UK: Supreme Court Guidance On The Meaning Of "Establishment" In Council Regulation EC 1346/2000 On Insolvency Proceedings ("Insolvency Regulation")

Last Updated: 1 May 2015
Article by Devi Shah, Ashely Katz and Alexandra Wood

Keywords: insolvency,

The Supreme Court (unanimously dismissing the appeal in Trustees of Olympic Airlines SA Pension & Life Assurance Scheme v Olympic Airlines SA) has held that "economic activity" is central to the definition of "establishment" in the Insolvency Regulation1.

The definition of establishment envisages a fixed place of business. There must be activities which by their nature involve business dealings with third parties. Pure acts of internal administration are not sufficient. The definition of "establishment" cannot sensibly be read as requiring that the debtor should simply be locatable or identifiable by a brass plate on the door.

Olympic Airlines SA (the "Airline") was already the subject of main liquidation proceedings in Greece. The Supreme Court held that, whilst some activities which a company in liquidation elsewhere might carry on in the UK (such as carrying on business or disposing of stock in trade on the market) might satisfy the definition of "establishment" (for the purposes of founding jurisdiction to open insolvency proceedings in the UK), where the company has no subsisting business, it is clearly not the case that the mere internal administration of its winding up would qualify. If this were enough to establish jurisdiction then the requirement for economic activities would add little or nothing to the rest of the definition and the definition would almost always be satisfied by a debtor retaining premises in the UK with inevitable outgoings such as rent etc.

Although the Supreme Court declined to draw a precise boundary, the case provides helpful guidance on what is necessary in order for there to be an "establishment" entitling an English Court to wind up a company which has its centre of main interests in another member state of the European Union.

Implications of the decision in practice

The practical result of the Supreme Court's decision is that any creditor contemplating commencing insolvency proceedings in this jurisdiction (when the company's centre of main interests is in another member state) should investigate and consider the economic activities which the company is carrying on here at the earliest opportunity in order to determine whether they are sufficient to satisfy the definition of "establishment". If there is any concern that, over time, such activities may diminish or cease altogether, the creditor should seek advice as to whether promptly to take steps to commence insolvency proceedings here before any jurisdiction is lost.

Pensions law perspective

In light of the Supreme Court's decision and given the narrow scope of the Pension Protection Fund (Entry Rules) (Amendment) Regulations 2014 (which seem likely to extend only to the Airline and not to other schemes), the timing of any application for a winding up order in the UK (in respect of a company with its centre of main interests in another member state) for the purposes of establishing a qualifying insolvency event for entry into the Pension Protection Fund ("PPF") remains critical. Foreign insolvencies are not treated as a "qualifying event" for PPF entry.

The trustees of any scheme with an EU (non-UK) employer in financial difficulty will need to investigate and consider whether the company has an "establishment" in the UK and seek advice quickly - if the company's economic activities in the UK diminish over time or cease altogether, any jurisdiction which the English Court may have had to wind up the company might be lost. Absent an establishment then further secondary legislation under the Pensions Act 2004 may be the only route to establishing a qualifying event for PPF entry.

Background to the first instance and Court of Appeal decisions2

The Airline was a Greek state-owned airline which commenced operations in Greece in 2003. It flew to many European destinations, including London Heathrow, and carried on business in England from a head office in Conduit Street, London, which it leased from an associate company. It also had premises at Heathrow and Manchester Airports and employed about 27 employees in England. Most of those employees were members of the Olympic Airlines SA Pension & Life Assurance Scheme (the "Scheme").

The Trustees of the Scheme applied to the English Court for a winding up Order in respect of the Airline in order to secure entry for the Scheme into the PPF. This was necessary because, absent a winding up order in the UK, no qualifying insolvency event had occurred in relation to the Airline for the purposes of entry into the PPF.

