UK: EU Regulation on Insolvency

The EU regulation on insolvency enters into force on 31 May 2002. It provides for a new framework for the conduct of cross border insolvency proceedings within the EU which simplifies the current rules, particularly in relation to the recognition of office holders in another member state. These jurisdictional rules will affect the administration of all insolvency procedures covered by the regulation. This is so even where the assets of the insolvent company or the insolvent individual are located only within the United Kingdom.

The new regime will mean that the current rules on jurisdiction contained in the Insolvency Act and Insolvency Rules will continue to apply to companies whose registered office or main place of business is outside the EU. In addition, the regulation does not extend to Denmark.

The regulation covers all types of insolvency proceedings apart from receiverships. In order that creditors' voluntary liquidations can come within the ambit of the regulation, a new procedure for confirmation of the Liquidator's appointment by the court is to be introduced (see below).

The regulation introduces two key concepts to establish the appropriate jurisdiction for insolvency proceedings. Firstly, it provides for the identification of the debtor's centre of main interests (COMI). If the debtor's COMI is outside the EU, the regulation does not apply. Secondly, it introduces the concept of establishment which is equivalent to a place of business, sustained and ongoing, rather than the mere presence of assets.

The regulation provides for three types of insolvency proceedings. Main proceedings can only be opened in the state in which the debtor's COMI is based. Evidence of this will have to be provided to the court. New forms for winding up petitions, administration petitions, bankruptcy petitions and petitions for an insolvency administration order are to be introduced. These will prompt enquiries as to whether the debtor' COMI is within the United Kingdom.

Secondary proceedings can be commenced in a member state where the company has an establishment other than the state where the COMI is based. This will prevent proceedings being commenced in a member state merely on the basis that assets are present within its jurisdiction.

Where main proceedings have already been commenced, the secondary proceedings will be limited to the winding up of the debtor company. This will severely restrict the ability of office holders to utilise the restructuring procedures available within administration and voluntary arrangements. However, where secondary proceedings are commenced prior to the main proceedings (called Territorial proceedings), these proceedings will not be limited to the winding up of the company. It will be possible for companies to apply for an administration order or propose a voluntary arrangement. The effect is to extend the administration and voluntary arrangement provisions contained within the Insolvency Act to foreign companies with an establishment in the United Kingdom. An administration order would be able to be made over the part of the company' business based in this country.

The bankruptcy regime is less likely to be affected by the regulation' jurisdictional provisions. Although an increasing number of bankrupts own property in other EU member states, the ownership of a property in another state will not amount to an establishment under the regulation and it is likely that the bankrupt' COMI will be the United Kingdom and that all proceedings relating to the bankruptcy will be carried out in this country. Accordingly, applications on the basis of Ashurst-v-Pollard [2001] Ch 595 will continue to be necessary.

New statutory instruments are to be made in the coming weeks to amend the Insolvency Act and the Insolvency Rules so that they comply with the provisions of the regulation. In the meantime, all petitions issued prior to 31 May 2002 will need to be amended to comply with the new regulation. The court will require evidence that the debtor's main residence (COMI) is within the United Kingdom, whether the EU regulation applies and whether the proceedings are main, secondary or territorial proceedings. In the case of winding up petitions, evidence that the registered office is within the United Kingdom should be sufficient. However, if the petitioner thinks that the company' COMI is based elsewhere, he should provide evidence of this to the court. The additional evidence will have to be supplied in the form of a witness statement.

The procedure for confirmation of the appointment of a Liquidator in a creditors' voluntary liquidation has been designed as a paper application. A new Insolvency Rule 7.62 will contain the necessary provisions governing the application. It is proposed that the application together with a draft order is filed at court and will be dealt with without a hearing.

One of the main advantages of the entry into force of the regulation is that office holders from each member state will now receive automatic and immediate recognition of their appointment in another member state. This will enable office holders to repatriate assets to the country of main proceedings so that they can be distributed from a common estate rather than being dealt with in the estates in each member state where territorial or secondary proceedings are being pursued.

The applicable law of the proceedings in all member states will be the law of the state of main proceedings. However, the local law will apply in secondary or territorial proceedings concerning the rights of creditors in a number of areas including third party rights in rem and set off. Employees'claims are governed by the law applicable to their contracts of employment.

In view of the increasing amount of cross border commercial activity within the EU, issues of cross border insolvency are likely to become increasingly common. Office holders will have to be aware of the provisions of the regulation in order to maximise returns to creditors within either the main or secondary proceedings.