UK: European Union Regulation on Insolvency Proceedings

Last Updated: 5 August 2002
Article by Barry Donnelly

Highlights of Recent Developments


Council regulation (EC) No.1346/2000 of 29 May 2000, came into force throughout the EU (except Demark) on 31 May 2002.

As a matter of European law the Regulation is self-executing and overrides all domestic legislation.

The Regulation has no retrospective effect and only applies to insolvency proceedings opened (e.g. the making of an administration or winding-up Order, not the filing of a petition) on or after 31 May 2002 and any acts of a debtor before 31 May 2002 are to be governed by the law applicable to them at the relevant time.

The purpose of the Regulation is to improve the efficiency and effectiveness of insolvency proceedings with a cross-border dimension by either simplifying or removing formalities previously associated with recognition and enforcement.

Relevant proceedings

The only types of insolvency proceeding directly covered by the Regulation are:

  • Winding-up by the Court;
  • CVL (with confirmation by the Court - see below);
  • Administration;
  • CVAs and IVAs;
  • Bankruptcy.

Schemes of arrangement, whether as insolvency or reconstruction proceedings, are not listed.

Nevertheless, if a scheme can be described as a "composition" and is over-arched by a listed proceeding, such as administration, it would seem that once the scheme is approved by the Court it will be entitled to recognition throughout the EU (see, for example, Article 25 (1)).

The Regulation lists a sub-class of "winding-up proceedings" in Annex B, consisting of: Winding-up by the Court, Creditors’ Voluntary Winding-Up (with confirmation by the Court), and Bankruptcy.

Annex C lists "liquidators" as: Liquidators, Supervisors, Administrators, Official Receivers and Trustees in Bankruptcy. Administrative Receivers are not included.

Excluded matters

The Regulation does not cover:

  • Schemes under Section 425 of the Companies Act 1985, as mentioned above;
  • Insurance undertakings (Article 1(2)), although there is no definition of "insurance undertaking" in the Regulation;
  • Credit Institutions and Investment Undertakings (Article 1(2)), which provide services involving the holding of funds or securities for third parties. Such Credit Institutions will be covered by a separate directive;
  • There is no provision for groups of companies. The Regulation also has no direct application to a subsidiary in one EU member state, of a company which is in a form of insolvency proceeding in another EU member state. The shares of the subsidiary will be treated as an asset located in another state and therefore be affected by the provisions of the Regulation dealing with those assets.

Legislative changes

Despite the fact that the Regulation will prevail in any conflict between national law and the Regulation itself, limited changes to both primary and secondary legislation have been necessary.

For example, the jurisdictional provisions of IA 1986 (Sections 117, 120, 221, 225 and 265) have been amended to reflect the fact that their operation is subject to the Regulation.

Amendments made to IR 1986 include provisions to deal with applications for the conversion of territorial administration and voluntary arrangement proceedings into winding-up proceedings (see further below).

Provisions have also been made for applications by liquidators for confirmation by the Court in a CVL. That confirmation will be required for the proceedings to be recognised and (where applicable) enforceable in other EU member states.

A number of statutory forms (principally relating to the opening of insolvency proceedings) have been modified, and a limited number of new forms has been introduced.

Jurisdiction - Proceedings under the Regulation

The Regulation governs the jurisdiction to commence insolvency proceedings.

Main proceedings

When considering the commencement of "main" insolvency proceedings in England and Wales, it will be necessary pursuant to Article 3(1) to consider where the "centre of a debtor’s main interest is situated". Only that jurisdiction can open "main" proceedings. In the case of a corporate entity, there is a rebuttable presumption that the place of the registered office is the centre of its main interest.

Secondary and Territorial proceedings

If the centre of a debtor’s main interest is in another EU member state, the English Court will have jurisdiction to open proceedings only if the debtor has "an establishment" within the UK. In that event, the English proceedings will be limited to the assets of the debtor in the UK (see Article 2(g)) pursuant to Article 3(2).

"Establishment" is defined in Article 2(h) as "any place of operations where the debtor carries out a non-transitory economic activity with human means and goods". This is similar to the "established place of business" in English law although the reference to "goods" is unhelpful and should most likely be interpreted as meaning "property" or "assets".

