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Case study – secondary insolvency proceedings against a solvent debtor

Case study – secondary insolvency proceedings against a solvent debtor. Specific problems arising in a few Polish-French cases. Deficiencies of the old EIR vs. changes introduced by the recast EIR Dr Marek Porzycki. A real-life case : Christianapol.

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Case study – secondary insolvency proceedings against a solvent debtor

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  1. Case study – secondaryinsolvencyproceedingsagainst a solventdebtor Specific problems arising in a few Polish-French cases. Deficiencies of the old EIR vs. changes introduced by the recast EIR Dr Marek Porzycki

  2. A real-life case: Christianapol • CJEU jugmentof 22 November2012, Case C-116/11 - Bank Handlowy and Adamiak • The debtor, Christianapol sp. z o.o., was a companyestablished in Poland, producingfurniture. Itsfactory, allassets and employeeswerelocated in Poland. • Christianapol sp. z o.o. was fullycontrolled by a French group of companiesCauvalIndustries. • Tribunal de commerce de Meaux (Meaux Commercial Court) (France) openedFrenchsauvegardeproceedingsagainst the debtor. Sauvegardeproceedingswereopened in parallelagainstseveralcompaniesin the group, incorporated in severalMemberStates effort to coordinaterestructuringwithin the group

  3. A real-life case: Christianapol • Sauvegarde proceedings are applicable to debtors who are not yet insolvent but they are threatened by insolvency. Its purpose is to prevent insolvency and to restructure the debtor • the entire estate of the debtor was located in Poland, the activities were concentrated in Poland. Economic choices controlled by the parent company in France. Decisions of the management were taken partly in Poland, partly in France  highly doubtful decision of the French court that COMI was in France • the Polish subsidiary was functioning and solvent at the time of the opening of main proceedings in France. • A creditor filed for the opening of secondary insolvency proceedings against Christianapol.

  4. Concept of ‘insolvencyproceedings’ under the EIR • initial meaning of Article 1(1) of the old EIR • Constitutive elements: collective proceedings, insolvency, divestment of the debtor, appointment of a liquidator • „a very broad framework“; „conditions which enable proceedings to be added to the lists [in the Annexes]“ (Virgos-Schmit report, paragraph 48)

  5. Concept of ‘insolvencyproceedings’ • question:how far can the term ‘insolvencyproceedings’ under the old EIR includerestructuringproceedingsaimingatavoidinginsolvency • practice:MemberStatesthemselvesproposedproceedings to be includedintoAnnexes A and B to the old EIR  expansionbeyondthe original concept of insolvency proceedings

  6. Jurisdiction to openmaininsolvencyproceedings • the concept of COMI • the firstcourt to open mainproceedingsmaintainsjurisdiction – no examination of itsjurisdiction by courts in otherMemberStates [Eurofood] Result „race to the court” Possibility for aneffectiveopening of mainproceedingsunderquestionablegrounds for jurisdiction main problem area– groups of companies, insolvencyproceedingsagainstsubsidiaries in otherMemberStates.

  7. Consequence for secondaryproceedingsunder the old EIR • Secondaryproceedings as ‘secondprize’ for the ‘losingcourt’ in a conflictoverjurisdiction • no examination of insolvency (grounds to open proceedings) aftertherequest to opensecondaryproceedings‘automatism of opening’ (Art. 27 old EIR) - duty to open orright to open proceedings? • secondaryproceedingsopenedalways as winding-upproceedings(Art. 27 old EIR, Annex B) Backdoor to automatic opening of winding-upinsolvencyproceedingsagainstsolvent and functioningdebtors [under the old EIR]

  8. Economicconsequence • even if COMI is located in France (which was doubtful but the French court was first to open main proceedings  Eurofood), any restructuring efforts would necessarily need to be concentrated in Poland

  9. Result of application of the old EIR (as interpreted in Eurofood) • Unnecessaryopening of secondaryproceedings as winding-upproceedingswhichincludes the entireestate of a solvent, functioningdebtor. • Hampering of restructuringefforts in mainproceedings. • A disastrousblow to the debtor’sreputation, resulting in a likelyloss of business partners. • Evenif the debtoris not woundup in the result (seebelow) – a long period of legaluncertainty.

