CROSS BORDER INSOLVENCIES

The scope, aim and purpose of the new Regulation
A recent judgment has at last highlighted some of the practical effects of the new cross-border insolvency regulation which came into force on 31 May 2002. Since then, businesses trading across Europe (other than in Denmark) that have become insolvent have been subjected to the new regime which determines the resolution of cross-border insolvencies (Council Regulation (EC) No. 1346/2000). Its aim is to implement a uniform set of rules that tell practitioners which system of insolvency law applies when cross-border creditors or assets are involved. Home state law continues to govern the effect of insolvency proceedings across the whole of the EU; the Regulation is only intended to resolve conflicts as to which system of law applies. Ultimately the Regulation should contribute to the proper functioning of the internal market for commercial transactions within the European Union.

This Regulation is actually the first part of a trio of new insolvency legislation, which will affect most commercial transactions in due course. The further two tranches to be adopted are the Directive on the reorganisation and winding up of insurance undertakings by April 2003 and the Directive on the reorganisation and winding up of credit institutions by May 2004, which will apply to banks and building societies.

All the legislation is intended to provide equal treatment for creditors across the EU and reduce the scope for ring-fencing assets in a particular locality.

Types of proceedings covered by the Regulation
Winding up by, or subject to the supervision of the court; creditors' voluntary winding up (with confirmation by the court); administration; voluntary arrangements under insolvency legislation (both company and partnership voluntary arrangements); and bankruptcy (or sequestration in Scotland).

Central concepts of the Regulation

Main Proceedings
The Regulation creates a two-tier structure for cross-border insolvencies: main proceedings of universal scope (of which there can only ever be one set) and local or secondary proceedings of territorial scope (of which there can be any number), to protect diversity of interests.

The main proceedings are instituted in the country where the debtor has the centre of his main interests. In relation to a company there is a rebuttable presumption that the place of the registered office is the centre of main interest. Otherwise the centre should correspond to the place where the debtor conducts the administration of his interests on a regular basis.

Secondary Proceedings
In addition, secondary proceedings can be opened in other Member States for the purpose of liquidating assets located in that Member State provided the debtor has an "establishment" in that state. "Establishment" is defined as any place of operations where the debtor carries out non-transitory economic activity with human means and goods.

Secondary proceedings can only take the form of winding up proceedings. They may be requested by the insolvency office holder in the main proceedings or by any other person empowered to do so under the law of the state where the proceedings are sought. They will run in parallel with the main proceedings.

The question of what is an "establishment" for the purposes of the Regulation has already been litigated. In Telia v. Hillcourt [2002] EWHC 2377 (Ch) Telia was a company which had the centre of its main interests in Sweden. It allegedly owed Hillcourt rent and had no reason for witholding it. Hillcourt indicated initially that it would pursue insolvency proceedings in Sweden.

It then served a statutory demand in this country and refused to give an undertaking that it would not pursue winding-up proceedings in the UK. In these circumstances Telia applied for an injunction to restrain Hillcourt from presenting a winding-up petition here. Hillcourt argued that Telia's UK subsidiary company ranked as an "establishment" for the purposes of Article 3.2 of the Regulation but Mr Justice Park rejected that submission and found that, as the Regulation was now in force, it was only appropriate for proceedings to be brought in Sweden. He therefore granted Telia's application for an injunction.

Co-ordination of proceedings
There is a duty on liquidators in concurrent proceedings to co-operate with each other and communicate sufficient information. A liquidator in secondary proceedings has a duty to allow the liquidator in the main proceedings an opportunity to submit proposals on the liquidation or use of the assets, thus preventing (in theory) any unfair practices. The liquidator in the main proceedings can request that the court that opened the secondary proceedings stay them for up to three months. This period may be continued or renewed if appropriate.

Liquidators and publication
Office holders are referred to as "liquidators" - this means any person or body whose function is to administer or liquidate the debtor's assets or to supervise the administration of the debtor's affairs. Liquidators should seek immediate publication of the decision appointing them in other Member States where the debtor has an establishment.

Principal exceptions to the effect and scope of the Regulation

Proceedings
The Regulation does not apply to administrative or other receiverships (as they are not "collective" insolvency proceedings). It does not apply to members' voluntary winding up or winding up orders made on solely just and equitable grounds.

Subsidiaries
The Regulation only applies to companies which are organised through a network of branches throughout Europe or which have significant assets or activity in more than one EU Member State. It is more common, within an English commercial structure, for businesses that are active in more than one state to establish subsidiaries rather than branches.

Insurers and Financiers
As mentioned above, credit institutions, investment undertakings, holding funds or securities for third parties and collective investment undertakings are immune from this Regulation.

Conclusion
It is central to the new regime that home state law continues to govern the effect of insolvency proceedings across the whole of the EU; the Regulation is only intended to resolve conflicts as to which system of law applies. The purpose of this is to provide equal treatment for creditors across the EU and reduce the scope for ring-fencing assets in a particular locality.

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