservation of title (articles 5 and 7) and set-off rights (article 6). These rights (under certain conditions) are not affected by the legal consequences (lex concursus) of the commencement of main proceedings. In other instances another choice of law instead of the lex concursus is made. Important examples are contracts relating to immovable property (article 8: effects of insolvency 2

3 proceedings shall be governed by the law of the Member State within the territory of which the immovable property is situated) and contracts of employment (article 10 states that this is governed by the law of the Member State applicable with respect to the contract of employment). The Insolvency Regulation does not apply to all proceedings provided for in the national laws of the Member States to deal with insolvency. EIR in general terms states that the Insolvency Regulation applies to collective insolvency proceedings which entail the partial or total divestment of a debtor and the appointment of a liquidator. However, this very general description does not determine the applicability of the Insolvency Regulation. The proceedings that fall within the ambit of the Insolvency Regulation are exhaustively listed in Annex A to the Insolvency Regulation. The function of Art. 1 (1) EIR is twofold. Firstly, it sets forth the conditions for proceedings to be added to the Annex and thus be covered by the Insolvency Regulation. Secondly, it follows from Art. 1 (1) EIR that proceedings listed in Annex A that serve purposes that are not confined to insolvency law, only fall within the scope of the Insolvency Regulation if they are based on the debtor's insolvency. Then it follows from Art. 1 (1) EIR and Annex A that, as to the applicability of the Insolvency Regulation, a distinction is not made with respect to the objective of insolvency proceedings. It applies to liquidation as well as reorganization proceedings. Only secondary proceedings may be only liquidation proceedings. As we ll see, this is one of the issues that the Regulations suggested reform will change. The Regulation doesn t say when an insolvency proceeding may be considered a crossborder proceeding. It s possible to limit this notion to cases where assets are situated in a different Member State or also comprehend situations where the proceeding only ingenerates effects in a different State, for instance when a creditor is citizen of a different Member State. Or you can have cases when the debtor stipulated contracts ruled by an other Member State s law. Generally speaking we can say that the Recitals 2 and 4 of the Regulation justify a broad interpretation of this notion. The law of the State of the opening proceedings will rule all situations, except exceptions contemplated by the Regulation as in the case of detrimental acts ruled by Art. 13. Another problem is if the judge has the duty to always declare if the insolvency proceeding is a crossborder proceeding, submitted to the Regulation. Any provision is offered on this subject by the Regulation itself. But it s notorious that many times at the opening of the proceeding the judge doesn t know if there will be crossborder problems entailing the procedure. He can ignore that there are assets abroad or that part of the creditors are foreigners. So the common opinion is that the proceeding is a crossborder proceeding also if the judge doesn t decide this topic. The Regulation reform aims to change this situation declaring that the judge or the subject authorized to open the proceeding in the countries where the judge is not immediately invested, must declare if the proceeding is a crossborder 3

4 main proceeding or a secondary proceeding. If such amendment will come into force, we ll be obliged to solve the problem of what happens if the judge doesn t say that the proceeding is a crossborder proceeding. The Insolvency Regulation takes a neutral position in respect of the types of debtors that can be subject to an insolvency proceeding. For the purpose of the Insolvency Regulation it is irrelevant whether the debtor is a natural or a legal person, a trader or a consumer. Whether a particular type of debtor can be subject to insolvency proceedings, remains a matter of national law. As stipulated in Art. 4 (2) (a) EIR, the law of the Member State where the application for the opening of an insolvency proceeding has been filed, determines in respect of which debtors insolvency proceedings may be opened on account of their capacity. For instance Italian insolvency law says that only commercial entrepreneurs may be declared bankrupt and only when the total amount of their activities is bigger of a certain amount. But Italy will recognize Member States Courts decisions opening a proceeding for consumers or civil debtors. Pursuant to Art. 1 (2) EIR, insurance undertakings, credit institutions, investment undertakings which provide services involving the holding of funds or securities for third parties and collective investment undertakings are excluded from Art.2(a)IR. The Insolvency Regulations doesn t apply to insolvency proceedings opened in third Countries at all, also if assets or effects related to the proceeding are in a Member State. The reason is that Regulation only regulates the intra-community effects of insolvency proceedings. The effects vis-a-vis third countries are governed by the normal rules of private international law of the forum. This issue is very important. It s was very clear already when the Regulation hadn t still implemented and his text had been approved as a Convention between the European countries. As the Virgos-Schmidt report said in those times: As the Convention provides only partial (intra-community) rules, it needs to be supplemented by the private international law provisions of the State in which the insolvency proceedings were opened. When incorporating the Convention into their legislations, the Contracting States will therefore have to examine whether their current rules can appropriately implement the rules of the Convention or whether they should establish new rules to that end. In this respect, nothing prevents Contracting States from extending all or some of the solutions of the Convention unilaterally on an extra-community basis, as part of their national law. We must add that Uncitral approved the Insolvency Model Law and Model Law suggest rules to be adopted by States to recognize foreign insolvency proceedings. The criterion to recognize a foreign proceeding is linked in the Model Law to the same notion of COMI centre of a debtor s main interests adopted by the Regulation. And Model Law has been adopted in many countries. U.S. inserted 4