Nevertheless, since the mere presence of assets and other traditional connections to the UK under English law, will no longer be sufficient for jurisdiction to commence territorial or secondary proceedings (see below) when the Regulation applies, the meaning of "establishment" will be very important.

Where such proceedings are opened before main proceedings they are termed territorial proceedings, and where after main proceedings, they are termed secondary proceedings.

Secondary proceedings can only be winding-up proceedings (listed in Annex B), and not rescue or rehabilitation proceedings (Article 3(3)).

This may pose difficulties where, for example, a debtor’s centre of main interest is in another EU member state and is unprofitable, but there is an establishment with a profitable business in England. Whereas it might be advantageous to have an administration in England, the effect of Article 3(3) of the Regulation is such that unless territorial administration proceedings are opened first under Article 3(2), it will not be possible to have administration proceedings in England, since they are not winding-up proceedings listed in Annex B, capable of being used as secondary proceedings. It will also be important to start territorial proceedings rather than secondary proceedings wherever possible since the provisions of Articles 31 - 35, which regulate the relationship of main and secondary proceedings, ensuring the primacy of the main proceedings, only apply to territorial proceedings insofar as the progress of the main and territorial proceedings permit (Article 36).

Territorial proceedings can only be opened prior to main insolvency proceedings where two conditions under Article 3(4) are met:

  • the main insolvency proceedings cannot be opened because of conditions laid down by the law of the State of the centre of the debtor’s main interest; or
  • the opening of territorial proceedings is requested by a creditor who has his domicile, habitual residence or a registered office in the State within the territory of which the establishment is situated, or whose claim arises from the operation of that establishment.

Generally, therefore, as a result of these provisions under the Regulation, the wide jurisdiction which United Kingdom courts have asserted to open insolvency proceedings in relation to debtors whose centre of main interests is not in the United Kingdom, will be restricted. Furthermore, as stated, the scope to request the opening of territorial proceedings before the opening of main proceedings is limited to those creditors established in that state or whose claim arises directly from the operation of the establishment (article 3.4). Finally, the reach of the "liquidator" (the term the Regulation uses for the insolvency officeholder - see Annex C) in territorial proceedings is restricted to those assets situated in the member state where the proceedings were opened, irrespective of whether or not main proceedings have been opened in relation to the debtor.

The Law Applicable

Under the Regulation, the general rule is that the national law of the state in which the proceedings are opened is the applicable law and it is the law which determines the conditions for the opening, conduct and closure of the proceedings. However, the Regulation contains a number of substantive conflict of law provisions, which are exceptions to the general rule. They have the effect of exposing situations where, for example, property is or parties are situated in a member state other than that in which the insolvency proceedings have been opened, to laws other than those of the proceedings. In summary, the conflict provisions apply in the following areas:-

  • Creditors or third parties holding secured (or "in rem") rights over assets (article 5).
  • Set off (article 6).
  • Reservation of title (article 7).
  • Contracts relating to immovable property (article 8).
  • Rights and obligations in relation to payment or settlement systems or financial markets (article 9).
  • Employment contracts and relationships (article 10).
  • Effect of insolvency proceedings on debtor’s rights in immovable property, ships or aircraft subject to registration in a public register (article 11).
  • Community patent, trade mark or similar rights (article 12).
  • Voidness, voidability or unenforceability of detrimental acts (voidable transactions) (article 13).
  • Protection of third party purchasers of immovable or registered assets (article 14).
  • Effect of insolvency proceedings on pending lawsuits concerning assets or rights of which the debtor has been divested (article 15).

Recognition of Insolvency Proceedings

In the past, the process of obtaining recognition from a foreign court has tended to be slow and costly and consequently detrimental to the interests of creditors. The Regulation makes major advances in the areas of international recognition of insolvency proceedings and the exercise abroad of the office-holder’s powers. In future, proceedings opened under the Regulation will be recognised without any formality in all member states, subject only to normal public policy considerations (articles 16 and 26). Main proceedings will become immediately effective in all member states as long as no territorial proceedings have been opened there (article 17). Subject to the same condition, the office-holder appointed in main proceedings will immediately be able to exercise his powers in other member states and even the office-holder in territorial proceedings will be able to act to recover assets removed to another member state after the proceedings for which he was appointed were opened. At all times the office-holder must comply with the general law of the member state in which he intends to take action, but a certified copy of his appointment (with an appropriate translation) is all that he will need to be able to act (articles 18 and 19).

