UK: Administration orders over foreign companies - some issues

Last Updated: 24 November 2005
Article by Peter Fidler

The practical difficulties faced by administrators when seeking to export their powers into another EU member state is an area on which insolvency practitioners and directors of companies facing insolvency ought to be aware. There has been a spate of cases in which the English court has made administration orders in respect of groups of companies incorporated in various EU member states, having held that they had their centre of main interests (COMI) in the UK, more particularly in England. Some of these cases have been controversial. In some cases, the administration orders have been attacked in the member state of incorporation.

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Administration orders made by the English court in respect of foreign companies under the EC Insolvency Regulation (the ECIR)

There has been a spate of cases in which the English court has made administration orders in respect of companies incorporated in various EU member states, having held that they had their centre of main interests (COMI) in the UK, more particularly in England. These have included single companies (BRAC Rent-a-car – actually a Delaware company) and also groups consisting of an English company and a number of companies incorporated elsewhere in the EU (e.g. Daisytek, Criss-Cross Communications, MG Rover, Collins & Aikman).

Some of these cases have been controversial. There is unease amongst some lawyers (even in England) over the fact that the English court has effectively been assuming long-arm jurisdiction over European companies in a way which, they say, was not intended under the ECIR. We express no view on this. It is at least arguable that the judgments come well within the wording of the ECIR.

A second objection has been that English courts have looked at these cases on a group basis. There does not seem to us to be any substance in this particular allegation. Having read the judgments in these cases, what we think the English court was saying was not that the group had its COMI (whatever that might have meant) in England, but that, looking at each company individually, the relevant facts, i.e. those relating to the management, policy making and implementation, at least on a high level basis, of policy so made, were all effected or carried out in England in such a way as to lead to the conclusion that in the case of each individual company the COMI was in England.

Thirdly, as has been reported in a number of places, some of these orders have been attacked in the member state of incorporation of at least some of the companies, in particular France and Germany. The case law, both in England and in Europe, will no doubt develop over the years, and will, one hopes, be reported.

Under the ECIR it is clear that it is not permissible to challenge an order opening main insolvency proceedings in the state where the COMI is situated in any other state. The only proper procedure (as happened in the Eurofoods IFSC case) is to invoke whatever appeal procedures there may be in the member state where the main proceedings were opened. Notwithstanding this the French have tried at least a couple of challenges in their local courts; these were eventually struck down on appeal, but at a cost in terms of time, effort and money.

Not so often reported, but of equal importance for directors or prospective officeholders, are the practical difficulties which some of these administrators have faced when seeking to export their powers into the state of incorporation. There is no doubt about the legal position. Under the ECIR, a judgment opening main proceedings in the member state where the COMI is situate must be recognised throughout the EU (except Denmark) (Art 16) and is to have immediate effect without any further formalities (Art 17). The officeholder (in the ECIR he is known as the liquidator, a term which includes the person in charge under reorganisation proceedings; in English terms he is almost always the administrator in this context) is entitled to exercise the powers he has under his own state’s domestic law, at least in relation to insolvency law issues, throughout the EU (except Denmark) (Art 18).

The real problem is how he persuades third parties in other states with whom he is dealing to accept the validity of his appointment and the nature and extent of his powers.

The sort of difficulties may be classified under the following headings:

1. Publication and Registration of the order

Articles 21 and 22 of the ECIR provide for notice of the appointment to be published and for the appointment being recorded in local registers. Most EU states have not specified any particular means of publication or registration. The obvious thing is to try to publish and register the order in a manner which resembles as closely as possible the way in which local orders are published and registered. In many states the English administration orders have not been in the sort of form which would be recognised under the local law. Local lawyers therefore had to spend time and money persuading the appropriate authorities to allow registration of the English order.

2. Delegation of powers: formal documents needed

Administrators often want to delegate the day to day management of the company to local representatives. In some countries directors who delegate powers must do so by a formal document. In Spain and Portugal administrators (who are entitled to exercise all the powers of the directors of the Spanish and Portuguese companies) have been advised that they should delegate their powers by a formal document. That document had to be signed by one of the administrators and then notarised and registered in the local jurisdiction.

3. The nature of the powers

There have been many issues with regard to the powers of the administrator under English law as it is often necessary to demonstrate to people in the various jurisdictions that the administrators are acting within their powers. In one case it was found necessary to have a supplementary order confirming those powers, attaching a copy of schedule B1 and the Insolvency Rules.

4. The Moratorium

Third parties in some jurisdictions who wish to take enforcement action are not easily persuaded that the administration moratorium applies in their jurisdiction.

5. Directors’ powers and duties

There have been concerns over whether the directors still have an obligation to place the company into an insolvency procedure for the purposes of local laws, or whether the obligation to do so could be regarded as having been complied with. Do local auditors still have to monitor the financial performance of the company? Do local directors still have an obligation to file accounts and other returns?

In some jurisdictions it is usual for the powers of liquidators to be set out in the judgment opening the insolvency proceedings.

6. Priority of claims

Under Article 4 English law applies in the case of what might be called insolvency type issues. English priority laws are different from local laws. In Germany inter-company debts are subordinated to all other debts. In many European countries employee claims are larger than in England and have significantly better priority than under English insolvency law. Does that make it likely that secondary proceedings are likely to be opened? If so, they could only be winding up proceedings but that could cause difficulties if employees thought that their local preferential status was being endangered.

On the employee point, the administrators in MG Rover obtained an order from the English court declaring that the administrators had power, if they considered that exercising the power would further the purpose of the administration, to make payment to employees of any of the foreign subsidiaries to put them in the same position as they would have been in if a local secondary proceeding had been commenced in respect of that subsidiary.

None of this should deter those seeking, or exporting, such orders. Early planning is, however, essential, so that steps can be taken to forestall or deal with these problems without causing unnecessary delay once the administrators are appointed. These considerations also underline the undesirability of relying on an out of court appointment where the intention is to export the powers of the officeholder.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 24/11/2005.

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