5 Model Law in the Bankruptcy Code s chapter 15. U.K., Poland and Romania also adopted it. So in many European countries there is a different legal framework not only the European Regulation to recognize a foreign insolvency proceeding. The Uncitral Model Law is designed to operate next to other international instruments that are binding on the State enacting the Model Law. This is expressed in Art 3 Model Law. To the extent that the Model Law conflicts with an obligation arising out of a treaty or other form of agreement to which the enacting State is a party, those treaties or other agreements will prevail over the Model Law. For the Member States of the European Union it may offer a regime complementary to the Insolvency Regulation that addresses cross-border aspects that are not covered by the Regulation. The practical importance of implementation of the provisions of the Model Law in the Member States would particularly lie in the introduction of a harmonized regime of recognition of insolvency proceedings opened in non Member States. The Uncitral Model Law in that respect provides for a regime that is internationally acceptable. 2. We must come back to the definition of insolvency proceeding offered by Regulation art. 1. It says: This Regulation shall apply to collective insolvency proceedings which entail the partial or total divestment of a debtor and the appointment of a liquidator. As we said before, the definition is not so important because art. 2 (a) adds that insolvency proceedings shall mean the collective proceedings referred to in Article 1(1). These proceedings are listed in Annex A. Also the liquidators are defined by art. 2(b), but they are listed in Annex C. Annex C lists the liquidation proceedings - art. 2(c) It is for each Member State to decide whether it wants to notify a particular national procedure to be included in Annex A of the EIR. The EIR definition covers all the proceedings founded on the insolvency where the debtor is not in possession and a liquidator is appointed. There is a general agreement that these procedures may be aimed both to liquidate the enterprise or to the reorganization. But the EIR's definition of insolvency proceedings does not cover national procedures which provide for the restructuring of a company at a pre-insolvency stage ( pre-insolvency proceedings ) or leave the existing management in place ( hybrid proceedings ). The Commission staff report supporting the proposal of amendment of the EIR, says that the Heidelberg University study, committed by the Commission, observed that almost two thirds of Member States have pre-insolvency or hybrid proceedings which are not covered by the Regulation with the consequence that there is no EU-wide recognition of their effects, notably the stay of individual enforcement actions. As a result, the following problems occur: 5

