EUROPEAN UNION REGULATION ON INSOLVENCY PROCEEDINGS

Transcription

1 1 EUROPEAN UNION REGULATION ON INSOLVENCY PROCEEDINGS An Introductory Analysis (October 2006) (Annexes deleted) Prof. Bob Wessels Preface Over four years ago, after nearly 40 years of preparation, the European Union Regulation on Insolvency Proceedings entered into force. Within the development of insolvency law in Europe 31 May 2002 symbolises a historic day. The EU Insolvency Regulations sets forth a framework for cross border insolvency within the European Union, especially providing rules for the international jurisdiction of a court in a Member State for the opening of insolvency proceedings, the (automatic) recognition of these proceedings and the powers of the liquidator in the other Member States, and important choice of law provisions. Since mid 2002 further developments have taken place. Ten mainly central and eastern European states have joined the EU and therefore are bound by the Regulation. Some 150 court cases have been published dealing with all kind of issues relating to the Regulation. A hot debated issue is COMI, the acronym of the debtor s centre of main interest, which forms the judicial basis for opening insolvency proceedings. Several battles between jurisdictions have been taken place which involves cases that also have had quite some attention in the USA, including BRAC Rent-A-Car, Daisytek, Collins & Aikman and Eurofood IFSC Ltd/Parmalat. Although the Regulation only applies to insolvency proceedings where the centre of the debtor s main interest is located in the European Community, and therefore is territorial in its scope, the Regulation will have its effects on US corporations with economic activities or operations in the EU. The American Bankruptcy Institute (ABI) has recognized that it is of enormous importance for businesses, banks and bankruptcy practitioners, involved in international dealings and international aspects of bankruptcy, to be aware of the key issues of the EU Insolvency Regulation. This was, in short, the aim of the first edition of this booklet and this approach has been taken again in the preparation of the second edition. It is evident that in the publication the text of the Insolvency Regulation and its Annexes contain the three groups of changes that have been made since I have included references to the two cases relating to the interpretation of the Regulation that have been decided by the European Court of Justice in January 2006 (Suzanne Staubitz-Schreiber) and May 2006 (Eurofood/Parmalat). Finally, I have included a concise bibliography for those readers that are looking for more detailed information and analysis. The contents of this publication has been finalised during the first week of October

2 2 PREFACE 1. INTRODUCTION 1.1. The EU Private International Law Insolvency system 1.2. History of the Insolvency Regulation 1.3. From Convention to Regulation 1.4. Goal and Method of the Regulation 1.5. Scope of the Regulation 1.6. Exclusions 1.7. Quick Summary of the Regulation Chapter I - General Provisions (Articles 1-15) Chapter II - Recognition of Insolvency Proceedings (Articles 16-26) Chapter III - Secondary Insolvency Proceedings (Articles 27-38) Chapter IV - Provision of information for creditors an lodgement of their claims (Articles 39-42) Chapter V Transitional and final provisions (Articles 43-47) 2. GENERAL PROVISIONS 2.1. Scope and Definitions 2.2. International jurisdiction Main insolvency proceedings Local insolvency proceedings Independent territorial insolvency proceedings Secondary territorial proceedings European Court of Justice 17 January 2006 (Suzanne Staubitz-Schreiber) European Court of Justice 2 May 2006 (Eurofood) 2.3. Law applicable 2.4. Third parties rights in rem (Article 5) 2.5. Set-off (Article 6) 2.6. Reservation of title (Article 7) 2.7. Contracts relating to immovable property (Article 8) 2.8. Payments systems and financial markets (Article 9) 2.9. Contracts of employment (Article 10) Effects on rights subject to registration(article 11) Community patents and trademarks (Article 12) Detrimental acts (Article 13) Protecting third-party purchasers (Article 14) Effects of the insolvency procedure on lawsuits pending (Article 15) 3. RECOGNITION OF INSOLVENCY PROCEEDINGS 2

3 Principle 3.2. Effects of recognition Recognition of the main proceedings Recognition of secondary proceedings 3.3. Powers of the liquidator 3.4. Proof of the liquidator s appointment 3.5. Return and imputation 3.6. Publication, registration and costs 3.7. Honouring of an obligation to a debtor 3.8. Recognition and enforceability of other judgments 3.9. Public policy 4. SECONDARY INSOLVENCY PROCEEDINGS 4.1. Opening of proceedings 4.2. Applicable law 4.3. Right to request the opening of secondary proceedings 4.4. Duty to cooperate and communicate information 4.5. Exercise of creditors rights 4.6. Stay of the process of liquidation 4.7. Measures ending secondary insolvency proceedings 4.8. Assets remaining in the secondary proceedings 4.9. Subsequent opening of the main proceedings Conversion of earlier proceedings Preservation measures 5. PROVISION OF INFORMATION FOR CREDITORS AND LODGMENT OF THEIR CLAIMS 5.1. Right to lodge claims 5.2. Duty to inform creditors 5.3. Content of the lodgement of a claim 5.4. Languages 6. RELATIONSHIPS WITH NON EU MEMBER-STATES 6.1. The EU Insolvency Regulation; some tentative conclusions 6.2. EU Insolvency Regulation and non-member States 3

