Beyond COMI Creditors and Coordination

Beyond COMI Creditors and Coordination

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Editor's Note: Regular readers of this column will be aware that much of the decisional law relating to the European Community Insolvency Regulation is concerned with the location of a debtor's centre of main interests, or COMI. Since, in the new chapter 15 of the U.S. Bankruptcy Code, this concept has been imported into U.S. law, the scope of your case search will need to be broadened to include European cases. That much is clear from the interesting decision of Judge Drain in the recent case of In re SphinX, No. 06-11760, 2006 WL 2578727 (Bankr. S.D.N.Y. Sept. 6, 2006), in which there is liberal citation of the decision of the European Court of Justice in the case of In re Eurofood IFSC Ltd., Case 341/04, slip op. at 6, 2006 E.C.R., 2006 WL 1142304 (E.C.J. May 2, 2006). But there is much more to the European Insolvency Regulation than COMI, as Richard Tett outlines in this month's column.

Perhaps surprisingly, this article on Council Regulation No. 1346/2000 of May 29, 2000, on insolvency proceedings ("the EC (European Community) Insolvency Regulation") is not about Eurofood or the centre of main interests (COMI). In the four years since becoming operative, the EC Insolvency Regulation has generated a growing body of case law and many pages of legal journals. As exemplified by Eurofood, the vast bulk of these cases and journals have focused on one issue: COMI. This is understandable as the location of COMI is crucial to how the EC Insolvency Regulation applies to a debtor's insolvency, which is why parties argue over its location. However, COMI is not what this article covers; rather, it considers the creditors' rights once proceedings have been opened, and the coordination regime between the liquidators in main and secondary proceedings.

Creditors' Rights

The starting principle when considering the rights of creditors under the EC Insolvency Regulation is that there should be equal treatment of creditors throughout the EC. Whilst it is not an absolute principle and there are exceptions, this principle shapes many aspects of the EC Insolvency Regulation.

Notification of EC Creditors

To start with, pursuant to Article 40, whenever insolvency proceedings are opened, the relevant court or liquidator is required immediately to inform known creditors who have their habitual residences, domiciles or registered offices in other Member States (excluding Denmark, which has exercised its right to opt out). This applies whether the proceedings are main, secondary or territorial.

Article 40(2) prescribes that the notice shall be individual and shall set out any time limits, related penalties, details about lodging claims and whether preferential or secured creditors need to lodge claims. Fortunately for the court/liquidator, the notice does not need to be translated into each creditor's national language. However, it should be headed "Invitation to Lodge a Claim. Time Limits to Be Observed" in all the European Union official languages (Article 42(1)).

As might have been expected, the "Report on the Convention on Insolvency Proceedings" by Miguel Virgos and Etienne Schmit (Virgos/Schmit Report) explains that Article 40 aims to improve the situation of intra-EC creditors situated outside the State in which proceedings are opened and to protect those creditors. Virgos/Schmit Report, points 271 and 272. It is worth noting that Article 40 only applies to intra-EC creditors. For creditors outside the EC, they only receive whatever notice the national law of the relevant Member State requires.

Lodgement of Claims

Article 4(2)(h) provides that the law of the State opening the proceedings governs the lodging, verification and admission of claims—in other words, it is a question of national law. However, Article 39 adds another layer. In accordance with the principle of equal treatment, Article 39 states that any creditor who has its habitual residence, domicile or registered office in a Member State other than the State of the opening of proceedings has the right to lodge a written claim. As the Virgos/Schmit Report notes at point 265, this is a rule of substantive law. To remove all doubt, Article 39 also specifies that tax authorities and social security authorities are included. (Again, this applies irrespective of whether the insolvency proceedings are main, secondary or territorial.)

For some Member States, Article 39 represents an important change. For example, in England, foreign tax claims were inadmissible in an insolvency. The rationale for over 200 years was that the English courts would not collect the taxes of foreign states for the benefit of foreign sovereigns (Government of India v Taylor [1955] AC 491). Whilst that has now been superseded for Member State tax claims, it is unlikely that the change will extend to fines or penalties because the EU Insolvency Regulation has a public policy carve-out in Article 26, and Article 39 makes no reference to fines or penalties. (As an aside, the inadmissibility of foreign tax claims has been further eroded in Great Britain by the Cross-Border Insolvency Regulations of 2006, which enacted in Great Britain the UNCITRAL Model Law on Cross-Border Insolvency. The 2006 Regulations prohibit challenge of a claim solely because it is a foreign tax or social security claim, irrespective of the country asserting such a claim. However, such a claim may still be challenged for being a penalty or on any other ground on which a claim might be rejected under British insolvency law.)

Regarding the language in which a creditor can lodge its claim, Article 42(2) allows the creditor to use the language of its Member State. However, the claim must be headed "Lodgement of Claim" in the language of the proceedings and, more significantly, the creditor can be required to translate its claim.

Overlapping with Article 39, Article 32(1) states that any creditor may lodge its claim in the main or in any secondary proceedings. Perhaps more significantly, Article 32(2) requires a liquidator in the main or secondary proceedings to lodge in other proceedings claims lodged in its proceedings, provided that this is in the creditors' interests. Creditors have a right to oppose such lodging or to withdraw their claims (if withdrawal is permissible under the applicable law).

