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WINDING UP EU COMPANIES WITH LIMITED PRESENCE IN THE UK
Iqbal Mohammed considers the decision of the Supreme Court in
the Trustees of
the Olympic Airlines SA Pension and Life Assurance Scheme v
Olympic
Airlines SA [2015] UKSC 27 concerning secondary winding-up
proceedings
Background
Council Regulation (EC) 1346/2000 on insolvency proceedings (the
Regulation)
aims to introduce certain conflict of law rules for insolvency
proceedings concerning
debtors based in the EU operating across member states. It
requires insolvency
proceedings over a debtor to be commenced in the member state
where it has its
centre of main interests (COMI). Insolvency proceedings
elsewhere are subservient
to the main proceedings. The Regulation merely establishes the
best forum for
proceedings rather than harmonise substantive law across the
EU.
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Provisions
Section 221 of the Insolvency Act 1986 gives UK courts
jurisdiction under to wind
up a foreign company. However, in the case of companies whose
COMI is in another
EU state, the exercise of this power is constrained by the
Regulation.
Article 3(2) of the Regulation states (my emphasis):
Where the centre of a debtors main interests is situated within
the territory of a
Member State, the courts of another Member State shall have
jurisdiction to open
insolvency proceedings against that debtor only if he possesses
an establishment
within the territory of that other Member State. The effects of
those proceedings shall
be restricted to the assets of the debtor situated in the
territory of the latter Member
State.
Establishment is defined within the Regulation as any place of
operations where the
debtor carries out a non- transitory economic activity with
human means and goods.
Facts
The Appellants were the trustees of Olympic Airlines pension
scheme (the
Scheme). A Greek court wound up the Respondent in October 2009
with main
proceedings commencing in Greece. As a consequence, the Scheme
had to be
wound up as well, revealing a deficit of 16m, which Olympic was
bound to make
good.
On 20 July 2010, the trustees presented a winding-up petition
against the company
in England on the ground that it was unable to meet this
liability. Recovery was
unlikely but the winding-up order was necessary to qualify the
Scheme for entry into
the Pension Protection Fund (PFF) under the Pensions Act 2004.
In this case,
entry was conditional upon a winding-up order being made.
Therefore, the court was required to determine whether Olympic
had an
establishment in England on 20 July 2012, permitting the
presentation of a winding-
up petition on that date. However, by then only three people
were employed in its UK
office. Their work consisted of paying bills and essentially
assisting the liquidator in
Athens.
Arguably, the employees were really only engaged in winding
the
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company up.
High Court and Court of Appeal decisions
It was held that to be economic an activity did not have to
amount to external
market activity: [2013] 1 BCLC 415. The activities of the 3
workers constituted non-
transitory economic activities for the purpose of the definition
of establishment and
made the winding-up order. The Respondent (through the Greek
liquidator) appealed
arguing that the Regulations definition of establishment
required economic activity
which was external and market facing, and the running down of a
business did not
count.
The Court of Appeal agreed: [2014] 1 WLR 1401. In summary, they
thought that the
relevant economic activity had to consist of more than the
activity involved in
winding up the companys affairs, and that the three remaining
employees were
doing no more than that. This decision meant that there had been
no qualifying
insolvency event and the Scheme could no longer enter the
PPF.
Supreme Court ruling
Lord Sumption, giving judgment for the court, noted that there
was scant authority on
point. However, the he approved of commentary in the Virgos-
Schmit Report which
considered the rationale behind requiring an establishment:
Place of operations means a place from which economic activities
are exercised on
the market (i. e. externally), whether the said activities are
commercial, industrial or
professional. The emphasis on an economic activity having to be
carried out using
human resources shows the need for a minimum level of
organization. A purely
occasional place of operations cannot be classified as an
establishment. A certain
stability is required. The negative formula (non-transitory)
aims to avoid minimum
time requirements. The decisive factor is how the activity
appears externally, and not
the intention of the debtor. In this way, potential creditors
concluding a contract with
a local establishment will not have to worry about whether the
company is a national
or foreign one. Their information costs and legal risks in the
event of insolvency of the
debtor will be the same whether they conclude a contract with a
national undertaking
or a foreign undertaking with a local presence on that
market.
The court also applied Interedil Srl (in liquidation) v
Fallimento
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Interedil Srl [2011] ECR I-9939, in which the E. C. J. said of
article 3(2) in order to
ensure legal certainty and foreseeability concerning the
determination of the courts
with jurisdiction, the existence of an establishment must be
determined, in the same
way as the location of the centre of main interests, on the
basis of objective factors
which are ascertainable by third parties.
His Lordship took the view that the definition of establishment
should be read as a
whole as each word coloured the other. The relevant activities
must be (i) economic,
(ii) non-transitory, (iii) carried on from a place of
operations, and (iv) using the
debtors assets and human agents. This suggested a fixed place of
business. Such
activities must be sufficiently accessible to enable third
parties, in particular
creditors, to be aware of them. They must be activities which by
their nature involve
business dealings with third parties. Mere internal
administration of a winding-up,
without activities exercised on the market (such as trading or
disposal of assets)
would not qualify.
Practice Point
EU companies in the process of winding down must show that they
are carrying on
some degree of dealings with third parties to enter into local
insolvency proceedings.
Legislation dealing with entry requirements for the PPF
following insolvency currently
only covers domestic insolvency events. There is no protection
provided for UK
employees of overseas entities should they suffer an insolvency
event abroad,
unless they are able to bring secondary winding up
proceedings.
The revised Council Regulation (EU) No 663/2014 redefining
establishment as
any place of operations where the debtor carries out or has
carried out in the three
months prior to the request to open main insolvency proceedings
a non-transitory
economic activity with human means and asset is likely to come
into force within
months. If this happens, courts must consider market activity 3
months prior to the
opening of main proceedings as well as the date on which an
application is made to
open secondary proceedings.