6 Foreign creditors can continue with individual enforcement actions against the company and its assets; individual enforcement action can jeopardize the success of the rescue or restructuring. This possibility can in particular be used by dissenting foreign creditors (the so-called holding-out problem). Foreign creditors will be less willing to fully engage in restructuring negotiations or consent to rescue plans involving a certain reduction of their claims; as a consequence, the opportunity of rescuing the company may be lost. Opportunities for the continuation of businesses through pre-insolvency and hybrid proceedings are reduced and jobs are lost. It s common opinion that these procedures enable financially distressed enterprises to become again competitive and productive participants in the economy, thereby benefiting not only their creditors but society at large. We must add that since the Regulation was enacted, many Member States have modernised their insolvency laws by introducing new procedures which aim at rescuing businesses, providing a second chance to honest entrepreneurs and allowing a debt discharge for private persons. Many of these new procedures are not covered by the Regulation and their effects are not recognised in other Member States. The Commission staff Report offers as example a very interesting case: Rechtbank 's Gravenhage, judgment of 10 June A Dutch national had lived for several years in Germany and had taken out loans from several German banks to invest in the German property market. After his return to the Netherlands, his business went into financial difficulties and he was unable to repay the instalments on the loans. He eventually filed a petition with the court in The Hague requesting the opening of debt reorganisation proceedings under the Dutch Bankruptcy Act. In these proceedings, a debtor can request the court to oblige dissenting creditors that have not consented to an offer made by the debtor to do so if the judge considers that they are unreasonably withholding their consent from the proposed arrangement ( cram down ). However, the court refused to grant the requested order, arguing that since the debt reorganisation proceedings were not covered by the EIR, the cram-down of dissenting creditors would not be recognised in Germany, where the debtor's creditors were located, and therefore be ineffective. The Dutch entrepreneur had to apply for insolvency and have his business liquidated. The case illustrates that the fact that a national pre-insolvency, hybrid or personal insolvency procedure is not covered by the EIR can prevent the successful rescue of business or reorganisation of personal debt in cross-border situations. 1 Full decision available at 6

7 The Report adds a very important note. Concerns have been raised that a few Member States have included proceedings in Annex A, which actually do not fulfil the criteria of the EIR. Following the ruling of the CJEU in the Eurofood case, a court cannot challenge the validity or appropriateness of any proceedings included in the Annex of the Regulation. This situation creates a risk to mutual trust since some courts do not consider it appropriate to recognise certain proceedings, yet they are required to. This problem brought some Courts, as it happened in the Eurofood case, but also in other more recent cases, to refuse to recognize the foreign Court decision, according to art. 26 of EIR. This article says that any Member State may refuse to recognize the insolvency proceeding opened in another Member State where the effects of such recognition would be manifestly contrary to the State s public policy, in particular its fundamental principles or the constitutional rights and liberties of the individual. The European Commission proposal for the amendment of the EIR says also that, before adopting a delegated act amending the list of national proceedings in the annexes, the Commission should scrutinize if the procedure notified fulfils the criteria set out in the Regulation. In this way the mutual trust between the Member States that presently is the only rule governing the foreign procedure recognition is supported by a previous scrutiny done by the Commission. 3. Discussing the EIR scope of application, we must still observe that the Regulation covers the insolvencies of natural persons, and some Member States have indeed already notified procedures that apply to "consumer insolvencies". There seem to be no problems in the application of the Regulation to these proceedings in practice. The growth of personal over-indebtedness in Europe since the late 1980s has led to many Member States introducing personal insolvency schemes, including debt discharge proceedings 2. Such proceedings are applicable both to individuals as entrepreneurs or consumers or both of them, depending from the Member State s political choices. There is an increasing awareness that insolvency and the ensuing personal debt is a significant obstacle to entrepreneurship because entrepreneurs often finance their business using personal loans, possibly secured against their houses. The introduction of the possibility to obtain a debt discharge also aims to counter the negative social impacts which private over-indebtedness has on the individuals concerned and their families. However there is an obstacle to the coverage of further national personal insolvency procedures by the Regulation. While several personal insolvency procedures are covered by the Regulation, a considerable number of others are not. This situation is partly because the proceedings do not match the EIR's definition - e.g. the Scandinavian procedures and some common law systems, because they do not foresee the appointment of a liquidator -, were only recently but not in force until 1999), Belgium (1998), Netherlands (1997), Luxembourg (2000), England and Wales (2002), Portugal (2004), Latvia (2008) (based partly on English model of individual voluntary arrangement), Czech Republic (2008), Slovakia (2006), Slovenia (2008), Poland (2009), Greece (2010) (based partly on German model), Italy (2012), Ireland (on-going 7