Plainly, the intention of Articles 32 and 39 is to improve the prospect of an even distribution of a debtor's assets notwithstanding multiple main and secondary proceedings. This reflects the universal aspect of the EC Insolvency Regulation.

Recovery and Hotchpot

The principle of equal treatment manifests itself again in Article 20(1). If, after the main proceedings are opened, a creditor obtains satisfaction of its claim on the debtor's assets situated in another Member State, the creditor must return what he has obtained to the main liquidator. This is a sensible provision as it effectively prevents a creditor rushing off to enforce for its individual benefit in another Member State before the main liquidator can get there (subject, of course, to the Article 5 (third parties' rights in rem) exception).

Article 20(1) is expressly subject to Article 5 (third parties' rights in rem) and Article 7 (reservation of title). Articles 5-15 set out specific exceptions to the universal approach to main proceedings. As discussed in Recital (11), this territorial aspect of the EC Insolvency Regulation is a carve-out from the universal approach and is an acknowledgement of the widely differing substantive laws within the EC. Detailed discussion of these exceptions is beyond the scope of this article.

Whilst Article 20(1) simply requires a delivery of what has been obtained, the rule in Article 20(2) is more complicated: If a creditor receives a dividend in one proceeding, it is not entitled to a dividend in a second proceeding until other creditors of the same rank or category have received an equivalent dividend. In English law, this is called the hotchpot rule. In contrast to the delivery of Article 20(1), the creditor does not have to hand over its dividend in the first proceedings—it is merely brought into account when dividends are paid out in the second proceedings. Therefore, if in the second proceedings no dividend (or a smaller dividend) is paid, then the creditor keeps his dividend from the outset, and that is an end of the matter (notwithstanding that the treatment across the EC would not have been equal). However, if a larger dividend is paid in the second proceeding, then the creditor gets an additional amount from the second proceeding so that in the aggregate it receives the same as an equivalent creditor only claiming in the second proceedings. In other words, the creditors receive equal treatment.

Cooperation

The potential of multiple main and secondary proceedings risks undermining one of the aims of the EC Insolvency Regulation—namely efficiency and effectiveness of insolvency proceedings with cross-border effects (Recital (8)). The EC Insolvency Regulation acknowledges that cooperation between concurrent liquidators is needed for the effective realisation of the debtor's total assets (Recital (20)). Therefore, immediate communication of information relevant to the other proceedings is mandatory, particularly regarding progress in lodging and verifying claims and measures aimed at terminating the proceedings (Article 31(1)). Point 230 of the Virgos/Schmit Report sets out a longer list of information to be exchanged, including assets, actions to recover assets, reorganisation measures, proposed compositions and progress of operations in the proceedings. This mandatory exchange of information is then complimented by a mandatory duty on liquidators to cooperate (Article 31(2)). These provisions for the exchange of information and cooperation are unarguably correct and to be welcomed. A little more controversially, Articles 31(3) and 33 reflect the precedence given to the main liquidator. Article 31(3) provides that the secondary liquidator is to give the main liquidator an early opportunity of submitting proposals on the liquidation or use of assets in the secondary proceedings. Article 33, on its terms, requires a court seized of secondary proceedings to stay the secondary proceedings on the main liquidator's request provided that there is suitable protection for the secondary proceedings' creditors. The request can only be rejected if it is manifestly of no interest to the creditors in the main proceedings.

The precedence given to the main liquidator and main proceedings is designed to assist in maximising the value of the debtor's estate where the estate is spread across different Member States. Whilst sensible and in the creditors' interests, in practice some difficulties have arisen as liquidators adapt to the new regime. Challenges have particularly arisen where the debtor's main operations, assets and employees (but not according to the court COMI) are located in the Member State of the secondary proceedings. This has been the case for some of the "group" filings in England starting with Enron Directo and more recently with MG Rover and Collins & Aikman. Courts seized of secondary proceedings in this type of case have shown some reluctance to stay their proceedings, notwithstanding the terms of Article 33. This perhaps reflects unease in the secondary proceedings arising from the opening of English main proceedings. Be that as it may, multiple active proceedings do not assist the efficient and effective overall management of the insolvency of the debtor. Hopefully, as a consensus on COMI grows out of the Eurofood decision, we will also see the cooperation between main and secondary proceedings envisaged by the EC Insolvency Regulation growing still further.

Conclusion

Beyond the lively debate over COMI, the EC Insolvency Regulation has a wealth of very sensible and beneficial provisions, many of which have not received much prominence. The regime strongly encourages equal treatment of EC creditors through notification and lodgement provisions. The requirements for the main and secondary liquidators to communicate and to cooperate are also good news. As a consensus emerges over COMI, and liquidators and courts around the EC grow in experience of the practical outworking of the EC Insolvency Regulation, the efficiency and effectiveness of cross-border European insolvency proceedings will be seen more and more.

Journal Date: 
Wednesday, November 1, 2006