European Insolvency Regulations and the UNCITRAL Model on Cross Border Insolvency
Council Regulation (EC) No. 1346 of 2000
SGH Keynotes - Revised July 2004

Click here for full article in PDF Format

• Came into force on 31 May 2002.
• Applies to all EC Member States, with the exception of Denmark.
• The Regulation only applies to Intra-European Union effects of insolvency proceedings. It does not regulate the position as between member states, and non-member states, in relation to insolvency proceedings.
  

1. Compulsory winding-up;
2. Company voluntary liquidations, SUBJECT to confirmation by the Court pursuant to the procedure adopted by Insolvency Rule 7.62;
3. Administrations (companies and partnerships);
4. Partnership winding-up;
5. Company voluntary arrangements;
6. Partnership voluntary arrangements;
7. Individual voluntary arrangements;
8. Bankruptcy/sequestration.

1. Administrative receiverships;
2. Debt recovery proceedings, save for with the exception of debt recovery proceedings brought by an office-holder in an existing Main/Secondary insolvency proceedings under the Regulations;
3. Public interest winding-up petitions, or just and equitable winding-ups (due to requirement for insolvency under the Regulation);
4. Banks and similar entities insolvencies (e.g. credit institutions);
5. Insurance undertakings;
6. Collective investment undertakings;
7. Investment undertakings, which provide services involving the holding of funds or security for third parties.

• Intended to create single insolvency proceedings, within the EC, with universal effect.
• Main insolvency Proceedings can only be commenced in the Member State where the debtor’s Centre of Main Interest ("COMI") is located.
• Main insolvency Proceedings, once commenced, are to be automatically recognised across all Member States.
• The law of the Member State where Main insolvency Proceedings are commenced will govern the proceedings.
• The office-holder may exercise all powers that he has, under the law of the Member State where Main Proceedings have been commenced, in any other Member State.
• Insolvency proceedings can also be commenced in a Member state where a debtor has an "Establishment" (as opposed to COMI), but such insolvency proceedings will only apply in respect of assets situated in that Member State (where the insolvency proceedings are commenced). Such insolvency proceedings are defined as:
1. Secondary Proceedings, if commenced in a Member State after Main Proceedings have been commenced in another Member State; OR 2. Territorial Proceedings, if no Main Proceedings have been commenced.

• Secondary/Territorial Proceedings can only be opened in a Member State if the debtor has an Establishment within that Member State.
• Can only be commenced prior to Main Proceedings, and hence known as Territorial Proceedings, where:
1. The laws of the Member State where the debtor’s COMI is situated preclude the opening of Main Proceedings; OR 2. Territorial Proceedings are brought by a creditor whose domicile/ habitual residence/registered office is in the same Member State as the debtor’s Establishment is situated, or where a creditor’s claim arises from operation of that establishment.
• In order for Secondary/Territorial Proceedings to be commenced, there is a requirement for a winding-up process. Hence, within the UK, only the following types of insolvency proceedings can be commenced as Secondary/Territorial Proceedings:
1. Compulsory Liquidation;
2. CVL, subject to confirmation with the Court; or
3. Bankruptcy.

• Where Main Proceedings have been opened in another Member State, the Court in the Secondary/Territorial Proceedings does not have to consider the issue of insolvency of the debtor (as insolvency would already have been determined by another Member State in the Main Proceedings).
• Secondary/Territorial Proceedings, within a Member State, can theoretically be opened by a liquidator in respect of Main Insolvency Proceedings within another Member State. However this may not be necessary, as the liquidator in Main Proceedings can simply rely on the provisions for automatic recognition (of the Main Provisions in other Member States).

• A COMI must be established if Main Proceedings are to be commenced within a Member State.
• Defined as the Member State where a debtor conducts the administration of his interests on a regular basis.
• In the case of a company/legal person, the registered office is presumed to be the COMI in absence of proof to the contrary.
• "Interest" is widely defined, and extends to general economic activities of individuals/legal entities.

• It must be established that a debtor has an Establishment, within a particular Member State, if Secondary/Territorial Proceedings are to be opened within that Member State.
• Defined as any place of operations where the debtor carries out a non-transitory economic activity within human means and goods.
• For there to be an Establishment there must therefore be a "place of operations" within a particular Member State. The mere presence of assets within a particular jurisdiction is in itself insufficient.
  

