Some 200,000 corporate insolvency proceedings are initiated across Europe each year, and more than a quarter of these are cross-border in nature. Yet with dramatic variations in how insolvency is handled across different jurisdictions, John Brazier asks what the profession can expect from work that extends internationally.
In December 2012, the European Commission outlined a series of legislative proposals to alter the way cross-border insolvency proceedings are conducted, aimed at amending laws that have been in place since 2000.
Europe has recognised that, as national insolvency regimes continue to diverge, differences between them are creating legal uncertainty and operational dilemmas for companies working across multiple jurisdictions. It takes just four months to close down a failed business in Ireland, for example, yet more than six years in the Czech Republic.
Key issues to be addressed by the EC with a view to harmonisation include the time required to discharge a debt, the conditions for opening proceedings, the filing of claims, and the rules for restructuring plans.
Proposals addressing judicial cooperation and international laws, and the thorny subject of which jurisdiction a multinational corporation’s most important assets are understood to fall under, sound very positive in light of the Europe-wide “rescue culture” discussed recently by Viviane Reding, the EU’s justice commissioner.
Nevertheless, the effect on UK-only businesses is likely to be minimal, as the aims of the new legislation are largely in tune with current UK insolvency legislation. More likely, UK-based cross border specialists will be seeing further work come from the continent, as more firms look to undergo pre-insolvency proceedings here rather than at home.
However, according to Karl Clowry, partner in the financial restructuring practice of international law firm Paul Hastings, the practice of “exporting” restructuring work to the UK may not be so well received elsewhere. “A lot of creditors, particularly in the EU, are a bit fed up of seeing their debtors splashed all over the place – such as the London courts for example.”
There are, however, moves afoot to keep restructuring domestic. Clowry explains: “We have seen legislation brought in in places like Spain and Germany to try to bring in pre-insolvency mechanisms, to at least encourage local companies to use the tools of restructuring and pre-insolvency to try to effect restructurings in those jurisdictions.”
Centre of attention
The move to promote pre-insolvency tools is aimed at encouraging companies to undertake such processes under their respective domestic jurisdictions, therefore combating the “forum shopping” that occurs as companies seek the most favourable climate in which to enter an insolvency process.
Many companies understand that some jurisdictions are more debtor friendly than others when it comes to insolvency proceedings and so have tried to change their Centre of Main Interest (CoMI) to take advantage of this.
CoMI is a term used to describe the jurisdiction with which a person or company is most closely associated for the purposes of cross-border insolvency proceedings. Despite there currently being no fixed definition of CoMI within European legislation, the proposals put forth in December 2012 have sought to clarify the point.
CoMI can become contentious within cross-border insolvency cases, most often driven by those who oppose a company’s view of where its main interests lie. The issue becomes complicated when creditors decide to challenge the competency or relevance of the national court that has taken on responsibility for the case.
“With respect to CoMI, the commission’s proposal to introduce an appeal against a national court´s decision to be competent for a particular case may have a counterproductive effect, particularly when it comes to rescue situations,” says Dr Christoph von Wilcken, insolvency lawyer at Schultze & Braun.
“This would allow creditors from other jurisdictions to raise a challenge. That just gives leverage to people in such situations, which shouldn’t happen.
“If creditors can appeal against the court’s reasoning then the whole process becomes uncertain – and uncertainty is something you don’t want in these situations.”
Uncertainty within insolvencies covering more than one country is exactly what the new proposals from the European Commission have been designed to quash.
However far the EC gets in achieving these aims – with further refinements expected to come after the current proposals are passed into legislation, most likely in 2014 or early 2015 – it seems there will be no shortage of work coming from Europe for experts in the UK.
THE NEW RULES
Q&A WITH STUART FRITH
head of the restructuring and insolvency practice at law firm Stephenson Harwood LLP
Are pre-pack administrations becoming fashionable in Europe as they are in the UK?
Fashionable is probably the wrong word – but other jurisdictions recognise the efficacy and efficiency of the UK’s rescue procedures and are starting to introduce their own versions, as Germany has recently done. This will lead to more competition in forum shopping (when and where appropriate) in Europe.
How much is judicial cooperation a stumbling block in cross-border work?
There have been several attempts to introduce some sort of central recognition for groups of companies in different jurisdictions which have not enjoyed success. In the absence of workable alternatives, judicial cooperation is the only viable alternative. Of course automatic recognition of office holders should not make this an issue, but the cultural differences between jurisdictions sometimes makes this difficult, particularly with regard to real estate issues.
Are the new proposals leading to an Americanisation of EU legislation, aiming to follow Chapter 11 style proceedings?
If we define Americanisation in this context as moving towards a central or “federal” code, then I’d say no – the legislation covers a number of distinct and different procedures and jurisdictions.
As the European Commission has attempted to clarify the issue of CoMI, how much of a contentious issue does it remain?
CoMI forum shopping should not always be seen as negative – indeed, it has been the subject of judicial acceptance in corporate insolvency cases, for example the Wind Hellas group case. In individual insolvencies, it is much more contentious, and UK courts are regularly scrutinising changes in CoMI, particularly with regard to insolvency tourism.