Insolvency Oracle

Developments in UK insolvency by Michelle Butler


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Proposals to Reform EC Insolvency Regulation: Better to be inside the tent?

If you, like me, were dissuaded from exploring the EC’s proposal on revising the European Regulation on Insolvency Proceedings, issued on 12 December 2012, by reason of its sheer length, you might find the Insolvency Service’s recent Call for Evidence useful in summarising its potential reach into the UK.

The Insolvency Service opened its Call for Evidence on 7 February 2013, with a closing date of 25 February. Whilst this may seem a tiny window in which to contemplate such a tome of proposals, I am certain that those for whom this holds most interest already will have spent quite some time over the last two months absorbing the proposals.

The fundamental question being asked by the Service is: should the Government opt in or out of the Regulation? Even with my zero personal experience and limited understanding of the work of cross-border insolvencies, it seems to me a no-brainer (well, the way the Service has argued it anyway). The Call for Evidence also asks questions on elements of the proposals likely to impact most on UK insolvency with a view to developing a negotiating mandate for the UK.

The Insolvency Service’s Call for Evidence can be found at: http://www.bis.gov.uk/insolvency/Consultations/EU-CallForEvidence and the EC’s full proposals at: http://ec.europa.eu/justice/newsroom/civil/news/121212_en.htm. I’ve set out below the proposals as they appear in the Service’s consultation.

In or Out?

By opting in, the UK can engage in negotiations in order to finalise the proposals, but it will not be able to opt out subsequently and so the UK will be bound by the final Regulation, whatever its form.

If the UK does not opt in, it can only observe the process; it may decide to opt in later, but it will need the Member States’ consent. If the UK does not opt in to the final Regulation at all, it may mean that the UK will remain bound by the existing Regulation. This could cause much confusion when dealing with an insolvency that crosses the border of an opted-in Member State and, as the Impact Assessment puts it, “the UK is generally considered to be a good environment for cross-border insolvency resolution, and this scenario would undermine that position” (paragraph 30).

An alternative scenario if the UK does not opt in is that the European Council may decide that the existing Regulation in its current form could no longer apply to the UK. The Service describes the consequences as: disenfranchisement of UK stakeholders from EU cross-border insolvencies; UK insolvencies failing to have EU-wide recognition; and, whilst the Model Law might help, it might involve multiple court proceedings in the different relevant jurisdictions and thus increased costs and time to get results.

From scanning commentaries on the EC proposals, it appears to me that not opting in is very unlikely. The only seriously negative vibe I’ve picked up – although even this is by no means universal – is a desire to keep Schemes of Arrangement out of the Regulation. As the EC proposes to retain the power of each Member State to decide whether a national insolvency procedure should be included, it seems to me that this is a weak reason for not opting in. And in any event, I would have thought there would be value in having Schemes of Arrangement acquire recognition across the EU. (UPDATE 16/10/2013: okay, I can see now the value of keeping Schemes out of the Regulation – see, for example, the following article by Dentons extolling the virtues of Schemes for essentially foreign companies: http://www.lexology.com/library/detail.aspx?g=3fd5d9b8-3356-4dd4-86bf-aea8980a9311&utm_source=Lexology+Daily+Newsfeed&utm_medium=HTML+email+-+Body+-+General+section&utm_campaign=Lexology+subscriber+daily+feed&utm_content=Lexology+Daily+Newsfeed+2013-10-15&utm_term=)

Scope of the Insolvency Regulation

As alluded to above, the EC proposes to extend the scope of the Regulation wider than just “liquidation”, as presently (albeit that the Annex to the 2000 Regulation already includes Administration, VAs, Bankruptcy and Sequestration). It proposes to include proceedings “in which the assets and affairs of the debtor are subject to the control or supervision by a court. Such supervision would include proceedings where the court has no real involvement unless a creditor makes an application to review a decision” (paragraph 21) and “proceedings which include the adjustment of debt and the debtor remains in control of any assets” (paragraph 22). This is where the idea that Schemes of Arrangement will be wrapped up in the Regulation comes from.

Also as mentioned above, the Member State can decide whether to notify a particular national insolvency procedure to be included, but it is proposed there will be a new mechanism whereby the EC then will scrutinise the procedure to ensure that it fits the defined scope of the Regulation.

Jurisdiction for opening insolvency proceedings

The concept of COMI is proposed to be retained, consistent with the body of case law that has developed. The proposals seek to extend the concept to individuals.

The EC proposes to introduce a duty on the court or IP that opens the insolvency proceedings to examine the COMI of the debtor and specify the ground on which their jurisdiction is decided. Creditors from other Member States shall have the right to challenge the decision.

Secondary proceedings

It is proposed that the court receiving an application to open secondary proceedings must inform the office-holder of the main proceedings and allow him/her to be heard before the court makes its decision. The main proceedings’ office-holder will be entitled to ask for the application for secondary proceedings to be stayed, if they are not necessary to protect the interests of local creditors.

The proposal removes the restriction that secondary proceedings must be winding-up proceedings; it is proposed that they can be any proceedings available under the law of that Member State, including restructuring.

In addition, it is proposed that the courts in the main and secondary proceedings be obliged to communicate and cooperate with each other and that a similar obligation will be on the office-holder to communicate and cooperate with the court in the other Member State involved in the proceedings.

