Insolvency update: The Recast Insolvency Regulation

The European Insolvency Regulation (Regulation (EC) No. 1346/2000) (the “Regulation”) has reduced the risk to banks and financial institutions of enforcement against insolvent companies in EU Member States by enabling cross-border cooperation and increasing certainty in the law applicable on insolvency. New European legislation addresses some deficiencies of the Regulation and introduces a new framework for group insolvencies. Banks lending to groups of companies will take note in particular of the increased scope for coordination between different jurisdictions in complex cross-border group insolvencies.

The Regulation originally came into force on 31 May 2002. Its purpose was to provide rules to determine the proper jurisdiction for a debtor's insolvency proceedings and the applicable law to be used in those proceedings and to require mandatory recognition of those proceedings in other EU member states. The Insolvency Regulation provided for a review of its operation after ten years and in December 2012 the European Commission made proposals for it to be updated. Following extensive trialogue discussions between the European Commission, European Parliament and Council, the final text of the recast Insolvency Regulation was approved by the European Parliament on 20 May 2015, and the recast Insolvency Regulation (Regulation (EU) No. 2015/848) (the “Recast Regulation”) entered into force on 26 June 2015, applying to insolvency proceedings from 26 June 2017.

The Recast Regulation contains a codification of the method of determination of centre of main interests (COMI). COMI is a central concept that determines whether the Recast Regulation applies to a debtor and the jurisdiction for opening of main insolvency proceedings. COMI will be presumed to be at the registered office, but the presumption is rebuttable if the central administration is located in another Member State and a comprehensive assessment of all the relevant factors establishes, in a manner that is ascertainable by third parties, that the company’s actual centre of management and supervision and of the management of its interests is located in that other Member State. The registered office presumption will not apply if there has been a move of the registered office during the three months prior to the opening of proceedings. Although essentially stating what has been developed by case law since the Regulation, these new rules provide welcome clarity.

The Recast Regulation is extended in scope to new categories of proceedings. It covers hybrid and pre-insolvency proceedings and secondary proceedings will no longer be limited to liquidation proceedings where a company has an establishment. The definition of 'establishment' is amended to 'any place of operations where the debtor carries out a non-transitory economic activity with human means and assets' (using a reference to 'assets' rather than 'goods') and the relevant time for assessing an establishment will be either the time of the opening of the secondary proceedings or, alternatively, the three month period prior to that, so that secondary proceedings may still be possible even if an establishment has recently closed. In addition, the insolvency practitioner in the main proceedings is now expressly permitted to provide undertakings to treat local creditors as they would be treated under secondary proceedings.

Under the Recast Regulation, the courts of the member state where main insolvency proceedings are opened will also have jurisdiction to hear actions derived directly from the insolvency proceedings that are closely linked, such as avoidance actions, to avoid the risk of irreconcilable judgments resulting from separate proceedings.

There will be new linked registers of insolvency proceedings. The recast Regulation calls for both national electronically-searchable databases in each member state, and for these to then be linked via a central European e-justice portal. On 7 July 2014, the Commission announced a pilot scheme to connect insolvency registers in the Czech Republic, Germany, Estonia, Netherlands, Austria, Romania and Slovenia through the e-justice portal.

The Recast Regulation introduces a framework for group insolvency proceedings. The aim is to improve the efficiency of insolvency proceedings concerning different members of a group of companies, which may encourage cooperation across the group and rescue of the group as a whole. Currently, each insolvent debtor company is subject to separate insolvency proceedings in the place of its COMI. Where two or more members of a group of companies are subject to insolvency proceedings, an insolvency practitioner appointed to any group company, together with any courts involved, will be obliged to cooperate (for example by agreement or protocol) to facilitate the effective administration of those proceedings, to the extent it is not incompatible with the rules of such proceedings and there is no conflict of interest in doing so.

Group coordination proceedings may be requested before any court having jurisdiction over the insolvency proceedings of a group member by the insolvency practitioner appointed there. The purpose of these proceedings is to propose a group coordination plan recommending a comprehensive set of measures appropriate to an integrated approach to the resolution of the group members’ insolvencies. Insolvency practitioners in other members states may choose not to participate in proposed group coordination proceedings, so they will only be effective where they are consensual. It is already open to insolvency practitioners in some European jurisdictions to form agreements with insolvency practitioners in other jurisdictions and give appropriate undertakings to creditors in order to effect a form of group coordination plan, and given the new provisions in the recast Regulation, we may see increased group coordination in advance of the new provisions applying.

The Recast Regulation has direct effect in each member state (apart from Denmark, which has opted-out) without the need for separate enactment at a national level. The majority of the provisions apply from 26 June 2017 and the original Regulation will continue to apply to proceedings opened before this date. The establishment of national insolvency registers will not come into force until 26 June 2018, with the requirement for an EU interconnected register by 26 June 2019.

Banks and financial institutions will hope to take advantage of the Recast Regulation. The amendments to COMI and extension to all secondary proceedings should discourage forum shopping. The insolvency register and group coordination proceedings will facilitate complex cross-border insolvencies. Even before the Recast Regulation comes into effect, there may be a push towards increased cooperation in group insolvencies.