4 4 1. Introduction 1.1. The EU Private International Law Insolvency system The EU Regulation on Insolvency Proceedings, which entered into force 31 May 2002, is an instrument that forms a part of a more comprehensive framework of the Private International Insolvency Law system of the EU. This wider framework consists of the following components: a. The System of International Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters. This system, set up in the 1968 Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters, is based on Article 220 EC Treaty. Insolvency proceedings relating to the winding-up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous proceedings are excluded from the scope of the 1968 Brussels Convention. The EU Insolvency Regulation (also: InsReg) aims to fill up the gap. The Insolvency Regulation provides for rules regarding jurisdiction, applicable law and recognition. Since it also contains conflict of law rules (private international law) it goes beyond the traditional scope of the Brussels Convention. This latter Convention has been transformed into a Regulation as of 1 March 2002 (Council Regulation No. 44/2001 of 22 December 2000, Official Journal L 12 of 22 December 2001). Article 25 Insolvency Regulation aligns the recognition and enforceability of insolvency related judgements (concerning the course and the closure of insolvency proceedings and court approved compositions) with the Brussels Regulation b. Insurance Undertakings, Credit Institutions and Investment Undertakings. Insolvency proceedings concerning insurance undertakings, credit institutions, investment undertakings, holding funds or securities for third parties and collective investment undertakings are excluded from the scope of the Insolvency Regulation, see Article 1(2) InsReg. The excluded entities and undertakings are not defined in the Regulation, but by other instruments of EU Community law. The entities and undertakings which fall under the definitions given by the relevant Community Regulations and Directives are excluded from the Insolvency Regulation since they are subject to special arrangements and, to some degree, national Supervisory authorities have extremely wide-ranging powers of intervention. Insurance undertakings will be defined according to the description, laid down in Directive 2001/17 of the European Parliament and the Council of 19 th March 2001 on the reorganisation and winding-up of insurance undertaking (Official Journal L 110 of 20 April 2001), and credit institution will be covered by the definition to be found in Directive 2001/24 of the European Parliament and the Council of 4 th April 2001 on the reorganisation and winding-up of credit institutions (Official Journal L 125 of 5 May 2001). Opposite to a Regulation a Directive will go through a legislative implementation process in each individual Member-State. The implementation dates are 20 April 2003 (insurance) and 5 May 2004 (credit institutions) respectively and a large number of countries have enacted their implementation legislation. The aforementioned Directives are in nature and content quite similar to the Insolvency Regulation. The differences flow from some specific characteristics: - these institutions operate according to the principle of one single licence, issued by one Member State, but applicable in all Member States. In addition the supervisory system for these institution is based on home country control. For this reason the Directives provide for one main insolvency proceeding, to avoid unnecessary interference because of a secondary insolvency proceeding in another member State; - jurisdiction for the relevant court is based on the law of the statutory seat; 4

5 5 - the Insurance Directive will contain certain provisions with regard to harmonising the system of protection of rights of policy holders. A draft Directive on Winding Up of Investment Undertakings is still under consideration. c. Credit Institutions. Within the context of Credit institutions three other EC measures are of importance: 1. Deposit-guarantee schemes. The main objective of this Directive 94/19 (Official Journal L 135 of 31 May 1994) is to protect a depositor up to in the event of a deposit becoming unavailable, e.g. when a bank becomes insolvent. A home Member State bank is responsible for the deposit-protection scheme for branches established in other EEA Member countries. The EEA (European Economic Area) countries contain the 25 EU Member States and also Norway, Iceland and Liechtenstein. Home country schemes shall guarantee depositors of a bank and of the branches, set up by banks in other Member States, although branches may opt to join a host country protection scheme. 2. Netting and Securities settlement Systems. The EU Directive 1998/26 (Official Journal L 166 of 11 June 1998) protects netting in payment and securities settlement systems and insulates collateral given to operators of these systems or the Central Banks in the performance of their functions from the effect of bankruptcy. The implementation date was 1 January 1999; 3. Financial Collateral Arrangements. A EU Directive on Financial Collateral Arrangements has been issued (Official Journal C 180 of 26 June 2001). It will apply to collateral arrangements between parties, providing a uniform conflict of laws treatment of book entry securities used as collateral in a cross-border context, and protects these arrangements from the effect of bankruptcy. The implementation date is 27 December 2003 and most EU Member States have enacted legislation on the topic. d. Other relevant community provisions. Other provisions concerning insolvency, which have a source in EC community law, include: 1. Directive 77/187/EC with regard to Safeguarding of Employees Rights in the event of Transfer of Undertakings; 2. Directive 90/314/EC re the insolvency of a Tour Operator; 3. Directive 97/9/EC re Investor Compensation Schemes; 4. Directive 2000/35 with regard to Late Payments in Commercial Transactions; 5. Directive 2000/74 on the Protection of Employees in the Event of Insolvency of their Employer (updating Directives 77/187 and 80/987) 6. Regulation 2001/2157 with regard to the European Company Statute, in which Article 67 provides that an ECS will have the same treatment as public limited liability company set up in accordance with law of the Member State in which its registered office is situated History of the Regulation The intention of this summary of the EC Insolvency Regulation is to provide a general overview of purpose and contents of the Insolvency Regulation. For more extensive commentaries one should consult specific sources of literature. See Appendix II (Select Biography). In order to complete the internal EC market the absence of a Treaty on Insolvency Proceedings was viewed as a lack in the legal protection of persons and businesses. Only national law (including its private international law) is applicable in the event of a (legal) person going bankrupt. At the same time a whole range of cross-border activities is increasingly being undertaken by persons notably legal persons, companies trading only within the borders of one Member State. In order to face these and future 5

6 6 problems the European Community Ministers of Justice met informally in San Sebastian from 25 to 27 May There they expressed the wish that a solution was needed, and therefore they re-launched discussions and negotiations regarding a Convention on Cross-border Insolvencies that could apply in the European Community. Member States gave instructions to that effect by setting up, within the Council of the European Communities, an ad hoc Working party on a Bankruptcy Convention. A number of national experts, under chairmanship of Dr Manfred Balz (Germany), were therefore designated. The ad hoc Working Party met and discussed frequently from 1991 until the conclusion of the definitive text of the European Convention of Insolvency Proceedings in 1995 (hereafter referred to as the Convention). The Convention itself was tabled for approval by the EU Council of Ministers on 25 September From Convention to Regulation Legal basis of the Convention was Article 220 EC Treaty. It provides: Member States shall, so far as is necessary, enter into negotiations with each other with a view to securing for the benefit of their nationals: the protection of persons and the enjoyment and protection of rights under the same conditions as those accorded by each State to its own nationals,., the simplification of formalities governing the reciprocal recognition and enforcement of judgments of courts and arbitration awards. The characteristics of a Convention are that all EC Member States must ratify the Convention, and powers to give rulings on interpretation are conferred upon the Court of Justice of the European Communities (ECJ). These powers are granted in the text of the Convention itself and not in additional protocols. The text of the EU Convention on Insolvency Proceedings was open for signature between 23 November 1995 and 23 May Out of the 15 Member States 14 signed the Convention. When the deadline for completion of signatures passed only the United Kingdom remained outstanding, due to political controversies with regard to the distorted relations between the UK and the other Member States because of the mad cow disease (an epidemic disease named bovine spongiform encephalopathy, or: BSE) and, later, between UK and Spain regarding the sovereignty over the tiny territory of Gibraltar. Now most of the content of this Convention is subject of the Insolvency Regulation, based on the post- Treaty of Amsterdam 1998 area of creating private international private law (conflict of laws), especially international private procedural law directly. A Regulation is a Community law instrument, which is binding and directly applicable in Member States. The Insolvency Regulation has as its basis Article 65 and Article 67 (judicial cooperation) of the EC Treaty. Its application has immediate effect in all Member States as of 31 May 2002, except for Denmark, see Whereas (33). The Regulation applies since 1 May 2004 to the ten new entrants to the EU. See 1.5. By Declaration Portugal has reserved its rights concerning the application of Article 26 and Article 37 (Official Journal C 183 of 30 June 2000, p. 1), stating that public policy of Portugal in applying Article 37 InsReg may lead to defend important local interests when an independent territorial proceeding, as referred to in Article 3(4), is requested to be converted into a main insolvency proceeding as meant in Article 3(1) InsReg Goal and Method of the Regulation 6

