Recast EU Rules on Cross-Border Insolvency

Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast) (the “Recast Regulation”) comes into force today, 26th June 2017. Establishing a common framework for the benefit of all stakeholders, it improves the prior Regulation on Insolvency proceedings (EC) 1346/2000 (the “Regulation”) and represents a significant step towards the broader harmonization of regulation of insolvency proceedings across the European Union (EU). The Recast Regulation addresses some shortcomings of its predecessor and introduces a new legal framework for group insolvencies. It shall apply to all insolvency proceedings started in an EU member state (except for Denmark which has opted-out) on or after 26 June 2017. The original Regulation shall continue to apply to proceedings opened before this date.

What’s new?

1.      Broader Scope

The scope of the Recast Regulation has been extended to include certain pre-insolvency rescue and restructuring proceedings, as well as liquidation as part of a policy to encourage rescue and rehabilitation of debtors where there may be only a likelihood of insolvency. Each EU member state has produced an exhaustive list of procedures which fall within the Recast Regulation.

2.      Centre of Main Interests (“COMI”) and Avoiding Abusive COMI Relocation

The Recast Regulation introduces an essential clarification of the COMI for determining the jurisdiction for the opening of main proceedings and the applicability of the Recast Regulation to debtors. While the definition has not changed, the clarification and guidance given is helpful for practitioners taking appointments in EU member states. The presumption that COMI is at the registered office is rebuttable if the central administration is located in another member state and a comprehensive assessment of all the relevant factors establishes that the company’s actual centre of management and supervision and of the management of its interests is located in that other member state. Furthermore, the registered office presumption shall also not apply if there has been a move of the registered office during the three months prior to the request to open the insolvency proceedings. In this situation, the court in the member state of the earlier location shall have jurisdiction to open proceedings. A similar three-month look-back test applies to the definition of a COMI for an individual exercising an independent business or profession. The principal place of business is presumed to be its COMI in the absence of proof to the contrary. The presumption shall only apply if the principal place of business has not been moved to another member state within the three-month period preceding the filing of the petition for the relevant insolvency proceedings. The purpose of the harmonized framework regarding insolvency proceedings is to avoid assets or judicial proceedings being transferred from one EU country to another in order to obtain a more favourable legal position to the detriment of creditors (the so called “forum shopping”).

Under the Recast Regulation, the court hearing an application to open main insolvency proceedings should examine whether it has jurisdiction and it should specify the grounds for its finding.

The amendments also introduce an express right on the part of a debtor or any creditor to challenge before a court the decision opening main insolvency proceedings.

3.      Secondary Proceedings

The Recast Regulation lifts the restrictions so that secondary proceedings are no longer confined to being winding up proceedings. Secondary proceedings shall not be restricted to liquidation and may now also be opened for reorganisation proceedings. The new legal framework now expands the scope to include all rescue and pre-insolvency proceedings governed by the regulation. Moreover, the so called “synthetic” (or virtual) secondary proceedings are expressly provided for in the Recast Regulation, whereby the relevant office holder may give a unilateral undertaking to the effect that local creditors, when it comes to distributions, shall be treated as if secondary proceedings have been opened. The objective is to limit the cases in which secondary proceedings shall be opened, in response to secondary proceedings broadly being seen as disruptive and an impediment to a rescue and/or an efficient realization strategy. It is controversial whether local creditors might enjoy greater rights than creditors in the main proceedings.

The Recast Regulation amends the definition of “an establishment” to “any place of operations where the debtor carries out a non-transitory economic activity with human means and assets”.

4.      Group of companies

A shortcoming of the former Regulation was its lack of any provision for the insolvency of multiple companies which are part of the same corporate group. The new legal framework introduces specific rules for cooperation and coordination in case insolvency proceedings relating to different members of a corporate group are opened in more than one member state. 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 in order to propose a group coordination plan and appropriate an integrated approach to the resolution of the group members’ insolvencies. The aim is to improve the efficiency of insolvency proceedings concerning different members of a group of companies and to encourage rescue of the group as a whole. However, cooperation with office-holders in other member states are not obligatory if there is conflict of interest or with national rules. The Recast Regulation also outlines a new voluntary process overseen by the courts for coordinating some elements of the proceedings.

5.      Standardization of the procedure for filing claims

The Recast Regulation creates a European standard claim form to file claims in all member states. The claim form shall specify inter alia the interest rate, the period of calculation and the capitalized amount of interest. It also enables creditors to provide all the information necessary to protect their rights.

6.      Paving the way for an EU-wide register of insolvency proceedings

By 26th June 2018 all member states shall establish and maintain national electronically searchable registers of insolvency proceedings. They should be linked and searchable centrally via the European e-Justice Portal by 26 June 2019.

See the full document HERE.