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Significant changes in cross-border insolvency proceedings

Recast Insolvency Regulation affects cross-border insolvencies as of 28 June 2017.

The Recast Insolvency Regulation (EU) 2015/848 applies to insolvency proceedings commenced on or after that date. It is directly applicable in all EU member states (except Denmark).

Here is a short description of the key changes in the Recast Insolvency Regulation as compared to the Insolvency Regulation (EU) 1346/2000. These changes can be summarized as follows:
  • Broadening of the scope of the regulation to cover also pre-insolvency proceedings.
  • Clarification of the concept of a debtor’s COMI (Center of Main Interest).
  • Improvement of the interplay of main proceedings and secondary proceedings.
  • Introduction of new regulations regarding (pre-)insolvency proceedings for international groups of companies.
  • Improved publicity of insolvency proceedings and protection of interests of foreign creditors.
In more detail:

Broader scope
The initial Insolvency Regulation (EU) 1346/2000 did not cover pre-insolvency proceedings and so-called hybrid proceedings aimed at preventing insolvency and rescuing companies in financial distress. This limitation in scope was perceived as a shortcoming.

The scope of the Recast Insolvency Regulation is now broader, since it also encompasses rescue and adjustment of debt proceedings (see Article 1). As before, the Recast Insolvency Regulation explicitly refers to its Annex A. This Annex A now also lists (pre-) insolvency proceedings in the member states of the EU falling within the scope of the Recast Regulation.  In this context, the Recast Insolvency Regulation clarifies that Annex A is exhaustive and that no further examination by the courts is needed in this regard when assessing whether a given case falls into the scope of the Recast Insolvency Regulation (see Recital 9).

Clarification of COMI concept
The Recast Insolvency Regulation now defines the concept of COMI as “the place where the debtor conducts the administration of its interests on a regular basis and which is ascertainable by third parties” (see in Article 3.1). This definition reflects the criteria developed over the past decade by the European Court of Justice. The case law of the European Court of Justice had helped in solving difficulties that had arisen when applying the concept of COMI as defined under the Initial Insolvency Regulation (for instance: diverging interpretations of the previous COMI definition, abuse, and forum shopping).

Improvement of the interplay between main and secondary proceedings
The Recast Insolvency Regulation has not changed the general system of the main insolvency proceedings and secondary insolvency proceedings. However, changes were introduced to improve and clarify the system. The types of possible secondary proceedings are extended: Any of the proceedings, as listed in Annex A, can now be secondary proceedings. Therefore, it is now possible to launch secondary proceedings aimed at restructuring the debtor. This was not possible under the Initial Insolvency Regulation, as previously secondary proceedings could only be in the form of liquidation proceedings. A new tool offered by the Recast Insolvency Regulation consists of ‘virtual’ secondary insolvency proceedings. To initiate ‘virtual’ secondary proceedings, the insolvency practitioner (administrator or other, as defined in Annex B of the Recast Insolvency Regulation) in the main proceedings will have to use a new concept, the “right to give an undertaking” (see Article 36 Recast Insolvency Regulation). This allows insolvency practitioners in the main proceedings to act “as if” secondary proceedings had been opened in one or more other member states and to comply with local distribution and priority rights with regard to the proceeds of local assets “as if” secondary insolvency proceedings had been conducted. The aim of the ‘virtual’ proceedings is to avoid actually opening secondary insolvency proceedings, since this usually means additional expense and administrative burdens, leading to delay in administration and often reducing the chances of rescuing the debtor’s business. On the other hand, avoiding the opening of secondary insolvency proceedings should not be detrimental to creditors that would normally be allowed to participate in such proceedings.

The Recast Insolvency Regulation also sets forth improved rules for coordination between the main proceedings and secondary insolvency proceedings. For example, the insolvency practitioner in the main proceedings will be able – subject to certain conditions – to request in the secondary insolvency proceedings the opening of another type of insolvency proceedings than the type of proceedings initially used. Another tool of the insolvency practitioner in the main proceedings is to request suspension of secondary proceedings. Suspension is possible for up to three months, provided a temporary stay has been ordered in the main proceedings and suitable measures have been put in place to protect the interests of local creditors, i.e. the creditors in the secondary proceedings. The aim is to allow the insolvency practitioner in the main proceedings to conduct negotiations without their focus being blurred by having to look after secondary proceedings which might be taking place in various jurisdictions of the EU.

New instruments for international groups of companies
What is completely new and is usually not even available under national laws, including those of EU member states, are specific rules on the treatment of insolvencies of various members of groups of companies. The Recast Insolvency Regulation now introduces a whole new chapter dealing with insolvencies of members of an international group of companies. The Recast Insolvency Regulation introduces a voluntary group coordination and cooperation scheme  applicable between the different main proceedings opened against companies of the same group. 

As part of this scheme the insolvency practitioners in each of the main proceedings must “cooperate and communicate”. Here, the Recast Insolvency Regulation offers two alternatives. Firstly, the insolvency practitioner of any group company may request a stay of realization of assets of another insolvent group company to enable the insolvency practitioner to implement a restructuring plan. Secondly, a so-called group coordinator may be appointed. The group coordinator can make recommendations for the coordinated conduct of different main insolvency proceedings and can even propose a group coordination plan. The group coordinator may also request a stay of proceedings opened in respect of any member of the group to ensure proper implementation of the plan.

As mentioned before, participation in group insolvency proceedings is voluntary, making execution of the provisions to a large degree dependent on goodwill. Insolvency practitioners will be able to opt out before a group coordinator is appointed. They may also opt in at a later stage. The coordinator’s recommendations for a group coordination plan are, as the name indicates, recommendations that do not bind the insolvency practitioners in the various main proceedings.  Nevertheless, introduction of this new chapter for insolvencies of members of an international group of companies is a significant step by the legislator in acknowledging the realities of today’s business, which is increasingly conducted by internationally active groups of companies.

Improved publicity of insolvency proceedings and protecting the interests of foreign creditors
The Recast Insolvency Regulation addresses another problem that had become obvious in the past decade, i.e., serious shortcomings with regard to the publicity of insolvency proceedings (starting from publicity of the decision opening proceedings) and lodging of claims. The Recast Insolvency Regulation now imposes additional obligations on the member states to set up publicly accessible insolvency registers. The Commission will create a central public electronic access point to allow interested persons easy access to information to be published in insolvency registers to be set up and maintained by the member states.

Lodging of claims will be facilitated by a standard claims form and by setting a minimum deadline for foreign creditors of 30 days to lodge their claims.

One of the aims of the Recast Insolvency Regulation is to improve the framework for rescuing businesses. In this context, other initiatives can be expected, as shown by European Commission proposal at the end of 2016 for a Directive on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures and amending Directive 2012/30/EU.

Compared to the Initial Insolvency Regulation, the Recast Insolvency Regulation contains significant changes, including completely new tools such as the chapter on insolvencies of members of an international group of companies, ‘virtual’ secondary insolvency proceedings and interlinked and publicly accessible insolvency registers. In an increasingly international business environment, companies are well advised to acquaint themselves with the changed set of rules for insolvencies in an international, cross-border context.

Experts from the bnt attorneys in CEE Insolvency and Restructuring practice group have ample experience of all legal and practical aspects of insolvency and restructuring proceedings, be it locally in their respective jurisdictions, or internationally in cross-border situations. They stand ready to support bnt clients and also to advise on the changes prompted for the Recast Insolvency Regulation.

For more information, please contact:

Frank Heemann
Partner
Head practice group Insolvency and Restructuring