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European Union

A new EU regulation has been introduced with the stated objectives of improving the efficiency and effectiveness of insolvency proceedings with a cross-border element and avoiding the incentive for parties to transfer assets or proceedings within the EU in an attempt to forum-shop. The new regulation, Council Regulation (EC) No 1346/2000 on Insolvency Proceedings Within the EU (except Denmark), came into force on May 31 2002.

Given that insolvencies with an international character are becoming increasingly common, this regulation is an important step towards addressing the expensive, sometimes unworkable and often lengthy procedures previously used. Although it has no retrospective effect, the regulation takes direct effect as domestic law, and aims to provide a standard set of rules governing the jurisdiction for commencing insolvency proceedings, the recognition of related judgments and the applicable law.

Annexes A and B to the regulation set out the various particular proceedings within national jurisdictions to which it applies – broadly defined as "collective insolvency proceedings which entail the partial or total divestment of a debtor and the appointment of a liquidator". The scope of the regulation requires divestment, and the intervention of a third party (practitioner) before it applies.

The dual-annex structure was the result of a compromise between the two schools of thought which gained currency during the negotiations: universality and territoriality. The regulation envisages two generic types of proceedings: main (annex A) and secondary or territorial (annex B) proceedings.

Main proceedings are universal in their effect, and are proceedings brought in the "centre of a debtor's main interests" which – in order for the Regulation to apply at all – must be located in the EU. "Centre of main interest" is not specifically defined, but in the case of companies, this is taken to be the registered office unless the contrary is proved.

Secondary territorial proceedings are proceedings brought in another member state where the debtor has an establishment (defined as "any place of operations where the debtor carries out a non-transitory economic activity with human means and goods"). Secondary proceedings are limited in scope to assets located in the member state where those proceedings are brought (the so-called opening state); they can generally only follow primary proceedings (except in limited circumstances); and they must be of such a nature as to culminate in a winding-up.

In conducting the proceedings, the liquidator (or court) is required to send an individual notice containing the required information to each foreign creditor known to him or her, immediately after the opening of proceedings. This notice must be drafted in an official language of the state where proceedings are commenced, and should bear a standard heading in all the official languages of the institutions of the EU.

In respect of the applicable law, the general position is that it is determined by the forum where proceedings are commenced. The conduct of the proceedings is therefore governed by the domestic law of the relevant member state, subject to the exceptions to "protect the legitimate expectations and the certainty of transactions in member states". Significant among these exceptions are, among others, third party rights in rem, rights of set-off, reservation of title, employment contracts and pending litigation.

One crucial development is the automatic recognition of foreign insolvency proceedings. Under the regulation, the legal effects of main proceedings must be recognized in all other member states "with no further formalities", and the status of the insolvency practitioner appointed in the main proceedings must be recognized. It should be noted that this development, while significant, is limited: while recognition of a judgment requires no exequatur, enforcement of that judgment does, although the procedure is a simplified one. Nevertheless, the practitioner will be able to exercise his or her powers in other member states without the need for a further court order. Furthermore, the regulation requires insolvency practitioners to operate under a duty of cooperation and communication of information.

In general, the regulation anticipates substantive rules for the protection of creditors in order to guard against inequities, for example:

  1. equality of information;
  2. claims (especially with respect to language issues); and
  3. payments.

The regulation will have a considerable effect on the practice of insolvency within the EU. While enhancing coordination of the measures to be taken regarding an insolvent debtor's assets, the regulation does not seek to harmonize the substantive laws of the member states, even though this had been the original intention. However, it certainly does impose a new and more efficient modus operandi on practitioners under which the member states may engage and interact. The regulation is an important development, but much remains to be achieved in this area of law.

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