THE IMPACT OF THE EUROPEAN REGULATION ON INSOLVENCY PROCEEDINGS:
ENGLISH LAW, ASSISTANCE, FOREIGN LIQUIDATION AND INSOLVENCY PROCEEDINGS
TABLE OF CONTENTS
I. Introduction
II. International Insolvency
A. UNCITRAL Model Law on Cross-Border Insolvency
B. EC Regulation on Insolvency Proceedings (2000)
III. European Regulation on Insolvency Proceedings
A. The Legal Framework of Insolvency Proceedings in EU
B. Principles of the Regulation
C. Sub-conclusion
IV. The English Law Experience
A. Legal Regime of Insolvency in UK
B. Recognition and Assistance of Foreign Liquidation and other Insolvency Proceedings
C. Compliance of UK with the EU Regime
D. Perceived Alterations in English Law
E. Sub-conclusion
V. Analysis
VI. Conclusion
VII. References
I. Introduction
In field of international trade and commerce, organisations seek to do well in their respective industries. If they have played their cards right, made well-informed decisions, and regarded their environment they operate in with utmost care, then there is a possibility that they survive or even make it to the top of the industry. However, considering the other elements present in the actual settings of business and trade, this may not be possible. Some organisations may succumb to the problems that they may encounter. More often than not, these problems tend to fall under the financial element of the operations. In reality, a lot of companies have been taking nose-dives in recent history just because they could no longer address the financial demands of business. Most of the time, they implement insolvency procedures in order to determine any liability that the corporations have with its major stakeholders. It is this legal responsibility of the corporations to their major stakeholders that spawned the creation of the regulatory measures from the state. Legislations have been passed in both national and international settings to deal with this legal issue. ( 1997, ) The problem arises when the international standards and regulations are in stark contrast or at least not applicable to the legal regime of the individual states. This may have been the case in the context of UK and the European Union as the latter ratified a set of regulations that intends to provide added protection on the implications of the insolvency or bankruptcy of a particular multinational firm. The following discussions will be examining the context of the international insolvency regime and its implications to the UK laws. Moreover, the focus will be on the implementation of these laws and the major changes that it have instigated to the practice of common law in UK’s legal system. The arguments, observations, and findings are to be based on academic and scholarly journals that are directly related to insolvency.
II. International Insolvency
The concept of international insolvency is often seen in academic journals as a source of dilemma for legal resolution. In the study of (2004, ) issues of territorialism and universalism tends to hound cases that take in legal issues of international insolvency. (2004, ) mentioned that territorialism tends to “allow the bankruptcy court of a particular jurisdiction to apply its laws to the benefit of its jurisdictional creditors.” This means that the courts are tasked to adhere to the laws implemented in the host country. To a certain extent, this may generate an unequal plane for the parties involved in the case. On the other hand, universalism encourages “stability, predictability, and efficiency.” () This implies that this is mostly preferred by the majority of academics as it offers a standard approach and a systematic way of resolving disputes regarding international insolvency. As (2004, ) puts it, universalism in insolvency law tends to “require all involved jurisdictions to relinquish their sovereignty and apply the law of a foreign jurisdiction.” The following discussions are examples of legal models that encourage universalism in international insolvency laws.
A. UNCITRAL Model Law on Cross-Border Insolvency
This international standard was implemented in the later part of the 1990s by the United Nations Commission on International Trade Law. The said law focuses on international/cross-border insolvency and intends to initiate a setup that will standardise the actions held with utmost efficiency. Essentially, this piece of legislation realises that the national insolvency policies in certain states are not as effective or even applicable to deal with issues relating to cross-border insolvency. In general, this is basically a barrier to trade and flow of investment. ( 2003, ) The Model Law intends to address the inherent conflict of laws that exists in the regime of international insolvency. Basically, the law is a set of protective policies for the debtors and creditors both local and foreign alike. Specifically, it covers the recognition and coordination of proceedings, rights of foreign creditors and foreign representatives, and collaboration between the states involved in a particular case. A central concept of this legislation is the Centre of Main Interests (COMI). Basically this determines whether to treat the proceeding as a main proceeding or as a non-main proceeding. The debtor’s COMI basically covers the habitual residence or the place where the registered office is located. Other factors that determine the debtor’s COMI include the main trading presence or the location of where its main administrative operations are carried out. Mainly, this Model law could only be applicable to a particular state when the Secretary of State enacts legislation using the text of this UNCITRAL model.