Publicity of proceedings and lodging of claims

“Each Member State will be required to maintain a public register(s) of insolvency decisions relating to companies and self-employed individuals, which must be internet based and free of charge. This requirement does not extend to insolvency proceedings concerning non-trading individuals or consumers” (paragraph 32). The register will contain basic information on the insolvency (albeit more than is currently on Companies House; for example, the information must include the court and reference number) plus a date for lodging claims. “Each register will be searchable via the European e-justice portal, with an interconnected search facility” (paragraph 33).

The EC proposes the provision of two standard forms for foreign creditors – a notice of insolvency and claim form – which will be made available (by whom? I think by the European e-justice portal) in all official EU languages. Foreign creditors must be given at least 45 days to lodge a claim, irrespective of any national laws specifying shorter timescales.

Groups of companies

The EC proposes to retain the Regulation’s entity-by-entity approach to the insolvencies of group companies, but seeks to improve coordination of efforts. Thus courts and office-holders involved in different proceedings on group companies will be obliged to communicate and cooperate.

It is proposed that the office-holder of an insolvent group company will be entitled to be heard in any opening proceedings on any other group company and will have the right to request a stay. An office-holder will also be able to participate in any insolvency proceedings on other group companies, for example in creditors’ meetings. As the EC puts it, “these procedural tools enable the liquidator [i.e. office-holder] which has the biggest interest in the successful restructuring of all companies concerned to officially submit his reorganisation plan in the proceedings concerning a group member, even if the liquidator in these proceedings is unwilling to cooperate or is opposed to the plan” (page 9 of the EC proposal).

The proposals are not intended to interfere with a strategy of pursuing a single set of insolvency proceedings over a highly integrated group of companies when it is determined that their COMI is in one jurisdiction.

Of course, this is all subject to negotiation and time… probably lots of time…

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UPDATE: On 15 April 2013, it was announced that the Government has decided to opt in to the proposal. This followed a unanimous response in favour of opting in by those who responded to the consultation. The written ministerial statement and the consultation responses can be accessed from: http://www.bis.gov.uk/insolvency/news/news-stories/2013/Apr/EUCallForEvidence


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Supreme Court decides on enforceability in England of US judgment in Rubin v Eurofinance

Rubin & Anor v Eurofinance SA & Ors [2012] UKSC 46 (24 October 2012)

On 24 October 2012, the Supreme Court considered whether, and if so, in what circumstances, an order or judgment of a foreign court in proceedings to set aside prior transactions, will be recognised and enforced in England and Wales and whether the UNCITRAL Model Law has any bearing in this regard.

The Supreme Court Press Summary is available at http://www.bailii.org/uk/cases/UKSC/2012/46.(image1).pdf and the full judgment is at http://www.bailii.org/uk/cases/UKSC/2012/46.html.  I have yet to read the full judgment (and if I see anything further, I shall add a comment to this blog post), but here are some points from the Press Summary.

On a 4:1 majority, the Supreme Court allowed the Rubin appeal “holding that there should not be special rules for avoidance judgements”.

The background of the appeal is that the US Federal Bankruptcy Court for the Southern District of New York had decided, in default of appearance, in respect of fraudulent conveyances and transfer and the judgment was enforced in England at common law.  As the party against whom the judgment was made was neither present in the foreign country nor had it submitted to the jurisdiction, the question was “whether the Court should adopt separate rules for judgments in personam in avoidance proceedings where the judgments were central to the purposes of the insolvency proceedings or part of the mechanism of collective execution”.

The Court did not agree that there should be a more liberal rule for judgments given in foreign insolvency proceedings for the avoidance of transactions.  “Such a change would not be an incremental development of existing principles, but a radical departure from substantially settled law, and more suitable for legislature than judicial innovation.”  Lord Collins, with the agreement of two others, “held that the earlier Privy Council decision in Cambridge Gas Transportation Corporation v Official Committee of Unsecured Creditors of Navigator Holdings Plc [2007] 1 AC 508 was wrongly decided in that there was no basis for the recognition of the US Bankruptcy order in the Isle of Mann in that case”.

The Court also saw nothing in the Cross Border Insolvency Regulations 2006 or UNCITRAL that applied to the recognition or enforcement of foreign judgments against third parties.

The Press Summary also describes the reasons behind Lord Clarke’s dissent.

In addition, the Press Summary covers the Supreme Court’s consideration of the appeal of New Cap Reinsurance Corporation (In Liquidation) & Anor v A E Grant & Ors as Members of Lloyd’s Syndicate 991 for the 1997 Year of Account and Anor [2012] UKSC 46.  This is another foreign jurisdiction case regarding a voidable transaction (this time based on a judgment in Australia), but the circumstances were quite different.  The Court decided to dismiss the appeal, as the Syndicate had proven in the Australian insolvency of New Cap and thus had submitted to the jurisdiction of Australia.  In the circumstances, the Court decided that the Foreign Judgments (Reciprocal Enforcement) Act 1933 applied.

My thanks go to Maurice Moses, Ernst & Young LLP, for forewarning me of this matter, as newsflashed by Allen & Overy on 23 October.