Vol 1 (2004) - Issue 2

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The European Insolvency Regulation and Groups of Companies

I. Introduction

The European Insolvency Regulation (EIR) has brought about a giant leap forward in the effective administration of insolvency proceedings in the European Union. Although over the previous quarter of a century some European countries (notably Germany and France) had started to become much more generous in giving effect to foreign insolvency proceedings, while others such as the United Kingdom had already traditionally been prepared to do so, the adoption of the Regulation for the first time ensured recognition of such proceedings throughout the whole European Union (with the exception of Denmark). Moreover, the Regulation provides for, among other things, rules determining the types of powers which a liquidator from another member state may exercise and rules dealing with the enforcement of court decisions in insolvency proceedings, including compositions. It also contains conflict of law rules with respect to a number of important insolvency issues. The Regulation has entailed the surrender by the member states of a substantial part of their sovereignty, because they have, to a large degree, accepted the powers of foreign liquidators and have only very limited grounds for refusing the enforcement of foreign court decisions (Articles 25(3) and 26 EIR). This is particularly true of cases in which the debtor does not have an establishment in the member state where the foreign insolvency proceedings are to be recognised or enforced, because, under the Regulation, it is not possible in such cases to open secondary proceedings in that member state.
Nonetheless, the Regulation cannot be the last step in this regard. One of its weaknesses is that it contains almost no rules harmonising the national insolvency laws of the member states. In a number of areas, such harmonisation would have been preferable, but attempts to achieve this turned out to be a bridge too far. Another weakness is that it deals solely with single companies and does not contain any provisions on how insolvencies that affect groups of companies should be dealt with. Thus, for example, the provisions on coordination between main proceedings and secondary proceedings do not apply when separate establishments of an enterprise have been incorporated in the form of separate legal entities. The mere fact that the Regulation applies only to single companies has made insolvency practitioners sceptical as to its relevance, although by now it has become clear that such scepticism is not entirely justified, as there are many cases in which the Regulation appears to be applicable. Nevertheless, the absence of any provisions on groups can cause severe problems.
In particular, problems arise when the assets owned by separate companies or the activities conducted in separate companies are connected in such a way that splitting up the sales process would cause a considerable loss of value to the assets. A typical example of this was provided by the bankruptcy of KPNQwest nv. The KPNQwest group owned cables in Europe and across the Atlantic Ocean, the main ones being in the form of rings. For example, one ring ran through Germany, France, Belgium and The Netherlands, connecting major cities in these countries. However, the part of the ring that was situated in Germany was owned by a German subsidiary, the part of the ring situated in France by a French subsidiary, and so forth. When the Dutch parent company, KPNQwest nv, went into bankruptcy many of the subsidiaries had to enter insolvency proceedings as well. Interestingly, the KPNQwest nv bankruptcy was one of the first to fall under the scope of the Regulation since it was adjudicated on 31 May 2002, the date on which the Regulation entered into force. However, the trustees of the Dutch bankruptcy did not hold any powers with respect to bankrupt subsidiaries in other member states, and it proved to be very difficult to coordinate the sale of the rings. As it turned out, the KPNQwest group disintegrated and it is likely that the proceeds of the sale of the assets were much lower that they would have been if the enterprise had been sold as a whole. Similar problems arise in groups of companies that own contingent intellectual property rights.