Historically, insolvency is an area that has been excepted from the ambit of the Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters. Now, under article 25 of the Regulation, certain specified judgments of the Court which has opened insolvency proceedings will also be recognised without formality and fall to be enforced in accordance with the Brussels Convention.

The Regulation contains substantive provisions dealing with the position of creditors who have obtained payment after the opening of insolvency proceedings, as well as by way of distribution in other insolvency proceedings (article 20) and the effectiveness of discharge of third party obligations after the opening of proceedings (article 24). So as to achieve greater certainty in these areas, office-holders are permitted to publish notice of the Order opening their proceedings in other member states (article 21). The office-holder in main proceedings is also authorised to request registration of the judgment in the public registers (for example, the Land Register) in other member states.

Relationship of Main and Secondary Insolvency Proceedings

For the purpose of improving the efficiency and effectiveness of insolvency proceedings which have cross-border effects, the Regulation provides a structure for the interaction of multiple insolvency proceedings in relation to the same debtor.

The Regulation affords primacy to main insolvency proceedings and the opening of such proceedings will serve as proof of the debtor’s insolvency for the purposes of opening secondary insolvency proceedings. To achieve this primacy the Regulation not only imposes a duty on office-holders to cooperate with and communicate information to each other, it also provides the office-holder in main proceedings with a range of powers in relation to secondary proceedings. He is empowered to -

  • request the opening of secondary proceedings (article 29)
  • request the stay of the process of realisation of assets in secondary proceedings (article 33)
  • propose a rescue plan or composition in secondary proceedings (article 34)
  • request that pre-existing territorial proceedings be converted into winding-up proceedings (article 37).

Where territorial insolvency proceedings have been opened before main proceedings, following the opening of main proceedings they are thereafter to be treated as secondary proceedings insofar as the progress of those proceedings allows (article 36).

The Enterprise Bill - Corporate Insolvency Provisions


The Insolvency Service of the DTI published a White Paper on 31 July 2001, proposing reform of both corporate insolvency and personal bankruptcy (see issue no. 18). Some of the proposals had been heralded in a number of papers from the DTI, in conjunction with other Government departments (see issue nos 16 and 17). The White Paper appeared at a time when the Insolvency Act 2000 was and is still not fully in force.

The White Paper noted the increasing focus in insolvency law reform to promote a rescue culture, for which the administration and CVA procedures were originally introduced by IA 1986. The take-up of both these procedures has been seen as disappointingly low. On the other hand, the large number of appointments of administrative receivers, particularly in the last recession, may have represented precipitate behaviour by secured lenders, causing companies to fail unnecessarily.

The Bill was introduced into the House of Commons on 26 March 2002. It provides for substantial amendments to be made to IA 1986 with the majority of the new provisions (expected to come into force in 2003) being included in schedules to the Act, including:

  • a new administration régime;
  • removal of the floating charge holder’s right to appoint an administrative receiver (except for certain capital market arrangements and public private partnership projects, where administrative receivership will be preserved);
  • abolition of Crown preference in all insolvencies;

The new administration procedure

The existing provisions of the IA 1986 (Sections 8 to 27) will be replaced by a new Schedule B1 to IA 1986.

Appointments in and out of court

Administrators may be appointed:

(a) by the Court, upon the application of the company, its directors or liquidator, one or more of its creditors (including contingent and prospective creditors), the holder of a qualifying floating charge, the justices’ chief executive for a magistrates’ court or a combination of two or more of these parties;

(b) out of court by the holder of a "qualifying floating charge; or

(c) out of court by the company or its directors.

A "qualifying floating charge" is one which is created by an instrument which expressly states that paragraph 12 of Schedule B1 applies to it or empowers the holder to appoint an administrative receiver or an administrator of the company.

A company will enter administration and the administration will commence when the appointment of an administrator takes effect.

If a company is already in liquidation, it may only enter administration upon an application by the liquidator or the holder of a qualifying floating charge.


The Bill replaces the four statutory purposes for which administration orders may currently be made with one: to rescue the company (ie not just the business). Where that is not reasonably practicable, the administrator should perform his functions with the objective of achieving a better result for the company’s creditors as a whole than would be likely if the company had been wound up (without first being administration). And where that is not reasonably practicable, the administrator’s objective must be to realise property in order to make a distribution to one or more secured or preferential creditors.