7 7 The European Union has set out the aim of establishing an area of freedom, security and justice. The activities of undertakings have more and more cross-border effects and are therefore increasingly being regulated by European Community law. While the insolvency of such undertakings also affects the proper functioning of the internal market, the EU wants to respond to the need for a Community act requiring coordination of the measures to be taken regarding an insolvent debtor s assets. The proper functioning of the internal market requires that cross-border insolvency proceedings should operate efficiently and effectively and the Regulation aims to achieve this objective within the scope of judicial cooperation in civil matters within the meaning of Article 65 EC Treaty. For the purpose mentioned above it is necessary to: a. determine the jurisdiction of the courts or authorities with regard to the intra-community effects of insolvency proceedings, b. create certain uniform conflict-of-laws or private international law rules for such proceedings, c. ensure the recognition and enforcement of judgments given in such matters, d. make provisions for the possibility of opening secondary insolvency proceedings, and e. guarantee information for creditors and a right to lodge claims. See Whereas (8). The Insolvency Regulation adopts a combined method (or: mixed model), which introduces main insolvency proceedings, reflecting the principle of universality, but permits local proceedings, necessary to protect local interests. The Regulation acknowledges the fact that as a result of widely differing substantive laws in the Member States it is not practical to introduce insolvency proceedings with universal scope in the entire Community. The application without exception of the law of the State of opening of proceedings would, against this background, lead to several difficulties, e.g. with regard to the widely differing laws on security interests and the differing laws re preferential rights enjoyed by some creditors in insolvency proceedings. The Regulation, therefore, provides for two categories of special rules on applicable law, being (i) special rules with regard to particularly significant rights and legal relationships (e.g. rights in rem and contracts of employment), or (ii) national proceedings covering only assets situated in the State of opening. The former group is excluded form the principle that the law applicable to insolvency proceedings is the law of the Member State within the territory of which such proceedings are opened (also referred to as: lex concursus or lex forum concursus ). The latter group leads to allowing local proceedings alongside main insolvency proceedings with universal scope (see Whereas (11)). The result of this combination of different interests leads to a system in which the main insolvency proceedings can be opened in the Member State where the debtor has the centre of his main interests. These proceedings (only one) have universal scope and aim at encompassing all the debtor s assets. To protect the diversity of interests, the Regulation permits secondary proceedings to be opened in other Member States and to run in parallel with the main proceedings. These proceedings, called secondary proceedings, may be opened in the Member State where the debtor has an establishment as defined in Article 2(h). The effects of secondary proceedings are however limited to the assets located in that specific State. In addition, mandatory rules of coordination with the main proceedings satisfies the need for unity in the Community Scope of the Regulation The Insolvency Regulation applies to collective insolvency proceedings, which entail the partial or total divestment of a debtor and the appointment of a liquidator. See Article 1(1). Two annexes (A and B) to the 7

8 8 Regulation determine the national proceedings covered by the Insolvency Regulation. A third Annex (C) determines the persons or bodies that act as liquidator. These Annexes form an integral part of the Regulation. The consequences of proceedings and liquidators being listed in the Annexes A, B and C are the encumbrance of the scope of the Regulation and the eligibility for recognition under the provisions of the Regulation, as also the automatic recognition of the liquidator s appointment and powers. In all, in 2006 the EU Insolvency Regulation applies to 81 types of insolvency proceedings and 93 types of persons/bodies (acting as liquidators) in 24 countries. The Regulation originally in 2002 applied to 52 types of proceedings and 58 types of liquidators in 14 countries (Denmark excluded). The entry of 10 new Member States into the European Community as of 1 May 2004 added 29 types of proceedings and 35 types of liquidators. These countries are (with their capital between brackets): Cyprus (Nicosia), Czech Republic (Prague), Estonia (Tallinn), Hungary (Budapest), Malta (Valetta), Latvia (Riga), Lithuania (Vilnius), Poland (Warsaw), Slovakia (Bratislava) and Slovenia (Ljubljana). The enlargement has led to some minor changes in the text of the Insolvency Regulation. Under Article 2(a) and (c), insolvency proceedings covered by the Regulation must also have been expressly entered by the State concerned in the lists of proceedings in Annexes A and B. Only those proceedings expressly entered in the list will be considered insolvency proceeding as covered by the Regulation and therefore will be able to benefit from its provisions. The term liquidator used by in the Regulation reflects a very broad concept. Under Article 2(b) InsReg it includes any person or body whose function is to administer or realise the assets or supervise the management of the debtor s business. A court itself may fulfil this role. The persons or bodies considered to be liquidators by the Regulation are set in the list in Annex C to the Regulation. The Annexes have been amended three times (March 2004, April 2005 and April 2006). Appendix I contains the most recent text of the regulation and its Annexes Exclusions The Regulation applies to all listed insolvency proceedings, whether the debtor is a natural person or a legal person, a trader, a merchant or an individual. As previously discussed, insolvency proceedings concerning insurance undertakings, credit institutions, investment undertakings holding funds or securities for third parties and collective investment undertakings are excluded from the scope of this Regulation. See paragraph Quick Summary of the Regulation The following provides for a quick summary of the contents of the Insolvency Regulation Chapter I - General Provisions (Articles 1-15) The general provisions establish the area of application of the Regulation. It is confined to proceedings which entail the partial or total divestment of a debtor and the appointment of a liquidator, see Article 1(1) InsReg. As far as the jurisdiction is concerned the Regulation is based on the general principle that the courts of the Member State within the territory of which the centre of the debtor s main interests is situated shall have jurisdiction to open insolvency proceedings, see Article 3(1). For a company or legal person, the centre of its main interests is the place of its registered office (Article 3(1) last line). In 8

