Winding up the Europeans

The English High Court decision in Daisytek-Isa Ltd [2003] BCC 562 has upset Europe. Daisytek-Isa was an English registered subsidiary of Daisytek International Corporation which, with its subsidiaries, filed for Chapter 11 reorganisation in the USA. Daisytek-Isa was the holding company of a group with a complex structure, in which one company performed head office functions, including negotiating contracts with suppliers and giving guarantees in respect of other group companies. The grant of administration orders in respect of the English companies was uncontroversial, but orders were also made in respect of one French and three German companies.

EU Council Regulation 1346/2000 on insolvency proceedings provides that “main proceedings” in insolvency can only be opened in the member state where the debtor has his “centre of main interests”. At recital 13 it states: “The Centre of Main Interests shall correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties.” By article 3: “The place of the registered office shall be presumed to be the centre of its main interests in the absence of proof to the contrary.”

The High Court held on the evidence that most of the administration of the German companies was conducted in England. The businesses were funded by local subsidiaries of The Royal Bank of Scotland. Their financial information complied with English accountancy principles, reviewed and approved in Bradford. Bradford also controlled purchasing and recruitment of senior staff, provided all IT support, serviced pan-European customers, dealt with corporate branding and required subsidiaries to conform to a centralised management strategy. The court decided the French company was controlled in the same way and the English courts therefore had jurisdiction to make administration orders in respect of all four companies as the centre of main interests (“COMI”) was in England.

France for the French?

This decision was unpopular in France and Germany. The French company’s directors applied to commence insolvency proceedings in the local commercial court. A French administrator was appointed. The French judge decided that the English administration order had no effect. The French company could only benefit from French proceedings. The English administrators applied to the French courts to have that judgment set aside, failed and appealed. The French Court of Appeal noted that the presumption that a company’s registered office was its COMI was rebuttable. They held that to do so the claimant must give sufficient evidence that the COMI was located elsewhere; and that on the facts the presumption had been rebutted, the COMI of the French company was in England, and the court having jurisdiction was therefore the English court.

The court went on to hold that the EU Regulation required that the English administration order must be immediately recognised in France without further formality. The English decision to open main proceedings in respect of the French company prevented a French court subsequently doing so in respect of the same company. The French court therefore had no jurisdiction and had wrongfully appointed the French administrator, who was ordered to pay costs.

The French Court of Appeal also rejected the French administrator’s claims of procedural irregularities in French law. The administration order applied in England and the required formalities were complied with. Accordingly none of the procedural arguments prevented the administration order applying in France.

It is understood that the French public prosecutor is to appeal to the French Supreme Court on the grounds of public policy. That may take several years and will add to the legal uncertainty in France surrounding insolvent groups involving French entities.

An Anglo-Saxon conspiracy?

In Germany the principle of the COMI is accepted. However the Regulation is being challenged in the Daisytek case by applications to distinguish the German companies. Their directors filed for insolvency in Germany and the court appointed provisional administrators on the basis that the English court had wrongly concluded that the COMI was in the UK.

On appeal, the German proceedings have been reduced to secondary status in relation to one company, and otherwise remain subject to appeal because of unrelated complications. The original decision has triggered furious debate among German lawyers. Some assert that the Regulation is based on a strict concept of priority. Others adopt the court’s argument, that the Regulation requires earlier proceedings to be recognised only when opened by a competent court.

German lawyers are annoyed that German companies have been subject to UK administration orders, and concerned that the international accountancy firms are intent on establishing an Anglo-Saxon supremacy which will take European insolvency cases to the English courts. The Daisytek case may therefore go to the European Court. At least if it does the decision will be available in English, and available to all. There is no translation service and no central registry of national court decisions, which makes following these precedent-setting cases extremely difficult.

Alistair Burrow, Tods Murray WS