Administrator’s duties

The administrator is an officer of the court and must exercise his functions in the interests of the company’s creditors as a whole, or where he can only reasonably realise property for one or more secured or preferential creditors, he must ensure that he does not unnecessarily harm the interests of the company’s creditors as a whole.

Administration application

Petitions for administration orders are to be replaced with "administration applications". The Bill provides little detail about the new procedure. New rules will eventually accompany the Enterprise Act. However, when an administration application is made an "interim moratorium" arises (such as under Section 10 IA 1986), whereby no action may be taken against the company or its assets and no steps may be taken to enforce security except with the leave of the court.

Powers of the Court

Where any party other than the holder of a qualifying floating charge applies to the Court for an administration order, it will only be made where the Court is satisfied that the company is or is likely to become insolvent and that the order is reasonably likely to achieve a purpose of administration. However, holders of a qualifying floating charge are only required to satisfy the court that they are entitled to make an appointment (see below).

Notice to floating charge holders etc

Notice must be given to the holder of a qualifying floating charge or anyone who has or is entitled to appoint an administrative receiver "as soon as is reasonably practicable" after the making of the application. The Bill

does not specify the period of notice which must be given nor the period which must elapse before the application can be heard by the Court. Upon receiving such notice, any holder of a qualifying floating charge may apply to the Court for the appointment, as administrator, of its preferred insolvency practitioner and the Court will be obliged to make the appointment unless it considers that the circumstances of the case justify a refusal to do so.

Administrative Receiver already in office

Where an administrative receiver is already in office or appointed following an application to the Court for an administration order:

  • the Court is precluded from making an administration order unless the appointor consents to the making of the administration order or the Court considers that the security is liable to be set aside under Sections 238 to 245 IA 1986; and
  • the interim moratorium will not begin to apply until the appointor provides his express consent to the making of the administration order.

Out of court appointments

The most radical amendment since the publication of the White Paper is the suggestion that the holder of a floating charge or a company’s directors may appoint an administrator out of Court. The holder of a qualifying floating charge may appoint an administrator of the company out of court under paragraph 12 of Schedule B1:

  • provided the floating charge is enforceable and neither a provisional liquidator – nor administrative receiver has already been appointed;
  • by giving not less than two business days’ notice to the holder of any prior ranking qualifying floating charge;
  • by filing at court the requisite papers which will comprise a notice of appointment and such other documents as the rules are likely to prescribe.

Commencement of a paragraph 12 administration

The appointment takes effect (and the administration commences) as soon as all of the requisite papers are filed at court.

The notice of appointment must include a statutory declaration by or on behalf of the appointor that it is entitled to appoint an administrator and that the appointment has been in accordance with the Schedule. It must be accompanied by a statement by the administrator that he consents to act and that in his opinion the purpose of administration is "reasonably likely to be achieved" and in which he should give such other information and opinions as may be prescribed.

Indemnity for invalid paragraph 12 appointment

In the event that a paragraph 12 appointment is subsequently found to be invalid, the Court may order the appointor to indemnify the person appointed against liabilities arising solely as a result of the defective appointment.

Prior ranking Charge-holder’s preferred administrator

The holder of any prior ranking, qualifying floating charge may apply to the Court for the administrator to be replaced by its preferred candidate.

Out of Court appointment by the company or directors

Under paragraph 20 of Schedule B1, the company or its directors may appoint an administrator out of court provided that :

  • there is no outstanding petition for a winding up order or administration application and an administrative receiver is not already in office;
  • more than 12 months have passed since any previous out of court appointment by the company ceased to have effect or any CVA moratorium under the new Schedule Al of the Act (introduced by the Insolvency Act 2000 but not yet in force) came to an end without a voluntary arrangement having been approved, or since the conclusion of any failed CVA;
  • at least 5 business days’ written notice is given (or less with the consent of the relevant parties) of their intention to do so to (i) any party entitled to appoint an administrative receiver; (ii) any party entitled to make a paragraph 12 appointment; and (iii) such other party as may be prescribed;
  • there is filed at court a copy of the relevant notice together with a statutory declaration that the company is or is likely to become unable to pay its debts and providing such other information as may be prescribed.