8 introduced or are not considered to fall within the scope of the Regulation by the respective Member States. The diversity of national laws adds complexity to the issue: some Member states have no personal insolvency schemes at all. Other have personal insolvency schemes that apply both to self-employed or sole traders and consumers. A third group has schemes only for consumers and include self-employed and soletraders in company insolvencies, whereas a fourth group has separate schemes for consumers, self-employed and sole traders. Where a debt discharge procedure is not covered by the Regulation, the debt discharge has no effect against foreign creditors of the individual. Consequently, an honest entrepreneur, who has been discharged from its debts in one Member State may be prevented from starting a new business in or trading with another Member State, thereby affecting his freedom of establishment or to provide services and to conduct business. The problem can also discourage debtors who have benefited from a debt discharge at home to live or seek employment in another Member State, thereby affecting the free movement of persons and workers. The fact that the EIR does not cover some personal insolvency schemes therefore constitutes an obstacle to offering a second chance to honest entrepreneurs and debt discharged persons, and allowing them to make full use of the opportunities of the single market. So the Commission s proposal for EIR revision extends the scope of the Regulation by revising the definition of insolvency proceedings to include debt discharge proceedings and other insolvency proceedings for natural persons which currently do not fit the definition. At present art. 1 as amended by the Commission s proposal says: "Article 1(1) Scope 1. This Regulation shall apply to collective judicial or administrative proceedings, including interim proceedings, which are based on a law relating to insolvency or adjustment of debt and in which, for the purpose of rescue, adjustment of debt, reorganisation or liquidation, (a) the debtor is totally or partially divested of his assets and a liquidator is appointed, or (b) the assets and affairs of the debtor are subject to control or supervision by a court. The proceedings referred to in this paragraph shall be listed in Annex A. So the new art. 1 says that the Regulation shall apply not only to collective insolvency proceedings as at present, but to collective judicial or administrative proceedings, considering also the proceeding opened by an administrative body as in Italy happens for some types of proceedings. This amendment is not so important because already in the existing Regulation ( art. 2, d) says that court 8

9 shall mean the judicial body or any other competent body of a Member State empowered to open insolvency proceedings or to take decisions in the course of such proceedings. This rule will be maintained in art. 2 (c) of the proposal. The definition says also that the proceedings, included interim proceedings, must be based on a law relating not only to insolvency as in the past, but also to adjustment of debt for the purpose of rescue, adjustment of debt, reorganisation or liquidation. Then it s not more required that the debtor is totally or partially divested of his assets and a liquidator is appointed, as it was until now, because it s alternately needed that the assets and affairs of the debtor are subject to control or supervision by a court. It s clear that a vast amount of different personal debts discharge proceedings will be included in this definition and that debtor s disinvestment and insolvency are not more required. Interim proceedings and hybrid procedures where the debtor is in possession are included. 4. The EIR doesn t regulate the group s enterprise insolvency. The ECJ in the Eurofood case and in the more recent decisions said that control of corporate direction alone does not suffice to locate the centre of economic interest of a subsidiary with its parent company, rather than at its own registered address. After Eurofood, it is still possible to open insolvency proceedings over a subsidiary in the Member State where the parent company has its registered office, but only if the factors showing that the subsidiary's COMI is located at the seat of the parent company are objective and ascertainable by third parties. I will not insist on this point because there is a separate intervention focused on the COMI notion. We can say that the acquis communautaire is in the sense that insolvency proceedings relate to a single legal entity and that, in principle, separate proceedings must be opened for each individual member of the group. There is no compulsory coordination of the independent insolvency proceedings opened for a parent company and its subsidiaries. The Commission s proposal for EIR revision provides a group notion. It has been decided that EIR will contain provisions for the coordination of different proceedings relating to several members of the same group of companies. The EIR should ensure the efficient administration of insolvency proceedings relating to different members of the group. Where insolvency proceedings have been opened for several members of the same group, these proceedings should be properly coordinated, in order to maxim the value of the assets and to facilitate successful restructuring. The various liquidators and the courts involved will be under the same obligation to cooperate and communicate with each other as those implicated in main and secondary proceedings relating to the same debtor. In addition the liquidators involved should have standing to propose a rescue plain in the proceedings concerning the other members of the group. 9

