HURDLES IN INTERNATIONAL INSOLVENCIES BY ZITA CASSERLY.

HURDLES IN INTERNATIONAL INSOLVENCIESBY ZITA CASSERLY

“Although the number of cross-border insolvency cases has increased significantly since the 1990s, the adoption of national or international legal regimes equipped to address the issues raised by those cases has not kept pace.”

A BRIEF OVERVIEW OF INTERNATIONAL INSOLVENCIES

• “In its simplest form, a transnational insolvency may involve an insolvency proceeding in one country, with creditors located in at least one additional country” .

• Insolvency equates to an inability for a debtor to repay their debts

•No single international insolvency regime

• Strides for uniformity most notably with the European Insolvency Regulation and the UNCITRAL Model Law on insolvency

• Insolvency is not defined in either the Regulation or the Model Law

•Not constrained to a single process

• Allow the States to retain their own national insolvency proceedings

• Even between States with closely aligned legal systems there are significant differences

THE EUROPEAN INSOLVENCY REGULATION

BACKGROUND

• Can be traced back to the foundation of the European Economic Community

•Negotiations for a European regime of insolvency go as far back as 1960

• Convention on insolvency proceedings was never entered into force as only 14 of 15 Member States at the time signed the convention before the May 1996 deadline

• Part of the EU’s competences since the Amsterdam Treaty in 1997

•Council Regulation (EC) No. 1346/2000 (“the European Regulation”) on insolvency proceedings which entered into force May 2002

• Ambition to create a “unified process” i.e. “a single insolvency process in which all creditors take part and in which all the assets of the debtor are liquidated under one law”

SCOPE OF PROCEEDINGS

•Regulation applies to “collective insolvency proceedings which entail the partial or total divestment of a debtor and the appointment of a liquidator”

•No definition of insolvency in the Regulation

• List set out in Annex A of national proceedings

•Regulation presupposes that the debtor is insolvent and that they must be divested and a liquidator appointed

• Absence of singular procedure or regime has led to a certain amount of forum shopping for insolvency proceedings

•Not limited to insolvency of companies but also encompasses personal insolvency

•Not applicable to insolvency proceedings involving insurance undertakings, credit institutions, investment undertakings that provide services involving the holding of funds or securities for third parties or collective investment undertakings

MAIN PROCEEDINGS

•Court order opening insolvency proceedings must have automatic recognition in the other Member States

• Liquidator of the main proceeding may exercise all available powers in every Member State

• Except for a state in which secondary proceedings have commenced

SECONDARY PROCEEDINGS• Two situations in which a secondary proceeding may be opened

first:

• a) In the event that main insolvency proceedings cannot be opened because of conditions laid down by the law of the Member State within the territory of which the centre of the debtor’s main interests is situated (an example of this may be where the level of insolvency is below the statutory level for the making of an insolvency order); or

• b) Where the opening of territorial insolvency proceedings is requested by a creditor who has his/her domicile, habitual residence or registered office in a Member State within the territory of which the debtor’s establishment is situated, or whose claim arises from the operation of that establishment.

JURISDICTION•Debtor’s COMI (Centre of Main Interest)

• Presumption is that a debtor’s COMI is generally the place of their registered office, although this presumption can be rebutted with the vague notion of “proof to the contrary.”

• Eurofood and confirmed in Interedil the ECJ stated that in order to determine COMI a comprehensive study of the circumstances of each individual case was required.

•Commission report stated that one of the most difficult cases in which to determine COMI is when the debtor has recently changed their domicile

Determination of COMI Member State in which the case was heard (forum State)

“Day to day administration is conducted in the forum state” Ireland

“Directors possessed the forums nationality” Italy

“The most substantial creditor of the company (incorporated in Delaware, US)had presented itself to its most substantial creditor as having its principle executive offices in the forum State (England)”

England

“The debtor (natural person) has maintained with regard to the substantial interests in a large number of companies established in the forum State, to administer these commercial interest in the forum State”

The Netherlands

“The Director (of an Irish incorporated company being a wholly owned subsidiary of a UK company) was based in the UK and was solely responsible for the company’s business”

The UK

“Some remaining contractual works (conducted by a company incorporated in Finland) were still in progress in the forum State”

Sweden

“The group’s parent company (Austrian company with a seat in Innsbruck) is located in the forum State”

Germany

“The company (registered in the UK with a postal address in Spain) is a partner in a Swedish limited partnership”

Sweden

“The codes to computer programmes of the debtor company (registered in the UK, postal address in the UK, premises in Sweden) are stored in the forum State”

Sweden

RECOGNITION OF JUDGEMENTS: MAIN PROCEEDINGS •Recognition “should be based on the principle of

mutual trust. To that end, grounds for non-recognition should be reduced to the minimum necessary”.

