Insolvency cross-border issue.
There is an EU wide Regulation on cross-border insolvency. It does not seek to harmonise laws in the area of insolvency as such. Instead, it provides mandatory rules as to which jurisdiction must be recognised as pre-eminent and requires co-operation and assistance by the courts and authorities of other EU states.
The basic rule is the courts with jurisdiction to “open” (commence) insolvency proceedings are those of the state where the debtor has his “centre of main interests”. In the case of a company or corporate entity, this will generally be the state in which the registered office is situated. In the case of an individual, it is where he has his main interests or connections
The court order opening insolvency proceedings in the state of the centre of main interests must be recognised by other EU states. No further scrutiny is permitted except in limited matters of essential public policy, which may apply in the latter states.
Generally, proceedings in other states are by way of assistance to the state of the centre of main interests and are restricted to assets of the debtor within the relevant state. Secondary proceedings may be opened to liquidate and realise assets in other states, in some cases. They may be instituted prior to the commencement of the main proceedings in the state of the centre of main interest, where appropriate.
Centre of Main Interests
The centre of main interests is not specifically defined by the EU Regulation. The recitals indicate that the centre of main interest corresponds to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable to third parties. It is the place where the debtor regularly has close contacts, in which his manifold commercial interests are concentrated and in which the bulk of his assets are situated.
Interests refer to commercial business and operations. They embrace a broader range of activities, including professional activities. “Main” appears intended to serve as criteria, where the interests include different types of activities, which are run from different centres.
In the case of a company, the registered office is presumed to be the centre of main interests. However, the entirety of the circumstances and other factors may displace this presumption.
Corporate COMI Factors
Among the factors relevant to determining the centre of main interests are the following:
- where the day-to-day administration of the business is conducted;
- the nationality of directors / debtors;
- where he or it administers his / its interest in business and company;
- the place of residence of the directors / debtor
The centre of main interests of the parent company will be usually where board meetings, in particular, those dealing with high level and strategic matters are held.
There are two broad approaches. One looks at the place where the entity is managed. The other approach looks at the matters from the perspective of the major creditors.
In principle, each company within the group may have a different centre of main interest. Some courts take the view that the centre of main interests will be that of the holding company in that it will generally control and administer the interests of the group. However, this is not necessarily so, and each case will turn on its own facts.
Change of COMI
The centre of main interests is to be considered in the light of the facts as they apply when the insolvency proceedings are taken. The facts as of that date include all historical facts. The courts shall have regard to the ability of others such as creditors to ascertain the centre of main interests.
The key question is how an objective observer would perceive the matters. There will generally be an element of permanence in a person’s centre of main interests.
A debtor may change his centre of main interests. The courts are reluctant to accept an alleged changed “centre” resulting from transitory or temporary activities. However, a recent change may be nonetheless real. The motive for so doing does not matter; there may be a self-serving purpose.
The courts look critically at facts which are claimed to give rise to a change in the debtor’s centre of main interest, in circumstances where there are grounds for suspicion that he has sought deliberately to change the centre of main interest when he was insolvent in order to change the insolvency rules applicable to existing debts. The matter is determined at the commencement of the proceeding.
Commencement of Proceedings
The Regulation covers winding-up proceedings in respect of companies, bankruptcy in respect of individuals, administration and bankruptcy of estates, winding up of partnerships, creditors voluntary winding up and court controlled winding up. In broad terms, the opening of insolvency proceedings refers to the commencement of the relevant proceedings. This includes an application for the appointment of a provisional liquidator.
It describes as “the liquidator”, the person who is obliged to liquidate and distribute, the assets of the debtor. Accordingly, under Irish law, the liquidator may be a liquidator but may also be the Official Assignee, a provisional liquidator, an examiner, or a trustee in bankruptcy.
A liquidator appointed by the court may take provisional steps to preserve assets located in another EU state. He may take steps to remove the debtor’s assets to the home jurisdiction. He may set aside transaction in other states if it is in the interest of the creditors. A creditor, based in the EU, whose claim is satisfied after the commencement of insolvency from assets belonging to the debtor, must return the proceeds to the liquidator.
Notice and Registration
Where the debtor had an establishment in the state concerned, the liquidator or other authority must ensure that the notice opening the insolvency proceedings is published, in the prescribed manner. In Ireland, it must be published in Iris Oifigiúil, and at least one daily newspapers circulating in the State
The liquidator may request that the order opening proceedings be published in such other states as he may so direct. The publication procedures applicable to that state apply. Publication is not a precondition to recognition in the foreign proceedings, but there is an obligation to ensure it is undertaken.
