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Cross-border insolvency in the EU

Cross-border insolvency in the EU. Dr Marek Porzycki. Scope of application – an international element. the debtor has some assets abroad the debtor has creditors abroad the debtor carries out his activit ies on a cross-border basis

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Cross-border insolvency in the EU

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  1. Cross-borderinsolvencyinthe EU Dr Marek Porzycki

  2. Scope of application – an international element • the debtor has some assets abroad • the debtor has creditors abroad • the debtor carries out his activities on a cross-border basis • the debtor is a multinational entity, with establishments in several countries • the debtor is a multinational entity, carrying out business in several countries under legal form of local subsidiaries and in other countries by establishments

  3. Background - conflictingapproaches UNIVERSALISM vs. TERRITORIALITY • Territoriality – traditional approach, based on state sovereignty • Universalism – modern approach, based on cross-border effects of bankruptcy proceedings

  4. Territoriality • state’s sovereignty bankruptcy decisions issued by foreign authorities are neither effective nor enforceable within the state • decisions issued by the state’s authorities are neither effective nor enforceable abroad • insolvency proceedings are strictly limited to assets of the debtor situated within one jurisdiction Weak point: Isolated country-based efforts are not able to solvecomplex cross-border cases.

  5. Universalism • insolvency proceedings opened in relation to a debtor affect his entire estate (including assets located abroad) • foreign insolvency proceedings are recognized and their effectiveness is guaranteed Advantage: possible coordination of liquidation or restructuring efforts in all relevant jurisdictions

  6. Main problems under universalist approach • possibility of conflicts over jurisdiction between courts of various states • taking into account local interests in other jurisdictions, e.g. • employees in a debtor’s foreign establishment • creditors with collateral rights on the debtor’s assets situated abroad • highly divergent solutions adopted by substantive insolvency laws – are results of application of foreign insolvency law acceptable under the basic concepts of domestic law?

  7. Solution: limited universalism Limitations by measures to safeguard local interests, e.g. • requirement of a formal recognition of foreign insolvency proceedings by a local court (not applied in EU law) • additional territorial proceedings over the debtor’s local assets • modification to effects of foreign insolvency proceedings in order to take into account local interests

  8. EuropeanInsolvencyRegulation - background - 1st draft Convention – 1970 - EU Convention on Insolvency Proceedings of 1995 – endorsed by the EU Council but blocked by non-signature by the UK explanatory report to theConvention by Miguel Virgos and Etienne Schmit (Virgos-Schmit Report) - unofficial explanatory memorandum to the European Insolvency Regulation - Council Regulation (EC) No. 1346/2000 of 29 May 2000 on insolvency proceedings (European Insolvency Regulation)

  9. EuropeanInsolvencyRegulation – ongoing reform • 12.12.2012 - initialproposal by theCommission for an amendment of the EIR (COM(2012) 744 final) • March 2015 – draft recast EIR: http://data.consilium.europa.eu/doc/document/ST-16636-2014-REV-5/en/pdf • Adoption by theCouncil and by theEuropeanParliamentexpectedin mid-2015 • Entryintoforcein 24 monthsafteradoption

  10. Polishregulationapplicablein non-EU cases Articles 378-417 of the Law of 28.02.2003 0n Bankruptcy and Rehabilitation (Prawo upadłościowe i naprawcze) To be substantially amended by Law on restructuring (Prawo restrukturyzacyjne), adopted by the Sejm on 9.4.2015 overriden by EU law  applies only outside the scope of application of the Regulation No. 1346/2000 (EIR)  mostly in non-EU cases example  recognition and effects of U.S. bankruptcy proceedings in Poland

  11. EIR: Aims of the Regulation • coordination of the measures regarding insolvency – in the context of more cross-border activities in the Community • filling a gap left by the Brussels Convention, currently Regulation (EU) No. 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast)('Brussels Ia')‏ • avoiding incentives for 'forum shopping‘ • NOT AIMED – unification of substantive insolvency laws

  12. EIR: Scope of application (a) insolvency proceedings (Article 1(1), Article 2(a) + Annex A)‏ (b) centre of main interests (COMI) of a debtor located in the EU, except Denmark (recitals 13 and 14 in connection with Article 3)‏

  13. EIR: Centre of a debtor’s main interests (COMI)‏ The place where the debtor conducts the administration of his interests on a regular basis (recital 13)‏ (a) ascertainable by third parties (in particular by creditors)‏ (b) for companies and legal persons – presumption of COMI being in the place of its registered office, Article 3(1)‏ (c) for natural persons – habitual residence for non-professionals or professional domicile for professionals (Virgos-Schmit)‏

  14. EIR: Jurisdiction to open insolvency proceedings (a) main proceedings – courts of the Member State within the territory of which the debtor’s COMI is situated, Article 3(1)‏ (b) territorial proceedings (secondary or independent territorial proceedings) – courts of the Member State within the territory of which the debtor possesses an establishment, Article 3(2)‏

  15. EIR: Definition of an establishment Article 2(h)‏ place of carrying out an economic activity (a) of non-transitory character (b) with human means and goods

  16. EIR: Main and territorial proceedings Main proceedings, Article 3(1)‏ - opened in the state, where the debtor’s COMI is situated - subject to automatic recognition and immediately effective in other Member States Territorial proceedings, Article 3(2)-(4), Articles 27 to 38 - opened in the state, where the debtor’s establishment is situated - their effects are generally limited to the Member State where they are opened - if running in parallel to main proceedings – secondaryproceedings

  17. EIR: Recognition and effectiveness of insolvency proceedings in other Member States • - opening of insolvency proceedings by a court of a Member State which has jurisdiction pursuant to Article 3 is automatically recognized in other Member States (Article 16)‏ • - main proceedings are automatically effective in other Member States (Article 17)‏ • decisions issued in course of the insolvency proceedings are subject to automatic recognition and enforcement according to the Regulation No 44/2001 (Brussels I), Article 25 • Exception: public policy clause (ordre public ) (Article 26)‏

  18. EIR: Law applicable - rule: law of the State of the opening of proceedings (lex fori concursus, Article 4)‏ - exceptions (for protection of local interests): i.a. third parties’ rights in rem (Article 5), immovable property (Article 8), contracts of employment (Article 10) – various grades of taking into account the law of another Member State with a link to the particular situation

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