B. EC Regulation on Insolvency Proceedings (2000)
The European Commission (EC) Regulation on Insolvency was implemented in 2002 with several regulations to serve as its foundation. Similar to the other international standards geared toward creating a universal set of polices, this is set to enhance the efficiency and effectiveness of the member countries of the EU with regards to dealing with insolvency issues. Basically, the regulation intends to standardise the laws in the EU in general, or at least establish a framework on each and every member country could employ in their legal regime. In the same account, one of the underlying rationales why this piece of legislation have been created is to make sure that corporations or any private entity would not have the opportunity to choose any of the insolvency jurisdiction available in the whole of Europe.
The framework of this regulation includes numerous other regulations enacted by the EC. Some of which includes Regulations /2001 (1968 Brussels Convention ), Regulation/2000, Insurance undertakings Directive 2001/; and credit institutions Directive 2001. Same as the UNCITRAL Model Law, the debtor’s centre of main interest is taken into consideration. Unlike the Model law, the EU Regulation does not specifically state the operational definition of a centre of main interest. However, it only states in Article 3(1) of the regulation that it should imply the place of where the office is registered.
III. European Regulation on Insolvency Proceedings
Based on the legal articles reviewed for this paper, both the UNCITRAL Model law as well as the EC Regulation on Insolvency proceedings are both implemented, sometimes overlapping, in the European Union. However, in the UK setting, the EC regulations tend to have higher ground over the Model law. In this regard, a closer look on the elements surrounding the legal framework of the EC insolvency regime will be made. Basically, an examination on the directives and regulations that composed the legislation as well as the major principles behind it will be made in this part of the paper.
A. The Legal Framework of Insolvency Proceedings in EU
As indicated above, the legal framework of the EC Regulation on Insolvency is composed of numerous EC regulations and directives. Essentially, the construction of such elements as regulations and directives compels the member countries to make concurrent policies in their national laws to accommodate such additions. Based on the research made for this paper, there are at least four minor EC initiatives, two regulations and two directives. The first of these is Regulations /2001. This is called more popularly called the 1968 Brussels Convention. This regulation ratified by the European Commission intends to provide a legal framework regarding the allocation of jurisdiction regarding member countries involved in a civil or commercial dispute. ( 1995, ) To some degree, the intention of the said regulation is to establish a universalistic orientation on the rules of litigation and jurisdiction in the regional bloc. In this manner, harmonisation of rules and similar or even simultaneous litigation is averted. Basically, the ratification of such a regulation similarly reinforces the initial intention of the EU of a unified market in the region. Thus, it seems rather rational to install a set of rules that will deal with the issues involving disagreements between the members of the bloc.
The other regulation ratified by the EC which constitute as a framework of the insolvency regime in the region is Directive 2001/. Basically, this directive tackles the winding up of corporations that encountered insolvency issues in Europe. Based on the manuscript of the directive, the intent of the EC is to open up the reorganisation initiatives and the actions involved in winding up these corporations. It must be emphasised that the focus of this directive is the factors that involve the insurance claims of the corporations geared to compensate the major shareholders of the company.
