Vol 1 (2004) - Issue 1

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The Centre of Main Interest and the Administration of Daisytek

One grey December day in December 2003, 30 German creditors attended a meeting in Düsseldorf airport about three German companies which were subject to English insolvency legislation. In an era when such meetings held in England are often sparsely attended, it was encouraging to have a meeting well attended, with creditors taking seriously their opportunity to question the administrators and their proposals and to hold them to account. Part of the attraction was undoubtedly the novelty of finding out who were these English administrators and what did they think they were doing? Another part was the fact that this was the first time that the appointment of administrators under English insolvency legislation to a German company under the EU Insolvency Regulation has been challenged in court.

The decisions from the legal challenges are important in establishing how the EU Regulation can be applied and work in practice. They offer hope that insolvency practitioners will be able to apply collective procedures across a European group of companies in order to maximise the return for the stakeholders and minimise the conflict between insolvency practitioners in different jurisdictions.

The Daisytek ISA case is an early example of the use of the EU Regulation to apply the insolvency regime of one member state to a company registered in another member state, and it demonstrated the approach that the English judiciary takes to the application of the regulation. The case concerned a group of companies with headquarters in Bradford, England and trading subsidiaries in Germany, France, Italy and Scandinavia as well as the UK, dealing in the retail and wholesale of computer peripherals. The UK parent was itself a subsidiary of a US company, Daisytek Inc, which became subject to Chapter 11 insolvency proceedings in May 2003. The European group was profitable, but key suppliers were common to the European and US companies and these started to restrict supplies and credit terms; as supplies dried up, the companies were unable to source stock for sale and it was clear that the group had collapsed and would continue to deteriorate without the protection of some form of formal insolvency arrangement.

PricewaterhouseCoopers was instructed to advise the European group’s secured creditors and to undertake a distressed merger and acquisition disposal exercise of the entire European Group’s operations. The firm contacted a number of potential purchasers of the business but formal insolvency proceedings were needed before a sale could be completed so the Group’s directors petitioned the court for administration orders. After legal advice, the directors decided to petition for the French and German subsidiaries to be placed into UK administration as well as the English companies. In supporting the directors in this, the PricewaterhouseCoopers advisers were mindful of the fact that the key creditors were common to all the companies and that common control of all the proceedings could allow the advisers to leverage from their earlier distressed M&A work and rapidly achieve a sale of all the businesses and assets as going concerns, to the benefit of the creditors.

All the companies in the Group were either insolvent or would have become so shortly and a better realisation of all their assets would be obtained in an administration than in a liquidation. The English court could therefore grant administration orders over all the companies, provided it had the jurisdiction to do so.

Article 3(1) of the EU Insolvency Regulation states that a member state court has the jurisdiction to open main insolvency proceedings where the debtor has its “centre of main interests” (COMI) in that jurisdiction. There is no definition of COMI in the Regulation, but there is a presumption that it will be in the country of the company’s registered address. This can be rebutted where the company conducts the administration of its interests in another member state on a regular basis, such that the COMI would be ascertainable to be in that other state by third parties.

In the case of the French and German subsidiaries of Daisytek ISA, the following key factors were taken into account by the English court in determining that their COMIs were in England:

- The UK head office in Bradford negotiated some 70% of the supply contracts for French and German companies. This is significant in that the majority of creditors by value would regard the Bradford head office as the place where the companies had their COMI. In addition, two of the UK parent companies had given guarantees to many of the suppliers (in respect of French and German debt), providing a further link to the UK.