9 9 addition, the court of another Member State shall have only jurisdiction, if the debtor possesses an establishment within the territory of that other Member State (Article 3(2)). The effects of the latter proceedings are however restricted to the assets of the debtor situated in the territory of the other Member State (Article 3(2) last line). The law applicable to insolvency proceedings under the Regulation is that of the Member State within the territory of which such proceedings are opened, see Article 4(1), known as: lex concursus or lex forum concursus. The exceptions to the application of the lex concursus are referred to in Article 5 15 InsReg. These exceptions include third parties rights in rem and reservation of title (Article 5 and 7), set-off rights (Article 6), contracts relating to immovable property (Article 8) and contracts of employment (Article 10) Chapter II - Recognition of Insolvency Proceedings (Articles 16-26) Recognition of a judgement opening insolvency proceedings in a Member State means that the judgment produces the same effects in the other States as under the law of the State of the opening of these proceedings. This key issue of the Regulation is granted by Article 16. Insolvency proceedings opened in the opening State where the debtor has his centre of main interests will be (automatically) recognised in all the other Member States. Nevertheless such recognition does not prohibit the opening of secondary proceedings in a State where the debtor owns an establishment, see Article 16(2). This recognition includes the termination of the debtor s authority to dispose of the assets. It also puts an end to a judgment that results in executing in favour of an individual creditor. The chapter describes furthermore, amongst others, the powers of a liquidator, the publication of the opening judgement in another Member State or in public registers Chapter III - Secondary Insolvency Proceedings (Articles 27-38) As already has been pointed out, opening of main insolvency proceedings in the opening State where the debtor has his centre of main interests does not preclude the opening of secondary proceedings in other Member States provided that the debtor has an establishment. Secondary proceedings can be said to serve mainly two purposes: (i) they protect creditors, usually local creditors, from the main proceedings, and (ii) at the same time they assist and support the operation of the main insolvency proceedings. The opening of secondary proceedings may be requested by the liquidator in the main proceedings or by any other person authorised to do so under local law (Article 29). A creditor for example who thinks that his chances will be better in local proceedings than in the main proceedings in an other State, may file such a request Chapter IV - Provision of information for creditors an lodgement of their claims (Articles 39-42) Any creditor has the right to lodge claims in writing, if his residence is located in a Member State other than the State of the opening of proceedings. He may either file in main proceedings or in secondary proceedings. This provision is meant also for the tax authorities and social security authorities (Article 39). The chapter further provides for a duty to inform known creditors in the other Member State and the language to be used in the specific notice Chapter V Transitional and final provisions (Articles 43-47) 9

10 10 The Insolvency Regulation applies only to insolvency proceedings opened after its entry into force (Article 43), which is (Article 47) 31 May Ten years later the Commission shall present an Evaluation Report on the application of the Insolvency Regulation (Article 46). As the Annexes A, B and C relate exclusively to the legislation of Member States, there are specific and substantiated reasons for the Council to reserve the right to amend these Annexes in order to take account of any amendments to the domestic law of the Member States. The Annexes can be amended in a simple manner, see Article

11 11 2. General provisions 2.1. Scope and Definitions Article 1(1) defines a framework for the applicability of the Regulation, requiring four cumulative conditions, which all have to be fulfilled: 1. Proceedings must be collective. This means that all creditors concerned may seek satisfaction only through these insolvency proceedings, as individual actions will be precluded. A proceeding may comprise acts and formalities set down in the applicable law (Whereas (10)). 2. The proceedings must be based on the debtors insolvency and not on other grounds. The insolvency-test itself is rooted in the legislation of the lex concursus. 3. The proceedings must entail the total or partial divestment of the debtor. It should be stated that partial divestment, regarding the debtor s assets or his power of administration, is sufficient. The legal nature that such divestment may take, depending on the national legislation applicable, has no bearing on the application of the Regulation to the proceedings in question. 4. The proceedings should entail the appointment of a liquidator. This requirement is directly linked to the previous condition. In general in any insolvency procedure, in order to achieve a divestment, a transfer of powers to another person, the liquidator, takes place. This transfer covers powers of administration or disposal over all or a part of the debtor s assets, and the limitation of the powers of the debtor, through the intervention and control of the debtor s actions. For the Insolvency Regulation to be applied, it is however not sufficient that the proceedings in question meet the four conditions mentioned above. A fifth condition should be met. The specific proceeding and its liquidator should be mentioned in one of the applicable Lists in the Annexes: - A. Insolvency proceedings referred to in Article 2(a); - B. Winding up proceedings, referred to in Article 2(b), and - C. Liquidator, as referred to in Article 2(c). Insolvency proceedings do not necessarily involve the intervention of a judicial authority. For this reason the expression court in this Regulation has been given a broad meaning and includes a person or body empowered by national law to open insolvency proceedings, see Article 2(d) International jurisdiction The rules of jurisdiction set out in the Regulation establish only international jurisdiction. Article 3 InsReg therefore designates the Member State of which the courts may open insolvency proceedings. Territorial jurisdiction within that Member State itself must be established by the national law of the Member State concerned (Whereas (15)). The essential design of the Regulation is to establish a hierarchical scheme of main (primary) and 11

