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Secondary insolvency proceedings – the industry's best kept secret?

Secondary proceedings, first introduced at the turn of the millennium, are something you rarely hear about. Richard Clark, specialist restructuring and insolvency lawyer at TLT, explains how they can be invaluable for creditors of overseas insolvencies.

Richard Clark
specialist restructuring and insolvency lawyer at TLT

With several recent high profile instances of such proceedings being brought in the UK and a recast EU regulation changing the circumstances under which they can be used, there has never been a better time to explore what they are, their benefits and what has changed.

Most people know about the 2000 regulation (Council Regulation (EC) 1346/2000) through cases concerning the centre of main interests (COMI) of debtors, such as Eurofoods and Interedil. Much less is known about secondary proceedings, which this regulation first introduced. These are confined to the assets of a debtor located outside of the COMI and run concurrently with the main proceedings.

Secondary proceedings will take effect in, and apply the laws of, the country in which they are brought to the business and assets located in that country, and apply the consequences of the laws of the jurisdiction to the insolvency process (under Article 4). In domestic English liquidations, for example, this means that the prohibition against disposal of company assets and the powers to reverse transactions at an undervalue and preferences under the Insolvency Act 1986 will apply.

Secondary proceedings were introduced to afford the office holder in main proceedings a more orderly realisation of assets. But there is much more to secondary proceedings than meets the eye. Despite the “spirit of cooperation” in EU law, games of cat-and-mouse have been played between debtors in the COMI and creditors in other jurisdictions. Debtors attempt to relocate the COMI to take advantage of more benign insolvency laws (England and Wales being a prime candidate), or do not start secondary proceedings overseas in order to avoid the benefits afforded to creditors.

Creditors, by contrast, often commence secondary proceedings in order to secure collateral benefits. For example, in the UK, the commencement of liquidation will trigger the PPF assessment period for defined benefit pension schemes, whereas overseas proceedings do not have this effect. Another benefit is the UK moratorium on disposal of assets, which arises when compulsory winding up proceedings are filed under Sections 127 and 129 of the Insolvency Act 1986.

Bringing such proceedings is not without its issues, however. The petitioner must prove the debtor has an “establishment” in the UK (being a “place of operations where a debtor carries out, or has carried out in the three-month period prior to the request to open main insolvency proceedings, a non-transitory economic activity with human means and assets”), and that the debtor is insolvent.

The recast regulation

The recast regulation (EU) 2015/848 of the European Parliament and of the Council (the 2015 Regulation), which came into force on 26 June 2017, come with a nasty sting in the tail. Article 36 allows a foreign insolvency practitioner to provide an undertaking to UK creditors to treat them as they would have been treated if UK insolvency proceedings had been commenced. Where such an undertaking is given, Article 38(2) means the foreign practitioner can request a court not to open secondary proceedings and take the collateral benefits off the table.

This means creditors must rapidly decide whether their interests are prejudiced by the main proceedings and, if so, commence secondary proceedings as quickly as possible.

Each case will be assessed on its merits, and no doubt a further substantial body of law will follow on the subject. I look forward with much interest to seeing how this plays out.

Posted on 14th July 2017 by Marcel LeGouais

 

 

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