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2017-08-doc2 Proposal to amend EIR 2015 Annex A

EIR recast: Who’s in charge of Annex A?

Interview with me in Global Restructuring Review, see http://globalrestructuringreview.com/article/1146475/eir-recast-whos-in-charge-of-annex-a; published on line on 21 August 2017.

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Just a few weeks after the entry into force of the recast European Insolvency Regulation, the European Commission is inviting comments on a legislative proposal to change its Annex A – a list of all of the EU insolvency proceedings to which it applies – so that it includes newly-created Croatian legislation. GRR’s editor Kyriaki Karadelis approached our columnist for Europe, professor Bob Wessels, for his views on the revised process for making sure that new national insolvency proceedings can receive automatic recognition.

The Republic of Croatia initated the legislative proposal that was published on 9 August 2017. It would see the European Commission amend Annex A to include new pre-insolvency proceedings and consumer insolvency proceedings introduced locally in the member states this January.

Interested parties can submit feedback on the proposal. The comments period lasts for eight weeks, ending 4 October.

Professor Wessels, tells us about the relationship between the recast European Insolvency Regulation (EIR 2015) and Annex A: what is the function of Annex A?

The EIR 2015 is more than twice as voluminous as the old regulation. It contains 89 recitals, 92 articles (in seven chapters) and four annexes. Annex A lists all the national terms for insolvency proceedings falling under the scope of EIR 2015. Annex B lists all the national terms for insolvency practitioners. Annex C lists all the repealed regulations, including regulations amending the annexes and the former Insolvency Regulation 1346/2000, and Annex D has a table showing the correlation between the articles in the old regulation of 2000 and the EIR 2015.

The EIR 2015 applies to 27 EU member states (Denmark excluded), which together count roughly 100 different types of national insolvency proceedings (listed in Annex A) and around 110 names for national insolvency practitioners as they are now called (Annex B).

As to the function of Annex A, the relationship between the definition of “insolvency proceeding” in the old regulation and Annex A was debated throughout the old regulation’s life for some 15 years.

Under the EIR 2015, the clear starting point is that “bankruptcy, proceedings relating to the winding-up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous proceedings and actions related to such proceedings” are excluded from the scope of the Brussels Judgments or Brussels I Regulation. There should be no gap between these proceedings and the proceedings covered by the Insolvency Regulation. The interpretation of this latter regulation, therefore, should as much as possible avoid regulatory loopholes between the two instruments.

However, the mere fact that a national procedure is not listed in Annex A to the Insolvency Regulation should not imply that it is covered by the Brussels I Regulation. Annex A therefore has a defensive function: if a proceeding is not listed on it, this does not automatically mean that it falls under the scope of Brussels I.

Annex A, in addition, has an affirmative function. The EIR 2015 says it should apply – at recital 9 – to insolvency proceedings that meet the conditions set out in it, irrespective of whether the debtor is a natural person or a legal person, a trader or an individual. “In respect of the national procedures contained in Annex A, this Regulation should apply without any further examination by the courts of another member state as to whether the conditions set out in this Regulation are met. National insolvency procedures not listed in Annex A should not be covered by this Regulation,” the text states.

The EIR 2015 does not allow rooms for mistakes: Annex A is exclusive and decisive and any proceeding mentioned on it must benefit from the regulation’s system of automatic recognition in any other member states, without any checks by, for instance, the court of that other member state.

So if any member state introduces new insolvency proceedings and notifies the change in domestic legislation, will the Commission list this proceeding on Annex A?

The method of operating with lists has been taken from the 1990 Istanbul Convention, which never went into force. In legal literature, the question had been raised as to whether using this method serves to guarantee the simple applicability of different types of national insolvency proceedings in practice, or whether it arises out of a lack of confidence in the generic, abstract definition of collective insolvency proceedings supplied in article 1 of the EIR.

The former regulation contained a provision that the European Council, acting by qualified majority on the initiative of one of its members or on a proposal from the Commission, may amend the annexes. Since 2002, it has done so eight or nine times. The present EIR 2015 is rather inflexible, as it lacks such a provision. Any “new” national insolvency proceeding introduced in a member state after 26 June 2017 must lead to the formal amendment of the regulation itself, via the formal ordinary legislative procedure as laid down in article 294 of the Treaty on the Functioning of the European Union (TFEU), which is cumbersome and time-consuming.

Why has this system been chosen and why has it been made harder to change Annex A?

In literature some seven alternatives were discussed, from deleting the Annex all together; to giving it a non-binding descriptive function to assist the interpretation of the definition of an insolvency proceeding in article 1; to having the annex list insolvency proceedings after adoption through a delegated act in accordance with article 290 TFEU; or to giving the Annex a decisive meaning, with the result that the annex in nature and form is an integral part of the regulation.

