UNIVERSITY OF NAIROBI
COLLEGE OF HUMANITIES & SOCIAL SCIENCES
FACULTY OF LAW
GPR 613
NEW DEVELOPMENTS IN INSOLVENCY LAW
CYNTHEA P. ANYANGO
ADM NO. …………………………..
EUROPEAN UNION INSOLVENCY REGIME
‘Capitalism without bankruptcy is like Christianity without hell.’
-Frank Borman
Introduction
Over the years and with increase in economic activities, many companies and individuals are increasingly establishing business activities in countries other than where their core activities are located. However, with the changing economic times, many of these businesses are forced to take credits or are pushed into a state of instability which more often than not leads those individuals and companies in situations where they are unable to meet their financial obligation. When this happens, the individuals, companies and/or their creditors file petitions for bankruptcy or liquidation. In instances where the individuals or companies have business activities in other countries, it becomes difficult for the appointed receivers or administrators to handle assets of the insolvent individuals or companies that are not within their jurisdiction. These kinds of challenges often lead to the incomplete realization of necessary assets to settle the creditors’ obligation and in turn translate to massive losses to the concerned creditors.
Now, because insolvency regimes vary from state to state, an international approach to insolvency law has been adopted over the years, and this approach remains relatively new. Associative bodies and organizations have committed to suggest on how some level of uniformity could be achieved. An evident achievement in the area of international insolvency law is the UNCITRAL Model Law on Cross-border Insolvency 1997 which has currently been introduced in the law of several countries. The European Union Insolvency Regulation similarly is also a perfect example where insolvency laws have been harmonized to provide a level of uniformity in conducting insolvency proceedings.
This paper will focus solely on the European Union Insolvency Regime. The paper will narrate the historical development of the now current insolvency regime in the European Union; it will further proceed to talk about the objectives, principles and practice of the European Union Insolvency Regime and will later critic some of the short comings of the insolvency regime and highlight the challenges already being experienced by the coming into force of the European Insolvency Regulation.
HISTORICAL DEVELOPMENT OF INSOLVENCY LAW IN THE EUROPEAN UNION
The current European Insolvency Regulation traces its roots back to the year 1968 when the Brusel Convention; a convention on the Jurisdiction and the enforcement of judgements in civil and commercial matters implemented in the UK buy the Civil Jurisdiction and Judgement Act of 1982, introduced detailed provisions to govern the jurisdiction in proceedings brought within the European Community and the mutual recognition and enforcement of judgement of courts of Member States . The convention however did not pay attention to bankruptcy proceedings or proceedings relating to winding up of insolvent entities.
With effect from 1st March 2002, the Brusel Convention became converted into a Regulation (Generally known as Brusel 1). Brusel 1 like the Brusel Convention did not apply to insolvency proceedings but was applicable to winding up of solvent companies. In September 1995, the EC Convention on Insolvency was completed by the European Community and was opened for signature within 6 months. Only 14 member states signed the convention and within no time the convention lapsed.
A few years later, a project to revive the EC Convention on insolvency was commissioned. Provisions of the EC Convention were taken over verbatim with amendments being made to certain articles. This converted the EC Convention into an EC Regulation. The Regulation ‘avoided the need for ratification by all member state and also had the effect of conferring power on the ECJ to interpret the instrument without the need for any provision in it to that effect.’ This meant that the Regulation had a direct effect on all member states.
The Insolvency Regulation came into force on 31 May 2002 with the ECJ having the final authority on the interpretation of the Insolvency Regulation.The Regulation also made provisions for the repeal of the regulation after a period of time. The need for repealing of the European Insolvency Regulation was based on five short comings identified by the European Commission namely:
a) The European Insolvency Regulation excluded pre-insolvency proceeding, hybid proceedings and certain personal Insolvency proceedings
b) The application of the ground rule of international jurisdiction of a court (i.ethe center of main interest ( COMI)) of an insolvent debtor has led to some difficulties and to forum shopping by relocating COMI
c) Opening of secondary proceedings has shown to disturb efficient administration of the
d) debtor’s assets;
e) There is no obligation to publicize the opening of insolvency proceedings, for lodging
f) of claims creditors need to be aware of an insolvency proceeding; and
g) The EIR does not deal with the insolvency of groups of companies.
The repealedEuropean Insolvency Regulation now commonly known as the Recast EIR came into force on 26th June 2017 and applies to all insolvency proceedings opened on or after the effective date.
