Professor of International Insolvency Law, University of Leiden, the Netherlands and Professor at St John's University, School of Law, New York, U.S.A.
The Changing Landscape of Cross-border Insolvency Law in Europe
The 21st century has started with several legislative measures of importance for insolvencies with a cross-border effect. In 2000, birth was given to the EU Insolvency Regulation (No. 1346/2000), which entered into force on 31 May 2002 (InsReg). For several financial institutions falling outside the regulation's scope, 2001 produced Directive 2001/17 and Directive 2001/24, on the reorganisation and winding up of insurance undertakings and of credit institutions. Where a 'Regulation' is a European Community legislative measure that is fully binding for the EU Member States (except for Denmark), both directives have to go through a legislative implementation process in each individual EEA (European Economic Area) member state. The implementation date for Directive 2001/24 was 20 April 2003 and for Directive 2001/24 - 5 May 2004, and the drafting process in all countries is nearing its final phase.
In this article, I would like to describe where Europe stands (as of May 2006). On the European level a regulation has been introduced that is based on well-known theories of private international law for dealing with cross-border insolvencies (see section 2 of the paper). This regulation is referred to as the EU Insolvency Regulation (see section 3), and the basis it provides for a court to exercise international jurisdiction to initiate insolvency proceedings ('centre of main interests') is discussed in section 4, with an examination of two cases of the European Court of Justice (of 17 January 2006 and 2 May 2006) in sections 5 and 6. The EU Insolvency Regulation carries its own legal concept (addressed in section 7). The regulation should be seen in its procedural context, as it fills the gap that had been left open by the introduction of the 1968 Brussels Convention, dealing with the international jurisdiction and recognition of judgments in civil and commercial matters. In the context of legal proceedings, the latter (known as the Brussels Regulation 2000 in its current form) constitutes the general rule, while the regulation (for insolvency judgments) itself forms the special rule. As 'financial institutions' are not covered by the Insolvency Regulation, the latter serves in its turn as a general rule with regard to credit institutions and insurance undertakings, for which the entities directives 2001/17 and 2001/24 have been issued (see section 8). The article ends with a short conclusion.
"The activities of undertakings have more and more cross-border effects and are therefore increasingly being regulated by Community law. While the insolvency of such undertakings also affects the proper functioning of the internal market, there is a need for a Community act requiring coordination of the measures to be taken regarding an insolvent debtor's assets", according to Recital 3 of the Insolvency Regulation. So, what is the chosen approach to achieve proper functioning of the internal EU market when confronted with cross-border insolvency cases? These cases include instances where the insolvent debtor has assets in more than one member state or where some of the creditors of the debtor are not from the state in which the insolvency proceedings are taking place. These instances give rise to a great number of sometimes rather complex legal questions, such as that of the international jurisdiction of the court that is authorised to commence insolvency proceedings; the law applicable to the insolvency proceedings; the substantive and procedural effects of these proceedings, e.g., on the legal position of creditors from abroad and their rights to set-off or the termination of employment contracts; the issue of recognition of proceedings that have been initiated abroad; and the powers of a liquidator or administrator who has been appointed abroad. To strike at their heart, the issues to be resolved concerning cross-border insolvencies are being approached from two points of departure: 'universality' and 'territoriality'.
In the universality model, insolvency proceedings are seen as unique proceedings reflecting the unity of the estate of the debtor. The proceedings should involve all of the debtor's assets, wherever in the world these assets are located. Under this approach, the whole estate will be administered and reorganised or liquidated on the basis of the rules established in the law of the country where the debtor has his domicile (or registered office or similar reference location) and in which country the proceedings have been opened. The applicable law for the proceedings and its legal and procedural consequences is the law of the state in which the insolvency measures have been undertaken. This law is referred to as lex concursus or lex forum concursus ('forum law'), being the law (lex) of the country where a court (forum) has opened insolvency proceeding (dealing with concurrent claims of creditors: concursus) and which court is (or has been) charged with hearing, conduct, and closure of the proceedings. The liquidator (or administrator) in this approach is charged with the liquidation (or reorganisation) of the debtor's assets anywhere in the world of which the debtor himself (partly) has been divested; respectively, he is charged with the supervision of the administration of the debtor's affairs. The lex concursus determines all consequences of these proceedings, e.g., with regard to current contracts, the powers of an administrator, and the bases and system for distributing dividends to creditors.
The territoriality model, on the other hand, takes as a basic idea that the insolvency measure under consideration will have legal effects only within the jurisdiction of the state within the territory of which a court has opened said insolvency proceedings. The legal effects of these proceedings therefore will stop abruptly at this state's borders. The limitations these proceedings will bring to a debtor's legal authority to administer his assets are not applicable abroad. Assets in other countries are not affected by these proceedings, and the administrator who is appointed will not have any powers abroad.
These points of departure form both endpoints of a continuum and are discussed extensively and sometimes sharply in the literature1. In practice, most countries modify or limit the sharp edges of these theories and have introduced modified or mixed models, mostly referred to as 'modified', 'limited', or 'mitigated' universalism, as most of them at their core have a universality element. The EU Insolvency Regulation is based on a mixed model, referred to by me as 'co-ordinated' universality2.
On 31 May 2002, Regulation (EC) 1346/2000 of 29 May 2000 on insolvency proceedings entered into force. The regulation applied entirely and directly to the ten Member States that joined the EU as of 1 May 20043. A regulation is a European Community measure of law that is binding and directly applicable in Member States4. The regulation does not apply to Denmark , as it opted out in accordance with the Treaty of Amsterdam.
In the light of the introduction above, it should be mentioned that the regulation acknowledges the fact that, as a result of widely differing substantive laws in the Member States, "it is not practical to introduce insolvency proceedings with universal scope in the entire Community" (Recital 11). The differences mainly lie in the widely differing laws on security interests to be found in the Community and the very different preferential rights enjoyed by some creditors in the insolvency proceedings.
The goals of the regulation, with 47 articles, are to enable cross-border insolvency proceedings to operate efficiently and effectively, to provide for co-ordination of the measures to be taken with regard to the debtor's assets, and to avoid 'forum shopping'. The regulation, therefore, provides rules for the international jurisdiction of courts in a Member State for the opening of insolvency proceedings, the (automatic) recognition of these proceedings in other Member States, and the powers of the 'liquidator' in the other Member States. The regulation also deals with important choice of law (or private international law) provisions. These contain special rules on applicable law in the case of particularly significant rights and legal relationships (e.g., rights in rem and contracts of employment). On the other hand, national proceedings covering only assets situated in the state of opening are allowed alongside 'main' insolvency proceedings with universal scope. The material that follows provides a quick summary of the contents of the Insolvency Regulation.
The general provisions establish the area of application of the regulation. It is confined to "proceedings which entail the partial or total divestment of a debtor and the appointment of a liquidator" (see article 1 (1) InsReg). Annex A addresses all insolvency proceedings of the Member States; Annex C mentions all names of the officeholders ('liquidators'). As far as the courts' jurisdiction is concerned, the regulation is based on the general principle that "the courts of the MemberState within the territory of which the centre of the debtor's main interests is situated shall have jurisdiction to open insolvency proceedings" (see article 3 (1)). For a company or...