Connected to this issue, the EC has also covered their bases with regards to the instance when credit institutions themselves take a financial nose-dive. This is noted in Directive 2001/. Basically, this covers all companies in Europe involved in financial services. The directive was conceived on the fact that financial institution industry has been flourishing in the EU thus installing numerous branches all over the region. This may pose a problem particularly for the creditors once the main office of the financial institution claims for insolvency. Based on the stipulations in the directive, if a particular branch winds-up in a particular member state, then the proceedings will be done in that member state. In the same regard, protection is imbued to the creditors as the credit organization winding up is compelled to inform them of the insolvency and winding up initiatives though publications and information.
B. Principles of the Regulation
The key regulation in the insolvency regime of EU is Regulation /2000. A glimpse of the regulation has already been noted in the earlier part of this paper. In this part, an analysis of the contents and point out the principles embedded in the said regulation. First and foremost, the key element in the regulation is the location of the COMI. The wordings of the stipulations imply that the place of the registered office of the company is considered the company’s COMI. Another principle that is implied in the regulation is that the member states are compelled to recognise the insolvency proceedings the moment it started.
With the intention to provide a standard in the region, the regulation indicated that the implemented laws in the member state will be applicable in the insolvency proceedings the instance it started. These are noted in Article 4 and Article 28 of the regulation. Moreover, regulation indicated that the insolvency proceedings could also be done in a member state where the debtor has establishments in the territory. Basically, establishments are used in the context of “non-transitory economic activities.” This means that these establishments should be confirmed to be owned by the company undergoing the insolvency proceedings and that it is a major part of the operations of the organisation. This implies that the mere presence of assets in a particular member state will not suffice as establishments.
Such those included in the classification of establishments are immoveable property. In the same regard, the regulation has established a standard in dealing with these issues. Specifically, the regulation mentioned that the laws governing the land will be applicable. Thus, for properties and other immoveable assets like land or buildings, Article 8 of the regulation maintains that the proceedings have to consult the prevailing laws implemented in the member state. This principle is the same with the context of employment relations as affected by the insolvency proceedings. As Article 10 provides, the national laws on employment are to be consulted when disputes arise in this area.
C. Sub-conclusion
The discussions above have indicated that the Regulation /2000 ratified by the EC balances both universal and territorial perspectives of international insolvency regimes as indicated in the earlier claims of this paper. In this regard, the ascendancy of states is still intact as the regulation, despite being a compulsory, as the EC have established certain areas of the insolvency proceedings that should be handled by the state themselves. Moreover, it has also been established in the discussions in this part of the paper that aside from the actual principles of the regulation on insolvency, it is similarly backed up by other initiatives by the EC to continue covering the legal loopholes and establish a fair and judicious standard in dealing with insolvency, bankruptcy and winding up procedures in the region.
IV. The English Law Experience
The area of insolvency in UK is governed by the Insolvency Act 1986. Specifically, the area of law that closely implicate Regulation /2000 of the EU is seen in this piece of legislation. The following discussions will be looking into the effects of the Regulation on the implementation of Insolvency proceedings in UK. Basically, the discussions in this part of the study are to be based on the manuscript of the Regulation and the Act along with specific cases that made use of the principles of that area of law.
A. Legal Regime of Insolvency in UK
As stated in the introduction above, the Insolvency Act 1986 is basically the closest piece of legislation that alludes to the Regulation. Multinational companies, especially those that similarly have its COMI in the EU are governed by this piece of legislation. Specifically, there are two sections in the said Act that deals with winding up of cross-border companies: s426 and s221. The latter basically covers the responsibility of foreign companies in UK, particularly once they have taken steps to wind-up. As stated in s221 (5) of the said Act, the courts have the power to wind up English courts. More specifically, the Act empowers the courts to wind up any company that has declared itself as insolvent. Basically, these include companies that are bound to dissolve, stopped its operations or those that still operates but for the sole purpose of winding up, and those that are unable to pay its liabilities.