12 12 secondary (subsidiary) jurisdictional competence in relation to a debtor. The court where the centre of the debtor s main interests (COMI) is situated, so within the territory of a Member State, will have the primacy to open the proceedings. It is important to keep in mind that the principle of subordination between primary and secondary proceedings is set forth by Articles 3(2) (4): where the centre of the debtor s main interests is situated within the territory of a Member State, the courts of another State have a jurisdiction to open insolvency proceedings only if the debtor possesses an establishment in the territory of that other State (Article 3(2) and Article 2(h) InsReg). See Consequently several proceedings in relation to the same debtor, which run under the insolvency laws of two or more different Member States, are due to be opened. However, only one main proceeding (opened in the State where the centre of the debtor s main interest is situated) is allowed, whilst there could be as many secondary proceedings in other States as the debtor possesses establishments in these territories. The Regulation does not provide any express rule to resolve cases where the courts of two States concurrently claim jurisdiction in accordance with Article 3(1). Such conflicts of jurisdiction are seen as an exception, given the necessarily uniform nature of the criteria of jurisdiction. The principle of mutual trust forms the basis on which any dispute should be resolved where the courts of two Member States both claim competence to open the main insolvency proceedings. The decision of the first court to open proceedings should be recognised in the other Member States without those Member States having the power to scrutinise the court s decision (Whereas (22)) Main insolvency proceedings The Regulation does not define the concept of centre of main interests as meant in Article 3(1), but it appears that only economic interests are to be taken into consideration. Main is meant to serve as a criterion where these interests include activities of different type or nature. Article 3(1) 2 nd sentence assumes that the registered office is the centre of main interests, in the absence of proof to the contrary. The assumption serves as a rebuttable presumption. Most commonly such a place corresponds to the actual head office of a debtor. Actually this might not be so: in the UK, for instance, it is quite common for the registered office to be somewhere else than the actual operational headquarters of the company. One might argue that if the actual head office was elsewhere this would be required sufficient to rebut the presumption. To determine the centre of main interest (COMI) of a natural person, the Regulation does not contain presumptions. The concept of COMI must be interpreted as the place where the debtor conducts the administration of his interests on a regular basis, which is therefore ascertainable by third parties (see Whereas (13)). In two decisions issued in 2006 the European Court of Justice has provided further guidance for interpreting COMI, see and It should be mentioned that centre of main interest and the method of dividing proof by the same rebuttable presumption has found its way to Section 1502(4) and Section 1516 (c) U.S. Bankruptcy Code Local insolvency proceedings In cases where the debtor s centre of main interests is located in a Member State, the courts of other Member States have no power to open main insolvency proceedings. However, any of those States may open territorial proceedings, if the debtor has an establishment in the territory of that State. This is called a secondary proceeding. An establishment means any place of operations where the debtor carries out a non-transitory economic activity with human means and goods according to Article 2(h). The UNCITRAL 12

13 13 Model Law s definition of establishment (Article 2(f) UNCITRAL Model Law) has been derived from Article 2(h) InsReg. Section 1502(2) U.S. Bankruptcy Code is inspired by the Model Law s description of establishment. The mere presence of an asset or only a bank account is not enough to create this establishment. Consequently Article 3(2) does not grant jurisdiction to open territorial proceedings to the courts of the States where the debtor does not have an establishment. The assets located in that State are encompassed in the main insolvency proceedings, if such proceedings have been opened. As said, in the event of there being a number of establishments located in different Member States, several sets of secondary proceedings may be opened Independent territorial insolvency proceedings Article 3(4) deals with situations that exist prior to the opening of main proceedings, since there are yet no main proceedings to which they are subordinated. This is exceptional with regard to the universal scope of the proceedings now that territorial proceedings may be opened in advance, in order to satisfy local creditors. The courts of a Member State having jurisdiction under Article 3(2) may open, prior to the main proceedings, territorial insolvency proceedings (also called: independent territorial proceedings), in only two cases: (i) the conditions for opening the insolvency proceedings, as set out by the law of the State where the centre of a debtor s main interests is located, do not allow main proceedings to be opened, see Article 3(4)(a), e.g. the debtor misses the qualification of being a merchant, and (ii) where the opening is requested by a local creditor ( a creditor who has his domicile, habitual residence or registered office in the Member State within the territory of which the establishment is situated ) or whose claim arises from the operation of that establishment, within the meaning of Article 3(4)(b). In this case one can think especially of local suppliers. The reason for this restriction is that cases where territorial insolvency proceedings are requested before the opening of main insolvency proceedings are intended to be limited to what is absolutely necessary. If the main insolvency proceedings are opened, the territorial proceedings become secondary proceedings. See Whereas (17) Secondary territorial proceedings Article 3(3) InsReg requires that, after the main proceedings have been opened by the competent court within the meaning of Article 3(1), the subsequent proceedings opened by the court of the State where the establishment is located, in accordance with Article 3(2), are secondary proceedings subject to Chapter III of the Insolvency Regulation. Following the opening of the main insolvency proceedings, the right to request the opening of insolvency proceedings in a Member State where the debtor has an establishment is not restricted by this Regulation. The liquidator in the main proceedings or any other person empowered under the national law of that Member State may request the opening of secondary insolvency proceedings, see Article 29 InsReg. Secondary insolvency proceedings do not only serve the protection of local interests. In a case 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 the liquidator in the main proceedings may request the opening of secondary proceedings when the efficient administration of the estate so 13

