As 26 June 2017 approaches – the date of entry into effect of the Recast EU Insolvency Regulation (2015/8484/EU) – we look in detail at the new provisions for co-ordinating the insolvency proceedings of members of a pan-European group of companies and consider whether the new proposals for co-operation will be compulsory, the practicalities of who will pay the co-ordinator’s fees and whether the creditors can have a say in the process.
Some of the issues raised by pan-European insolvency proceedings involving groups of companies have been examined by the European Court of Justice in the Eurofood case (Case C-341/04 Eurofood IFSC Ltd), its third judgment interpreting Regulation 1346/2000 on insolvency proceedings, which is replaced and superseded by the Recast Regulation. We have previously commented more generally on the various changes being introduced by the Recast Regulation -see New Focus on Cross-Border Restructuring of Groups for the Recast EC Regulation on Insolvency Proceedings
The introduction of new rules on the insolvency proceedings of groups of companies (defined in art. 2(13) as “a parent undertaking and all its subsidiary undertakings”) by the Recast Regulation does not affect the situation where the centre of main interest (COMI) of several companies belonging to the same group is located in a single Member State (Recital 53). However, where each of the companies within the group has a COMI in a different country and therefore would need a local insolvency practitioner in each of those countries, new co-operation provisions will apply with a view to maximizing the return for the group as a whole.
The clear aim of the Recast Regulation is to set out a general framework enabling co-operation and setting out the principles for such co-operation between all insolvency practitioners dealing with each subsidiary of a group of companies in various member states but on a mostly voluntary basis and as a non-binding process. It is worth bearing in mind that one of the rationales for bringing these changes was that diverging insolvency laws across member states caused disparity in the restructuring options available to relevant business. This in turn was seen as an obstacle to cross-border investments due to legal uncertainty as to the risks investors might face in different countries. However, more uncertainty and delay may arise out of co-operation process.
A GENERAL CO-OPERATION FRAMEWORK
Cooperation and communication between insolvency practitioners is now encouraged. Despite the firm obligation to co-operate ( the word “shall” is used), this provision appears to involve an obligation to consider the possibility of co-operating and agreeing powers/allocation of tasks. This is left to the practitioners to decide amongst themselves – but what is the sanction for not doing this? The only clear cut obligation is to exchange relevant information.
There is also an obligation on the courts to co-operate but only “to the extent that such co-operation is appropriate to facilitate the effective administration of those proceedings.” The idea appears to be to encourage an increased awareness of other proceedings within the group with a view to reach an optimum outcome for each company and creditor but to a large extent, the way in which co-operation is implemented is left to the court’s discretion with suggestions such as the court “may communicate directly with each other or request information/assistance” (art. 57).
There is scope for value judgements to be made as to the appropriateness of group proceedings, which may be positive as every insolvency situation is different and will affect companies within a group differently; however, with this flexibility comes uncertainty for creditors and a potential brake to investment.
Alongside the general framework, practical powers are given to insolvency practitioners to:
(1) be heard in any of the proceedings open in respect of any other member of the same group;
(2) request a stay of measures with a corresponding duty of the court to stay the measures in question if it is satisfied that the conditions set out in art 63(1) are met (3 month stay renewable once by decision of the court); and
(3) apply for “group co-ordination proceedings” (art. 60).
The procedure to apply for group proceedings must include inter alia an outline of the proposed co-ordination and proposed coordinator (art. 61). The choice of co-ordinator and their remuneration could be contentious as insolvency practitioners are welcome to challenge the appointment of the proposed co-ordinator, in which case it will be open to the court to invite the objecting insolvency practitioners to submit a new proposal. Many insolvency practitioners across Europe are from small boutique firms and the question of how the co-ordinator’s fees will be met may be the main issue to be resolved.
Following receipt of the application for group proceedings, the court will then need to determine whether it is satisfied that group proceedings are appropriate and that no creditor of any group member will be at a financial disadvantage by including each company. No assistance is given on the appreciation of these criteria. It appears to be at the court’s discretion and upon hearing the insolvency practitioners involved. There is no mention that any of the creditors could make representations to the court.
This is where the question of a “myth” of co-operation arises. With art. 64, insolvency practitioners can object to the inclusion of the company over which they have been appointed within the group proceedings. No guidelines are available as to how this decision must be reached except a reference to the individual laws of each Member States to obtain any approval which may be required before a decision to participate or not. However, insolvency practitioners can at a later date apply to the appointed co-ordinator to opt in to the group proceedings, and the co-ordinator will decide whether or not to grant this, upon hearing the insolvency practitioner and complying with conditions at art. 69(2).
Objections must be received by the court within 30 days of receipt of notice of a request to open group proceedings. After this time, the court will appoint the co-ordinator (who will identify and outline recommendations for the co-ordinated conduct of the insolvency proceedings and propose a plan for the co-ordination, such as how to deal with settlement of intra-group disputes.
It is undeniable that the co-ordinator has been granted real powers to manage the group proceedings e.g. art. 72(2)(e) allows a request for a 6 month stay in proceedings.
The main weakness of the proposals may lie in the fact that even for the insolvency practitioners who have opted in to the group proceedings, the recommendations of the co-ordinator and the content of the group co-ordination plan are not binding. Although the insolvency practitioners have a duty to consider these, it is possible that a lot of time and costs may have been spent trying to co-ordinate proceedings without being able to reach a firm outcome.
This critical approach to the new group proceedings provisions should not detract from the positive effort to implement a general framework for co-operation which should strengthen the cross-border insolvency framework within the EU and is in line with insolvency practitioners’ requests. This reform is likely to be the first step of a much larger process of harmonising national insolvency laws across the EU, in particular following the EC proposal for a directive on Insolvency, Restructuring and Second Chance dated 22 November 2016 which, amongst other matters, aims at increasing the opportunity for pre-insolvency restructurings.
In the meantime, this Recast Regulation will apply in the UK at least until its exit from the EU. What happens after that is still an unknown quantity dependent on the outcome of the UK’s negotiations with the EU27.