Vol 12 (2015) - Issue 4

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Reform to the European Insolvency Regulation

Introduction
Following two years of negotiation and consultation, the European Council and the European Parliament have finally reached a 'political agreement' on the proposed amendment to the European Insolvency Regulation. On 12 March 2015, the European Council adopted its first 'reading position'. The new regulation should be enacted by summer 2015, to come into force in summer 2017.
The explanatory memorandum accompanying the proposed changes highlighted five difficulties with the existing regime:
– The existing regulation does not cover many types of proceedings, such as pre-insolvency restructurings and debtor-in-possession proceedings, despite such proceedings existing in many member states and often being highly effective ways of rescuing a business.
– Determining a debtor’s centre of main interests (COMI) is sometimes difficult, and the existing regulation does too little to combat abusive forum-shopping.
– The opening of secondary proceedings can hamper the efficient administration of the debtor’s estate. Moreover, secondary proceedings currently have to be winding-up proceedings, which precludes a rescue of the business.
– There is currently no EU-wide register of insolvency proceedings, making it difficult for small businesses and courts in other member states to know when proceedings have been commenced.
– The current regulation contains no specific rules dealing with the insolvency of corporate groups with entities in different member states.

The proposed changes aim to deal with each of these five difficulties.

Types of proceedings covered
The new regulation has a much wider definition of insolvency proceedings, covering proceedings 'for the purpose of rescue, adjustment of debt, reorganisation or liquidation'. Reflecting this broadening of scope, the new draft now refers to an 'insolvency practitioner' rather than a liquidator. The proceedings must, however, be public, collective, and based on a law relating to insolvency. The proceedings must also fit into one of three categories:
(a) the debtor must be totally or partially divested of his assets and an insolvency practitioner (IP) appointed;
(b) the assets and affairs of the debtor must be subject to the control or supervision of the court; or
(c) there must be a temporary stay of individual enforcement proceedings granted by a court or by operation of law in order to allow negotiations between the debtor and his creditors.

There was concern that Schemes of Arrangement under the UK Companies Act 2006 might be brought within the new regulation, which would mean that proceedings could only be opened if the debtor’s COMI was within the jurisdiction. Schemes of Arrangement, of course, are available under general company law to entities which are not in financial difficulty, although one of their most powerful (and controversial) applications is to restructure the distressed debt of foreign companies which would not be liable to winding up in England. As is the case under the existing regulation, the requirement for insolvency proceedings to be based on a law relating to insolvency in the proposal will ensure that Schemes of Arrangement fall outside the scope of the new regulation and will instead be recognised throughout the EU under the Judgments Regulation.
The agreed text provides that a proceeding listed in Annex A cannot be challenged on the basis that it does not fall within the definition of insolvency proceedings. Although the statutory definition of insolvency proceedings has been loosened, there are no stricter controls over the types of proceedings to be listed in Annex A. The proposal does, however, introduce a procedure by which the Commission scrutinises whether a national insolvency procedure notified actually fulfils the conditions of the revised definition.