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2017-09-doc5 On Annex A of the Insolvency Regulation

Interview published in Global Restructuring Review (globalrestructuringreview.com) published on its blog on 24 August 2017 on the theme: Who’s in charge of Annex A?

GRR editor Kyriaki Karadelis: 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. 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, can you tell us about the relationship between the recast European Insolvency Regulation (EIR 2015) and Annex A: what is the function of Annex A?

Wessels: 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 Annex C lists all the repealed regulations, including regulations amending the annexes and the former Insolvency Regulation 1346/2000, and Annex D has a table showing the correlation between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 room 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.

GRR: 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?

Wessels: 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.

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

Wessels: 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”.

GRR: What’s the main drawback of this new system?

Wessels: 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.

GRR: Why do you have doubts?

Wessels: 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.

GRR: What checking mechanism would you suggest?

Wessels: 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.

GRR: Isn’t there a more efficient alternative?

Wessels: 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.

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

Wessels: 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.

GRR: 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?

Wessels: 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.

GRR: 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?

Wessels: 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.