The Commission’s proposal of 2012 included a system empowering it to adopt delegated acts to amend the annexes in accordance with a procedure laid down in that proposal. Although these suggestions passed the European Parliament, the Council, which is the representative body of member states, was not inclined to handover any power in this regard to the Commission. Ultimately the last option mentioned was chosen. See the last line of article 1(1) of the EIR 2015, where it is explicitly said: “The proceedings referred to in this paragraph are listed in Annex A”.

What’s the main drawback of this new system?

It’s what I have called “uncontrolled self-promotion”. Under the EIR 2015, a method of self-promotion has been introduced for member states with recently-enacted domestic insolvency proceedings, without a proper verification test. It means you can promote your national insolvency proceeding to the European league – so it must be recognised in other member states – without a meaningful check. Of course I am not saying that Croatia has done so, I am just not sure.

Why do you have doubts?

Based on the Commission’s document of 9 August, I understand that the Republic of Croatia notified the Commission of recent changes in its domestic insolvency law on 3 January, introducing new types of insolvency proceedings, as the Commission says, “such as a pre-insolvency proceeding and a consumer’s insolvency proceeding”.

Until now Hrvatska (Croatia’s name in its domestic language) had listed in Annex A only one proceeding “Stečajni postupak“, and according to the proposal there will now be three proceedings: stečajni postupak, predstečajni postupak, and postupak stečaja potrošača.

The Commission states that it has carefully analysed Croatia’s request “in order to ensure compliance of the notification with the requirements of the Regulation”, with the result that it found, “Those new insolvency proceedings are consistent with the definition of ‘insolvency proceedings’ under Regulation (EU) 2015/848”. The analysis itself, as far as I can see, has not been published.

Again, I am not saying that the proceedings mentioned are not to be regarded as collective insolvency proceedings, it is just a mystery to me how “Brussels” has tested this. As automatic recognition abroad of a domestic insolvency proceeding can influence many creditor’s rights and may influence the law applicable to legal relationships, any system should include a transparant method of checking whether a new domestic insolvency proceeding fits indeed the definition of article 1, which itself is not fully clear either.

What checking mechanism would you suggest?

Well, as a matter of fact the recast EIR 2015 contains article 89 on Committee procedure, providing that the European Commission shall be assisted by a Committee within the meaning of EU Regulation No. 182/2011. The idea is to ensure uniform conditions for the implementation of the EIR 2015.

In June, the European Commission adopted implementing acts for four new forms: (i) the standard notice form to be used to inform known foreign creditors of the opening of insolvency proceedings (article 54(3) EIR 2015), (ii) the standard claims form which may be used by foreign creditors for the lodgement of claims (article 55(1)), (iii) the standard form which may be used by insolvency practitioners appointed in respect of group members for the lodgement of objections in group coordination proceedings (article 64(2)), and (iv) the standard form to be used for the electronic submission of individual requests for information via the European e-Justice Portal (see article 27(4)).

Those implementing acts have been adopted, as the respective documents say, after a consultation with the Committee established by article 89(1) of the EIR 2015. We remain in the dark as to whether there was any involvement of this Committee in Croatia’s proposal of 9 August.

As the procedure for amending the annexes under the old regulation was rather troublesome, in 2011 I suggested an advisory body to assist the Commission or the European Parliament at its own motion, or at the request of the Commission or the European Parliament respectively, on technical and policy issues relating to insolvency practice and regulation, as well as Commission proposals in that field. Such a committee could assist the Commission in scrutinising whether a national insolvency proceeding suggested for listing in Annex A is indeed such a proceeding.

The advisory body I suggested never has been established – a fate not uncommon for ideas put forward by academics – but equally the article 89 Committee does not appear to have been involved, as it was, I understand, when establishing the forms mentioned.

Isn’t there a more efficient alternative?

In March, Italian professor Stefania Bariatti presented a more flexible and prompt method to add new national procedures. She suggests that member states should, where possible, without constituting a circumvention of the exhaustive nature of Annex A, qualify new proceedings that will be introduced in their national legislations as a sub-category of proceedings that are already listed in Annex A. In such a case, it is suggested, courts should apply the EIR 2015 without any examination. When it is not possible to update Annex A via this solution, the formal ordinary legislative procedure to amend the regulation should be adopted.

I am not in favour of such an approach, which is hardly consistent with the principle of mutual trust between member states, and which leaves “self-promotion” by a member state to the state’s uncontrolled discretion. The Italian proposal suggests that article 1 should be interpreted as a substantive provision, functioning as a blueprint to be taken into account when deciding on the proceedings to be included in Annex A. Where some of its terms will not be known in, or do not reflect appropriately terms in, national insolvency laws of member states (terms such as “interim proceedings”, “rescue”, “negotiations between the debtor and its creditors” of “likelihood of insolvency”) the recommendation may trigger an unaligned interpretation of terms as they appear in the laws of a member state, with a lopsided result.