On the other hand, there is also s426 of the Act that covers the conditions surrounding the jurisdiction on cross-border disputes. Basically, this part of the legislation intends to establish the responsibility of English courts to provide assistance to other courts. Particularly, the said part of the Act mentioned of the responsibility of English courts to assist “relevant country or territory.” (s426(4)) It indicates that a request is required from these countries before actual the assistance is implemented. A further issue in this context is that s426(11) mentioned that these relevant countries or territories apply only to the Channel Islands and Isle of Man. Any other country, including those under the mandate of the EU, has to acquire an order from the Secretary of State such that the request becomes a statutory instrument.
In looking at the discussions on the primary parts of the legislation that directly affects cross-border insolvency procedures. It is apparent that the UK insolvency regime has covered its tracks with relation to the recognition of the need for aid among shareholders and even the corporations themselves. The issue arises on the apparent contradiction manifested in the definition of “relevant country or territory.” At this point only a couple of specific areas without particular mention of any other indication of inclusion of EU member states in the matter. In the same regard, this gives the Secretary of the State thus acquire such great influence on companies as well as with states seeking to be included in the good graces of UK’s cross-border insolvency regime.
B. Recognition and Assistance of Foreign Liquidation and other Insolvency Proceedings
The issue of bankruptcy in UK tends to cover a lot of ground as it tends to affect several legal regimes: England and Wales, Scotland, and Northern Ireland. In the legal environment concerning the issue of insolvency and foreign liquidation, s265 of the Insolvency Act tends to highlight the importance of certain elements regarding the debtor and the system observed in UK. For instance, for the insolvency regime of UK to apply to a particular case, the debtor should be connected to UK by means of domicile or residency, personal presence or even the conduct of a business in the area. In this category, the context of what the EU Regulation indicated as the COMI and how they defined an establishment is also added in the list of considerations.
In any case, the courts still have ascendancy on the matter. (Re , 1995) Basically, these types of cases only emphasises the prevailing legal principle on the discretion of the courts on exercising favour on the debtor. Other cases have also indicated that companies from overseas as well as those classified as partnerships are similarly allowed to wind up as unregistered companies. Basically, such cases have to establish what is coined as “sufficient connection” in order to allow and even assist the said organisation to wind up. (Re a Company ( of 1991) , 1991) However, it is required that before the courts allow such an initiative, the debtors must first establish a set of reasonable justification and affirmation that the act of winding up will surely benefit the creditors and the other stakeholders of the organisation. In the same regard as the courts have the authority to create an order to allow winding up of foreign companies, they similarly possess the power to reject any petition for winding up due to insolvency. For instance, a decision of a case ended up rejecting a petition for winding up as an unregistered company as the courts deemed that the courts of other countries will serve as a far better forum to hear the case. (Re () , 1992)
In recognition of the findings of these cases, these appear to be covering areas that operate under the principle of s426 of the Insolvency Act as mentioned above. Earlier cases like the Dallhold Estate case created a legal principle regarding the responsibility of the courts concerning the approval and rejection with regards to the assistance of other courts. The judgment in the said case indicated that the UK courts should have the legal responsibility to assist other courts provided that they satisfy the prescribed requirements indicated in the Insolvency Act. Moreover, the case also mentioned that the courts could also reject the request for assistance provided that the UK courts have a convincing set of justification to reject the request. This issue is also tackled further in the Focus Insurance case as Sir VC indicated that the obligation of the courts as stated in s426 of the Insolvency Act has a rather silent subsection. He further claims that the courts still have the prerogative on the manner of assisting the other courts requesting for assistance. As the wordings of the Act appears to present a rather authoritative stance in using “shall assist,” the interpretation that has been recently ingrained in common law places ascendancy on the regard of the judges’ and arbitrators’ discretion in acceding to or rejecting to the said requests of assistance.