The liquidator may require that the proceedings are registered in the relevant land, trade or other registry in the other state. The law of the other EU state may require him to so register.
A judgment or order of another EU state may require to be translated in the state of receipt. It must be accompanied by a prescribed form.
Notice of the commencement (opening) of proceedings must be published in another EU state at the request of the liquidator if one of the establishments of the entity concerned is located in that other state. Where the debtor has an establishment in the host state, then the liquidator or other authority must ensure that publication takes place as soon as possible after the principal insolvency proceedings commence.
A liquidator (in the above sense) who wishes to request that notice that the insolvency has been commenced and of his appointment be published in another state, must deliver to the host state for registration in a register kept for this purpose, a certified copy order of the home proceedings. The register is to be public register and is open for inspection. A certified copy of the order and translation are deemed, without further proof to be admissible as evidence of such commencement and appointment, until the contrary is proved.
In the case of companies, the details of appointment must be delivered to the Registrar of Companies. Publication in a newspaper and Iris Oifigiúil is required. Publication in two newspapers is required in the case of a company.
Post Commencement Dispositions
Where by an act concluded after the opening of insolvency proceedings, the debtor disposes, for consideration, of an immovable asset, or a ship or an aircraft subject to registration in a public register, or securities whose existence presupposes registration in a register laid down by law, the validity of that act shall be governed by the law of the State within the territory of which the immoveable asset is situated or under the authority of which the register is kept.
The opening of insolvency proceedings against the purchaser of an asset shall not affect the seller’s rights based on a reservation of title where at the time of the opening of proceedings the asset is situated within the territory of a Member State other than the State of the opening of proceedings. This does not preclude a claim that the transaction is void or unenforceable under the law of the centre of main interests.
Steps taken in good faith, before publication of the proceedings in the host or secondary state, are not affected. Where payments are made after publication of the proceedings in the state of main interests, it is presumed the parties are aware of the proceedings until the contrary is shown.
Confirmation of Order
A creditors voluntary winding up may be confirmed, by way of an order made on application to the Master of the High Court. Official orders and confirmations of appointment must be made by the authorities of the centre of main interests, for the purpose of recognition in other states.
Secondary proceedings may be opened, only in certain circumstances. The debtor must have an establishment within the state concerned. The effect of the proceedings is limited to assets within the state concerned.
An establishment means any place where the debtor carries on non-transitory activities with human and other resources. The presence of assets alone is not enough. The business should be conducted from an identifiable place of business. A single or transitory transaction would not suffice. The relevant tests apply at the date of the application. The purpose of the application and proceedings must be the winding up of the assets in that state.
Secondary proceedings may not generally be opened unless the main proceedings have already been opened in the state where the debtor has its main centre of interest. They may be opened at any time after the main proceedings have been opened.
They were two limited circumstances in which secondary proceedings may be opened in advance. The first is where the main proceedings cannot be opened because of conditions in the centre of main interest state.
The second is where it is requested by a creditor who has his domicile, habitual residence and registered office in the state within the territory in which the debtor’s establishment of a debtor is situated or whose claim arises from the operation of that establishment.
Extent of Secondary Proceedings
The liquidator in the main proceedings has the principal role in secondary proceedings. Secondary proceedings may be opened by the liquidator in the main proceedings or by other persons who are entitled to request proceedings to issue under the law of the other EU state, where the secondary proceedings are to be taken.
Secondary proceedings are limited to the debtor’s assets in that state. If there is more than one liquidator involved, they are bound to share information and to cooperate. They must keep each other informed regarding claims that have been lodged and other information that is relevant, including, the general progress of the proceedings.
The law applicable to the proceedings is that which the proceedings are opened, the centre of main interest. Generally, it determines procedural and substantive rules.
Governing Law I
Proceedings for insolvency must be opened (commenced) in the EU state of the debtor’s centre of main interests. The law of the state in which proceedings are opened (commenced) determines almost all matters in connection with them, including the conditions of opening, the conduct of the proceedings, and matters of substantive entitlements. This includes
- commencement of the proceeding against the debtor (opening);
- the assets available,
- the powers of the debtor and the “liquidator”,
- the effect of insolvency on contracts and lawsuits;
- the making of claims,
- the realisation of assets,
- ranking and priorities,
- rules which invalidate acts and transactions which would adversely affect the debtor
- liability for the costs
The law of the state in which the proceedings are opened determines the effect of insolvency proceedings on current contracts, to which the debtor is a party. It determines the effect of insolvency proceedings and proceedings brought by creditors.