14 14 requires (Whereas (19)) European Court of Justice 17 January 2006 (Suzanne Staubitz-Schreiber) In the beginning of 2006 the first full case concerning the application of the Insolvency Regulation has been given by the European Court of Justice on 17 January 2006 (Case C-01/04). The decision also concerns COMI, but this time for a natural person. The applicant for opening insolvency proceedings is Suzanne Staubitz-Schreiber, a resident in Germany where she operated a telecommunications equipment and accessories business as a sole trader. She ceased to operate that business in 2001 and requested, on 6 December 2001, the opening of main insolvency proceedings regarding her assets before the Court in Wuppertal. On 1 April 2002, she moved to Spain in order to live and work there. By judgement of 10 April 2002, the Wuppertal Court refused to open the insolvency proceedings applied for on the ground that there were no assets. The appeal brought by the applicant in the main proceedings against that order was dismissed in appeal, on the ground that the German courts did not have jurisdiction to open insolvency proceedings in accordance with Article 3(1) of the Regulation, since the centre of the main interests of the applicant in the main proceedings was situated in Spain. Susanne brought an appeal before the German Supreme Court (Bundesgerichtshof) in order to have the latter order set aside and the case referred back to the Court in Wuppertal. She submits that the question of the international jurisdiction of the court should be examined in the light of the situation at the time when the request to open insolvency proceedings was lodged, or, in this case, by taking account of her domicile in Germany in December The German Supreme Court refers the following question to the ECJ for a preliminary ruling: Does the court of the Member State which receives a request for the opening of insolvency proceedings still have jurisdiction to open insolvency proceedings if the debtor moves the centre of his or her main interests to the territory of another Member State after filing the request but before the proceedings are opened, or does the court of that other Member State acquire jurisdiction? Where is Suzanne s COMI? It follows that in the case of main proceedings the national court must determine whether it has jurisdiction in the light of Article 3(1) of the Regulation. The ECJ indicates that this provision does not specify whether the court originally seised retains jurisdiction if the debtor moves the centre of his main interests after submitting the request to open proceedings but before the judgment is delivered. The ECJ considers that a transfer of jurisdiction from the court originally seised to a court of another Member State on that basis would be contrary to the objectives pursued by the Regulation. The ECJ submits that the preambles to the Regulation express the intention to avoid incentives for the parties to transfer assets or judicial proceedings from one Member State to another, seeking to obtain a more favourable legal position: That objective would not be achieved if the debtor could move the centre of his main interests to another Member State between the time when the request to open insolvency proceedings was lodged and the time when the judgment opening the proceedings was delivered and thus determine the court having jurisdiction and the applicable law. Transfer of jurisdiction would also be contrary to the objective of efficient and effective cross-border proceedings and retaining the jurisdiction of the first court seised ensures greater judicial certainty for creditors who have assessed the risks to be assumed in the event of the debtor s insolvency with regard to 14

15 15 the place where the centre of his main interests was situated when they entered into a legal relationship with him. The answer to be given to the national court must therefore be that Article 3(1) of the Regulation must be interpreted as meaning that the court of the Member State within the territory of which the centre of the debtor s main interests is situated at the time when the debtor lodges the request to open insolvency proceedings retains jurisdiction to open those proceedings if the debtor moves the centre of his main interests to the territory of another Member State after lodging the request but before the proceedings are opened. It is interesting to note that in the ECJ s approach to the aims and objectives of the Insolvency Regulation the recitals (whereasses) are pivotal. Furthermore, emphasis is laid on the interests and the protection of creditors, which seems to function as a forerunner of the ECJ decision in the Eurofood case. On 9 February 2006 the German Supreme Court decided that the judgment of the Wuppertal Court of 10 April 2002 is overturned and the Supreme Court referred the matter for a new decision to the same court European Court of Justice 2 May 2006 (Eurofood) On 2 May 2006 the European Court of Justice has published its long awaited judgment, which is also important for the interpretation of COMI. Eurofood IFSC Ltd is registered in Ireland in 1997 as a company limited by shares with its registered office in the International Financial Services Centre in Dublin. It is a wholly owned subsidiary of Parmalat SpA, a company incorporated in Italy, whose principal objective was the provision of financing facilities for companies in the whole Parmalat group. On 24 December 2003, in accordance with Decree-Law No 347 of 23 December 2003 (Amministrazione straordaninaria delle grandi impresi in stato di insolvenza - extraordinary administration for large insolvent undertakings; GURI No 298 of 24 December 2003, p. 4), Parmalat SpA was admitted to extraordinary administration proceedings by the Italian Ministry of Production Activities, who appointed Mr Bondi as the extraordinary administrator of Parmalat. On 27 January 2004, the Bank of America applied to the High Court (Ireland) for compulsory winding up proceedings to be commenced against Eurofood and for the nomination of a provisional liquidator. That application was based on the contention that Eurofood was insolvent. The Irish High Court appointed on the same day Mr Farrell as the provisional liquidator, with powers to take possession of all the company s assets, manage its affairs, open a bank account in its name, and instruct lawyers on its behalf. Two weeks later, on 9 February 2004, the Italian Minister for Production Activities admitted Eurofood to the extraordinary administration procedure and appointed Mr Bondi as the extraordinary administrator. This was followed a day later by an application filed before the Tribunale Civile e Penale di Parma (District Court, Parma, Italy) for a declaration that Eurofood was insolvent. The hearing was fixed for 17 February 2004, Mr Farrell being informed of that date on 13 February. On 20 February 2004, the District Court in Parma, taking the view that Eurofood s COMI was in Italy, held that it had international jurisdiction in the meaning of Article 3(1) of the Insolvency Regulation to determine whether Eurofood was in a state of insolvency. 15