Moreover, some of these terms have a specific meaning within the EIR 2015. The European Court’s 2011 decision in Interedil has stressed that it follows from the need for uniform application of EU law and from the principle of equality, that the terms of a provision that makes no express reference to the law of the member states for the purpose of determining its meaning and scope, must be given an autonomous and uniform interpretation throughout the Union, having regard to the context of the provision and the objective pursued by the legislation in question. Concepts peculiar to the EIR 2015, such as “centre of main interest” (COMI) or “rescue”, “adjustment of debt” or “reorganisation” have an autonomous meaning and must therefore be interpreted in a uniform way, independently of national legislation.

Given the length of the commentary period, how long will it be before the Croatian legislation is actually added to the annex?

Under the old regulation Slovakia and Poland, on 28 October 2014 and 4 December 2015 respectively, notified the Commission seeking for Annex A (among others) to be amended. Annex A was renewed to include the Slovakian and Polish proceedings by a Council Implementation Regulation in mid-October 2016. This confirms my experience of some 15 years with the old regulation, in that it generally takes 12 to 18 months for a national amendment of insolvency proceedings to receive fully-fledged EU recognition.

The proceeding can be speeded up at an earlier stage in the process under the condition that the final law will not be changed, if the European Commission (or the Committee I suggest) is notified. In Croatia’s case, if by October no comments have been received or if they do not necessitate a change, one may expect the annex to be changed in October or November, and, as it is a regulation in itself, that it will enter into force on the 20th day following its publication in the Official Journal of the European Union (OJ). It then will be binding in its entirety and directly applicable in the member states.

What happens if a Croatian pre-insolvency process begins today, on 21 August? Does that mean the EIR 2015 will not apply to the new Croatian legislation?

Say that the 20th day after publication in the OJ is 20 November: any of the two “new” insolvency proceedings, which are not listed until 20 November, will not receive automatic recogition under the rules of the EIR 2015. These two proceedings seem to have existed in Croatia since 1 January. Under the old regulation, any of these proceedings opened after that date would not be recognised.

Given how much new legislation is due to come online in the coming years with the Harmonisation Directive, is this long-drawn out process for changing Annex A wise?

I think it is not, but I recognise the difficulty in inventing an alternative system. Remember, the member states themselves wish to be in charge, but where there are businesses in pre-insolvency with cross-border effects, one may seriously question what the justification is for the position member states have chosen to take.

 

Further reading recommended by Wessels:

Proposal for a Regulation of the European Parliament and of the Council replacing Annex A to the Regulation (EU) 2015/848 on insolvency proceedings, Brussels, 9.8.2017 COM(2017) 722 final.

Court of Justice of the European Union 20 October 2011, C-396/09 (Interedil Srl v Fallimento Intredit Srl, Intesa Gestione Crediti Spa); ECLI:EU:C:2011:671.

Bariatti, Stefania, et al, Part 1: Scope of Application, Pre-Insolvency / Hybrid Proceedings, in: The Implementation of the New Insolvency Regulation. Recommendations and Guidelines, JUST/2013/JCIV/AG/4679 (March 2017), 1ff.

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2017-08-doc1 The 2018 Nygh Hague Conference Internship Award

Until 30 September 2017 a student or a graduate of an Australian law school can apply for the 2018 Nygh Hague Conference Internship Award, working for up to six months at the Secretariat of the Hague Conference on Private International Law. The Conference is located in The Hague, the Netherlands. It aims to foster Australian involvement in the work of the Hague Conference and is established in honour of the late Hon. Dr. Peter Nygh. Sponsors of the award (which includes living expenses for the duration of the internship and travel costs) are the Australian Institute of International Affairs (AIIA) and the Australian Branch of the International Law Association (ILA). For details see http://www.internationalaffairs.org.au/news-item/2018-nygh-internship-applications-open/.

The Hague Conference (www.hcch.net) is a global intergovernmental organisation with over 80 members (including the European Union) representing all major regions and legal systems. It addresses the challenges arising from differences in law between jurisdictions by developing and implementing global legal conventions. Coordinated by a multinational Secretariat – the Permanent Bureau in The Hague – in both English and French, the Conference develops interstate consensus across a range of legal fields to provide legal certainty for individuals and businesses engaged in cross-jurisdictional activities. These can include family law, evidence and access to justice; cross border flow of personal data; migration; civil liability for trans-boundary harm and commercial dispute resolution (no, not insolvency, to my regret).