The effects of the insolvency procedure on lawsuits pending in another state are determined by the law of that State.
Governing Law II
The issue of whether set off is available, is determined by the law of the centre of main interests. If that state denies the right of set off, a creditor may demand set-off where the set-off is permitted under the law applicable to the insolvent debtor’s claim. The choice of law rules of the centre of main interest must be applied to determine the governing law of the obligation, which has given rise to a claim in favour of the insolvent debtor.
The reservation of title to goods is not adversely affected by the law of the centre of main interests, where the assets are situated in another state provided they are valid under that latter state’s laws in cases where the unpaid seller is insolvent.
Secured creditors are governed by the law of the place where the secured assets are situated. The rights in respect of movable and immovable property are governed by the law of the place where they are situated. In the case of movable property, the test is applied at the date the proceedings are opened in the centre of main interest. However, actions may be taken for the avoidance or adjustment of the transaction, done with the objective of defeating creditors.
Governing Law III
Employment contracts are governed by the law of the state applicable to the employment. This applies to issues such as termination. Claims for unpaid salary and other rights are governed by the law of the place of the centre of main interest.
Where legislation requires registration of movable assets, for example, ships, aeroplanes, etc. the effect of insolvency is determined by the law of the place where the register is kept.In the case of intellectual property, the law of the place where the centre of main interests applies and proceedings are opened.
The effect of insolvency procedures on pending lawsuits is governed by the law of the place where the lawsuit is pending. In the case of assets of the above classes where registration is critical to the title, the validity of the debtor’s acts of transfer is governed by the law where the immovable assets or the register is kept.
The COMI rules determine the discharge of debts and the completion of bankruptcy.
Proprietary Rights I
Certain matters are governed by the law of the place where the asset is situated, including, in particular, rights in relation to a security interest in the property and other matters where “in rem” rules define the status of the property concerned. In rem rules are rules relating to proprietary rights or the status of an asset which are binding as against all parties. They contrast with personal rights which usually have effect only as and between certain parties, usually those to a contract.
Rights in rem for this above purpose include, in particular:
- the right to dispose of assets or have them disposed of and to obtain satisfaction from the proceeds of or income from those assets, in particular by virtue of a lien or a mortgage;
- the exclusive right to have a claim met, in particular, a right guaranteed by a lien in respect of the claim or by assignment of the claim by way of a guarantee;
- the right to demand the assets from, and/or to require restitution by, anyone having possession or use of them contrary to the wishes of the party so entitled;
Proprietary Rights II
The opening of insolvency proceedings does not affect the rights in rem of creditors or third parties in respect of tangible or intangible, movable or immovable assets. This cover both specific assets and collections of indefinite assets as a whole which change from time to time, which belong to the debtor and which are situated within the territory of another Member State at the time of the opening of proceedings.
The effects of insolvency proceedings on a contract conferring the right to acquire or make use of immovable property are governed solely by the law of the Member State within the territory of which the immovable property is situated. The effects of insolvency proceedings on employment contracts and relationships are governed solely by the law of the Member State applicable to the contract of employment.
The Regulation applies to most insolvency proceedings including companies voluntary winding up, court winding up, bankruptcy, administration and estates of deceased persons, arrangements under control of the court and examinership.
References and Sources
Burke & Comyn Personal Insolvency Law 2014
Bracken Practioner’s Personal Insolvency Handbook 2013
Law Society (Wright) Insolvency Law 2009
Sanfey & Holohan Bankruptcy Law & Practice2nd Ed 2010
Farry, Holohan Consolidated Bankruptcy & Personal Insolvency Legislation2013
Forde, Kennedy & Simms Company Insolvency 2015
Forde & Simms Bankruptcy Law 2nd Ed 2009
Insolvency Law and Practice (Report of the review committee chaired by Sir Kenneth Cork CBE, 1982, Cmnd 8558) (the Cork report)
V Finch, Corporate Insolvency Law: Perspectives and Principles 3rd Ed 2017
RM Goode, Principles of Corporate Insolvency Law (4th Ed, 2011)
A Keay and P Walton, Insolvency law: corporate and personal (4rd Ed, 2017)
Marsh Bankruptcy Insolvency and the Law 2016
WW McBryde, Bankruptcy 2nd Ed, 1995
Butterworths Insolvency Law Handbook 14th Ed 2012
Core Statutes on Insolvency Law and Corporate Rescue (annual editions)