EC proposals to change insolvency regulations

13 Dec, 2012

The European Commission has adopted proposals to modernise the European insolvency laws.


Here, Dr. Christoph von Wilcken, a lawyer specialising in insolvency law at Schultze & Braun, highlights a couple of the expected changes and, in particular, one which could have a negative impact on the UK’s restructuring industry.


Christoph says: “The European Court of Justice has done a pretty good job of defining COMI all by itself. Tinkering with this area risks causing a lot of unnecessary confusion.

“The idea of a group insolvency regime is seductive, but I am concerned about whether it will work in practice.  This would be a totally new law, one which doesn’t exist in any member state and we have no experience of how it would actually work.  I would welcome any proposal that would encourage the courts in different jurisdictions to work together, but apart from that, believe that this area should be touched very carefully.

“I will be looking closely at any changes to Appendix A which will be of particular interest to the London restructuring industry.  Many insolvency practitioners on the continent would welcome the introduction of the ‘Scheme of Arrangement’ provisions under the Company Act 2006.  A number of high-profile financial restructurings of Greek, Spanish and German companies have taken advantage of this scheme in England.  While the companies were not based in the UK, the High Court sanctioned these arrangements in London because the solvent Scheme of Arrangement is not regarded as an insolvency proceeding.  The introduction of this procedure to the Regulation would reduce the influx of such business to London. In addition, dissenting Lenders, who are out of the money, could no longer be disciplined by the threat of the Scheme.

“The publication of insolvency proceedings is a very important and welcome proposal.  It should be easy to implement and is a quick win that will bring benefits to the whole of the business community.  By publishing a list of companies in insolvency proceedings, businesses will be quickly and easily able to find out whether their business partners are solvent.”

Overview of European Commission’s plan to revise the insolvency regulation

The regulation 1346/2000 governs EU-wide insolvency proceedings. Ten years after it came into force the European Commission now plans to release a report on the revision of the Insolvency Regulation in December. The report will not only include the revision of the Insolvency Regulation, but also a report on the application of the Insolvency Regulation in the Member States and  an Impact Assessment report, as well as a  communication setting out  plans for future EU action on insolvency (the so called “Insolvency Package). Its publication is expected either on the 12th or 19th of December.

One of the problems that will be covered is the fact that the Insolvency Regulation is oriented mostly on the liquidation of companies but contains insufficient procedures to facilitate the rescue of businesses. The Regulation will have to accommodate the development in many of the Member States since the financial crisis of Chapter 11 like proceedings.

Although there has been significant clarification achieved by the Court of Justice of the European Union and national courts, a discussion about the concept of the Centre of Main Interests (COMI) is still on-going. This concept determines which national insolvency law is applicable to the respective case. It is quite likely that the Insolvency Package will at least entertain the idea of a look-back period to determine where the COMI of a debtor is – in order to avoid form shopping.

The provisions for main and secondary proceedings will be reconsidered, too. One problem is that secondary proceedings currently have to be winding-up proceedings. Thus secondary proceedings potentially endanger a rescue of businesses. Another problem is that there exists no duty of coordination between the courts and the liquidators of the main and the secondary proceeding.

Another main issue are group insolvencies. Neither the Regulation nor any national law of the Member States have particular provisions to deal with groups of companies going bust. When it comes to the Regulation this means different laws may be applicable to parent companies and subsidiaries as well as sister companies. As a result, there is a high risk of any rescue of the group being jeopardized.  One option to deal with the matter of group insolvencies is the introduction of rules for the cooperation and communication between liquidators and courts. There also are considerations to permit one “lead” insolvency procedure to be defined with certain powers over the other procedures or to enable companies to define a “group COMI” and the centralization of all proceedings at this place.

The publication of insolvency proceedings is a significant proposal. At present the accessibility of information about proceedings depends on national law. It is not compulsory to publish the opening decision. A key area of debate has been whether to publish opening decisions in a mandatory register – maybe in the form of an electronic register – or just to maintain the networking between national registers.

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