Jurisdiction in insolvency proceedings

Major changes to the Scots law of insolvency were introduced by Council Regulation (EC) No 1346/2000 (the “EC Insolvency Regulation”) which came into effect on 31 May 2002. Since that date the provisions of the Bankruptcy (Scotland) Act 1985 and the Insolvency Act 1986 must be read as subject to the EC Insolvency Regulation. The Regulation deals with questions of the law to be applied in matters dealing with insolvency as well as the duties of the courts in one country to recognise and give effect to insolvency proceedings in other countries. Furthermore the instrument has made changes to the rules of jurisdiction, which have had a significant impact on the vast majority of insolvency processes raised after its date of commencement. This paper examines some of the complexities which now arise in respect of jurisdiction in Scottish insolvency proceedings.

When does the Regulation apply?

The Regulation applies to certain specified types of insolvency proceedings in all of the EU member states with the exception of Denmark. The main focus of the Regulation is with principal or “primary” insolvency proceedings which cover all the debtor’s assets, no matter where they are situated. As far as concerns proceedings in Scotland the Regulation deals with the following types of proceeding (and only with those types):

• Sequestration
• Winding up by (or supervised by) the court
• Creditors’ voluntary winding up (where confirmation by the court)
• Administration
• Voluntary arrangements

Jurisdiction in the Scottish courts

The basic rule of jurisdiction under the Regulation is that insolvency proceedings may be opened in the courts of the Member State within whose territory is situated “the centre of main interests” of the debtor. The effect is that where the centre of the debtor’s main interests is located in another Regulation State the Scottish courts lack jurisdiction even if they would have had jurisdiction under the 1985 or 1986 Acts. For example section 9 of the 1985 Act gives jurisdiction to the Scottish courts where the debtor has his habitual residence or an established place of business in Scotland during the prior 12 months. However if the centre of main interests of such a debtor was in another Regulation State (such as  Ireland or France), then the courts of that state would have jurisdiction instead of the Scottish courts. Similarly the Scottish courts have jurisdiction to wind up a company which was registered in Scotland. But where the centre of main interests of a Scottish-registered company is in another Regulation State, then the Scottish court can no longer exercise its winding up jurisdiction, which lies instead with the courts of that other state.

The matter is complicated by a further feature of the Regulation, that in addition to these types of principal insolvency proceedings the Regulation also allows for what it calls “secondary” proceedings. Secondary proceedings are restricted to the debtor’s assets which are situated in the territory of the state where the secondary proceedings take place. Furthermore the jurisdictional base is different. Secondary proceedings, which will normally be opened after the start of primary proceedings, can occur where the debtor has an “establishment” in the state in question and their purpose is to aid the task of the liquidator or trustee (or the local equivalent) in the primary proceedings. For example a debtor whose centre of main interests are in Ireland cannot be subject to a sequestration in Scotland even if his case meets the criteria for jurisdiction set out in section 9 of the 1985 Act. The Irish courts have sole jurisdiction in respect of bankruptcy as a type of primary proceeding. However the trustee in the Irish bankruptcy could petition the Scottish courts for sequestration, as a secondary proceeding, limited to the debtor’s assets in Scotland.

By recital 14 of the preamble to the instrument: “This Regulation applies only to proceedings where the centre of the debtor’s main interests is located within the Community.” (This expression is misleading. Although Denmark is a Community state, it is not a party to the Regulation.) This limitation is important. A debtor may have bases in some, or even all Regulation states but if the centre of his main business interests is in a non-Regulation state, then the Regulation does not apply. In a situation such as this one, the Scottish courts can found their jurisdiction on the provisions of the 1985 and the 1986 Acts.

Centre of main interests

It is clear that the idea of centre of the debtor’s main interests is crucial to the working of the Regulation’s provisions on jurisdiction. Unfortunately the Regulation does not define this key expression. It does provide that in the case of a company the centre of main interests is presumed (rebuttably) to be the place of the company’s registered office. No further guidance is given in respect of natural persons or other legal persons which do not have a registered office (such as a Scottish partnership). However recital 13 to the preamble of the Regulation states that the centre of main interests should correspond to the place where the debtor conducts the administration of his interests on a regular basis.

Assistance may also be obtained from less authoritative sources. A Committee of the European Parliament which considered the text of the Regulation was of the view that the centre of the debtor’s main interests was not a generally recognised term and should be more fully defined. The Committee proposed (unsuccessfully) an amendment to include the following definition: “The centre of main interests is taken as meaning a place with which a debtor regularly has very close contacts, in which his manifold commercial interests are concentrated and in which the bulk of his assets is for the most part situated.” (Report on the proposal for a Council regulation on insolvency proceedings 9178/1999-C5-0069/1999-1999/0806 (CNS).)

