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EU insolvency law plans propose dramatic changes in cross border cases, says expert

The European Commission has outlined new legislative plans which would dramatically alter the way insolvencies are managed in the EU where affected businesses operate across borders, an expert has said.17 Dec 2012

Earlier this week the Commission proposed (48-page / 200KB PDF) a new Insolvency Regulation which would replace existing laws that have been in operation since 2000. The Commission had consulted on the issue earlier this year.

The Commission's plans, if introduced, would be welcomed by many debtors, restructuring law expert Alastair Lomax of Pinsent Masons, the law firm behind Out-Law.com, said. He said, though, that the "important announcements" made by the Commission "make for baffling reading".

"The nature of the changes being proposed to insolvency law in the EU, their rationale and their impact are vague or buried deep within the Commission's published documents," Lomax said. "I suspect this is, in large part, why these changes have yet to attract widespread attention. Yet, these proposals call for a sea change in the way in which financially distressed and insolvent businesses which operate across EU borders are managed."

"The core themes are of harmonisation of national laws, early intervention, rescue rather than break up, greater visibility for stakeholders and collective involvement in restructuring and insolvency processes," the expert added. "The immediate plan is to amend the existing Insolvency Regulation but it will not end there – there are likely to be further changes to national laws in order to remove barriers to the smooth operation of a harmonised regime of insolvency laws across the EU which promote the rescue culture and offer 'honest entrepreneurs' a second chance." 

"This fits comfortably with the approach adopted in the UK over a number of years, so I would expect changes to UK legislation to be minimal. However, for many debtors across Europe, this is a step in the right direction; offering a chance of redemption and the opportunity to contribute to the growth needed to kick-start the stalling engine of the European economy. Their creditors may not agree however," Lomax said.

Under existing EU insolvency laws, the issue over where insolvency proceedings can be initiated has been widely debated and contested in the courts. The Commission has therefore proposed new definitions and criteria for determining where a debtors' 'centre of main interests' (COMI) can be said to be.

The main proceedings for resolving insolvencies can only be commenced by courts in a member state in which a debtor has its COMI. The results of those proceedings apply universally across the EU. Secondary proceedings can be brought in other member states, but those proceedings can only concern the debtors' assets based in that single state.

Lomax said that where a debtors' COMI is said to be is key to determining which set of national insolvency laws apply when a resolution to a cross border case is sought. He said that because national insolvency laws differ substantially between member states, businesses often engage in "forum shopping" by moving their COMI to a jurisdiction whose insolvency laws and processes are most likely to favour their restructuring or insolvency plans.

He said that the existing national regimes across the EU vary from being creditor-friendly and punishing businesses that default on their debts, to debtor-friendly frameworks that promote the rescuing of business and prevent creditors taking action. The regimes also vary in terms of the extent to which insolvency actions are "court-driven", Lomax said.

Under the Commission's proposals a court that is asked to open secondary proceedings will "immediately" be required to inform the appointed liquidator in the main proceedings. The court seized will be required to give the liquidator the chance to express their views on the request and will have to either "postpone the decision of opening or refuse to open secondary proceedings if the opening of such proceedings is not necessary to protect the interests of local creditors". The liquidator in the main proceedings will have a chance to challenge any decision to proceed with secondary proceedings.

Lomax said the Commission's plans were aimed at restricting the ability of secondary proceedings courts to control assets based within the jurisdiction in a manner which might frustrate courts where the main proceedings are taking place to "realise, in aggregate, greater value for all creditors".

Under the proposed new regime member states would also be required to provide a free, publicly-accessible online register of key information relating to insolvency proceedings involving companies, the self-employed and independent professionals. National registers would be connected to a pan-EU online portal.  Lomax said that this will be welcome news for creditors but is likely to present a real challenge for national governments, including in the UK.

In addition, under the reforms foreign creditors will be able to submit lodge claims for payment of debts by submitting a standard form within 45 days of notice of the opening of proceedings in the insolvency register being published. Creditors would also not be required to have legal representation when lodging a claim in a foreign jurisdiction, which the Commission said would help reduce costs.

The Commission has also outlined plans to bring pre-insolvency restructuring processes within the scope of the proposed Regulation.

"In the UK that might include Schemes of Arrangement of companies or any of the wide variety of debt relief measures available to individuals – this is an attempt to promote rescue and move closer to the model applied in other non-EU cross-border insolvency laws," Lomax said.

In a statement the EU's Justice Commissioner, Viviane Reding, said: "Our current insolvency rules need updating to make it easier for viable businesses in financial difficulties to keep afloat rather than liquidating. 1.7 million jobs are lost to insolvencies every year – we want to give honest companies and the people they employ a second chance."

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Expertise in Business Restructuring

Pinsent Masons' Restructuring team helps a wide range of clients who are working with businesses in financial difficulty to rescue those businesses, improve recoveries and save jobs. We do this by working with all parties to identify opportunities and risks and to deliver innovative strategies to achieve our clients’ goals. Our clients trust us to work on many of the UK's most high profile restructuring assignments. We also draw upon a wealth of expertise and market contacts which we use to introduce new business opportunities to clients.

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