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International insolvency law – basic principles within the European union

The aim of international insolvency law – the reasons for its establishment Insolvency may be generally understood as situation when the debtor has not sufficient financial resources to comply with his obligations (is not able to pay his debts). Each national law has its own regulation of this situation – with the aim of redistribution of available debor‘s resources to his creditors in such way that each creditor gains at least a part of his receivable. A problem may arise when the debtor has his assets not only in one country --- there are big differences between the national regulations and to cover the debor‘s assets in another country by the effects of insolvency proceedings in one country may cause big troubles (may be incompatible with the national law of the other state.)

The aims of international insolvency law The international insolvency law shall react upon the situations when there is an insolvent debtor having assets in more countries. The aim is to set down rules which assure that no debtor‘s assets will be left outside of insolvency proceedings (i.e. all assets will be used to settle the claims of his creditors.) The international insolvency law is based upon the principle of universality – the insolvency proceedings affect all the assets of the debtor regardless the place where it is situated. BUT !!! To affect assets of the territory of a state it requires a decision issued within the state‘s power (authority) – applying the principle of universality shall mean that one member state would be allowed to exercise his powers on the territory of another state Establishment of so called principle of controlled universality – there shall exist one insolvency proceeding (so called primary insolvency proceeding) which affects all the assets of the debtor. Beside this primary proceeding there may exist secondary proceeding in another state which may affect only the assets situated on the territory of that state and support the primary proceeding.

The efforts of unification of international insolvency law 1997 – UNCITRAL Commission prepared the Model law on cross-border insolvency. This law regulates especially the position of the bankruptcy trustee, the recognition of the insolvency proceeding in foreigner country. Under this law insolvency proceeding in one state has no direct effects in another country – sets down conditions for international legal aid. Since 1990 there exists European convection on certain international aspects of bankruptcy – it is opened for the signature, but the ratification procedures are very slow, the convention has not entered into force yet. (no complex regulation, only ceratain aspects are regulated).

The historical background of the Regulation no 1346/2000 Before the signature of the Amsterdam Treaty, there was created a draft of a convention concerning the unification of insolvency proceedings in the EU. The convention was not signed – the text was transferred into a regulation – Council Regulation no 1346/2000 on insolvency proceedings.

Regulation on insolvency proceedings General characteristics Entered into force – For all Member states with the exception of Denmark. Is based upon the principle of controlled universality, but is different from the UNCITRAL Model law.

Regulation on insolvency proceedings General characteristics Contains: a)Insolvency procedural law – regulates the jurisdiction for insolvency proceedings, and some aspects of their course. b)Insolvency substantial law – regulates e.g. the position of „liquidator“. c)Insolvency conflict rules – regulates the law applicable for the concrete proceedings.

Regulation on insolvency proceedings – scope of application Applies to collective insolvency proceedings which entail the partial or total divestment of a debtor and the appointment of a liquidator. It does not apply to insolvency proceedings concerning undertakings, credit institutions, investment undertakings which provide services involving the holding of funds or securities for third parties or to collective investment unduertakings.

Regulation on insolvency proceedings – important notions Insolvency proceedings – collective proceedings – listed in the Annex A. Liquidator – any person of body whose function is to administer or liquidate assets of which the debtor has been divested or to supervise the administration of his affairs (concrete persons – listed in Annex C)

Regulation on insolvency proceedings – the principle of controlled universality The jurisdiction to open insolvency proceeding have the courts of the Member state within the territory of which the centre of a debtor‘s main interests is situated – see also judgment Judgment of the Court (Grand Chamber) of 2 May Eurofood IFSC Ltd. In the case of company or legal person – the place of main interests is the place of the registered office (in absence of proof to the contrary). It is the so called „main insolvency proceeding“ – with the effects on the assets of the debtor situated in another Member state as well. The liquidator appointed in this proceeding may exercise his powers in another Member state as well as long as no other proceeding has not been opened there.

Eurofood C 341/04 1. Where a debtor is a subsidiary company whose registered office and that of its parent company are situated in two different Member States, the presumption laid down in the second sentence of Article 3(1) of Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings, whereby the centre of main interests of that subsidiary is situated in the Member State where its registered office is situated, can be rebutted only if factors which are both objective and ascertainable by third parties enable it to be established that an actual situation exists which is different from that which location at that registered office is deemed to reflect. That could be so in particular in the case of a company not carrying out any business in the territory of the Member State in which its registered office is situated. By contrast, where a company carries on its business in the territory of the Member State where its registered office is situated, the mere fact that its economic choices are or can be controlled by a parent company in another Member State is not enough to rebut the presumption laid down by that Regulation.

Eurofood C 341/04 2. On a proper interpretation of the first subparagraph of Article 16(1) of Regulation No 1346/2000, the main insolvency proceedings opened by a court of a Member State must be recognised by the courts of the other Member States, without the latter being able to review the jurisdiction of the court of the opening State.

Eurofood C 341/04 3. On a proper interpretation of the first subparagraph of Article 16(1) of the Regulation, a decision to open insolvency proceedings for the purposes of that provision is a decision handed down by a court of a Member State to which application for such a decision has been made, based on the debtor's insolvency and seeking the opening of proceedings referred to in Annex A to the Regulation, where that decision involves the divestment of the debtor and the appointment of a liquidator referred to in Annex C to the Regulation. Such divestment implies that the debtor loses the powers of management that he has over his assets. 4. On a proper interpretation of Article 26 of the Regulation, a Member State may refuse to recognise insolvency proceedings opened in another Member State where the decision to open the proceedings was taken in flagrant breach of the fundamental right to be heard, which a person concerned by such proceedings enjoys.

Regulation on insolvency proceedings – the principle of controlled universality Court of another Member state than where the centre of debtor‘s main interests is situated shall have jurisdiction to open insolvency proceeding against the same debtor only if he possesses an establishment (any place of operation where he carries out o non-transitory economic activity with human means and goods) within the territory of that Member state. It is so called secondary insolvency proceeding. The effects shall be restricted to the assets of the debtor situated in the territory of that Member state.

Regulation on insolvency proceedings - recognition Article 16 of the Regulation sets down the „principle“ – any judgment opening insolvency proceeding issued by court having jurisdiction upon this Regulation shall be recognised in all other Member states from the time it becomes effective in the State of opening proceedings. This does not mean that a secondary insolvency proceeding may not be opened.

Regulation on insolvency proceedings – the applicable law The law applicable to main insolvency proceeding and its effect shall be the law of the Member state within the territory of which such proceeding was opened. The applicable law to the secondary insolvency proceeding is the law of the Member state within the territory of which the secondary proceeding was opened.