Vol 1 (2004) - Issue 3

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The Centre of Main Interest and the Administration of Daisytek - An Update

In issue 1 of this journal, we reported on the administrations of the Daisytek group of companies, which were the first cases where an insolvency appointment made under the EU Regulation on Insolvency Proceedings over a company registered in another jurisdiction had been challenged in the courts. In this case the English courts had appointed myself, Stephen Taylor and Ian Green of PricewaterhouseCoopers as joint administrators to three German companies and one French company, having concluded that their centres of main interest (COMI) were in England.
The EU Regulation states that the COMI is deemed to be the place where the debtor conducts the administration of its interests on a regular basis and such administration is therefore ascertainable by third parties, with a rebuttable presumption that this is at its registered office. In making the appointments, the judge took account of a number of factors demonstrating that the administration of the companies was carried out at the group’s head offices in Bradford, but in particular that some 70% of the supply contracts for the French and German companies were negotiated from head office, such that the majority of creditors by value would regard Bradford as the place where the companies had their COMI.
In both France and Germany local proceedings were instigated that purported to be main proceedings under the EU Regulation; each company thus had two sets of purported main proceedings applying to their worldwide assets - something that the EU Regulation was designed to prevent. Recital 22 of the EU Regulation requires that the decision of the first court to open proceedings should be recognized in the other member states without those member states having the power to scrutinize that court’s decision. Despite this, in both countries the courts’ initial decisions went against the English administrators and we decided to appeal.
In Germany a dual track approach was taken: we took one action seeking to force the local company registrar to formally register our appointments over the companies, and a second action to appeal the opening of main proceedings in Germany. Both of these actions have now proved successful, and the proceedings instigated in Germany relegated to secondary proceedings limited to the assets in that country.
In France the situation remains fluid. On 4 September 2003, the French appeal court at Versailles overturned the appointment of a French administrator and recognized the English appointment, with the result that we were able to collect in the assets of the company and agree our proposals with its creditors. However, the French state has now served notice on the administrators of its intention to appeal the decision to the Cour de Cassation (supreme court) under article 26 of the EU Regulation, which allows member states to refuse to recognize the decision to initiate main proceedings where this would have some negative effect on its public order, or contravene fundamental principles of public policy. The specific grounds are:

1. That a decision initiating main proceedings can only be made in the territory where the COMI is and for a legal entity this is determined by its registered office. The Regulation was not designed to deal with difficulties of insolvencies of groups of companies and to determine the COMI, with regard to its parent company, is an abuse of procedure and breach of the peace.

2. That the appointment of administrators was made without consulting the works council. The hearing of staff representatives is a fundamental principle of right, the violation of which should be an obstacle to recognition of the proceedings in France.

Whilst this is not the place to debate points in detail, I can repeat that the administrators will be making vigorous counter-arguments.
In taking this approach the French state is following the grounds that were rejected by the Versailles court, and is taking a markedly different approach from that of the Italian courts in the case of Dutch and Irish subsidiaries of Parmalat SpA. In the case of the Dutch subsidiaries, the companies were used specifically for raising funding for the group through the issue of bonds and facilitating the flow of cash around the group.