1. The law generally applicable to insolvency proceedings, whether Main/ Secondary/Territorial proceedings, is that of the Member State where those insolvency proceedings are commenced.
2. Hence, a situation can arise where Main Insolvency Proceedings will be subject to the law of the Member State where they have been commenced, whilst Secondary Proceedings relating to the same debtor are subject to the law of the Member State where the Secondary/ Territorial Proceedings are commenced.
3. Secondary Insolvency Proceedings are not automatically governed by the laws applicable in respect of Main Proceedings.
4. The applicable law will apply to both substantive law, and procedural matters.
5. In certain cases, rights over assets located in another Member State are excluded from the scope and effect of Main Insolvency Proceedings. Any such rights will be governed by the relevant applicable national law, and not the law of the Member State where the Main Insolvency Proceedings have been commenced.

1. Third parties’ rights in rem - Article 5;
2. Set off - Article 6;
3. Retention of title - Article 7;
4. Contracts relating to immovable property - Article 8;
5. Payment systems and financial markets - Article 9;
6. Contracts of employment - Article 10;
7. Effects on rights subject to registration - Article 11;
8. EC Patents and trademarks - Article 12;
9. Detrimental Acts - Article 13;
10. Protection of third-party purchasers - Article 14;
11. Effects of insolvency proceedings on pending law suits/actions - Article 15.

Relevant Issues
Following the introduction of the European Insolvency Regulation, a number of UK insolvency principles are brought into issue. These principles are yet to be determined by the Court. The relevant issues are as follows:

Inter-action with requirements for presentation of a bankruptcy petition within the UK
Section 265 Insolvency Act 1986 sets out the requirements for a bankruptcy petition to be presented within the English & Welsh jurisdiction. It is possible to present a petition against an individual that is domiciled within the UK. What is the position if a debtor is domiciled within the UK, but his COMI is in another Member State? (For example, he has a home in the UK, is domiciled within the UK for tax purposes, but works in Barcelona). It would not appear to be possible to open Main Proceedings within the jurisdiction, and any bankruptcy proceedings would be limited to Secondary Proceedings (and hence as such any Secondary Proceedings would only apply to assets within the jurisdiction). The bankruptcy could not theoretically therefore be used to realise assets that fall abroad, for example in the case of the example above, in Spain. Indeed it is also questionable whether Secondary Bankruptcy Proceedings can be issued at all, since being able to issue the same is dependent on the debtor having an Establishment within the jurisdiction. It may be that the only available course of action in this example would be for a bankruptcy petition, or rather the Spanish equivalent, to be presented in Spain.

Winding-up of foreign companies within the jurisdiction
Under the principles established, inter alia, in Re Latreefers it was possible to wind-up a foreign company within the jurisdiction (England & Wales) on certain grounds, including where there were assets within the jurisdiction. Foreign companies could be wound up by the Court, as unregistered companies, pursuant to Part V Insolvency Act 1986. It should be noted that, although not yet in force, the proposed secondary legislation in relation to The Enterprise Act 2002 is intended to allow foreign companies (particularly those with assets, creditors or employees within the jurisdiction) to make use of the rescue provisions under the Insolvency Legislation.

However, if a foreign company has its registered office abroad, then (in the absence of proof to the contrary) its COMI will also be abroad. If this is the case it will not be possible to open Main Insolvency Proceedings within the jurisdiction. Secondary Proceedings can only be opened if the foreign company has an "Establishment" within the jurisdiction. The mere presence of assets within the jurisdiction is insufficient.

Therefore it may no longer be possible to seek to wind-up certain foreign companies within the jurisdiction.

• confirmation (for the reasons expressed in an affidavit/witness statement in support) as to whether the proceedings to be issued will be Main/Secondary/Territorial proceedings (as defined in Article 3 of the EC Regulations); and
• confirmation that the company sought to be wound-up is not an insurance undertaking; a credit institution; an investment undertaking providing services involving the holding of funds or securities for third parties; or a collective investment undertaking as referred to in Article 1.2 of the EC Regulations.

(d) CVLs

As detailed above, a CVL can be made subject to the Regulation by confirmation to the Court. Confirmation is made pursuant to Insolvency Rule 7.62 (as inserted by the Insolvency (Amendment) Rules 2002), using the prescribed form, on a without notice basis. In order to avoid Main insolvency Proceedings being opened/commenced in another Member State (post CVL within the jurisdiction), it may be best in all instances to advise insolvency practitioners to seek confirmation of a CVL at Court. If Main insolvency Proceedings are opened/commenced in another Member State, then it may be arguable that the assets that fall within the CVL are only those that fall within the jurisdiction (as they would then only constitute Secondary/Territorial Proceedings).

Note: These keynotes ought to be read in conjunction with SGH keynotes on the Uncitral Model Law on Cross-Border Insolvency

Revised 6 January 2003
2 January 2003

Daniel Sejas 020 7544 5555 daniels@sghlaw.com