C. Compliance of UK with the EU Regime
Traditionally, the context of insolvency as implemented in UK adheres to an extraterritorial nature. This means that in any insolvency dispute, the insolvency regime in UK is considered the prevailing legislation. That is to say that any dispute not considering the place on which a property owned by a defendant is covered by the Insolvency Act 1986. Moreover, this indicates that a liquidator tends to be the one in charge of managing the property for companies who seeks liquidation initiatives. On the other hand, the trustee of the company tends to take the reins of the company in the occurrence of a bankruptcy. In any case, the legal responsibilities lie on the people holding the position of trustee or liquidator. To some extent this shows some level of universalistic imperative on the implementation of the insolvency regime in UK. However, as observed in the discussions above, the ratification of the EU regulation regarding insolvency has provided a limited opportunity for the Act to perform an all out implementation of the universalism perspective. This is especially true the moment the dispute requires a parallel insolvency proceeding involving companies based on other member states.
In this scenario, there is apparently the possibility of encountering a conflict-of-laws in the process. This also denotes that the dimension of insolvency thus acquires an international visage as it requires certain factors to even out the inconsistencies like those in jurisdiction and choice of law to be used.
In order to clearly provide a manifestation of the compliance of UK on the EU regulation on insolvency, it would be very informative to discuss a very recent case that directly tackled issues of cross-border insolvency, the Hughes case. In the 1997 decision on the case, Lord tackled the issue of assistance and insolvency procedures in court. In his decision, he mentioned three related sources of law on which the UK courts could base their operations when they encounter cross-border disputes on insolvency. The first source is based on the own authority and jurisdiction of the courts over its dominion. This implies that for the most part, courts have every reason to enforce the stipulations under the Insolvency Act 1986 as provided by this caselaw. Another source of law which the courts could use is the English insolvency law. Basically, there have already been amendments to the existing insolvency regime in UK that seeks to complement the inherent principles provided for by the EU regulation on insolvency. The third source of law in cross-border insolvency disputes is the existing laws of the requesting state which essentially correspond to the principles of the Insolvency Act 1986. These three sources of law, as stated by Lord , serve as the criteria for courts as to whether they are to grant the petition for assistance. Otherwise, as indicated in the Focus Insurance case, the courts should establish a substantially reasonable justification why they would reject the petition.
D. Perceived Alterations in English Law
In the context of the insolvency regime in UK, there appears to be some changes in the UK setting especially on their take on the EU regulation. Basically, it seems that the UK courts tend to use the EU regulation to match their own individual interpretations. This indicates that the courts tend to employ the same principles from common law as well as the prevailing legislation in UK and at the same time employ the jargons and principles of the EU regulation in determining judgments in cases. This is seen basically in cases where courts openly take on cases even without the inclusion of UK parties is present in the dispute. There are numerous instances that reflect this propensity of English courts. For instance, the Enron Directo case involved a company that is incorporated under the Spanish government and consequently operates in the Spanish market. However, UK courts indicated that this company is under their jurisdiction since the headquarters of the company is situated in the greater London area. With reference of the EU regulation, the COMI of Enron Directo is still UK.
This incident is similarly seen in the BRAC case. In this case, the defendant or the debtor was incorporated in the United States, particularly in Delaware. However, the company has yet to operate in the US market and has instead chosen to engage the market of UK. Similar to the Enron Directo case, the courts deemed that the COMI of the company is in England and that the insolvency proceedings should be done under the laws of the land. This decision has become the seminal case that involved cases in England. The principles within decision of the BRAC case is even employed in cases where the creditor and a debtor company. This seen in the Ci4net.com case where England was initially not seen as any of the COMI of the debtor company, in this regard, the jurisdiction of England is thus contested. In this case, the courts intimated that despite the fact that the operations and registrations are limited to the United States and Jersey, the correspondence and representations that the debtor made with the creditor was in England. This means that the UK courts to some degree have altered the interpretation of the EU regulation in this case as the transaction between the creditor and the debtor was given ascendance instead of solely recognising the place of operations or place of establishment of the latter.