Once the company or its directors have complied with this obligation they may appoint an administrator out of court provided they do so not less then 5 and no more than 10 business days after the notice of intention to appoint is filed at court. They must then file the prescribed form of notice of appointment together with such other information as may be prescribed, including a statement from the administrator that he consents to act and that in his opinion the purpose of the administration "is reasonably likely to be achieved". The administrator is entitled to rely upon information provided by the directors.

The filing of the notice of appointment and accompanying documents at court gives rise to an interim moratorium where no winding up petition may be presented and no action may be taken against the company or its assets and no steps may be taken to realise security except with the leave of the court.

Charge-holder’s or creditors’ preferred administrator

If a court makes an administration order or a secured creditor makes a paragraph 12 appointment before the company or its directors have satisfied all of the criteria under paragraph 20, the insolvency practitioner appointed by the Court or secured creditor will take office. Therefore, the holder of a qualifying floating charge must respond immediately it receives notice of a proposed paragraph 20 appointment or an application to the Court for the appointment of an administrator.

Where there is no holder of a qualifying floating charge, the creditors’ meeting may replace the administrator with its preferred candidate.

Indemnity for invalid paragraph 20 appointment

In the event that a paragraph 20 appointment is subsequently found to be invalid, the Court may order the appointors to indemnify the person appointed against liabilities arising solely as a result of the defective appointment.

Effect of administration

If a winding up petition (other than a Section 124A public interest petition or a Section 367 FISMA FSA petition) is outstanding, it shall be dismissed when an administration order is made by the Court, or suspended when a paragraph 12 appointment is made for the duration of the administration.

Once a company is in administration, administrative receivers are required to vacate office and a moratorium such as the existing moratorium under section 11 (as amended by the Insolvency Act 2000) takes effect such that no action may be taken against the company or its property (including steps to realise security) except with the administrator’s consent or leave of the court.

Prohibition of appointment of administrative receivers

General prohibition

No administrative receiver may be appointed in respect of any qualifying floating charge, subject to certain prescribed exceptions (see below).

As stated, a "qualifying floating charge" is defined as one created by an instrument to which paragraph 12 of Schedule B1 is stated to apply, or which empowers the holder to appoint an administrative receiver or administrator of the company.

Exceptions to the prohibition

  • Capital markets arrangements
  • Public private partnerships
  • Utility projects
  • Project finance
  • Financial market contracts

Abolition of Crown Preference

The anticipated abolition of Crown preference is to be achieved by deleting the relevant paragraphs of Schedule 6 to IA 1986 which refer to social security contributions and debts due to HM Customs and Excise and the Inland Revenue.

The manner in which the money which would otherwise have gone to the Crown will be ring-fenced for the company’s unsecured creditors remains undecided. The Bill proposes a new section 176A, which requires the relevant insolvency office holder to make a "prescribed part" of the company’s net property available to discharge unsecured debts. This will be clarified in a statutory instrument and quantified by reference to a percentage of the company’s net property or an aggregate of different percentages of different parts of the company’s net property.

The effect of winding-up on CVA funds

In Re N T Gallagher &Son Ltd (26 March 2002), the Court of Appeal has revisited the question of whether a CVA is determined and the trust created by it discharged, by a supervening winding-up (see issue nos.16 and 18) Order. The Court has provided the following guidance in relation to both CVAs and IVAs.

  • Where a CVA or IVA provides for monies or other assets to be paid to or transferred or held for the benefit of CVA or IVA creditors, this will create a trust of those monies or assets for those creditors.
  • The effect of the liquidation of the company or the bankruptcy of the debtor on a trust created by the CVA or IVA will depend on the provisions of the CVA or IVA relating thereto.
  • If the CVA or IVA provides what is to happen on liquidation or bankruptcy (or a failure of the CVA or IVA), effect must be given thereto. - If the CVA or IVA does not so provide, the trust will continue notwithstanding the liquidation, bankruptcy or failure and must take effect according to its terms.
  • The CVA or IVA creditors can prove in the liquidation or bankruptcy for so much of their debt as remains after payment of what has been or will be recovered under the trust.

This briefing note is intended to raise your awareness of certain issues (as at July 2002) under the laws of England and Wales, and is not intended to be comprehensive or a substitute for proper advice which should always be taken for particular queries.

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