Timeline of events:

  • On 2 October 2009, following the decision of the European Commission that the Airline had received illegal state aid from the Greek State, it entered "special" liquidation in Greece. This "special" liquidation constituted "main proceedings" for the purpose of the Insolvency Regulation.
  • In November 2009 the ticket office at Heathrow was closed.
  • On 24 March 2010 the Greek liquidator gave instruction for the disposal of the Airline's assets at its branches outside Greece.
  • In May 2010 the premises in Manchester were vacated and their contents moved to the Conduit Street office.
  • On 24 June 2010 the bank manager reported to the English branch's financial and planning manager that he had insufficient funds to pay the Airline's English employees under the BACS payroll mechanism.
  • On 29 June 2010 all standing orders and direct debits from the English branch were cancelled.
  • On 2 July 2010 the Greek liquidator wrote to all of the Airline's employees in England terminating their employment from 14 July 2010. Final salary payments to English employees down to 14 July 2010 were funded by a remittance from the Greek liquidator. The English branch's financial and planning manager and former general manager were both retained on short term contracts which continued after 14 July 2010.
  • The retained managers paid suppliers and utility bills, reconciled bank statements, copied and sent relevant documents and records to the liquidator in Athens and dealt with other instructions or requests from the liquidator.
  • The Trustees of the Scheme presented a petition to wind up the Airline in England on 20 July 2010 which, if successful, would result in the Airline suffering a qualifying insolvency event and the Scheme being eligible to enter the PPF.

At first instance, the High Court decided that it had jurisdiction to issue a winding up order on the Trustees' petition on the basis that the Airline had an establishment in England on 20 July 2010 within the meaning of the Insolvency Regulation. The Airline appealed that decision on the basis that the Insolvency Regulation's definition of establishment required more than what had been identified by the High Court and in particular required some more than transitory economic activity which was external and market facing. It argued that the desultory running down of a business did not count.

The Court of Appeal noted its regret that its conclusion would leave the beneficiaries of the Scheme unprotected by the PPF. It is against this backdrop that the Secretary of State for Work and Pensions drew up The Pension Protection Fund (Entry Rules) (Amendment) Regulations 2014 (the "Amendment Regulations"). Pursuant to the Amendment Regulations, an additional qualifying insolvency event was prescribed for the purpose of s121 Pensions Act 2004 enabling the Scheme to qualify for the PPF. Notwithstanding the Amendment Regulations, the Trustees of the Scheme pursued an appeal to the Supreme Court for technical reasons relating to the exercise of "claw back" powers by a liquidator in respect of any overpaid benefits.

The Judgment of the Supreme Court

The Supreme Court unanimously dismissed the Trustees' appeal.

Court held that the definition of "establishment" in Article 2(h) of the Insolvency Regulation (being any place of operations where the debtor carries out a non-transitory economic activity with human means and goods) should be read as a whole and not broken down into discrete elements, for each element colours the others. The relevant activities must be economic, non-transitory, carried on from a place of operations and using the debtor's assets and human agents. This suggested to the Supreme Court that what was envisaged was a fixed place of business. It also suggested to the Court a business activity consisting in dealings with third parties and not pure acts of internal administration. The Supreme Court concluded the definition could not sensibly be read as requiring that the debtor should simply be locatable or identifiable by a brass plate on the door. It referred to the character of economic activities. There must be activities which by their nature involve business dealings with third parties.

Some activities which a company might carry on in liquidation (such as carrying on business or disposing of stock in trade on the market) may satisfy the definition. However, where the company had no subsisting business, it was clearly not the case that the mere internal administration of its winding up will qualify. Such activity would not be "exercised on the market" (as suggested by the Virgos-Schmit Report). If it were enough to establish jurisdiction then the requirement for economic activities would add little or nothing to the rest of the definition. Indeed the definition would almost always be satisfied by a debtor retaining premises in the UK with inevitable outgoings such as rent etc.

However, the Supreme Court found that it was unnecessary in the present case to undertake the difficult task of drawing a precise boundary between these extremes because on any meaningful view the facts of this case fell on the wrong side of it.

Comment

The Supreme Court's guidance will have broad implications for pension schemes, insolvency practitioners and creditors alike. The ruling will help creditors and insolvency professionals by providing greater clarity at Supreme Court level on what will be required for EU companies with a presence here to enter into insolvency proceedings in this jurisdiction.

For company pension schemes, the decision provides a timely reminder that when an employer is based in the EU but is providing UK final salary pension schemes, it remains difficult to benefit from PPF protection. It may prove crucial, once the local EU proceedings are underway, to start appropriate English insolvency proceedings as quickly as possible – the key action point is for trustees to take advice promptly on this.

Originally published 30 April 2015

Footnotes

1. [2015] UKSC 27

2. [2013] 1 BCLC 415 and [2014] 1 WLR 1401.

Learn more about our Restructuring, Bankruptcy & Insolvency practice.

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2015. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.