Revising the EC Insolvency Regulation: the final cut BRIEFING MARCH 2015 THE ECIR The EC Insolvency Regulation (or ECIR ) came into force in 2002. Its primary aim is to facilitate the efficient conduct of cross-border insolvencies. To this end, if an EU-based debtor has operations in more than one Member State, the ECIR provides that there will only be one main insolvency proceeding, and that will take place in the Member State in which the debtor has its centre of main interests ( COMI ). These proceedings should have universal scope and multiple proceedings should not run in parallel. If the debtor has an establishment in another Member State, secondary proceedings may be opened there, but only to deal with local assets, and secondary proceedings must be coordinated with the main proceedings. This aim still holds good. However, the world of restructuring has moved on since 2002. Back in the early noughties, the focus was on traditional insolvency proceedings aimed at the final realisation and distribution of a debtor s assets. Over the next decade, there was an upsurge in the use of, and interest in, restructuring and preinsolvency procedures, which was not really contemplated by the ECIR framework. In 2012, the EU Commission put forward proposals for reform, designed to address this and certain other shortcomings. There followed a back and forth between the EU institutions, with a variety of sometimes quite controversial proposals emerging along the way. Consensus between the Commission, Council and Parliament was finally reached at the end of last year. A draft of the revised ECIR has been issued, which the Council currently intends to adopt at first reading on 12 and 13 March, with approval from Parliament expected to follow without further substantive debate in April or May. The majority of the changes are anticipated to apply 24 months after the revised ECIR comes into force. This briefing considers the main changes anticipated by the draft ECIR. SCOPE The ECIR has been extended to rescue proceedings, including debtor-led pre-insolvency proceedings. It will apply to proceedings that are based on a law relating to insolvency. However, it will not apply to proceedings that are based on general company law and which are not designed exclusively for insolvency situations. Proceedings that are caught are listed exhaustively in Annex A to the ECIR. As UK schemes of arrangement are not included in Annex A, and are based on company law despite their application in an insolvency and restructuring context, it is clear that they will not be covered.
COMI The existing ECIR provides that a company s COMI should correspond to the place where it conducts the administration of its interests on a regular basis, and is therefore objectively ascertainable by third parties. There is a rebuttable presumption, that in the case of a company or other legal person, the COMI is in the same place as the registered office. The revised ECIR is intended to contain safeguards to prevent fraudulent or abusive forum shopping. In particular, the presumption that a company s COMI is in the place of its registered office will no longer apply if the company has relocated its registered office in the three months before requesting the opening of insolvency proceedings. However, we do not consider this likely to have a significant impact on sophisticated restructurings, as we would not expect a well advised company that was shifting its COMI for the purposes of entering an insolvency process to rely on the presumption, but to take multiple steps to ensure that its COMI was genuinely relocated. The revised ECIR also emphasises that the presumption as to the location of COMI is rebuttable, and that the court (or insolvency practitioner, in the case of out-of-court proceedings) should assess carefully whether the COMI is genuinely located in the Member State in question, taking into account what is ascertainable to third parties but this is in line with the approach the courts already tend to take. SECONDARY PROCEEDINGS At present, and in line with the original ambition of the ECIR, secondary proceedings must be winding-up proceedings (as opposed to reorganisation/restructuring proceedings). This restriction has been removed. The concept of synthetic or virtual secondary proceedings has also been built into the revised ECIR: in order to avoid the opening of secondary proceedings, the insolvency practitioner in the main proceedings can give an undertaking that he will distribute the assets in the jurisdiction in which secondary proceedings could have been opened in accordance with the local laws of distribution and priority. However, the undertaking must be approved by the known local creditors. English administrators are already able to do this in some circumstances, but the change may facilitate a wider uptake across Europe. COOPERATION AND COMMUNICATION BETWEEN MAIN AND SECONDARY PROCEEDINGS The existing ECIR requires communication and cooperation between the insolvency office holder in the main proceedings and the liquidator in the secondary proceedings, subject to the rules applicable to those proceedings. These requirements have been enhanced and expanded in the revised ECIR, for instance extending to exploring the possibility of restructuring the debtor, and coordinating a restructuring plan where such a possibility does exist. Measures requiring cooperation and communication (i) between courts, and (ii) between insolvency practitioners and courts, have also been added. However, the provisions continue to apply only to the extent they are compatible with the rules of the national proceedings (or other such limitations). There is, of course, still by no means a common approach in Europe in relation to the rules for national proceedings. 02
GROUP PROCEEDINGS The revised ECIR introduces a new concept of group coordination proceedings. This is perhaps the most interesting development. These involve the appointment of a group coordinator to oversee the coordination of the insolvency or restructuring across a group of companies and facilitate a group coordination plan. Group coordination proceedings may be requested by any insolvency practitioner appointed to a group company, but individual group members are free to opt out if they do not wish to participate. The coordinator must propose a group coordination plan setting out an integrated approach to the resolution of the group members insolvencies. In particular, the plan may propose agreements between the insolvency practitioners of the group members, and measures to rescue the group and/or settle intra-group disputes. The coordinator may request a stay of the proceedings opened in respect of any group member who has not opted out, if necessary for the proper implementation of the plan. All insolvency practitioners who are participating must consider the recommendations of the group coordinator and the content of the group coordination plan, but are not obliged to follow them. The rules governing national insolvency proceedings are not themselves altered by the new procedure, and therefore the group