• Any “decision of the first court to open proceedings should be recognised in the other Member States without those Member States having the power to scrutinise the Court's decision”.

• The ECJ confirmed the mutual trust rule in the Eurofoods case

RECOGNITION OF JUDGEMENTS: SECONDARY PROCEEDINGS • The opening of main proceedings in one Member

State does not prevent the opening of secondary proceedings in another

• Secondary proceedings concern only assets in the Member State in which the secondary proceedings are taking place in

•Rather than enforcing the judgment the Court of the country of main proceedings, accepts that their judgment on insolvency proceedings will not be enforced in the secondary Member State.

•Opening of a secondary proceeding causes the main proceeding to cease to have effects in the Member State where the secondary proceeding is opened.

PUBLIC POLICY EXCEPTION• Article 26 allows Member States to refuse to

recognise or enforce insolvency proceedings in another Member State “where the effects of such recognition or enforcement would be manifestly contrary to that State's public policy, in particular its fundamental principles or the constitutional rights and liberties of the individual”

• ECJ clarified in the Eurofood case the exception was “reserved for exceptional cases”.

• The ECJ further held that although the right to use the public policy exception was at the discretion of the Member State but that “at variance to an unacceptable degree with the legal order of the State in which enforcement is sought inasmuch as it infringes a fundamental principle” and that “the infringement would have to constitute a manifest breach of a rule of law regarded as essential in the legal order of the State in which enforcement is sought or of a right recognised as being fundamental within that legal order” .

RECOGNITION OF JUDGMENTS OPENED OUTSIDE THE EU AND RECOGNITION OUTSIDE THE EU OF EU INSOLVENCY PROCEEDINGS

• The European Regulation applies solely to insolvency proceedings of debtors which have their COMI in a Member State.

• No right to have judgments enforced where the COMI is outside the EU

• Several Member States have enacted legislation based on the UNCITRAL Model Law (Greece, Poland, Slovenia and the UK ), several others (Belgium, Germany and Spain) have enacted international insolvency legislation, which though not based on the UNCITRAL Model Law, are similar in nature .

• Therefore depends on which Member States and which other States are involved to determine if a judgment opened outside the EU will be recognised and if a European judgement also will be recognised by a non- Member State.

• The recent Commission study cited specific problems with getting EU judgements recognised in Switzerland but noted that Switzerland has “informally expressed an interest in elaborating a bilateral agreement with the EU on insolvency” .

LODGING CLAIMS

• A creditor habitually resident in a Member State may file a claim in the main or secondary proceeding.

• This right to be extended to include tax authorities and social insurance institutions.

• The liquidator is “required to lodge claims on behalf of all creditors in related proceedings” .

HURDLES IN LODGING CLAIMS• Practical problems related to the lodging of cross border claims; identifying “

language barriers, costs, time-limits for lodging claims and a lack of information on

the opening decision, the liquidator and the formalities of the lex fori concursus for

the lodging of claims”

• The report also stated that another stumbling block in lodging a claim is that the

Regulation only provides for minimum rules which enable foreign creditors to lodge

their claims, without a comprehensive procedural framework.

• The report cited the average cost of filing a claim as €2000.

• The Commission also stated that while previously the other Member States had

only sometimes requested claims to be translated and for a creditor to retain a local

lawyer it has now become standard practice.

RESOLUTION OF OTHER PENDING CASES

• If there are pending proceedings in the jurisdiction in which the insolvency proceeding is taking place then there is no issue and the law of that jurisdiction will apply.

• Difficulties arise, however if proceedings are pending or have already commenced in another jurisdiction.

• As confirmed in the Flightlease case Article 15 only applies to cases pending which concern an asset which is a part of the insolvency proceeding .

