EU Cross-Border Insolvency and Rescue – EU Insolvency Regulation
From 26 June 2017 an enhanced EU regime governing the commencement, recognition and enforcement of insolvency and restructuring proceedings throughout the EU will come into effect. The principal aim of the new regime is to encourage a corporate rescue culture within the EU.
EU Insolvency Regulation 1346/2000 (the "Original Regulation") will be replaced with Regulation (EU) 2015/848 (the "Recast Regulation"). The Original Regulation will continue to apply to insolvency proceedings commenced on or before 26 June 2017. The Recast Regulation will apply to proceedings started after that date.
As with the Original Regulation, the Recast Regulation is focused on cross-border issues. The Recast Regulation does not seek to harmonise the insolvency and restructuring laws of individual EU Member States, but provides a framework in which different insolvency regimes can operate and interact. Like the Original Regulation, the Recast Regulation will not apply to Denmark.1
The Recast Regulation is directly applicable – i.e. does not require any further Member State legislation to give effect to it. It does not apply to banks or other credit institutions, insurance companies, collective investment funds or investment firms.
This update briefly highlights the key provisions, with a focus on company insolvency and rescue (as opposed to personal insolvency).
The headline issues are:
- Pre-insolvency rescue proceedings are now in scope – allowing a greater number of corporate rescue proceedings to benefit from automatic recognition across the EU;
- Safeguards to prevent abusive forum shopping are introduced;
- Secondary proceedings will provide a better fit with company rescue;
- New concept of group co-ordination proceedings; and
- Improvements in cross-border coordination and transparency.
More corporate rescue processes in scope
The Recast Regulation extends the scope of the regime to include pre-insolvency rescue proceedings (i.e. proceedings that are commenced to avoid insolvency) and certain interim and debtor-in-possession proceedings. An Irish examinership will continue to be recognised in other EU Member States.
Safeguards to prevent abusive forum shopping
Both the Original Regulation and the Recast Regulation apply to a company that has its "centre of main interests" ("COMI") in an EU Member State and main insolvency proceedings can only be opened in the Member State where the company has its COMI. COMI is presumed to be located in the jurisdiction of the company's registered office unless the contrary is proved. This rebuttable presumption has led businesses successfully to relocate their COMI to take advantage of the insolvency or company rescue laws of another Member State. While the Recast Regulation recognises that "COMI shifting" can be positive, one of the policy drivers behind the Recast Regulation is to prevent abusive COMI shifting i.e. forum shopping by relocating to another jurisdiction to the detriment of the general body of creditors. Therefore, while the Recast Regulation still permits COMI shifting, it imposes the following controls designed to prevent abusive forum shopping.
First, the registered office presumption will not apply where the company has moved its registered office during a period of three months before the start of insolvency proceedings. However, given that a company's registered office is not usually moved to effect a COMI shift, it is unlikely that this provision will make much difference in practice.
Secondly, when an application is made to commence main proceedings the court must pro-actively examine whether the company's COMI is in that Member State.
Thirdly, for transparency, the court must set out its reasons for accepting jurisdiction.
While the Recast Regulation will not curb genuine COMI shifts designed to ensure a better outcome for stakeholders, it will ensure that a certain amount of scrutiny is carried out regarding whether the COMI shift is genuine. This is to be welcomed.
New provisions on secondary proceedings
Secondary proceedings can be opened in any Member State where the company has an "establishment." While the definition of "establishment" has been slightly altered, this will still require a business with substance and "boots on the ground". Notably the revised definition creates a short look-back period so that the existence of an establishment can be based on activities carried out in the three-month period prior to the opening of the main proceedings.
Secondary proceedings are no longer limited to winding-up proceedings (as was the case under the Original Regulation). Accordingly, where the main proceedings are rescue proceedings any secondary proceedings should be whatever form of local proceedings that fit best with the main proceedings. This means that an examinership will now be available as a secondary proceeding where the there is a business presence of substance in Ireland.
Further, the court to which a request is made for secondary proceedings to be opened must give the insolvency officer in the main proceedings notice of the request and the main insolvency officer will have a right to be heard. This enables the insolvency officer in main proceedings to have an element of control as to the opening of secondary proceedings. Under the Original Regulation insolvency officers in main proceedings could have secondary proceedings sprung on them.
