Monday 26 June 2017 marks a turning point in the history of European insolvency law. On that date, the majority of the measures in the EU Insolvency Regulation (2015/848, recast) (EIR 2015) will become effective. The original Insolvency Regulation (1346/2000) is repealed, but will continue to apply to insolvency proceedings opened before 26 June.
The EIR 2015 contains a novelty, in that groups of companies are addressed in a new Chapter V with over 20 articles (articles 56 to 78 of the EIR 2015).
The argument for including this set of rules in recital 6 of the EIR 2015 is a bit thin, saying simply that the recast regulation “… should lay down rules on the coordination of insolvency proceedings which relate to the same debtor or to several members of the same group of companies.”
The EIR followed a strict judicial approach in stating that every single member of an entity should be subject to its own insolvency proceedings (“one debtor – one estate – one insolvency proceeding – one court – one group of creditors”).
Under the former regulation, the centre of main interest (COMI) of establishments and subsidiaries in different member states to their holding company, was nearly always viewed to be located in the member state where the proceedings against the holding company were opened, examples being Collins & Aikman, MG Rover and Nortel Networks (in Europe).
Although it introduces the concept of a group proceeding, the EIR 2015 does not dictate an exclusive regime for the insolvency of members of a group. Recital 53 expresses that the new rules “… should not limit the possibility for a court to open insolvency proceedings for several companies belonging to the same group in a single jurisdiction if the court finds that the centre of main interests of those companies is located in a single Member State.”
To understand the new regime, it should be noted that a “group of companies” means a parent undertaking and all its subsidiary undertakings, while “parent undertaking” means an entity that controls, either directly or indirectly, one or more subsidiaries. An undertaking that prepares consolidated financial statements in accordance with Directive 2013/34/EU shall be deemed to be a parent undertaking.
The EIR 2015 provides for an impartial group coordinator, who must have eligibility under the law of a member state to act as an insolvency practitioner.
The aim of group proceedings is to ensure efficiency of coordination between different entities, while at the same time respecting each group member’s separate legal personality (see recital 54 EIR 2015). It should be mentioned, however, that the group coordination system is voluntary and that the impartial group coordinator can suggest non-binding recommendations to the IPs of the individual insolvency proceeding of the members of the group that are pending in different member states. For these reasons, the new set of rules on group insolvency have had a mixed reception in legal literature, with the majority of authors expressing doubts as to their effectiveness and practical value, as well as to the costs the group coordinating proceedings may bring with them and their complex character.
The EIR 2015 stipulates that the coordinator should be free from conflicts of interest, although persons who already are an IP in respect of one of the group members are excluded. Another professional requirement for the coordinator is to fulfil “… his or her duties impartially and with due care”. Based on the IP systems in several EU member states, an IP and therefore the coordinator can be a natural person (as under German or English law) or a legal person (as under Spanish or Hungarian law). In a scenario where there is a parent company in Austria, and group members in France, Italy and two in Spain, the coordinator might therefore very well be someone allowed to act as IP in Sweden or the Netherlands. I note that the EIR 2015 lacks definitions for “impartiality” and “due care”.
Article 72 of the EIR 2015 forms the heart of Chapter V on group insolvency proceedings, which sets out the task, role, rights and duties of the coordinator.
The coordinator shall (a) identify and outline recommendations for the coordinated conduct of the insolvency proceedings, and (b) propose a group coordination plan. The task shall not extend to any member of the group not participating in group coordination proceedings.
In identifying and outlining recommendations for the coordinated conduct of the insolvency proceedings the coordinator, under recital 57, “… should always strive to facilitate the effective administration of the insolvency proceedings of the group members, and to have a generally positive impact for the creditors”.
This means that the recommendations may contain all types of measures that enable the effective administration of the insolvency proceedings of the included group members and have a generally positive impact on the creditors. The group coordination plan may contain measures to re-establish the economic performance and the financial soundness of the group or any part of it, such as the increase of equity capital, simplification of the financial structure of the group, and the elimination of deficiencies in the intra-group cash pooling system. Measures might also aim to improve business performance, including through the reorganisation of the group structure, realignment and refocussing of business activities, replacement of management, and personnel reduction.
Plans may also include solutions to settle intra-group disputes and avoidance actions related to, for instance, intra-group sales on the basis of transfer pricing, performance of services by one group member for another below market price, and gratuitous allocation of means of production and licences. Other plans could see agreements between the IPs of the insolvent group members, for example to settle intra-group disputes, to implement a group coordination plan in the insolvency plans of the individual group members, reconsider the treatment of intra-group contracts, or provide securities.
What is certain is that the group coordination plan may not include recommendations as to any consolidation of proceedings or insolvency estates.
In addition, article 72(2) introduces five rights and tasks with which the coordinator “may” also have.
The coordinator may be heard and may participate in any of the proceedings opened in respect of any member of the group. Participating in a creditors’ meetings of one or more of the individual proceedings, for example, gives the coordinator the opportunity to find out which measures the creditors favour, to test certain ideas or to promote parts of its coordination plan in the making.
The coordinator may also mediate or suggest mediation of any dispute arising between two or more insolvency practitioners of group members. He or she may present and explain the coordination plan to the relevant persons or bodies within insolvency proceedings to which the group members participating in the group coordination are subject. This is important because the coordinator can inform participants of any pros and cons of the plan and what its implementation will mean for the future of the group and its individual members. The overview will set a benchmark for creditors when assessing whether to comply or not with the coordinator’s proposals.
The coordinator may request information from any IP in respect of any member of the group where that might be of use in identifying and outlining strategies and measures to coordinate the proceedings. This should be read in conjunction with the overall duty of the insolvency practitioners to communicate all information that is relevant for the coordinator to perform their tasks. Such information may include: the company’s capital structure; shareholders’ involvement; numbers of employees, their salaries and pension entitlements; accounting reports; inter-company agreements; financial structures, including securities given in bank loans for the obligations of other members in the group; overviews of the status and future of research, development and innovation; and long-term contracts, for example a real estate or fleet lease.
Finally, the group coordinator may request a stay for a period of up to six months of the proceedings opened in respect of any member of the group, if it is necessary to ensure the proper implementation of the plan and would be to the benefit of the creditors in the proceedings. The stay seems to be the most powerful tool in the hands of the coordinator.
The coordinator does not work pro bono. Interestingly, the EU sets a general European benchmark on his or her fees by providing that the remuneration shall be adequate, proportionate to the tasks fulfilled, and reflect reasonable expenses. The EIR 2015 also includes rules for agreeing the costs of the coordination, and the share of those costs that each group member will bear, as well as a procedure in case the coordinator considers that the fulfilment of his or her tasks requires a significant increase in these costs.
This is a slightly adapted version of a regular column Bob Wessels is writing for Global Restructuring Review (GRR) on the topic of cross-border restructuring and insolvency in a European context. GRR is a subscription-only publication, but here is a link to the full piece, which appeared in May 2017, on GRR’s website at http://globalrestructuringreview.com