European Insolvency Proceedings

David Phelan's presentation to the EU-LEX Spring/Summer Conference 2003, hosted by Hayes solicitors in Dublin.

Since 31 May 2002, all EU Member States (except Denmark) have had to apply a uniform set of rules to insolvency proceedings with a European cross-border dimension.

EC Regulation 1346/2000 ("the Insolvency Regulation") introduces these new rules and has the broad aim of regulating cross-border and insolvency proceedings. The Insolvency Regulation, amongst other things, governs jurisdiction for the opening of insolvency proceedings and judgments based on such proceedings. Insolvency proceedings had not previously been dealt with as they were expressively excluded from the Brussels Convention, which governs choice of jurisdiction in commercial proceedings.

In European law, a regulation, such as the Insolvency Regulation is directly applicable and so there is no need for Member States to draft national implementing legislation.

The Insolvency Regulation can be said to apply to rescue and winding-up proceedings involving a company with a branch and assets in more than one Member State and to bankruptcy of individuals.  Therefore, it is worth noting that if one is dealing with a scenario involving an Irish company with business interests solely within Ireland, the Irish Companies Acts will continue to apply to that situation. It is only in situations that have a cross-border dimension that the Insolvency Regulation will apply.

The Insolvency Regulation recognises two categories of proceeding: main proceedings and secondary proceedings. Main proceedings can be both rescue and winding-up or bankruptcy scenarios, whereas secondary proceedings can only be opened in respect of winding-up or bankruptcy proceedings.

Main Proceedings

There can only be one set of main proceedings. They must be opened in the Member State where the debtor has its’ "centre of main interests". That phrase is not defined in the Insolvency Regulation, but in the case of a company it can be presumed to be the Member State where the company has it's registered office.

The main proceedings affect all the debtor’s assets and the creditors on a Europe-wide basis. The main proceedings, and the liquidator appointed there under, must be recognised in all other Member States.

The liquidator in the main proceedings has an onus to notify all known creditors in other Member States of the opening of the main proceedings. Thereafter it is open for a creditor from any Member State to lodge a claim in the main proceedings. The law applicable to the main proceedings is the law of the country in which the main proceedings are opened.

Secondary Proceedings

In addition to the opening of main proceedings, the Insolvency Regulation provides for the opening of secondary proceedings in another Member State, provided that the debtor has an "establishment" in that other Member State. Unlike the main proceedings, which have Europe-wide effect and recognition, secondary proceedings are restricted to the assets of the debtor in the State in which the secondary proceedings have been opened. Subject to certain exceptions, secondary proceedings can only be opened in another Member State after the opening of the main proceedings. The law applicable to the secondary proceedings is the law of the Member State of the opening of the secondary proceedings.

Illustration

The question arises as to why a creditor might apply to open secondary proceedings, rather than simply lodge a claim against the debtor in the context of the main proceedings. The answer to this question explains a large part of the rationale behind the Insolvency Regulation, in that one of its aims is to recognise that different Member States have different systems of ranking creditors in an insolvency situation, and to reconcile the operation of those systems.

If we presume insolvency proceedings have been opened in Member State "X", a creditor from another Member State "Y", can lodge a claim in the context of those main proceedings. However, it might be that that creditor will have a relatively low ranking in priority in those main proceedings as opposed to other creditors. However, if the creditor would have a higher ranking as regards priority in Member State "Y", the creditor can open secondary proceedings in Member State "Y", which proceedings will affect all of the debtor’s assets in that Member State. In that way, the creditor can avail of the superior priority he would have in Member State "Y".

Miscellaneous

The Insolvency Regulation also contains a number of special cases regarding the choices of law applicable to insolvency proceedings. For example, in the case of employment contracts the relevant law for the insolvency proceedings is the law applicable to the contracts. Similar rules apply to insolvency proceedings concerning rights subject to registration and community patents and trademarks.

Separately, there are also a number of types of entity, which are stated, to be exempted from the Insolvency Regulation, including insurance undertakings, credit institutions and financial institutions.

Conclusion

In conclusion the Insolvency Regulation is intended to simplify cross-border insolvency situations and to facilitate the concentration of main proceedings in one jurisdiction. It also is intended to recognise and reconcile the different creditor ranking systems which are applicable throughout the Member States of the EU.

Notwithstanding the significant changes which are introduced by the Insolvency Regulation, it remains that there has only been one case instituted on foot of the Regulation and it remains to be seen whether there will be a greater impact going forward.

David Phelan
June 2003