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2017-07-doc8 Naar een stille curatele voor zorginstellingen II

Het Commentaar van de hoofdredactie van het Financieele Dagblad in het FD van vandaag, vrijdag 28 juli, kent de titel ‘Benoem geheime manager in zorg’. Het slot ervan werpt de vraag op of het maatschappelijk belang van de zorg niet zo groot is dat toezichthouders in de zorg de bevoegdheid moeten krijgen ‘… een stille bewindvoerder aan te stellen, zoals DNB dat kan doen in de financiële sector’. Had u zoiets eerder gelezen? Kan goed, want ik schreef er gisteren over op mijn blog http://bobwessels.nl/2017/07/2017-07-doc7-naar-een-stille-curatele-voor-zorginstellingen-in-financiele-problemen/, met het pleidooi dat de zorgsector (en haar patiënten en professionals) gebaat is bij een heldere wettelijke regeling voor stille curatele ten aanzien van een zorginstelling en een regeling voor een overdrachtsplan waarin een toezichthouder een belangrijke say heeft. Achtergrond: dat was de tekst van een op uitnodiging ingezonden bijdrage aan het FD die overigens niet geschikt bleek voor plaatsing omdat de opiniepagina zich richt op ‘… een breed samengesteld lezerspubliek. Uw stuk vraagt toch wel wat specifieke deskundigheid van de lezer’. Da’s best, want dat is de beleidsvrijheid van de redactie, maar om in het slot van het hoofdredactionele Commentaar (met een nogal onheilspellend opschrift) het idee op te werpen zonder bronvermelding is … bedenkelijk. Nu we toch bronnen vermelden, het idee opperde ik al in 2008 als onderdeel van het thema ‘Belangenstrijd in het insolventierecht’, afscheidsrede VU Amsterdam 2008, verkrijgbaar in brochurevorm en nog steeds via http:hdl.handle.net/1871/12787.

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2017-07-doc7 Naar een stille curatele voor zorginstellingen in financiële problemen

De curator behartigt in het stelsel van de Faillissementswet in de eerste plaats de belangen van de schuldeisers. Daarbij moet hij of zij óók rekening houden met belangen van maatschappelijke aard. Schept deze regel, die alleen steunt op rechtspraak, voldoende waarborg voor het cruciale belang van het tijdig waarborgen van de continuïteit van de zorg en het recht van de patiënt om daar toegang tot te hebben? De wereld van de zorg heeft eigen karakteristieken. Instellingen hebben naast een bestuur, vaak een raad van toezicht, een belanghebbenden-vertegenwoordiging resp. een patiëntenraad. Naast gewone verplichtingen, die voor elke bestuurder gelden, heeft een bestuur mogelijk ook eigen wettelijke taken (gebaseerd op specifieke regelgeving in de zorg) en contractuele verplichtingen, bijvoorbeeld om de zorgverzekeraar tijdig en volledig te informeren indien bepaalde liquiditeits-ratios in gevaar komen. De zorg is een sector met tal van organen met eigen taken. Ik denk aan de Inspectie voor de Gezondheidszorg, Nederlandse Zorgautoriteit (NZa), gemeenten of het College voor de sanering van zorginstellingen. De wettelijke taak van een faillissementscurator kan belemmerd worden omdat veel van deze organen geraadpleegd moeten worden c.q. eigen bevoegdheden hebben ten aanzien van de continuïteit van de zorg. Tenslotte, typische bankfinanciering is niet uitgesloten maar de core komt binnen via een verzekeringsstelsel (waarbij de aard van verzekering als restitutie- of naturaverzekering een rol speelt) en de moeilijk grijpbare dcb-financiering (dbc staat voor diagnose-behandelcombinatie). Daarnaast bestaan in geval van vastlopende financiering specifieke vangnetstichtingen, in stand gehouden door het ministerie van VWS, die voorzien in voldoende aanbod van cruciale zorg.
Het enorme belang van behoorlijke continuïteit van zorg (patiënten-belang; financieel belang overheid) rechtvaardigt dat zorginstellingen een eigen, autonome insolventieregeling krijgen dat mogelijkheden biedt om vroegtijdig in te grijpen. Ik leg een link met de financiële sector. Conform de regeling voor de ‘stille curatele’ in de Wet op het financieel toezicht (Wft) zou een toezichthouder (gedacht kan worden aan de NZa) moeten kunnen besluiten een of meer personen te benoemen als (stille) curator ten aanzien van alle of bepaalde organen van een zorginstelling indien een adequate en continue functionering van de instelling ernstig in gevaar komt (of dreigt te komen). Een stille curator zou een in insolventie geverseerd advocaat kunnen zijn, maar ook een ervaren zorgbestuurder met specifieke kennis. Zijn of haar taken worden in het benoemingsbesluit uitgewerkt, in het bijzonder met een specificatie van de belangen waardoor de stille curator zich dient te laten leiden. Zodra het benoemingsbesluit aan de zorginstelling is bekend gemaakt mogen organen en vertegenwoordigers hun bevoegdheden alleen uitoefenen na goedkeuring door de curator en met inachtneming van zijn of haar instructies. De wet zou op deze organen en vertegenwoordigers jegens de stille curator een volledige, onvoorwaardelijke en prompte medewerkingsverplichting moeten leggen.
Zou de wetgever deze kant opgaan dan dient in de Faillissementswet onder meer een uitzondering te worden opgenomen ten aanzien van de regel dat in beginsel elke schuldeiser de insolventie van zijn schuldenaar kan verzoeken. Tal van andere vragen dienen te worden beantwoord. Blijven de bevoegdheden van een raad van toezicht onbeperkt van kracht gedurende een periode van stille curatele? Is daar wel behoefte aan? Zou niet de vertegenwoordiging van belanghebbenden (patiënten, medisch personeel) de gelegenheid moeten worden gegeven op een gestructureerde wijze te overleggen met de stille curator? Blijven hun adviesbevoegdheden overeind gedurende stille curatele? Indien een zwakke financiële positie structureel lijkt zou de NZa bevoegd kunnen worden verklaard – naar analogie van DNB in de financiële sector – een overdrachtsplan voor te schrijven, waarbij activa en passiva van de instelling aan een derde, die los staat van de instelling, kunnen worden overgedragen. Dit uiteraard onder rechterlijke controle. Deze regeling moet worden afgestemd met de opvangregeling, die via een afzonderlijk lichaam loopt (ik begrijp een stichting) en die continuïteit van cruciale kernzorg waarborgt. Bij deze laatste activiteit is er dan ook voor het gewone faillissementsrecht, met een rol voor de ‘beoogd curator’.
De zorgsector (en haar patiënten en professionals) is gebaat bij een heldere wettelijke regeling voor stille curatele ten aanzien van een zorginstelling en een regeling voor een overdrachtsplan waarin een toezichthouder een belangrijke say heeft.