10 The group s notion offered by the EIR revision s proposal says: a) "group of companies" means a number of companies consisting of parent and subsidiary companies ( art. 2, i); b) "parent company" means a company which (i) has a majority of the shareholders' or members' voting rights in another company (a "subsidiary company"); or (ii) is a shareholder or member of the subsidiary company and has the right to (aa) appoint or remove a majority of the members of the administrative, management or supervisory body of that subsidiary; or (bb) exercise a dominant influence over the subsidiary company pursuant to a contract entered into with that subsidiary or to a provision in its articles of association ( art. 2, ii). It must be observed that the EIR revision proposal suggest only cooperation between two or more proceedings related to different companies of the same group through cooperation between the courts and the liquidators or the administrators. It s not provided that the court of the parent company or the administrator of the parent company may rule all the subsidiaries giving binding directives. This solution is coherent with the result of the debate of these years about the group s problems. Also in the Uncitral insolvency working group (working group 5) the solution suggested was the same and the Insolvency Model Law doesn t contemplate solutions referring to the insolvent group. As matter of fact it s really difficult to find solutions to individuate without problems the parent company (sometimes there can be more than one parent company) and to convince the States to renounce their jurisdiction in favour of another State on this topic. And practical experience of these years demonstrates that the cooperation and the negotiation of protocols between different procedures referring to the companies of the same group are the viable solution. 5. Some words may be spent about the notion and the discipline of the secondary proceeding. According to the EIR secondary proceeding may be opened only in the Member State where there is an establishment of the enterprise. As I said before to provide a secondary proceeding was the solution to protect the creditors rights recognized on assets situated in a Member State by the law of the same State. Recital 19 of the EIR says that Secondary insolvency proceedings may serve different purposes, besides the protection of local interests. Cases may arise where the estate of the debtor is too complex to administer as a unit or where differences in the legal systems concerned are so great that difficulties may arise from the extension of effects deriving from the law of the State of the opening to the other States where the assets are located. For this reason the liquidator in the main proceedings may request the opening of secondary proceedings when the efficient administration of the estate so requires. The preliminary study done by the Commission before suggesting the EIR proposal demonstrated that the opening of secondary proceedings can jeopardize the efficient administration of the estate: under the current Regulation, main insolvency proceedings have EU-wide effect and encompass all of the debtor's 10

11 assets. Secondary insolvency proceedings can be opened in any other Member State where the debtor has an establishment. The system of secondary proceedings was introduced to protect the interests of local creditors and/or to facilitate the administration of complex cases. In practice, however, secondary proceedings can obstruct both the effective administration of the estate and the successful reorganisation of a company, because the opening of secondary proceedings removes part of the assets from the control of the insolvency administrator of the main proceedings. Secondary proceedings also increase the costs of proceedings because an additional insolvency practitioner has to be paid. Secondary proceeding is inefficient for two main reasons. First the secondary proceeding may be only a liquidation proceeding and can be an obstacle to rescue the enterprise. Second the coordination between the main and the secondary proceeding many times is ineffective. I think that a good example of the first inefficiency reason is exposed in the Commission s staff report on the EIR revision proposal. Case example: Bank Handlowy and Ryszard Adamiak v. Christianopol sp.zoo (C116/11) Christianapol is a Polish company specialised in the production of furniture. It is part of the Cauval Industries Group with its head office in France to which it supplies all its production. The group suffered from the recession and went into financial difficulties. In an attempt to rescue the group, several members, including Christianapol, filed for sauvegarde proceedings in France. These proceedings aim at permitting solvent companies to restructure themselves under court protection at a pre-insolvency stage. They are covered by the Regulation although concerns have been raised as to whether they comply with the definition One of the Polish creditors of Christianapol, Bank Handlowy, applied for secondary proceedings in Poland where the company's furniture factory was located. The winding-up of the factory would have prevented the successful implementation of the restructuring plan elaborated in the French sauvegarde proceedings. This problem prompted the Polish court to seek a preliminary ruling from the CJEU. In her conclusions of 24 May 2012, advocate-general Kokott strongly encouraged the European Legislator to modify the Regulation: 55. «L exposé de la juridiction de renvoi montre clairement qu une procédure secondaire de liquidation peut gêner, voire mettre en échec les objectifs d une telle procédure de redressement [procédure de Sauvegarde]. Ce résultat n est effectivement pas souhaitable. Si l on songe en particulier que la législation en matière d insolvabilité de nombreux États membres s est éloignée des procédures de liquidation «pures» au profit de procédures de redressement et de réorganisation, et compte tenu des ajouts qui ont été de ce fait apportés à l annexe A du règlement ces dernières années, intégrant également de plus en plus de procédures de redressement, il apparaît que ces procédures sont de plus en plus importantes et devraient, par conséquent, également relever du champ d application du règlement. 56. Indépendamment de ces ajouts apportés à 11