Another case that seemed to have made a significant impact on the cross-border insolvency regime in UK is the Shierson case. This case established the principle on the time of determining the COMI of the debtor. Thus, in UK the COMI is determined in the date of the hearing of the bankruptcy petition. There were issues stated in the case asking whether the date of the presentation of the petition or the incurring of the debt would tantamount to the moment where the COMI is determined. The judgement in this case also made known to the public that there is a risk involved in carrying out cross-border insolvency disputes as the COMI could be altered freely by the debtor. In this manner, the risk is given solely to all possible creditors that seek to make UK cover the jurisdiction of their case. This also means that in any cross-border dispute in insolvency issues, the parties involved, especially the creditors is subjected to a situation where they will not be aware of the type of legislation that will cover their petition. In any case, the said caselaw have established that only the courts could determine the COMI of a particular cross-border insolvency case.
In discussing cross-border insolvency issues, the Daisytek case should not be left out. Actually, this may have been one of the cases heard by English courts which have significantly influenced the legal environment surrounding insolvency proceedings. The company, Daisytek, is a parent company of three subsidiaries. The parent company is incorporated in the UK territory while the three subsidiaries are incorporated in Germany and France. In the onset, English courts have opened insolvency proceedings of the parent and subsidiaries under their jurisdiction as they deemed that the company’s COMI was in UK. Basically, they came up with this conclusion because the creditors intimated that most important elements of Daisytek’s operations are held in their parent company in UK. On the other hand, some of the other regimes maintained that the COMI of the subsidiaries lies on the place where they are incorporated. Thus, the insolvency proceedings are held in France and Germany. The French subsidiary intimated that the COMI of the French subsidiary is in France while the German counterpart concurred with the claim of the UK courts that the COMI are enclosed within the English jurisdiction. As expected, appeals were made. This magnified the problem for the parties involved as inefficiencies in the process emerged as the confusion and possible conflicts of jurisdictions were imminent. Upon seeing this incident, future cases with similar issues of conflict of jurisdiction were forwarded to the European Court of Justice (ECJ) to resolve their crises.
E. Sub-conclusion
The discussions above have presented the conditions surrounding the EU regulation on insolvency and its treatment and application in the English setting. Specifically the discussions held closely the interpretation of the English courts with regards to the operation of the term COMI and establishment within cross-boundary insolvency disputes. This tends to be rather important in consideration of these types of cases since the interpretation of the courts as to whether a particular dispute falls on their jurisdiction. In this regard, the moment the English courts deem that the dispute’s COMI falls on their jurisdiction, it also points to the start of implementing the Insolvency Act 1986 as the legal framework used in the insolvency proceedings.
V. Analysis
In looking at the discussions above, the individual interpretation of the courts of UK tends to provide the assumption that the EU regulation does not indeed in any case alter the position of UK in the insolvency proceedings. As manifested in the indicated caselaws on insolvency proceedings, assistance and cross-border hearing tends to depend on the regard of the courts as to whether they deem responsible of hearing it or not. The more troubling instance in these types of cases tends to fall in the category of effectiveness and efficiency. As seen in the case of Daisytek, there is still the possibility of encountering conflict with regards to the determination of jurisdiction among the parties involved in the cross-border insolvency dispute. It is thus noted in this study the need of the ECJ to step up once these types of conflicts occur.
VI. Conclusion
The EU regulation has provided the region with some attempt of standardisation pertaining to cross-border insolvency proceedings. The study has covered the implications of the said regulation on the UK setting and if there is an actual effect on the interpretation of the laws as it was ratified in 2002. Based on the discussions above, the regulation merely reinforced the capability of UK courts to determine the disputes that fall on their jurisdiction. Since UK still follows caselaws rather religiously, the lack of a concrete definition of COMI has been compensated by previous judgements and regard on the said issue. In the same regard, the recent decisions in these types of cases have created legal principles that the rest of the region need to establish a standard in legal interpretations of specific cases with similar instances. However, it must be emphasised that the success of the EU regulation rests on the cooperation of each and every member state with regards to assisting each other as they encounter issues like conflict of jurisdiction and conflict of laws.
VII. References
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