Simplifying insolvency proceedings?

To think that in 1986 the Insolvency Act was intended to constitute an overhaul of insolvency proceedings in the United Kingdom which would see a substantial framework remaining unaltered for many years! To the plethora of amending legislation which has succeeded is now added EU Council Regulation number 1346/2000 on insolvency proceedings which actually or potentially affects every type of insolvency proceeding in the UK and came into force throughout the European Union (Denmark excepted) on 31 May 2002.

The Regulation applies to relevant proceedings opened on or after 31 May. The time of the opening of proceedings is defined as the time at which the judgment opening proceedings becomes effective whether it is a final judgment or not. In the case of Court based procedures therefore it will be important that issues pertaining to the applicability of the Regulation are addressed at hearings after that date even in respect of petitions which may have been presented before that date.

The purpose of the Regulation is to improve the efficiency and effectiveness of insolvency proceedings with a cross border dimension by either simplifying or removing formalities previously associated with recognition and enforcement of foreign insolvency proceedings. It is not an attempt to harmonise the insolvency laws of individual member states.

Like all EU Regulations the Regulation is directly applicable and becomes an integral part of each member state’s law. The Regulation will prevail in the event of any incompatibility with national law. However, to ensure full workability and enforceability in the United Kingdom a number of amendments will be required to both primary and secondary insolvency legislation.

The Regulation applies only where a debtor has his centre of main interests within the EU and deals only with jurisdiction within the EU. It does not apply to insurance undertakings, credit institutions or certain investment undertakings. For the purposes of the Regulation the United Kingdom represents one jurisdiction and the relevant proceedings which are covered by the Regulation are winding up by or subject to the supervision of the Court; creditors voluntary winding up (with confirmation by the Court), administration, voluntary arrangements, bankruptcy and sequestration. Creditors voluntary windings up will not enjoy the benefits of automatic recognition and enforcement without formal confirmation by the Court and new procedures require to be put in place for this purpose.

The Regulation does not apply to any form of receivership nor does it apply to members voluntary windings up or to windings up made solely on just and equitable grounds, as the insolvency of the debtor is a prerequisite for recognition.

The Regulation introduces two types of proceedings. These are “main proceedings” which can be opened only in the member state where the debtor has his “centre of main interests”. Essentially this will be the place where he conducts administration of his business on a regular basis and therefore ascertainable by third parties. The (rebuttable) presumption in the case of a company will be that this is determined by the location of the registered office. These proceedings are (subject to territorial proceedings) to have universal effect throughout the EU.

“Territorial proceedings” can be opened in any member states in which the debtor has an establishment - effectively a place of operations where he carries out non-transitory business. The effect of territorial proceedings is restricted to assets situated in that member state. Where territorial proceedings are opened after main proceedings they are termed “secondary proceedings” and can only be winding up proceedings. They cannot be rescue or rehabilitation proceedings. There may therefore be some incentive to ensure, say, a territorial administrator is appointed before main proceedings which will not promote a rescue are commenced by someone somewhere else.

These changes will restrict the wide jurisdiction which UK Courts have previously asserted, for example on the basis of preservation of assets. The scope to request the opening of territorial proceedings before main proceedings have been opened is limited to creditors established in that state or whose claim arises directly from the operation of the establishment in that state or to situations in which main proceedings cannot be opened. The reach of the insolvency office holder in territorial proceedings is restricted to those assets situated in the member state where the proceedings were opened irrespective of whether or not main proceedings have been opened in relation to the debtor.

The general rule is that the national law of the state in which the proceedings are opened is the applicable law. This law therefore determines the opening, conduct and closure of the proceedings. The Regulation contains a non-exhaustive list of the matters to be determined by the law of the proceedings and contains a number of substantive conflict of laws provisions which apply in a number of areas, for example protecting existing proprietary interests in assets situated in another state, and applying the law governing an employment contract to the effects of the insolvency on that contract. Challenges to preferences and other antecedent transactions under the law of the proceedings also appear to be limited by the law governing the transaction which is being challenged.

The Regulation makes major advances in the areas of international recognition of insolvency proceedings and the exercise abroad of an office-holder’s powers. Proceedings opened under the Regulation will be recognised without formality in all member states and main proceedings will be immediately effective in all member states as long as no territorial proceedings have been opened there. Subject to the same condition an office-holder appointed in main proceedings will be able immediately to exercise his powers in other member states.

The Regulation also provides a structure for the interaction of multiple insolvency proceedings in relation to the same debtor for the purpose of improving the efficiency and effectiveness of proceedings which have cross border effect. This affords primacy to main proceedings which will serve as proof of the debtor’s insolvency for the purposes of secondary proceedings. To achieve this the Regulation imposes a duty on office holders to co-operate with and communicate information to each other. It also gives the office-holder in main proceedings a range of powers in relation to secondary proceedings. It should, however, be noted that less co-operation is required between territorial proceedings commenced before main proceedings elsewhere and those main proceedings.

The Regulation’s provisions in relation to information for creditors and approving of claims are generally straightforward but there are novel aspects to them. These include the power for office-holders in both main and secondary proceedings to prove the claims which have been proved in proceedings for which they were appointed in other insolvency proceedings. The Regulation also removes the previous exclusion of foreign tax claims in insolvency proceedings.

The DTI has already identified a number of provisions in the Insolvency Act 1986 which will require amendment and that a number of definitional provisions will require to be introduced and the rule making powers of the Act extended to enable rules to be made to give effect to the Regulation. A range of amendments to the Insolvency Rules 1986 and the Insolvency (Scotland) Rules 1986 will also be needed and a number of statutory forms relating primarily to opening insolvency proceedings will require to be modified and a number of new forms introduced.

Taken with the changes to insolvency proposed in the Enterprise Bill currently before Parliament, practitioners and advisers in this area of law will need to commit significant time to familiarisation with the flow of legislation (both primary and secondary) together with associated forms and procedures over the coming months.

Alistair Burrow is a partner of Tods Murray