EU consultation on insolvency law

Comments from ACCA to the European Commission, June 2012.

1) Forum shopping and the COMI

The Regulation makes it clear that forum shopping is considered undesirable, and that primary proceedings should be possible only in the state of the debtor’s COMI.  The wording of the Regulation on the latter point caused considerable uncertainty after its introduction in 2000, mainly as the result of the desire of debtors to choose the jurisdiction they considered most convenient or beneficial to them. Article 3.1’s reference to the presumption that a company’s COMI will be the location of its registered office has led in particular to many cases of contrived re-structuring and migration and conflicting interpretations about how much weight to attach to the simple fact of location of the registered office.

Judgements of the ECJ in Eurofoods and Staubitz-Schreiber have brought helpful certainty to how the Regulation should be interpreted: it has become clear from the Court’s rulings that the location of the registered office should not be seen as the only relevant factor in determining the location of the COMI, and also that once initial applications have been made, the debtor may not subsequently file in another member state on the premise that his COMI has changed. Though these judgements have clarified the way the courts are to interpret the Regulation, it may be helpful for the definition of COMI to be brought up to date with the acquired legal understanding of what it means. The Eurofoods decision in respect of the COMI appeared at the same time to strengthen the status of the presumption regarding the registered office while at the same time stressing the importance of ‘objective and ascertainable factors’ to the determination of the factual situation. It would be helpful if an expanded definition could bring these two aspects together. It would also be helpful in his context if there were to be some reference in the definition to whether it is necessary for a COMI to be an ‘establishment’ (as opposed, potentially, to an address of convenience).  

While it is evident that the Regulation discourages forum shopping and wishes to eliminate it, the question must still be addressed as to why debtors in one country should feel motivated to try to relocate or restructure their business so as to initiate insolvency proceedings in one country rather than another.  A belief that procedures in one country are likely to be less punitive and transparent than elsewhere may well be one reason, but other reasons for carrying out migrations in the past have included less challenging approval thresholds (eg 75% in the UK as opposed to 95% for a comparative procedure in Germany), attractive rescue options such as debt-equity swaps being available in another jurisdiction, and the desire to cover a series of group companies within a related procedure.  Given that company law in the EU is making it progressively easier for companies to re-locate their registered offices, both under the Mergers Directive and the SE Regulation, the issue of forum shopping in cross-border insolvency is not likely to go away. It would therefore be sensible to consider whether the various reforms which are being made to insolvency laws at the national level are sufficient to address this issue or whether there are still matters that need be dealt with at the EU level.

2) Powers of the liquidator

Article 18(1) provides that the liquidator in main proceedings is entitled to exercise all the powers he has under the law of the state of the opening of those main proceedings (as long as no secondary proceedings have been opened in that other state).  Article 18(3) goes on to say that the liquidator must nevertheless comply with the law of each member state in which he operates.  It is evident that this situation results in cross-border liquidators incurring substantial additional costs since they are obliged to buy in legal advice in each of the states in which they operate, especially in relation to issues of employment law. Obviously, liquidators must comply with provisions of domestic law. But the cost issue must be seen as significant, not least because it reduces the returns for creditors, and suggests that attention must be given to ways of curbing administration costs in other ways.

3) Notification of the opening of proceedings and the liquidator's appointment

Articles 21 and 22 currently provide that the liquidator may request that notice of the opening of proceedings, and of his appointment, should be published and registered in appropriate publications. It would be helpful if there could be a standard requirement that, at least in all cases where the debtor entity has traded on a cross-border basis and where it is known or suspected that there are creditors in other member states, that such information is recorded and published as a matter of course. We support the idea of the creation of an EU-wide register in the form of an electronic portal which brings together the various national registers containing such information.

4) Coverage of pre-insolvency/rescue schemes

Where rescue schemes sanctioned by the domestic legislation of one state are not covered by the Regulation, the debtor and creditors in other member states may not benefit from the protections that that legislation affords. This situation has the potential to prolong the debtor’s state of financial uncertainty and to make it less likely that it will be able to re-structure itself and continue. The Commission would be entitled to view this as an issue which should be addressed in the context of encouraging entrepreneurial activity and safeguarding jobs. We see no reason in principle why the scope of the Regulation could not be extended to cover rescue procedures for individuals and businesses that are available under national law. It should be noted though that in some countries, including the UK, such procedures are increasingly being initiated via non-court procedures in order to speed up recourse to insolvency protection and to reduce costs. Accordingly it would not be sufficient for any amended Regulation to cover only court-approved arrangements.

5) Group situations

It is right that the law should acknowledge the fact that group companies have a close legal and operational relationship with each other. There are likely to be, in group situations, many intra-group financial transactions, a unified management structure and internal control systems, and a single corporate culture. All of these factors will be relevant to the administration of an insolvent group. But we would not advocate that groups should be dealt with as a single entity in insolvency. Every limited company is a separate legal entity and unless the parent company guarantees the debts of the subsidiaries, their financial obligations to creditors will invariably be independent of the parent company and the other group companies, meaning that the administration of each should be dealt with separately. We would though in principle be in favour of practical measures to reflect the special character of the group structure and to encourage or require the administrators of the parent company and the subsidiaries to communicate with and support each other.

6) Combating abuse

The insolvency of a business will always result in losses to creditors, whether employees, trade suppliers or other agencies such as the state.  Depending on the materiality of the losses they incur, the insolvency of a debtor entity can have a serious financial impact on the financial situation of the creditor. Many SMEs especially tend to be heavily dependent on one or a small number of larger customers, so when that larger customer becomes insolvent it is common for the insolvency to trigger a chain effect on its supplier businesses. While it is reasonable to pursue policies which aim to give entrepreneurs a second chance, it should at the same time be borne in mind that a more lax regulatory attitude towards business owners could be abused. Therefore, any reforms which are introduced that aspire to encouraging a more rescue-orientated legal framework and culture should be accompanied by safeguards to ensure that the responsibility of directors and entrepreneurs is controlled, and that legal remedies are available to deal with those that take advantage of more lenient rules to the detriment of creditors. In this context there should be co-operation at the EU level to ensure that those convicted of insolvency related offences and disqualified from managing businesses in any one state are not able to do so in others.

The special nature of insolvency work also means that those supervising insolvency administrations should be competent and qualified to do this work. As well as taking steps to increase the efficiency of the administration of cross-border cases, the EU should consider introducing a requirement that those who take on insolvency cases have demonstrated competence in insolvency issues, are insured in respect of the assets they assume responsibility for and are regulated appropriately.