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2017-07-doc6 Odd decision of Dutch Supreme Court in Oi Brasil case

On 7 July 2017, the Dutch Supreme Court decided in a case concerning the relationship between two sets of insolvency proceedings. These had been opened in Brazil as well as in the Netherlands. These proceedings concern the Dutch suspension of payment (surseance van betaling) for two Dutch legal persons, Oi Brasil Holdings Coöperatief U.A. (Oi Coop) and Portugal Telecom International Finance B.V. (PTIF). In Brazil a restructuring proceeding (recuperaçaõ judicial) (‘RJ-procedure’) had been opened. A RJ procedure is a consolidated judicial restructuring procedure aimed at restructuring the group on a going concern basis in connection with the financial difficulties in which it is in. Before the Duch Supreme Court Oi Coop and PTIF argue (among many other things) that these RJ procedure means that the Dutch suspension of payment procedure is to be subordinated to the restructuring process in Brazil in the interests of the success of that procedure and in the interests of the group as a whole. The result would be that the insolvency practitioners for both companies, appointed by the Dutch court, would not be involved or only to a limited extent concerning the question which actions would be benificial to the restructuring. The Dutch Supreme Court is clear (in my translation):

‘This view can not be accepted. It is clear in this procedure that the Netherlands Bankruptcy Act applies to Oi Coop and PTIF as companies established in the Netherlands. This means that the rules of the Bankruptcy Act are in principle in full aplicable to them, including in the case of surseance art. 228 of the Act, which means that the debtor has the power of managing and disposal of his assets together with the insolvency practitioner, so the debtor alone can not act without its cooperation, authorization or assistance. In the absence of an (applicable) international or special national arrangement to the contrary, there is no reason to make an exception as a result of the fact that Oi Coop and PTIF belong to an international group of related companies which has its centre of main interest abroad and against which in a foreign jurisdiction a restructuring proceeding, such as the RJ-procedure is pending. The latter fact, however, can be taken into account where the law does leave room for it, such as the balancing of interests which has to take place on the basis of art. 242 section 1 of the Act in connection to the cancellation of the suspension of payment proceeding. Furthermore, the insolvency practitioners in a case like this in fullfilling their task may take into account the interests of the group as a whole and the creditors of the group as a whole. However, as a starting point, also in insolvency proceedings the individual legal personality of members of a group applies.’

What strikes is that the question whether the Dutch courts had jurisdiction in these proceedings has not been been taken into account, at least not in the consideration cited. The Surpreme Court automatically ties the question regarding applicable law to the fact that both companies are legal persons, incorporated or established on the basis of Dutch corporate law. Under the EU Insolvency Regulation decisive for international jurisdiction is a debtor’s centre of main interest (COMI). Evedently, the Regulation does not apply to Brazil. In our 2012 report ALI-III Global Principles for Cooperation in International Insolvency Cases 2012 (in short: ALI-III Global Principles and Guidelines 2012) prof Ian Fletcher (london) and I have recommended to apply the COMI principle (with some modifications) as a global rule. See Principle 13 in the Report, the full text of which can be found here [https://www.iiiglobal.org/sites/default/files/alireportmarch_0.pdf]. he Report is the result of a joint study commissioned by the American Law Institute (ALI) and the International Insolvency Institute (III), conducted over a period of six years, ending in 2012. The Report was produced in collaboration with expert consultants (Members of ALI or III and others) representing more than 30 different countries, reflecting a wide and representative cross section of the different legal traditions and styles around the globe. These ALI-III Global Principles and Guidelines 2012 constitute a nonbinding statement, drafted in a manner to be used both in civil-law as well as common-law jurisdictions, and aim to cover all jurisdictions in the world. It is noted that the Report, at the end, also contains a separate Annex with a Statement of the Reporters, setting out our proposals for Global Rules on Conflict of Laws Matters in International Insolvency Cases. These proposals are not included in the Global Principles for Cooperation in International Insolvency Cases, but have been submitted to ALI and III as a useful starting point for further debate on a global level, bearing in mind the necessity to have these proposals tested against existing treaties or conventions and ALI’s other work products and ongoing work on Principles related to other topics with conflict of law consequences. We notice in the Report that the Global Rules on Conflict of Laws Matters in International Insolvency Cases may serve as legislative recommendations in general and sometimes in more detailed terms. They may also serve as a guide for courts, insolvency practitioners and creditors in those circumstances where applicable law with regard to international insolvency cases fails to deal with a certain point in issue or is vague. In Rule 12 (‘Law of the State of the Opening of Proceedings’) we defend, on a global scale, the lex fori concursus rule. This rule is reflected in the Dutch Supreme Court’s decision.