16 16 Back to Ireland: by 23 March 2004 the High Court decided that, according to Irish law, the insolvency proceedings in respect of Eurofood had been opened in Ireland on the date on which the application was submitted by the Bank of America, namely 27 January Taking the view that the COMI of Eurofood was in Ireland, it held that the proceedings opened in Ireland were the main proceedings. It also held that the circumstances in which the proceedings were conducted before the District Court in Parma were such as to justify, pursuant to Article 26 of the Regulation, the refusal of the Irish courts to recognise the decision of that court. Finding that Eurofood was insolvent, the High Court made an order for winding up and appointed Mr Farrell as the liquidator. Mr Bondi appeals against that judgment and the Irish Supreme Court considered it necessary, before ruling on the dispute before it, to stay the proceedings and to refer several questions, including the one regarding COMI, to the Court of Justice for a preliminary ruling. On this topic the European Court of Justice (Grand Chamber) 2 May 2006 (Case C-341/04) rules as follows: Where a debtor is a subsidiary company whose registered office and that of its parent company are situated in two different Member States, the presumption laid down in the second sentence of Article 3(1) of Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings, whereby the centre of main interests of that subsidiary is situated in the Member State where its registered office is situated, can be rebutted only if factors which are both objective and ascertainable by third parties enable it to be established that an actual situation exists which is different from that which location at that registered office is deemed to reflect. That could be so in particular in the case of a company not carrying out any business in the territory of the Member State in which its registered office is situated. By contrast, where a company carries on its business in the territory of the Member State where its registered office is situated, the mere fact that its economic choices are or can be controlled by a parent company in another Member State is not enough to rebut the presumption laid down by that Regulation. The European Court court too decides that the main insolvency proceedings opened by a court of a Member State must be recognised by the courts of the other Member States, without the latter being able to review the jurisdiction of the court of the opening State. This all means that the judgment based on the application on 27 January 2004 before the High Court (Ireland) must be recognized. For a company or legal person, the presumption is that the centre of the debtor s main interests is the place of its registered office, but this presumption may be rebutted, see Article 3(1) last line. This presumption should be taken serious. It only can be rebutted if factors which are both objective and ascertainable by third parties enable it to be established that reality differs from legal form (the formal location at that registered office). The ECJ provides two examples: (i) when the company is not carrying out any business in the territory of the Member State in which its registered office is situated, and (ii) where a company carries on its business in the territory of the Member State where its registered office is situated. In the first example (POboxes; sham companies) the presumption may easily be rebutted. In the second example, the COMI of the debtor could be in the other Member State, but the mere fact that its economic choices are or can be controlled by a parent company in another Member State is not enough to rebut the presumption. Internal invisible (potential) control by the parent company will be not or hardly ascertainable. Rebutting the presumption based on these facts does not work. That is only possible if factors which are both objective and ascertainable by third parties would lead to that consequence. 16

17 Law applicable The Regulation sets out, for the matters covered by it, uniform rules on conflict of laws, which replace national rules of private international law. Therefore Article 4 lays down the basic rule on conflict of laws of this Regulation, determining the law applicable to the insolvency proceedings, the product thereof and their effects. Unless otherwise stated by this Regulation, the law of the Member State of the opening of the proceedings (or: lex concursus) is applicable. This rule on conflict of laws is valid both for the main proceedings and for local proceedings (being secondary or independent territorial proceedings), repeated by Article 28 InsReg for secondary proceedings. It should be noted that the German text seems more narrow as it is formulated that the law applicable is das Insolvenzrecht des Mitgliedstaats, which is (not the law, but) the insolvency law of the Member State. The law applicable of the State of the opening of the proceedings determines all the effects of the insolvency proceedings, both procedural and substantive, on the persons and legal relations concerned. This lex concursus governs all the conditions for the opening, conduct and closure of the insolvency proceedings, the admissibility of claims and the rules on distribution and preferences, etc. These substantive effects are in a broad sense quite typical for insolvency law and are also necessary for the insolvency proceedings to fulfil its aims. See Article 4(2)(a) (m), that provides that the lex concursus shall determine in particular: (a) against which debtors insolvency proceedings may be brought on account of their capacity; (b) the assets which form part of the estate and the treatment of assets acquired by or devolving on the debtor after the opening of the insolvency proceedings; (c) the respective powers of the debtor and the liquidator; (d) the conditions under which set-offs may be invoked; (e) the effects of insolvency proceedings on current contracts to which the debtor is party; (f) the effects of the insolvency proceedings on proceedings brought by individual creditors, with the exception of lawsuits pending; (g) the claims which are to be lodged against the debtor s estate and the treatment of claims arising after the opening of insolvency proceedings; (h) the rules governing the lodging, verification and admission of claims; (i) the rules governing the distribution of proceeds from the realisation of assets, the ranking of claims and the rights of creditors who have obtained partial satisfaction after the opening of insolvency proceedings by virtue of a right in rem or through a set-off; (j) the conditions for and the effects of closure of insolvency proceedings, in particular by composition; (k) creditors rights after the closure of insolvency proceedings; (l) who is to bear the costs and expenses incurred in the insolvency proceedings; (m) the rules relating to the voidness, voidability or unenforceability of legal acts detrimental to all the creditors. Insolvency proceedings to which the law of the opening State normally applies, and their automatic recognition as provided in Article 16, may interfere with the rules under which transactions are carried out in other Member States. To protect legitimate expectations and the certainty of transactions (see Whereas (24)) in Member States other than that in which proceedings are opened, provisions have been made for a number of exceptions to the general rule. The exceptions to the application of the law of the State of the opening (exceptions to the lex concursus) are referred to in art InsReg. 17

18 18 Three subjects are excluded from the legal consequences normally attached to the opening of insolvency proceedings: third parties rights in rem (Article 5), set-off (Article 6), and reservation of title (Article 7). For six subjects the Regulation refers to another applicable law than the lex concursus. This is the case for: contracts relating to immovable property (Article 8), rights and obligations of parties to a payment or settlement systems or to a financial market (Article 9), contracts of employment (Article 10), the debtor s rights in immoveable property, a ship or an aircraft subject to registration (Article 11), the validity of some acts of a debtor concluded after the opening of insolvency proceedings, in order to protect third-party purchasers (Article 14), and the effects of insolvency proceedings on lawsuits pending (Article 15). Article 12 (Community patents and trade marks) provides that certain rights may be included only in the main proceedings. Article 13 (Detrimental acts) creates a defence against the applicability of the lex concursus. (see Scheme 1). I will now deal with some specifics of Articles Scheme 1 EXCEPTIONS TO LEX CONCURSUS (Articles 5 15) 1. Exclusion from lex concursus: opening shall not affect - third parties rights in rem (Art. 5) - set-off (Art. 6) - reservation of title (Art. 7) 2. Reference to another applicable law (another than the lex concursus) Subject Choice of Law - contracts relating to - law of Member State within immovable property (Art. 8) which property is situated (Lex rei sitae) - rights and obligations of parties - law of Member State to payment or settlement systems applicable to system or or to a financial market (Art. 9) market - contracts of employment (Art. 10) - law of Member State applicable to the employment contract - the debtor s rights in immoveable - law of Member State under property, ship or aircraft subject to the authority of which the registration (Art. 11) register is kept - validity of some acts of the - law of Member State within debtor s debtor concluded the territory of which the after the opening of immovable asset is situated insolvency proceedings, or under the authority of to protect third-party purchasers (Art. 14) which the register is kept 18