  10. Reference of the Polishcourt to the CJEU • Reference by the Bankruptcy Court of Poznań lodged on 7.3.2011, Case C-116/11, Judgment of 22.11.2012 • Practicalaspects of the questionsraised: • When do mainproceedings end? (=howlongisthere a duty to open secondaryproceedings?) [the court in Poznań haslodged the reference to the CJEU alreadyafter a restructuring plan hasbeenadopted in the French mainproceedings, during the phase of the realisation of the plan] • Can the opening of secondaryproceedings be refusedif the debtorissolvent? • Shouldsecondaryproceedings be openedifitwouldhamperrestructuringefforts in mainproceedings?

  11. CJEU judgmentinCase C-116/11 • Judgment of 22 November 2011, Case C-116/11, Bank Handlowy and Adamiak v. Christianapol • Answer to 1st question – the moment of closure of mainproceedingsneeds to be established under the law applicable to mainproceedings (Article 4(2)(j) old EIR), not under criteria set by the EIR  French law applies • Answer to 2nd question – under the old EIR the courthearing the request to open secondaryproceedingscould not examine the insolvency of the debtoragainstwhichmainproceedingshadbeenopened in anotherMemberState, evenifthosemainproceedingswereapplicable to solventdebtors

  12. CJEU judgmentinCase C-116/11 • Answer to 3rd question – the opening of main proceedings of „protective nature” (=applicable to solvent debtors, aimed at restructuring) permitted the opening of secondary proceedings in another Member State, even if the secondary proceedings needed to be opened as winding-up proceedings • The court deciding on the opening of secondary proceedings needs to „have regard to the objectives of the main proceedings and take account of the scheme of the [old] EIR, in keeping with the principle of the sincere cooperation”  unanswered question: Can the opening of secondary proceedings be refused in such case?

  13. Possibilities for rescueunder the old EIR? • Refusal of recognition of main proceedings on public policy grounds (Article 26 old EIR)? – not justified • Restructuring measures in secondary proceedings (Article 34 old EIR) Difficulty under old Polish law (before 2016) – doubts over conversion of a Polish winding-up bankruptcy (upadłość likwidacyjna, listed in Annex A and B) into a reorganization bankruptcy (upadłość układowa, listed in Annex A but not in Annex B) • Stay of liquidation in secondary proceedings (Article 33 oldEIR) • Sale of the debtor’s enterprise as a going concern

  14. Changes in the recast EIR resulting from (i.a.) the Christianapolcase • broaderdefinition of „insolvencyproceedings” – inclusion of proceedingsaimingatrescue, adjustment of debtsorreorganization , alsoapplicable in cases of only a likelihood of insolvency (Art. 1(1) EIR) • moreprecisedefinition of COMI (Art. 3(1) EIR) • requirement to explaingrounds for jurisdiction (in particular to explain the decision on COMI) (Art. 4 EIR) and possibility to challenge the decision to open maininsolvencyproceedings (art. 5 EIR)  but no change to the principlethatcourts in othermemberstatescannotscrutinise the decision of the firstcourt to open mainproceedings (recital 65, cf. Eurofoodcase)

  15. Changes in the recast EIR resulting from (i.a.) the Christianapolcase • reorganizationpossible in secondaryproceedings removal of the limitation to winding-upproceedings in Art. 34 EIR  removal of Annex B listing winding-upproceedings (not neededanymore) • no re-examination of insolvency of the debtor for the purpose of secondaryproceedingsonlyif the maininsolvencyproceedingsrequiredthat the debtor be insolvent (Art. 34 EIR)  ifmainproceedingswereopenedagainst a solventdebtor, the court in the secondaryjurisdictionmayrefuse to open secondaryproceedingsif law of the secondaryjurisdictionrequiresactualinsolvency of the debtor

  16. Changes in the recast EIR resulting from (i.a.) the Christianapolcase • introduction of „synthetic secondary proceedings” to avoid opening secondary proceedings – unilateral undertaking (= binding promise) of the insolvency pratictioner (liquidator) in main proceedings to satisfy creditors in the secondary jurisdiction as if secondary proceedings were opened (Art. 36 EIR)

  17. Additionalreading • CJEU judgment of 22 November 2012, Case C-116/11 • M. Porzycki, SecondaryInsolvencyProceedingsagainst a SolventDebtor: A PolishCaseHighlightsWeakPoints of theEuropeanInsolvencyRegulation, International CorporateRescue 2010, Volume 7, Issue 2, p. 118

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