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2017-07-doc5 Rights and duties of the group coordinator under the EU Insolvency Regulation

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

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2017-07-doc4 Are Swedish courts following the Durch court’s example?

Last week I blogged that the Dutch courts appeared to be the first court in a EU Member State to disclose that it is open for cross-border communication and cooperation in insolvency cases under the aegis of the EU Insolvency Regulation (recast), see http://bobwessels.nl/2017/07/2017-07-doc3-does-district-court-midden-nederland-lead-the-way/
I stressed the importance of available EU Cross-border Insolvency Court-to-Court Cooperation Principles and Guidelines (also “JudgeCo” Principles and Guidelines), available via http://www.tri-leiden.eu/uploads/files/eu-cross-border-insolvency-court-to-court-cooperation-principlespdf.pdf. However, the Swedish court may even be the first! Early July the Swedish National Courts Administration approached me on the topic and at their request I assisted, referring to the JudgeCo Principles and Guidelines. The spokesperson later did send me the link that contains – she wrote – some short information about the new insolvency EU-regulation, including a link to www.tri-leiden.eu website and the JudgeCo principles and guidelines, see
http://intranatet.dom.se/Malhantering/Konkursarenden/Insolvensforordningen/. It is, however a closed intranet-site, so I can not verify the information. This is a pity, as for instance a court in Poland or in the Netherlands or insolvency practitioners in a case in Sweden, the debtor of which is also subject to parallel insolvency proceedings in Finland, may be in doubt as to which (non-binding) rules Swedish courts may choose to apply in cross-border situations. To be able to anticipate that a court will follow the JudgeCo Principles and Guidelines will enhance (for foreign courts, IPs and creditors) trust and predictability in the Swedish courts in handling these matters and promote efficient and timely action. Evidently, it is a matter for the government of Sweden or its courts respectively to make its support for the use of the JudgeCo Principles and Guidelines public. Some countries (I know of Germany, Spain and Hungary) have translated the JudgeCo Principles and Guidelines, a country to firmly send out a positive message may lead to others to follow, which certainly will mean an important step to establish best practices in the meaning of recital 48 EIR 2015. The Netherlands, (possibly) Sweden, which one is next?

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2017-07-doc3 Does District Court Midden-Nederland lead the way?

District Court Midden-Nederland seems the first court in a EU Member State to disclose that it is open for cross-border communication and cooperation in insolvency cases under the aegis of the EU Insolvency Regulation (recast), see https://www.rechtspraak.nl/English/Pages/International-Insolvency.aspx). The site starts with the following introduction, thereby setting a great example for courts in other Member States to follow:
‘On 26 June 2017 the Insolvency Regulation (recast) (Regulation 2015/848) has entered into force. Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings (“EIR”) is repealed. In the Insolvency Regulation (recast) (or “EIR recast”) articles 42 and 43 state that courts and insolvency practitioners shall cooperate with each other. This website provides the means for concrete cross-border cooperation and communication between courts and insolvency practitioners.

In article 42 and 43 of the EIR recast, it is stated that cooperation and communication between courts and between courts and insolvency practitioners shall take place to the extent such cooperation is not incompatible with the rules applicable to the respective proceedings. This means that, whenever a request is made via this website, the court is limited by national legislation, for example, legislation relating to the protection of computerised personal data.

As recital 48 to the EIR recast indicates, communication and cooperation with courts in The Netherlands takes into account best practices for cooperation in cross-border insolvency cases, as set out in principles and guidelines on communication and cooperation adopted by European and international associations active in the area of insolvency law, and in particular the relevant guidelines prepared by UNCITRAL. For the European Union best practices have resulted in EU Cross-border Insolvency Court-to-Court Cooperation Principles and Guidelines (also “JudgeCo” Principles and Guidelines, available via http://www.tri-leiden.eu/uploads/files/eu-cross-border-insolvency-court-to-court-cooperation-principlespdf.pdf.