12 l annexe, le texte même du règlement n a cependant pour le reste subi aucune modification, ce qui peut concrètement générer des contradictions ou des problèmes pratiques, comme en atteste cette affaire». From the same report we can take a second example referring to the lack of coordination between main and secondary proceeding. Case example: The liquidation of Alitalia By August 2008, the well-known airline Alitalia was heavily insolvent. In September of the same year, extraordinary administration proceedings aiming at reorganising the company were opened in Italy and an administrator was appointed. Since Alitalia's COMI was in Italy, these proceedings were main proceedings for the purposes of the EIR. The administrator found a buyer for the company's assets which, however, took over only those employees indispensable for the operational activity. All other employment contracts were terminated but the administrator reached an agreement with the employees which provided for a payment of an equivalent of 3 months' salary in compensation for the failure to comply with the information and consultation requirements under the Directive on Transfer of Undertakings. The administrator kept one of the company's UK bank accounts with funds sufficient to make the compensation payment to the UK employees. In November 2008, secondary proceedings over the UK branch of Alitalia were opened in the UK. The UK liquidator blocked the distribution of the monies to the UK employees, arguing that under UK law employees had no priority rights and divided the sum among all of Alitalia's UK creditors. This argument was approved by the High Court. As a consequence, the Italian administrator was obliged to pay the UK employees from the funds of the Italian estate to the detriment of other unsecured creditors. The EIR revision proposal establishes new rules to solve these problems. The more important features of the new discipline suggested by the revision proposal are indicated in the new recitals 19a, 19b and 20: (19a) Secondary proceedings may also hamper the efficient administration of the estate. Therefore, the court opening secondary proceedings should be able, on request of the liquidator, to postpone or refuse the opening if these proceedings are not necessary to protect the interests of local creditors. This should notably be the case if the liquidator, by an undertaking binding on the estate, agrees to treat local creditors as if secondary proceedings had been opened and to apply the rules of ranking of the Member State where the opening of secondary proceedings has been requested when distributing the assets located in that Member State. This Regulation should confer on the liquidator the possibility to give such undertakings. (19b) In order to ensure an effective protection of local interests, the liquidator of the main proceedings should not be able to realise or re-locate the assets situated in the Member State where an establishment is located in an abusive manner, in 12

13 particular, with the purpose of frustrating the possibility that such interests be effectively satisfied if afterwards secondary proceedings were opened. "(20) Main insolvency proceedings and secondary proceedings can only contribute to the effective realisation of the total assets if all the concurrent proceedings pending are coordinated. The main condition here is that the various liquidators and the courts involved must cooperate closely, in particular by exchanging a sufficient amount of information. In order to ensure the dominant role of the main proceedings, the liquidator in such proceedings should be given several possibilities for intervening in secondary insolvency proceedings which are pending at the same time. In particular, the liquidator should be able to propose a restructuring plan or composition or apply for a suspension of the realisation of the assets in the secondary insolvency proceedings. In their cooperation, liquidators and courts should take into account best practices for cooperation in cross-border insolvency cases as set out in principles and guidelines on communication and cooperation adopted by European and international associations active in the area of insolvency law." So the coordination between the main and the secondary proceeding is implemented. The secondary proceeding may be suspended or transformed through the proposal of a restructuring plan if the liquidator of the main proceeding gives binding undertakings to treat local creditors as if the secondary proceeding had been opened and to apply the rules of ranking of the Member State where the opening of the secondary proceeding has been requested. Furthermore the liquidation requirement will be skipped. The last phrase of paragraph 3 of art. 3 - These latter proceedings must be winding-up proceedings is not maintained in the new suggested text of the Regulation. Luciano Panzani 13