Gauci-Maistre Xynou (Legal | Assurance) | View firm profile
Cross-border
insolvency law has been gaining importance in the EU’s legal system over the
past few decades. Harmonising insolvency laws is a difficult process as the
legal framework interacts with a myriad of domestic laws.
In order to increase the effectiveness of cross-border insolvency
proceedings, the original Council Regulation (EC) No 1346/2000 of 29 May 2000
on insolvency proceedings was replaced by new Regulation (EU) 2015/848 of the
European Parliament and of the Council of 20 May 2015 the Insolvency
Proceedings (Recast) Regulation (the “Recast”). Insolvency proceedings opened
after 26 June 2017 are regulated by the Recast which applies to all Member
States except Denmark. Like the old regulation, the Recast still deals primarily
with private international law issues and does not harmonise national
insolvency rules. However, the Recast fine-tunes the private international law
rules in relation to insolvency proceedings, establishes national insolvency
registers to facilitate smooth cooperation between Member States, broadens the
scope of the application to include additional insolvency processes, places
restrictions on secondary proceedings and allows for group insolvency
proceedings. Generally, the Recast aims to remove inefficiencies from the
systems that cause delays and make cross-border insolvency proceedings more
effective while also modernising them in accordance with the commercial
expectations of today’s rapidly changing global business environments.
The rules concerning jurisdiction are crucial. When a debtor or creditor
have the option to choose various jurisdictions, they will want to go to the
jurisdiction that offers the best options regarding procedures and substantive
law. Under the Recast, main insolvency proceedings are brought before the
courts of the Member State where the debtor has its centre of main interests
(“COMI”). The term had been criticised for being unpredictable and open-ended and
for leaving room for forum-shopping. However, the Recast defined it as “the place
where the debtor conducts the administration of its interests on a regular
basis and which is ascertainable by third parties”. For a company, which is the
main focus of this article, the place of its registered office is presumed to
be the centre of main interests, unless proven otherwise. Recital 30 also
clarifies that if the company’s central administration is located in a Member
State other than that of its registered office, and where a comprehensive
assessment of all the relevant factors establishes, in a manner that is
ascertainable by third parties, that the company’s actual centre of management
and supervision and of the management of its interests is located in that other
Member State, then the company’s COMI for the purposes of the Recast is
considered to be in than other Member State. In this respect, the Recast has
not provided for a radical shift from the approach taken by the old regulation
with regard to forum shopping by companies since it merely codifies the
interpretation given by the CJEU [1] in
its case-law [2].
The Recast also added an anti-abuse provision by inserting a three-month
period for which a legal entity could not open insolvency proceedings after
shifting its COMI to another Member State. It is quite common to shift a company’s
COMI to a more favourable jurisdiction for insolvency procedures, thus the introduction
of an anti-abuse provision was a welcome addition. However, it is argued that
it still left room for different interpretations of COMI. Additionally, Recital
5 of the Recast prohibits forum shopping when it is to the detriment of the
general body of creditors. It is therefore interpreted that if the parties
agree to shift the COMI to another Member State, seeking to obtain a more
favourable legal position, this is allowed.
To shift the company’s COMI, you can either relocate the registered
address of the company or change the jurisdiction where the everyday management
and control is exercised. The anti-abuse provision of the three-month period
refers only to relocating the company’s registered address. Hence, it is viewed
that the transfer of the company’s place of effective management falls outside
the scope of the anti-abuse provision. It is clear that the Recast aims to
protect the creditors and to that end, various safeguards have been added, yet
the anti-abuse provision could be read as a breach of the right of
establishment under article 49 of the Treaty on the Functioning of the European
Union (“TFEU”). Restrictions of the right to move, set up and manage companies
in another EU Member State are prohibited under TFEU.
Shifting of the COMI could also trigger tax implications. There are
Member States which for tax purposes consider the relocation of the company to
be liquidation and should the various conditions set by CJEU’s case-law [3]
be met, then they are allowed to impose exit taxes. The EU Anti-Tax Avoidance
Directive (EU 2016/1164) also caters for exit taxes when a taxpayer transfers
its assets/tax residence to a new Member State and falls under the circumstances
mentioned therein. These are factors which should be taken into consideration
prior to shifting the debtor company’s COMI and could potentially eliminate the
forum shopping as the costs which the company would face might outweigh the
benefits of relocating to a new Member State in order to benefit from a
favourable legal regime. It is evident that the costs involved would make it
less likely for SMEs to exploit forum shopping and this would in turn create inequalities
among corporate entities within the harmonised environment of EU.
The Recast extends its scope to include interim proceedings, which have
the purpose of rescue, adjustment of debt, or reorganisation. In this respect, the
Recast applies to all types of Maltese insolvency proceedings, namely,
dissolution (“xoljiment”),
provisional administration (“amministrazzjoni”),
members’ or creditors’ winding-up (“stralċ
volontarju mill-membri jew mill-kredituri”), court winding-up (“stralċ mill-Qorti”), bankruptcy (“falliment f'każ ta' kummerċjant”), and
the company recovery procedure (“proċedura
biex kumpanija tirkupra”). Proceedings not covered by Annex A of the Recast
do not fall within the scope of the Recast. Thus, Member States are free to
determine the legal framework for such proceedings and gain a competitive
advantage by introducing effective recovery proceedings. An example of such a
proceeding has been the “scheme of arrangement”, a restructuring mechanism
under English law. Such scheme is not included in the list of UK insolvency
proceedings contained in the Annex A of the Recast and therefore not subject to
the jurisdiction requirements of article 3 of the Recast.
Forum shopping is without a doubt a clear indication that harmonisation
of the insolvency proceedings within EU Member States has not yet been achieved.
However, we have noticed in the last years that there is a tendency for the
convergence of Member States’ laws including insolvency laws. Harmonisation of
the various legal frameworks aims to enable economies to promptly respond to
default conditions and insolvency in a way that promotes economic growth and
competition. On 22 November 2016, the European Commission published its
proposal for a Directive [4]
on insolvency, restructuring and second chance. The main objective of this
proposal is to provide a uniform European legal framework ensuring that companies
in financial distress have access to preventive restructuring proceedings as
soon as possible. Harmonising the principles of restructuring proceedings is a
tool for a growing economy.
[1] Court of Justice of the European Union
[2] See Case C-341/04 Eurofood IFSC Ltd; Case C-369/09 Interedil Srl and Case C-191/10 Rastelli Davide e C. Snc.
[3] Inter alia, Case C-371/10
National Grid Indus BV v Inspecteur van de Belastingdienst Rijnmond.
[4] Proposal for a Directive of the European Parliament and of the
Council on preventive restructuring frameworks, second chance and measures to
increase the efficiency of restructuring, insolvency and discharge procedures
and amending Directive 2012/30/EU.