Vol 3 (2006) - Issue 6

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The European Insolvency Regulation and the Treatment of Group Companies: An Analysis

Introduction
Since its inception, the European Insolvency Regulation has attempted to improve the efficiency and effectiveness of cross-border insolvency proceedings within the EU. Although it has received some praise and is recognised as having had a measure of success, it has nonetheless also received much criticism for its apparent failure to fully achieve its aims.2 This essay attempts to explore what is believed to be the most significant failing
of the Insolvency Regulation, its omission of group companies. In showing how the Insolvency Regulation has treated group companies, it first looks at the text itself and explains how it has in fact omitted group companies from its remit. It then attempts to examine what is believed to be the main problem contributing to the omission of group companies, that of the inadequately defined ‘centre of the debtor’s main interests’.

The concept of group companies
Before embarking on an analysis of the treatment of group companies within the Insolvency Regulation, it is first necessary to address the concept of group companies. Group companies have been in existence since time immemorial; however they have grown in both size and number, and continue to do so. They have become a reality in today’s trading world with many companies no longer satisfied with trading within their own country, but instead expanding across borders. This has been assisted within Europe by the breaking down of borders, while the Treaty of Rome, which founded the European Community (later Union) has further promoted the increase in cross-border trading.
The group company structure can be extremely successful bringing benefits such as employment and profits to the people of many different countries. Group companies exist in many forms, probably the most common being the parent and subsidiary relationship, but a group company can alternatively exist as a number of companies with substantially the same shareholders
and directors or other arrangements connecting a number of organisations which undertake the same business and are linked in some way.
One of the main reasons for group companies to be structured in such a way is for accounting purposes, so as to represent a ‘true and fair view’ of the affairs of the group as a whole.4 The parent company must present group statements as well as individual ones. In this way debtors are prohibited from providing a misleading view of the state of one of the subsidiaries which may be supported by the parent, and thus creditors or potential shareholders can see the entire picture. Another reason for groups of companies to be structured as such is due to tax laws which have many specific rules for dealing with group companies. Because of the number and magnitude of these businesses, when one does become insolvent, it can have serious repercussions for hundreds of people living within a number of different countries. This is one of the reasons why there has been so much criticism of the European insolvency regime for not recognising the existence of the group structure.