The Regulation has no accompanying explanatory report. However the Regulation was the culmination of a lengthy attempt by the EU and its predecessors to establish an instrument on insolvency. An agreed final draft of an Insolvency Convention lapsed in 1996 when the United Kingdom failed to sign it. A report on the Convention was prepared by Professor Miguel Virgos and M. Etienne Schmidt. (This report never received official approval but a version is contained in EU Council Document 6500/1/96.) As the Regulation is in virtually identical terms to the lapsed Convention, the explanatory report is a useful source of understanding. It states that “interests” encompasses not only the activities of commercial and industrial operations but also economic ones in the broad sense, professional or otherwise. Accordingly it applies to the activities of individual persons. The term “main” is used to serve as criterion where these interests include activities of different types which run from different centres. In respect of non-corporate debtors, in the case of professional debtors the centre of main interests would normally be the place of their professional domicile and for natural persons in general, the place where they habitually reside.

Helpful as these descriptions may be, the criterion of centre of main interests will often be a difficult one to apply in practice. The language seems to suggest that every debtor will have only one centre of main interests but in reality a debtor may have two or more. In order to determine which one of these is the main one, a minute examination of the debtor’s business practices may be required. Where a debtor trades in countries outside the EU, then in order to determine whether the Regulation applies at all, a detailed search will have to be made of all of the debtor’s trading activities, which in some cases could be on a world-wide basis. Finally it can be noted that the concept of centre of main interests, and the interpretation to be given to it as the place of administration of interests, is more suited to the case of a commercial, than a consumer, debtor.

Intra-UK jurisdiction

Recital 15 of the preamble to the Regulation states: “The rules of jurisdiction set out in this Regulation establish only international jurisdiction, that is to say, they designate the Member State the courts of which may open insolvency proceedings. Territorial jurisdiction within that Member State must be established by the national law of the Member State concerned.”

The effect of this provision is far from clear where the centre of main interests is in the United Kingdom. The Regulation (unlike most of the provisions of the Brussels I Regulation on civil jurisdiction and judgments) does not allocate jurisdiction to the courts of the place of the centre of main interests but to the courts of the state where that centre is located. Furthermore the Regulation does not contain any provision concerning states with more than one legal system (in contrast with the Brussels II Regulation which deals with jurisdiction in divorce and other proceedings).

Where the centre of a debtor’s main interests is in the United Kingdom, then any relevant sort of insolvency proceeding must be raised in that state. But in which legal system? Is it the legal system in which the relevant place is located or is it any of the three UK legal systems? The problem is that UK law contains no provision similar to Schedule 4 to the Civil Jurisdiction and Judgments Act 1982 for allocating insolvency jurisdiction between the courts of the different legal systems. However in practice, such an allocation is achieved by insolvency statutes within the UK. For example, a company registered in Scotland can only be wound up in Scotland and not in England, and a similar rule applies in respect of the winding up of English-registered companies. Provision also applies to the winding up of “unregistered” companies (that is to say companies incorporated outside Britain). Not that this allocation need be exclusively to one legal system within the UK, for it is quite clearly possible for a person to be subject both to sequestration in Scotland and to bankruptcy proceedings in England (a situation which explains the application of the common law doctrine of forum non conveniens in sequestration and its statutory equivalent in section 10 of the 1985 Act).

The important point is that where a debtor has his centre of main interests somewhere in the United Kingdom, then he will also have an appropriate connecting link for jurisdiction purposes under the insolvency law of the UK legal systems. Both Scots and English law use a criterion of place of business which the test of centre of main interests would meet in the vast majority of cases, if not indeed all of them. Where the debtor is a non-UK company the provisions on winding up of unregistered companies would cover such cases.

Accordingly it is suggested that where the centre of the debtor’s main interests is in the United Kingdom, allocation of jurisdiction within the United Kingdom is determined by the (non-Regulation) insolvency law of the UK legal systems. The same result applies where the centre of main interests is outside any Regulation state, for any such case would not be a Regulation case. A further type of non-Regulation case is where the debtor has no links at all with any Regulation state apart from the UK. In this scenario, even if his centre of main interests is in the UK, there is no possibility of a conflict of jurisdiction between different Regulation states, and the Regulation does not apply (at least in respect of questions of jurisdiction).

There remains one situation where this approach might not provide a solution. This is where a debtor has connections with other Regulation states. At the same time his centre of main interests is in the United Kingdom but he does not fall within any of the jurisdictional criteria of (non-Regulation) UK insolvency law. It is difficult to envisage a scenario where this outcome would arise in practice, but if it were to do so then it is thought that the appropriate courts are those for the place where the centre of main interests is situated.

Pleading jurisdiction

If an insolvency proceeding is to be raised in a Scottish court, the first question which has to be addressed is whether the Scottish court has jurisdiction. Since 31 May 2002 it has been no longer sufficient to plead that the debtor’s case meets the jurisdictional criteria of the Bankruptcy (Scotland) Act 1985 or the Insolvency Act 1986. In all cases the petition for sequestration or winding up must specify the location of the centre of the debtor’s main interests. In the absence of such an averment the Scottish court would be unable to satisfy itself that it possessed jurisdiction as the possibility would be left open that the place in question was in another Regulation state, whose courts would have exclusive jurisdiction for “primary” insolvency proceedings.