• Only applies in relation to assets or rights that form part of the estate and does not concern “individual enforcement actions such as distress, execution and attachment, the effects of insolvency on which are governed by the law of the state where proceedings are opened” .

• AMI/Semiconductor Belgium sets out that it also applies to ECJ cases

RESOLUTION OF PENDING ARBITRATION

• The Commission noted that “uncertainty exists concerning the applicability… to arbitration proceedings” but did not offer any clarification or possible remedies in regards to Article 15 .

•Divergent approaches to pending arbitration in the UK and Switzerland in the Elektrim cases.

AVOIDING A RACE TO THE BOTTOM WITH FORUM SHOPPING

• ’bankruptcy tourism‘ is limited to a few regions in the Union with eastern France, the UK and Latvia attracting debtors from other countries.

• Especially German and Irish debtors tried to take advantage of the discharge opportunities of English law.

PROPOSED CHANGES TO THE EUROPEAN REGULATION • The proposals would leave the protection for secured creditors in

place

• Seeks to remove the hurdle that is currently in place with regard to the recognition of pre-insolvency and rescue proceedings .

• Commission is seeking to clarify the rules regarding the location of assets .

• Register of insolvency proceedings in the EU to be established .

• Increase in co-operation between the judiciary and the liquidators .

UNCITRAL MODEL LAW ON INSOLVENCY

BACKGROUND

• Since its inception, UNCITRAL has published a number of Model Laws; these Model Laws are a pattern for states to help facilitate adoption of similar legislation as part of their national laws.

• Since 1997, the secretariat has been informed by 20 States that they have enacted similar legislation to the Model Law

•Most significant of these was the US who enacted an international insolvency law in 2005.

UNCITRAL secretariats list of countries that have enacted legislation similar to the Model Law

State Year enactedAustralia 2008Canada 2005Colombia 2006Eritrea 1998Greece 2010Japan 2000Mauritius 2009Mexico 2000Montenegro 2002New Zealand 2006Poland 2003Republic of Korea 2006Romania 2002Serbia 2004Slovenia 2007South Africa 2000Uganda 2011United Kingdom of Great Britain and Northern Ireland

British Virgin Islands 2003Great Britain 2006

United States of America 2005

SCOPE

• Qualifying foreign proceedings as “a collective judicial or administrative proceeding in a foreign state, including an interim proceeding, pursuant to a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganisation or liquidation.”

• Article 1 of the Model Law sets out the scope of the law, which covers the following situations in which:

• “Assistance is sought in this State by a foreign court or a foreign representative in connection with a foreign proceeding; or

• Assistance is sought in a foreign State in connection with a proceeding under [identify laws of the enacting State relating to insolvency]; or

• A foreign proceeding and a proceeding under [identify laws of the enacting State relating to insolvency] in respect of the same debtor are taking place concurrently; or

• Creditors or other interested persons in a foreign State have an interest in requesting the commencement of, or participating in, a proceeding under [identify laws of the enacting State relating to insolvency].”

FOREIGN MAIN PROCEEDINGS

• “in the absence of proof to the contrary, the debtor’s registered office, or habitual residence in the case of an individual, is presumed to be the centre of the debtor’s main interests.”

FOREIGN NON- MAIN PROCEEDINGS

• “a foreign proceeding, other than a foreign main proceeding, taking place in a State where the debtor has an establishment”

• Article 2 (f) as “any place of operations where the debtor carries out a non-transitory economic activity with human means and goods or services”; owning assets in the State will not simply constitute establishment.

RECOGNITION

• Framework to recognise a foreign insolvency proceeding.

•Unlike the European Regulation, judgements are not recognised automatically and accordingly the court under Article 19 of the Model Law may grant interim relief.

•Model Law also allows for States to not recognise a judgment based on public policy

ACCESS TO PROCEEDINGS• Foreign creditors same access to the proceedings as

non- foreign creditors

• Should not be ranked lower than non-foreign creditors solely due to this status

• Foreign creditors are to be notified of insolvency proceedings in the same manner as non-foreign creditors, reasonable time to make their secured or unsecured claim and state their place in the proceedings.

OTHER GUIDELINES

•NAFTA Transnational Insolvency Project

•Concordat