THE OBJECTIVES OF THE EUROPEAN UNION INSOLVENCY LAW
Cross-border transactions and resultant legal proceedings often cause problems for the parties involved. The biggest challenge is knowing which law should be used to govern the transactions and the subsequent legal proceedings if any. To address this issue, the European Regulation on Insolvency Proceedings was introduced and became law across the European Union, with the exception of Denmark, on 31 May 2002. It was felt that the European Insolvency Regulation was needed because national legal systems could not achieve the proper functioning of the internal market. The goal of the European Insolvency Regulation was to provide for a universal insolvency model founded on one law applying to insolvency proceedings and for that law to apply to all matters that related to that proceeding across the breadth of the European Union. This was designed to improve the effectiveness and efficiency of insolvency proceedings having cross-border effects. The European Insolvency Regulation’s objective was to produce a marked reduction in costs incurred in the administration of any insolvency. The European Insolvency Regulation provides clear guidelines that ensure stability and consistency in relation to areas of jurisdiction, applicable law and the recognition and enforcement of judgments. The European Insolvency Regulation deals with the problems of jurisdiction, applicable law, recognition and enforcement of insolvency decisions, as well as coordination of cross-border insolvency proceedings, but it does not oblige Member States to introduce specific types of procedures or rules, or to ensure that their procedures and rules achieve specific aims.
PRINCIPLES AND PRACTICE OF THE EUROPEAN UNION INSOLVENCY REGIME
Insolvency law represents the balancing of several objectives. It aims at protecting creditors’ rights, while safeguarding the interest of shareholders and customers on the one hand, and at avoiding liquidation of potentially viable companies on the other hand. This fundamental statement already shows that insolvencies and insolvency proceedings have effects on numerous different stakeholders.
Although increasing convergence does exist within the EU on personal (consumer and individual business) insolvency significant differences remain relating to such issues as entry requirements and the institutional process. As the Cork report stated in 1982, “The success of any insolvency system is very largely dependent upon those who administer it. If they do not have the confidence and respect, not only of the courts and of the creditors and debtors, but also of the general public, then complaints will multiply and, if remedial action is not taken, the system will fall into disrepute and disuse, multiply and, if remedial action is not taken, the system will fall into disrepute and disuse”.
The principle of qualified unity provides that the proceedings of any insolvency case can only be instituted in the state in which the debtor has the Centre Of Main Interest (COMI). The open nature of COMI factor allows for jurisdictional conflicts resolution where member states can claim to have the center of the debtor’s main interest within such a territory. The preamble offers guidance on how to resolve such conflicts on the basis of mutual respect. Article 3(1) enables the court with jurisdiction to open main insolvency proceedings, to order provisional and proactive measures from the time of request to open proceedings. With regard to the 1995 Draft Convention, the Virgos Schmit Report provided that the applicable law of lexforiconcursus is the internal law for the member states with exclusion of rules applicable in international law. This regulation sets out the uniformity on conflict of the laws applicable in the different states. If one was however to interpret the Regulation proceedings strictly, one could possibly argue that the substantive law of insolvency forum applies to the treatment of conflicts with the laws of third states.
The admissibility of claims by virtue of Article 39 of the Regulation, tax and social security authorities are granted the right to lodge claims in foreign insolvency proceedings. The article however is meaningless if national courts remain free and not recognize foreign public law claims. The Regulation prescribes the integration of foreign insolvency laws with the law of the forum which is no less complex. Courts however have to integratelexconcursus with the insolvency rules in order to determine the effects of insolvency in respect of executory contracts.
In the case of Re Stanford International Bank Limited, MG Rover, Daisytek,and Collins Aikman the combination of cross-border insolvency complexities and complexities raised by corporate groups, when put together, greatly reduce the level of legal certainty in such insolvency cases to the detriment of creditors. Due to the fact that the assets, creditors, and business operations of multiple subsidiaries are located in different jurisdictions, it becomes difficult to determine what court has jurisdiction over the insolvency proceedings of any given subsidiary, and this consequently makes it difficult to determine the applicable insolvency law.
The principle of qualified universality allows for courts to hold jurisdiction in any country anywhere in the world for the debtor’s assets. Insolvency laws in different jurisdictions may differ and they may give the parties involved in the insolvency proceedings incentives to choose one legal regime in favour of another.Proceedings are considered opened by A.2 (f) the time in which judgment opening proceedings has become effective, whether it is a final judgment or not.
The principle of legal certainty is a crucial element in international insolvency proceedings because the rights and obligations of all parties involved need to be clear, predictable, stable and precise. Certainty requires ‘accessibility and predictability of the law so that those affected by the law can reasonably anticipate the consequences of their action’ . Thus, when legal certainty is not present, creditors, debtors and other parties cannot predict with sufficient certainty which court will have jurisdiction and which law will apply to insolvency proceedings, in order to avoid unexpected monetary expenses and liabilities.