Under the Recast Regulation it will be possible for the insolvency officer in the main proceedings to give undertakings to creditors in the Member State of the establishment that local distribution and priority rules will be respected as if secondary proceedings were opened there. When this is done it will avoid the need for the effort and expense of secondary proceedings. This has been referred to as a "synthetic" or "virtual" secondary proceeding.
The reforms to secondary proceedings are important. Under the Original Regulation the commencement of secondary proceedings had the potential to obstruct the efficient administration of the estate. The Recast Regulation provides substantial improvements which will be welcomed by practitioners.
Group co-ordination proceedings
The Recast Regulation continues to respect the separate legal personality of companies in a group. However it provides for a formal group co-ordination procedure where insolvency officers have been appointed in different Member States to different companies in a group. This is a voluntary process.
An insolvency officer of any of the group companies may request the court to open group co-ordination proceedings. The court must then decide whether opening such proceedings will prejudice any group member and whether the process will facilitate the effective administration of the insolvency proceedings of the group as a whole. Alternatively, a majority of two thirds of the group's insolvency officers may agree that a particular court should have jurisdiction to open group co-ordination proceedings. If the court decides that group proceedings are to be opened in any Member State, it must consider whether any creditors will be financially disadvantaged.
The insolvency officer of any group company may choose not to partake in any proposals for group co-ordination. Opt-out is not irrevocable, however: the insolvency officer may opt in at a later date. Even where an insolvency officer decides to opt in, the only obligation is to consider the recommendations of the co-ordinator. These need not be followed. But if an opted-in insolvency officer decides not to follow them, he must give reasons for this.
Where the court opens group co-ordination proceedings it must appoint a co-ordinator. This cannot be one of the existing insolvency officers. It must also decide on how the co-ordination will proceed and estimate the pro rata share of costs for each group member. The co-ordinator's task is to identify and recommend an overall plan for the conduct of the insolvency proceedings. That person may also apply for a stay of proceedings relating to any group member if this is necessary for the proper operation of the plan.
Given the additional layer of cost, group co-ordination may well only be worthwhile in a large complex group where a group co-ordinator with the right skills can find ways to maximise value and to resolve differences of opinion between individual insolvency officers. The possibility of appointing a group co-ordinator will add a new dynamic to EU cross-border insolvencies of large corporate groups, and may provide the key to unlocking deadlock between insolvency officers operating with conflicting agendas.
Cross-border co-operation and transparency
The Recast Regulation encourages co-operation in group insolvencies even where no group co-ordination process is used. It provides for the use of protocols as a basis for insolvency officers and courts co-operating and communicating with each other. Although the court has always had an inherent jurisdiction to provide, and receive, assistance and co-operation from overseas courts, it is significant that this is now on a firm legislative footing. The Recast Regulation also encourages members of a group to consider a group restructuring (outside of a group co-ordination plan). In addition, an insolvency officer appointed to one group member may be heard in other proceedings and may request a stay of those proceedings if certain conditions are met.
The Recast Regulation also provides mechanisms to improve transparency in EU insolvency proceedings. Member States must provide a database of insolvency and restructuring proceedings that have been opened pursuant to the Recast Regulation, together with key information for creditors in relation to those proceedings. These databases must be operative from June 2018. The Recast Regulation also provides for the establishment of an interconnected insolvency register which will create a central search mechanism for EU insolvency filings. This is not expected to become fully live until June 2019.
Although many of the changes are technical, the following practical outcomes from the Recast Regulation can be expected:
- The procedures for the appointment of a group co-ordinator are complex and are likely to be of practical benefit only in EU-wide group restructurings. These may well feature in "pre-pack" arrangements where there is a degree of certainty as to the outcome of the overall process;
- The insolvency officer in main proceedings will have to be even more attuned to the possibility of co-operation with his counterparts in secondary proceedings, and insolvency officers in related main proceedings;
- Insolvency officers, and courts, will have to be alert to possibilities to enlist assistance from other courts;
- Secondary proceedings will no longer be a potential barrier to company rescue; and
- The EU-wide insolvency register will become a standard search in financing transactions when it goes live.
Should you have any questions or would like to discuss the above, please contact your usual Maples and Calder contact.
1 References in this note to EU Member States should be read as excluding Denmark. Further, the Recast Regulation's future application to the UK after Brexit is currently uncertain and will depend on any agreement reached between the UK and the EU.