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2022-05-doc2 On independent territorial insolvency proceedings

This time a hideout in the well-settled framework of the EU Insolvency Regulation (EIR 2015). The Regulation’s scheme does provides for the opening of main insolvency proceedings (based on the a debtor’s centre of main interests (COMI of the debtor)) and allows for the opening of one or more secondary insolvency proceedings against a debtor in any EU member state where the debtor possesses an establishment (Article 3(2) EIR 2015). In contrast to main insolvency proceedings, which have universal scope, the effects of secondary proceedings are restricted to the debtor’s assets situated in the territory of the member state the courts of which have opened these secondary proceedings. Where secondary proceedings have a supportive function to main insolvency proceedings they can only follow in time to the opening of the latter. There is, however, an exception to this scheme: in specific circumstances, the EIR 2015 permits the opening of so-called ‘territorial’ insolvency proceedings prior to the opening of main insolvency proceedings (Article 3(4) EIR 2015).

Opening territorial proceedings. Opening of such a stand-alone territorial proceeding is possible:
(a) where main insolvency proceedings cannot be opened because of the conditions laid down by the law of the member state within the territory of which the COMI of the debtor’s main interests is situated; or
(b) where the opening of territorial insolvency proceedings is requested either (i) by a creditor whose claim arises from, or is in connection with, the operation of an establishment situated within the territory of the member state where the opening of territorial proceedings is requested, or (ii) by a public authority that has the right to request the opening of insolvency proceedings, under the law of the member state within the territory of which the establishment is situated, has the right to request the opening of insolvency proceedings.

This is an interesting procedural figure, however literature is scarce, as are court cases. The limitations in the alternatives (a) and (b) flow from the idea (see recital 37 of the EIR 2015) that cases in which territorial insolvency proceedings are requested prior to any main insolvency proceedings ‘… are intended to be limited to what is absolutely necessary.’ The two latter words seem to be interpreted as not to adhere to a narrow interpretation. The legal consequence of the opening of main insolvency proceedings after territorial prcedings is stated in the last line of Article 3(4): ‘When main insolvency proceedings are opened, the territorial insolvency proceedings shall become secondary insolvency proceedings’proceedings’. The EIR 2015’s predecessor of the EIR 2015 (EIR 2000) included a similar rule, albeit it that Article 3(4)(b)(i) has been reworded and that Article 3(4)(b)(ii) is new.

To illustrate the working of Article 3(4)(a) it may be possible that the debtor cannot be subject of to national insolvency proceedings. This situation may occur in the event that the debtor is not a trader or ‘merchant’ and the applicable law of the relevant state requires the debtor to be such a trader or merchant. Another possibility could be that national applicable law precludes public companies or public institutions, such as a ‘province’ or a ‘town’ from being subjected to insolvecy proceedings.

CJEU 2011 case ZaZa Retail. Article 3(4)(b)(ii) has its roots in a 2011 case of from the Court of Justice of the EU (CJEU), see CJEU 17 November 2011, Case C-112/10, ECLI:EU:C:2012:743 (Procureur-generaal bij het hof van beroep te Antwerpen v Zaza Retail BV). In that case, a Belgian Public Prosecutor applied in Belgium for a declaration of insolvency with respect to the Belgian establishment of Zaza Retail, a Dutch company, while the debtor’s COMI was in the Netherlands. At that stage, no insolvency proceedings had yet been opened against Zaza Retail in the Netherlands. Applying a restrictive interpretation of the term ‘creditor’, the CJEU deprived the public authorities authority of the right to initiate the opening of territorial proceedings, in the meaning of independent proceedings in the absence of main insolvency proceedings. The EIR 2015 has largely neutralized neutralised this narrow interpretation by extending the right to request the opening of territorial proceedings to public authorities (Article 3(4)(b) of the EIR 2015) and more generally equating rights of various groups of creditors.
Note though, that this does not lead to any harmonization in the EU when it comes to ranking and priority of claims in insolvency, particularly concerning tax claims. In the authentic text versions of the EIR 2015, the term ‘public authority’ is used in national variations: ‘overheidsinstantie’, ‘authorité publique’, ‘Behörde’, or ‘authorité compétente’. National law should be decisive on its interpretation and such a ‘public authority’ should at a minimum have enforcement powers.