Other member state’s courts, insolvency practitioners and government organizations dealing with insolvencies can make inquiries on communication and cooperation in insolvency proceedings via: Insolventie.RB-MNL.Utrecht@rechtspraak.nl.’

 

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2017-07-doc2 International jurisdiction for annex and related (to insolvency) actions

The recast European Insolvency Regulation will bring in new jurisdictional provisions for actions that either derive from, or are closely linked to, insolvency proceedings in the EU. Bob Wessels, professor emeritus of international insolvency law at Leiden University and expert counsel on restructuring and insolvency to the European Commission, welcomes the changes and discusses how they can be further improved.
Readers of the Europe column in GRR will be aware that on 26 June 2017 the EU Insolvency Regulation Recast (EIR 2015) will come into effect. It introduces some innovations, a few of which I have discussed in past editions. The most-anticipated is the solid rule of international jurisdiction for the opening of insolvency proceedings: that goes to the courts of the member state where the debtor has its centre of main interest (COMI), which shall be the place where the debtor conducts the administration of its interests on a regular basis, and which is ascertainable by third parties, now laid down in Article 3(1) EIR 2015.
Since 2002, when the original Insolvency Regulation came into force, COMI and all the words used in the definition to establish COMI have been litigated. In my private collection of EIR cases some 300(!) are COMI matters.
Now one of the novelties is that courts of the member state within the territory of which insolvency proceedings have been opened, shall also have jurisdiction for legal actions that derive directly from those insolvency proceedings and are “closely linked” with them. Recital 35 to the EIR 2015 provides that such actions “… should include avoidance actions against defendants in other member states and actions concerning obligations that arise in the course of the insolvency proceedings, such as advance payment for costs of the proceedings”. I will call these “annex actions”. International jurisdiction for annex actions is provided for in a new Article 6(1) EIR 2015.
Actions “… related to another action based on general civil and commercial law”, recital 35 continues, can, as an alternative, be brought in the courts of the defendant’s domicile if the insolvency practitioner considers it more efficient to bring the action in that forum. I will call these “related actions”. An example is the case where the insolvency practitioner wishes to combine an action for director’s liability on the basis of local insolvency law with an action based on company law or general tort law. International jurisdiction for these related actions is provided for in a new Article 6(2) EIR 2015. I will take a closer look at these provisions.
Annex actions
Article 6(1) EIR 2015 can be regarded as a response to national reports, which, having reviewed the application of the former EU Insolvency Regulation over more than 10 years, highlighted the necessity to have clear grounds regarding international jurisdiction of annex actions in the new regulation.
In effect, Article 6(1) EIR 2015 codifies the existing case law of the Court of Justice of the EU. The most well-known example is the 2009 case Seagon v Deko Marty Belgium, which concerns the following: on 14 March 2002, Frick Teppichboden Süpermarkte GmbH, which has its registered seat in Germany, transferred €50,000 to an account with KBC Bank in Düsseldorf in the name of Deko Marty Belgium NV, a company with its seat in Belgium. Pursuant to an application made by Frick the following day, the Local Court in Marburg, Germany, opened insolvency proceedings on 1 June 2002 in respect of Frick’s assets.
By application to the Regional Court in Marburg, Mr Seagon, in his capacity as liquidator in respect of Frick’s assets, requested that court to set a transaction aside by virtue of the debtor’s insolvency, and to order Deko to repay the money. The court dismissed the liquidator’s application on the ground that it did not have international jurisdiction to hear and determine the case. Since the appeal brought by Mr Seagon also was dismissed, the case went to the European Court of Justice (the ECJ, as it was called until the end of 2009).
The ECJ observed that it was clear the action to set aside a transaction (undertaken before the insolvency proceedings were opened and detrimental to the creditors) was governed by German insolvency law, which states that only the liquidator may bring such an action in the event of insolvency with the sole purpose of protecting the interests of the general body of creditors. The action to set aside a transaction at issue in the main insolvency proceedings was therefore intended to increase the assets of the undertaking in insolvency proceedings.
The ECJ then, based on several arguments, decided that it was appropriate to examine whether these actions to set aside a transaction were included within the scope of the Insolvency Regulation. Based on the intention of the legislature and the need for effectiveness of the regulation, the ECJ decided that Article 3(1) of the EIR, providing international jurisdiction for the courts of a member state to open insolvency proceedings on the basis of the debtor’s COMI “… must be interpreted as meaning that it also contributes international jurisdiction on the member state within the territory of which insolvency proceedings were opened in order to hear and determine actions which derive directly from those proceedings and which are closely connected to them.”
In summary, the ECJ ruled that Article 3(1) must be interpreted as meaning that the courts of the member state within the territory of which insolvency proceedings have been opened have jurisdiction to decide an action to set a transaction aside, which is brought against a person whose registered office is in another member state by virtue of insolvency law.
After the determination of a debtor’s COMI, the second most contested group of cases has been the matter of international jurisdiction of annex actions, notably avoidance actions.
It is now confirmed in Article 6(1) EIR 2015 that if an action can be characterised as an action that derives directly from the insolvency proceedings and is closely linked with them, international jurisdiction is conferred to the courts of the member state where insolvency proceedings have been opened.
What is still undecided is whether this court has exclusive jurisdiction?
There are a few cases with different outcomes. The Amsterdam Court of Appeal in November 2009 in Groet Houdersmaatschappij BV/ Gold-Zack AG, decided it had exclusive jurisdiction as the opening court, and that there is no room, based on the common law of international jurisdiction, for the court of the statutory seat of the defendant, for instance. In a German case, a similar judgment followed: but remarkably the District Court of Amsterdam on 26 September 2012, denied exclusivity.
Literature is vast on the issue of exclusive or elective (or: optional, facultative or competing) jurisdiction. A majority follows the theory of exclusive jurisdiction, primarily based on the following arguments: (i) an elective or optional jurisdiction for another court might result in a contradiction in the interplay between the respective action and the insolvency liability regime, significantly improving procedural economy in the case that the insolvency practitioner (IP) is acting as defendant; (ii) it saves the IP the burden of going to a foreign court, including saving associated costs and time; and (iii) a positive outcome of an annex action proceeding benefits from the system of recognition and enforcement (now) laid down in Article 32 EIR 2015.
I also would see as a general advantage that the COMI-decision and the annex action decision fall under the same set of rules of applicable law, the lex fori concursus. Article 6(1) EIR 2015 follows this conclusion: the courts of the member state where the insolvency proceeding has been opened “shall” have jurisdiction, whether the IP acts as a plaintiff and when he is called as a defendant.
Recently, the benefits of exclusively have been rejected by University of Hamburg professor Wolf-Georg Ringe (see citation below) putting forward two main arguments: (i) exclusive jurisdiction limits the choices of the insolvency practitioner unduly, and (ii) the theory runs counter to the objective of Article 6(1), to improve the efficiency of insolvency proceedings. As so often with these cases, we’ll have to wait for the Court of Justice of the EU to decide on the matter.
Related actions
As to what I have called “related actions”, a new Article 6(2) EIR 2015 provides international jurisdiction for these type of actions, that is to say, legal actions that derive directly from the insolvency proceedings and are closely linked with them (in the meaning of Article 6(1)), where they are “… related to an action in civil and commercial matters against the same defendant”.
In such a case the IP has a choice. He “… may bring both actions before the courts of the member state within the territory of which the defendant is domiciled, or, where the action is brought against several defendants, before the courts of the member state within the territory of which any of them is domiciled, provided that those courts have jurisdiction pursuant to Regulation (EU) No 1215/2012”. This is a reference to what is known as the Brussels I regulation. Therefore, in case of a related action the IP has a choice where to file his claim: the COMI court, or the courts in the member state where the defendant is domiciled. Which court that is, will be determined by national law.
In the case of several defendants – two or more with different domiciles – the IP has a right to bundle jurisdiction and bring the action before the courts of the member state within the territory of which any of the defendants is domiciled.
Article 6(3) EIR 2015, finally, presumes that for the purpose of Article 6(2) actions are deemed to be related where they are so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments resulting from separate proceedings.
Efficiency, clarity and preventing loss of time and costs seem good reasons for the provisions discussed and they should be welcomed. On a “wish-for-the future” list we can place a list of examples of annex actions, a decision regarding the matter of exclusivity, and a more specified meaning of “so closely connected” in Article 6(3).

