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New EU cross-border insolvency rules approved

New EU rules aimed at making cross-border insolvency proceedings more efficient and effective will come into force in June or July of this year after receiving the backing of the European Council.16 Mar 2015

The new rules, which are expected to come into force in June or July, will bring the current insolvency regulation into line with developments in national insolvency laws that have been introduced since its entry into force in 2002, the Council said in a statement. The European Parliament has already backed the plans, which were proposed by the European Commission in 2012.

The scope of the regulation has been broadened, the Council said. It now covers proceedings for restructuring debts at a stage when there is only the likelihood of insolvency, proceedings that leave the debtor fully or partly in control of assets and affairs, and proceedings for a debt discharge or adjustment for consumers and self-employed people.

The procedural framework for determining jurisdiction has been improved, the Council said. The concept of "centre of main interest" (COMI) has been clarified, and the new rules include safeguards against "abusive forum shopping" where a company or a class of creditors looks for the best country to declare itself insolvent.   

This does not include the previously discussed "look-back" test for a company, but the presumption of the COMI being the place of its registered office does not apply where that has been moved to a different member state in the preceding three months, insolvency expert Nick Gavin-Brown of Pinsent Masons, the law firm behind Out-Law.com said.

The regulation sets out situations where a court can postpone or refuse a request to open secondary proceedings. Rules of cooperation and communication between actors in the main and secondary proceedings are also included.

EU member states will be required to update a publicly accessible register of cross-border insolvency cases. This aims to make more information available to creditors and courts, and to prevent parallel proceedings.

A new set of procedural rules will help in proceedings relating to different companies in a group, Gavin-Brown said, both in requiring co-operation and communication between courts and insolvency practitioners and also by promoting the concept of group "co-ordination proceedings" where the insolvency practitioner for one group company can seek appointment to implement a group wide plan. 

"Some concern remains, however, that this will lead to a race to the courts as the first court to hear group co-ordination proceedings takes precedence, unless overruled by two-thirds of the insolvency practitioners appointed in other jurisdictions," Gavin-Brown said

The European Parliament, which agreed a compromise to the proposed rules in November 2014, is expected to adopt the text in May or June 2015. The regulation will then be published in the EU's Official Journal, said European Council spokesman Joaquin Nogueroles-Garcia, and come into force 20 days later, although the majority of provisions will not come into effect for two years "to give time to member states to comply with the obligations," Nogueroles-Garcia said.

The regulation will be binding in its entirety, and applicable to all EU member states, the Council said. 

Insolvency proceedings affect an estimated 200,000 businesses in the EU every year, the Council said, and one quarter of these have a cross-border element.

Minister Rasnačs, Latvian minister for justice and president of the Council, said: "The regulation creates an improved EU insolvency regime which aims not only to better protect the interests of creditors, but also provides for a regulatory framework. I believe this new regulation is definitely a step in the right direction as it lays down more effective rules on cross-border insolvency proceedings, which would help achieving one of the current priorities - to boost growth in Europe."