coordination plans will need to be compatible with local laws and rules. The revised ECIR also provides for enhanced cooperation between insolvency practitioners appointed to group companies where the group coordination procedure is not being used, to the extent compatible with the rules applicable to each proceeding. The revisions are consistent with the trend towards attempting to encourage more dialogue and cooperation between insolvency practitioners. For example, this has been attempted (albeit often with limited success) through the use of informal cross-border insolvency protocols in previous situations. However, the extent to which this focus on coordination and cooperation will succeed in practice remains to be seen; as the Lehman and MF Global insolvencies (amongst others) have shown, upon the failure of a group some of the most difficult issues occasioning litigation are those between group companies. INTERCONNECTED ELECTRONIC INSOLVENCY REGISTER Member states will be required to publish information on insolvency cases in a publicly accessible electronic register and the national registers will be interconnected at EU level so that there is a single central access point (a pilot project interconnecting the insolvency registers of seven Member States, not including the UK, was launched in July 2014). An effective interconnected register would be helpful, but getting it up and running is likely to pose some technical challenges (and it is also worth noting in this context that the UK does not have an interconnected domestic insolvency register at present). The period for implementing interconnection is expected to be four years from the date the revised ECIR comes into force. IMPACT ON UK LAW The Government has indicated that some changes to UK law will be desirable to ensure consistency with the revised ECIR and to make sure all the measures it contains are workable. It has said that these are likely to include new rules on the publication of judicial decisions and on disclosing the basis for jurisdiction when proceedings are opened, and provisions to facilitate group coordination proceedings. They have described the sort of changes they 03
have in mind as consequential and so we expect them to be primarily technical, but it will be interesting to see what they have in mind regarding the group coordination proceedings, and whether the measures seem designed to encourage companies to make use of the procedure. AND WHAT ISN T INCLUDED While the Commission s original proposal was quite moderate, several controversial modifications were put forward during the revised ECIR s two year gestation period, causing some alarm among insolvency practitioners and restructuring professionals across Europe. In particular, proposals put forward by the Parliament s Committee on Legal Affairs (but ultimately rejected by the Parliament) would have meant that out-of-court insolvency proceedings did not benefit from automatic recognition as main proceedings under the ECIR. This could have had serious consequences for out-of-court administrations. Further proposals adopted by the Parliament would have introduced a look-back test under which a company would have needed to have its COMI in a Member State for at least three months before it could enter into main insolvency proceedings there (as discussed above, a much diluted variant of this survives, in that there will no longer be a presumption that COMI is in the place of the registered office if it has moved in the previous three months, but that is to do with how COMI is assessed, whereas the rejected proposal could have affected a company s freedom to shift its COMI). There was also concern that schemes of arrangement might be caught by the revised ECIR, which would have seriously curtailed the ability of the English court to accept jurisdiction for schemes involving foreign companies. None of these proposals made it to the final cut. AN EFFECTIVE PACKAGE? In general, the reform package is sensible and moderate. The decision to expand the scope of the ECIR to include more restructuring and pre-restructuring processes, while ensuring that procedures such as schemes of arrangement (which sit within UK company law but may be used in a restructuring context) are not accidentally caught seems to us to strike an appropriate balance. It will be interesting to see whether there is much appetite for the group coordination proceedings (at least in cases where group companies are not engaged in litigation against each other). There are bound to be various practical hurdles to overcome, and there is a risk they will add another layer of procedure and expense. In addition, as the group coordination plan will not be binding, the process may lack teeth. However, the opt-out provisions seem robust, so we do not think there is cause for alarm about the new process. If it facilitates simpler cross-border cooperation in the circumstances where insolvency practitioners would currently seek to pursue it on a voluntary basis, then it may prove helpful. If it is used on a wide enough scale, it will also be interesting to see whether, in the long term, it paves the way for incremental changes to national laws that would make cross-border cooperation easier. NEXT TIME The recitals to the revised ECIR say that the next time it is reviewed it will be necessary to identify further measures to improve the preferential rights of employees at European level. But that will be another ten years coming. The Commission is also due to report on the application of the group coordination proceedings five years after the revised ECIR enters into force (accompanied by a proposal for adaptation if needs be). 04
The full title of the ECIR regulation is Council Regulation (EC) 1346/2000 on insolvency proceedings. The amending regulation is presented as a recast of the ECIR. Both the current and the recast ECIR are directly applicable and apply to all Member States except Denmark. This briefing only considers the changes that affect corporate entities the ECIR also covers individuals. See further: EC Commission Press Release, BIS memorandum and Draft of the revised ECIR. Slaughter and May have advised on a large number of high profile cross-border insolvencies and restructurings in recent years, including MF Global, Lehman Brothers, General Motors, Eurotunnel, Wind Hellas, Glitnir and the resolutions of the Bank of Cyprus and Laiki Bank. If you would like further information on any of the issues raised in this briefing please contact Ian Johnson, Tom Vickers, Richard de Carle, Nicky Ellis or your usual contact at Slaughter and May. IAN JOHNSON T +44 (0)20 7090 4732 E ian.johnson@slaughterandmay.com TOM VICKERS T +44 (0)20 7090 5311 E tom.vickers@slaughterandmay.com RICHARD DE CARLE T +44 (0)20 7090 3047 E richard.decarle@slaughterandmay.com NICKY ELLIS ASSOCIATE T +44 (0)20 7090 4406 E nicky.ellis@slaughterandmay.com Slaughter and May 2015 This material is for general information only and is not intended to provide legal advice. For further information, please speak to your usual Slaughter and May contact. nee3.indd315