Further reading
Georg Ringe in Reinhard Bork and Kristin van Zwieten (eds.), Commentary on the European Insolvency Regulation, Oxford University Press, (2016), 6.37ff.
Case references
Seagon v Deko Marty Belgium, European Court of Justice, 12 February 2009, Case C-339/07, ECLI:EU:C:2009:83
Groet Houdersmaatschappij B.V./Gold-Zack AG, Court of Appeal Amsterdam, 3 November 2009, ECLI:NL:GHAMS:2009:BL8405
District Court of Amsterdam, 26 September 2012, ECLI:NL:RBAMS:2012:BY1621

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 April 2017, on GRR’s website at http://globalrestructuringreview.com/

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2017-07-doc1 Website for European Civil Procedure

http://sites.unimi.it/EUCivilProcedure/ is a new website for European Civil Procedure. It has been set up within the Jean Monnet Module on European Civil Procedure in a Comparative and Transnational Perspective, a teaching and research project funded by the EU and hosted by Università degli Studi in Milan. Its scientific coordinator is prof. Albert Henke and its goal is to practitioners, academics, students and all those involved in cross-border litigation in Europe updated about current trends and recent developments in legislation, case law and literature in this area. For me it is important as it also covers insolvency procedural law. The website furthermore wnats to create an open educational resource and possibly promote scientific partnerships among Universities, Centres of Research and Institutions active in the field. The website is still under construction.

http://sites.unimi.it/EUCivilProcedure/

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