19 19 - the effects of insolvency proceedings - law of Member State in on lawsuits pending (Art. 15) which lawsuit is pending 3. Rights only to include in main proceeding Article 12 (Community patents and trade marks) Third parties rights in Rem Protection of trade has been a major concern during the drafting process. Rights in rem have a very important function with regard to the granting of credit and obtaining capital investment. They protect their holders against the risk of insolvency of the debtor and the interference of third parties. They allow credit to be obtained under conditions that would not be possible without this type of guarantee. The Regulation also acknowledges the interest of each State in protecting its market s trade. The rationale of Article 5 is that the basis, validity and extent of such a right in rem should normally be determined according to the lex situs and not be affected by (the law of the State of) the opening of insolvency proceedings. The proprietor of the right in rem should therefore be able to continue to assert his right to segregation or separate settlement of the collateral security. Article 5 InsReg excludes from the effects of the opening of the insolvency proceedings rights in rem of creditors or third parties in respect of assets belonging to the debtor, which at the time of the opening of the proceedings are situated within the territory of another Member State. The Regulation imposes only an obligation to respect third parties rights in rem over assets located within the territory of a State different from the State of the opening of proceedings. The holder of the right in rem may exercise his right to separate the security from the estate and, where necessary, realise the asset individually satisfying his claim. On the other hand, the liquidator, even if he is in possession of the asset, cannot take any decision on that asset which might affect the right in rem created on it, without the consent of its holder. The rule, laid down in Article 5, however does not immunise fully rights in rem against the debtor s insolvency. Article 5(1) states that the opening of insolvency proceedings shall not affect rights in rem in respect of assets located in other Member States; it does not say that the proceedings shall not affect assets located in another State. As the main proceedings are universal they encompass all the debtor s assets. One should note that Article 5 does not interfere with the goods, which are subject to the right itself. If the law of the State where the assets are located allows these rights in rem to be affected in some way, the liquidator (or any other person empowered to do so) may request secondary insolvency proceedings be opened in that State if the debtor has an establishment there. The secondary proceedings are conducted according to national law and they allow the liquidator to affect these rights under the same conditions as in purely domestic proceedings. If a secondary proceeding is not opened, the surplus on sale of the asset covered by rights in rem must be paid to the liquidator in the main proceedings (Whereas (25)). The Regulation does not intend to impose its own definition of a right in rem, running the risk of describing as rights in rem legal positions which the law of the Member State where the assets are located does not consider to be rights in rem, or not encompassing rights in rem which do not fulfil the conditions of that definition. In order to facilitate the application of the Regulation and to avoid doubts Article 5(2) provides a list of types of rights that are commonly considered by national laws as rights in rem. Under Article 5(3) it is provided that the right, recorded in a public register and enforceable against third parties, under which a right in rem within the meaning of Article 5(1) may be obtained, shall be 19

20 20 considered a right in rem. Under Article 5(4), it is stated that Article 5(1) shall not preclude the actions for voidness, voidability or enforceability laid down in Article 4(2)(m) Set-off Set-off is a way of paying one s obligations, governed by the relevant rules of private international law regarding the law applicable to obligations. Set-off in principle means that two claims will be off-set mutually. Which law determines the set-off in cross-border insolvency cases in Europe? Under Article 4(2)(d), insolvency set-off is subject to the competence of the State of the opening of the insolvency proceeding, the lex concursus. It must be considered however that some countries restrict or prohibit set-off in situations of insolvency. If the lex concursus allows the set-off no problem will arise under Article 4. On the other hand, if the lex concursus does not allow for set-off, Article 6 constitutes an exception to the general rule of the applicability of the law of the Member State where the proceedings are opened. This Member State shall permit the set-off, according to the conditions established for insolvency set-off by the law applicable to the debtor s claim. As this creditor is entitled to the set-off if it is possible under the law applicable to the claim of the insolvent debtor, he will acquire through the set-off a kind of guarantee.. based on legal provisions on which the creditor concerned can rely at the time when the claim arises (Whereas (26)). Article 4(2)(d) determines whether the lex concursus allows the set-off. Article 4 deals with the effects of the opening of the insolvency proceedings; it does not imply to apply material conditions with regard to the set-off. Article 4 presumes, at the time op the opening of the proceedings, an existing debt versus an existing claim. Article 6 is most-favourable for set-off permitted by the law applicable to the insolvent debtors claim. In legal literature some authors are of the opinion that law only means general civil law ; other authors however argue that law also encompasses insolvency law of the court opening the insolvency proceedings. Although Article 6 is not clear it seems most likely that the provision implies that law applicable is the applicable law of a Member State. In the case a claim is not (yet) mature in the opinion that law stands for general civil law, the creditor is according to the Civil Code of the Netherlands (Art. 6:127) not able to set-off, as maturity (payability) of the claim is a prerequisite. In Dutch Insolvency law (Art. 53 Bankruptcy Act) on the other hand maturity is not a condition to be fulfilled. Authors defending the latter view hold the opinion that the creditor indeed can set-off. In other circumstances the former view would give the creditor a right to set-off, e.g. in general French law, that provides for relatively wide criteria to set-off. In the latter view applying the double standard of both civil law and insolvency law of France the creditor can not set-off his claim, as French insolvency law applies quite narrow conditions. The example shows that with engineering of financial transaction forum shopping could raise the possibilities for set-off, although this seems to go against the rationale of the Regulation, see Whereas (4), indicating that for the proper functioning of the internal market it is necessary to avoid incentives for the parties to transfer assets or judicial proceedings from one Member State to another, seeking to obtain a more favourable legal position (forum shopping). As in the case of Article 5(4), also Article 6(2) provides that any actions detrimental to all the creditors may be corrected by bringing actions for voidness, voidability or enforceability as provided for in Article 4(2)(m) Reservation of title 20