Vol 4 (2007) - Issue 1

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Avoiding Secondary Proceedings in EU Insolvency Regulation Cases

In the four years since the introduction of the EU Insolvency Regulation (the ‘Regulation’),1 much has occurred and been written to suggest that the flexible interpretation of the Centre of Main Interest provisions (‘CoMI’) can add incremental value when used to permit the administrative if not substantive consolidation of a group of companies whose business activities are spread across Europe and which are intertwined to create significant mutuality of interest.
One of the major difficulties faced by practitioners when attempting to carry out such a manoeuvre is the threat of secondary proceedings. This article looks at some of the ways in which that threat may be dealt with.

Background

The concept of a secondary liquidation appears in the Regulation as a means to assist a practitioner in a main proceeding. Probably the drafters of the regulation had in mind the vast number of practitioners who lacked the depth of resource and overseas experience and contacts to handle the assets of a company that lie outside his or her immediate jurisdiction. However, as the controversy began to surface over the use of CoMI other than in the jurisdiction of the registered office, the secondary proceeding became a means of countering, or at least mitigating, the effects of the main proceeding rather than an assistance to it.
Why would anyone object to a main proceeding if the result is to add incremental value? To answer this question, one needs to look at the two parties most impacted by the main proceeding – local practitioners and local creditors.
Local practitioners often consider the migration of cases to more favourable regimes to be both a threat to their commercial interests and, philosophically,a fundamental undermining of the concept of local law. More prosaically, local creditors are often deeply suspicious
of having to deal with foreign practitioners and, notwithstanding the overall benefit, might find their particular claims to be devalued because of the different ranking of claims between the two countries.
The Regulation makes it clear that any secondary proceeding must be a winding up proceeding.3 Most such proceedings do not allow for the continued trading and rescue of the business concerned, and therefore should only be entered into with care and consideration because of the impact not just on the value of the business but also on the employees of the business and the wider stakeholder base.
However, many local practitioners and creditors (the latter perhaps also considering the opportunity value to them in holding up the main proceeding) have decided that, on balance, a secondary proceeding should be commenced, notwithstanding the loss of the incremental value to the estate as a whole.