For the interests of creditors to be sufficiently protected, creditors must be certain of two things:
(1) There must be legal certainty as to what court will assume jurisdiction and consequently what insolvency law will apply
(2) There must be legal certainty as to what the outcome of the insolvency proceedings will be.
So what constitutes the opening of insolvency proceeding? Proceedings are said to be opened either; upon the passing of the resolution by the members, or where there is an order appointing a provisional liquidator in proceedings for winding up order or at the point of presenting the winding up petition. Once this is done, the applicable law on the insolvency proceedings is the law in which such proceedings are opened. Judgements arising from the insolvency proceedings are recognized and given effect in all other Member States. However, there is an exception to the recognition rule which provides that members are not obliged to recognize or enforce a judgement which might result in limitation of personal freedom or postal secrecy or interfere with public policy.
Once liquidation orders are issued by the court, the Liquidator is clothed with authority and a right to exercise in all other member state the powers conferred to him by the law of the state opening of the proceedings. The liquidator has also a right to require the stay of secondary proceedings but subject measures to guarantee the interests of creditors in the secondary proceedings.He can remove debtors’ assets from the territory of the Member State in which they are situated. He requests for notice of judgment opening main proceedings to be published in any member state and register in any land register.
The Liquidator may also propose a rescue plan, composition or comparable measure in the secondary proceedings and apply for conversion of proceeding opened up in another member state into winding up proceedings if it is in the interests of creditors in the main proceedings.
CHALLENGES FACING THE EUROPEAN UNION INSOLVENCY REGIME
The European Insolvency Regulation has so far been in force for almost 16 years and its achievements are yet to be measured against its initial objectives which inter alia include: (a) the promotion of the smooth functioning of the Internal Market; (b) the avoidance of forum shopping; (c) the improved efficiency and effectiveness of European cross borderinsolvencies and (d) the introduction of uniform rules on conflict of law. Unlike the previous European Insolvency regime, the current regime has been welcomed as a positive innovation in terms of cross-border bankruptcies. Unfortunately, the EIR did not harmonize substantive insolvency laws within the EU . Instead, the Regulation confined itself to harmonizing procedural international rules regarding conflicts of law in insolvency matters. This is due to the fact that domestic insolvency regimes touch upon a multitude of individual rights and a balance must be struck between protecting creditors' rights and safeguarding debtors' interests. Consequently, the scope of the EIR was limited to how such rules were to be implemented and administered at a national level, as opposed to the substance of rules that would be passed.
Additionally, as it fails to make provision for the insolvency of groups of companies and lacks a clear definition for the concept of COMI, the Regulation renders the coordination of proceedings difficult to organize and ultimately hinders corporate rescue. Professor Ian Fletcher observed,
“International insolvency law has arrived at the threshold of an exciting period of development… There is now a necessity to build bridges between the individual national systems, and to create adaptable structures that will enable communication and cooperation to take place in response to the particular elements present within each case -[this], requires a new vision, and new modes of thought, from all participants.”
A CRITIQE OF THE EUROPEAN UNION INSOLVENCY REGIME
A stated earlier, the European Insolvency Regulation deals with the problems of jurisdiction, applicable law, recognition and enforcement of insolvency decisions, as well as coordination of cross-border insolvency proceedings. While I believe that the developers of this Regulations had the intention to regularize and harmonize the key aspects of dealings in proceedings relating to insolvency, I feel that some certain aspects that should have been critically considered.
Ian Fletcher for instance suggests that the choice of whether ne state can comply with orders issued in another state regarding insolvency proceedings constituted in another state is discretional. The other party may elect to or not to comply with such orders. The European Insolvency Regulation does not give suggestions on how to remedy such short comings.
Further, I also believe that cross-border insolvency proceedings could not be necessarily effective especially in instances where the appointed liquidator is faced with such challenges as those brought about by political instability, wars, and language barriers. Further, cross border insolvency may also tend to be lengthy processes often clothed with the inability to ascertain whether there are creditors in other states who intend to institute insolvency proceedings or non-disclosure of material facts by the debtor.
Lastly, the question of the extent of applicability of the European Insolvency Regulation in the European Union states is questionable noting that the regulation avoided the need for ratification by all member state and also had the effect of conferring power on the ECJ to interpret the instrument without the need for any provision in it to that effect. This in itself may interfere with the direct Constitutional standing of a particular state especially where it is expressly provided that the Constitution of a particular state takes supremacy over all other laws or treaties.
Conclusion
To conclude, I agree that the move to come up with one solid insolvency regime for the European Union was a brave move, however, the challenges and short comings of the European Insolvency Regime need to be addressed with immediate effect failure to which, the regime may lapse again as it once did.
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