Under Article 3(4)b of the EIR 2015 the protected creditor to whom this right to request the opening of territorial proceedings ex Article 3(4)(b) is granted, is a creditor whose claim arises from, or is in connection with, the operation of an ‘establishment’ situated within the territory of the member state state where the opening of territorial proceedings is requested. According to Article 2(10) EIR 2015 ‘establishment’ means any place of operations where a debtor carries out or has carried out, in the three-month period prior to the request to open main insolvency proceedings, a non-transitory economic activity with human means and assets. The non-transitory character of the debtor’s activities indicates a certain degree of continuity and stability. A purely occasional place of operations cannot be classified as an establishment. The negative formula (‘non-transitory’) aims to avoid minimum time requirements.

Netherlands-Slovakia case 2021. In September 2021, the ’s-Hertogenbosch branch of the Dutch Court of Appeal in the south of the Netherlands was concerned with a request for opening insovency proceeding which is directed towards a company (X) incorporated under the laws of Slovakia. Did the defendant have an ‘establishment’ in the Netherlands? X not only has had a postal address, but also a warehouse in the Netherlands, in which there was a room with a table. From that location, the defendant’s Dutch-based employees and Dutch-speaking employees met and held discussions with (potential) clients. From that location, negotiations were also conducted with (possible) clients about the conclusion of contracts, which in the case at hand included a lease agreement with appellant A and the agreements on job placement by appellant B. Work clothing was also stored in the warehouse. The debtor also employed a number of Dutch employees who in any event performed work in the Netherlands for companies established in the Netherlands. Furthermore, in accordance with Dutch legislation, personnel administration was conducted in the Netherlands in accordance with Dutch legislation and the defendant had a Dutch G-account (a frozen bank account that you can use to make payroll taxes or VAT payments to the Dutch Tax and Customs Administration) and a bank account. In all, the court was satisfied that it is sufficient that from the location in the relevant market (after all for the benefit of (potential) clients), the defendant developed economic activities with the help of people and goods (for the benefit of (potential) clients). Now that those activities have had been developed for some time and were still taking place, the court concluded that there was no question of the exercise of those activities of a temporary nature. All thoese circumstances – seen in connection with each other, but also partly individually – meant that there was the operation of an establishment within the meaning of Article 2(10) of the EIR 2015.
Partly in view of the primary request formulated by the appellants, the court assumes assumed for the time being that the defendant’s COMI was located in Slovakia. Consultation of the Slovak insolvency registers via the EU’s so-called E-Justice portal did not lead to the conclusion that main insolvency proceedings had been opened there. It was unknown whether Slovakia is a participant in the E-system or whether technically the system just does did not work (interconnection between registers was due mid 2019). Anyway, the court could only open (independent) territorial insolvency proceedings if the conditions set out in Article 3(4) were met. In the case at hand the territorial insolvency proceedings had been requested by two creditors (established in the Netherlands), being the appellants, whose claims arise arose from or were related to the operation of the defendant’s establishment in the Netherlands.
Their claims in this case arose from agreements negotiated at the warehouse and also entered into by the defendant from that location. Their receivables also arose from activities managed from the aforementioned sites. After all, the claims related to (a) a mediation and (b) the rental of residential accommodation in the Netherlands for (seconded) workers of the defendant with regard to work in the Netherlands for Dutch companies.

In all, the court found it has had been sufficiently established that the claims in this case arise arose from or are were related to the operation of an establishment located in the Netherlands as referred to in Article 3(4)(b) EIR 2015 – and concluded it had authority to open territorial insolvency proceedings (Court of Appeal ‘s-Hertogenbosch 16 September 2021, ECLI:NL:GHSHE:2021:2872).

Relevant case law is like looking for a needle in a haystack. I saw also an 2017 Gibraltar case, the COMI of a person (K) could not be established (was it in England? Or Spain?) and so the court could only open (independent) territorial insolvency proceedings (Court of Gibraltar 12 January 2017, 2016-COMP-039).

Subsequent main proceedings? In the event that main insolvency proceedings will be opened, independent territorial proceedings are converted into secondary insolvency proceedings. Several provisions of the EIR 2015, including the rules regarding cooperation and coordination for IPs and courts (Articles 41 to -44 of the EIR 2015), will apply to those secondary proceedings in so far as the progress of such the proceedings so permits (Article 50 of the EIR Recast). Such conversion opens the door to another European procedural theme. That’s for another day. It seems clear, however, that decisions taken in the independent territorial proceedings cannot be revoked in these main proceedings.

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 and the column appeared in GRR on 10 April 2022. See globalrestructuringreview.com