Documents for debate
1 Business Failure and Insolvency
| (a)
(34563)
17881/12
COM(12) 743
(b)
(34564)
17883/12
+ ADDS 1-2
COM(12) 744
(c)
(34562)
17876/12
COM(12) 742
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Commission Report on the application of Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings
Draft Regulation amending Council Regulation (EC) No 1346/2000 on insolvency proceedings
Commission Communication : A new European approach to business failure and insolvency
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| Legal base | (a) —
(b) Article 81 TFEU; co-decision; QMV
(c) —
|
| Documents originated | 12 December 2012
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| Deposited in Parliament | 19 December 2012
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| Department | Department for Business, Innovation and Skills
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| Basis of consideration | (a) and (c) EMs of 11 January 2013
(b) EM of 9 January 2013
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| Previous Committee Report | None; but see HC 23-i (1999-2000) chapter 9 (24 November 1999)
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| Discussion in Council | (a)-(c) Not known
|
| Committee's assessment | (a) and (b) Legally important
(c) Legally and politically important
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| Committee's decision | (a) and (c) Not cleared; further information requested
(b) For debate on the opt-in in European Committee C
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Background and scrutiny
1.1 These three Commission initiatives, a report (document
(a)), a draft amending Regulation (document (b)) and a Communication
(document (c)) are all new documents which we have not previously
scrutinised. The report and the draft Regulation are aimed at
updating existing EU legislation on cross-border insolvencies
and mutual recognition between Member States of insolvency proceedings,
in the form of Council Regulation (EC) No 1346/2000 (which our
predecessors scrutinised),[1]
with particular emphasis on making better provision for business
rescue to assist economic recovery and growth in the EU. The
Communication, although containing no firm commitment to future
legislative action, goes far beyond the current cross-border regulatory
framework in mapping out potential, long-term aspirations to harmonise
aspects of the domestic insolvency laws of Member States.
1.2 The existing Regulation, adopted in 2000
but not in force until 2002, applies whenever a debtor, whether
a natural or legal person, has assets or creditors in more than
one Member State. Its primary purpose is to determine which court
has jurisdiction for opening insolvency proceedings, providing
the following hierarchy of judicial proceedings:
- main proceedings have to be
opened in the Member State where the debtor has its centre of
main interests ("COMI") and the effects of these proceedings
are recognised throughout the EU;[2]
and
- secondary (or "territorial") proceedings
can be opened where the debtor has an establishment; the effects
of these proceedings are limited to the assets located in that
State.
1.3 The existing Regulation also contains rules
on applicable law and certain rules on the coordination of main
and secondary insolvency proceedings. However, the Regulation
does not harmonise Member States' domestic insolvency laws in
any way.
1.4 Article 46 of the Regulation requires that
ten years after its entry into force, the Commission must review
its operation in practice and consider any necessary amendments
to it. The Commission's ten-year review is set out
in its report, document (a).
1.5 Since the recommendations of the report are
essentially reproduced by the Commission in the proposals for
the draft Regulation, we examine documents (a) and (b) together.
The report and the draft Regulation (documents
(a) and (b))
The case for amending the existing Regulation
1.6 In its report, which is based on evaluative
studies and a consultation,[3]
the Commission says that the existing Regulation on insolvency
proceedings is generally regarded by stakeholders and consultees
(in particular insolvency practitioners, lawyers and academics)
as successful (well-implemented, efficient and effective) and
that the underlying policies are largely supported by them.
1.7 However, the Commission identifies shortcomings
which mostly stem from the following changes in the EU insolvency
"market" since the entry into force of the Regulation
in 2002:
- rising insolvency cases across
the EU following the global financial crisis;
- increased use of group structures for companies
involved in international trade;
- development of different business rescue procedures
to help viable businesses survive; and
- an increase in insolvency "forum shopping",
particularly by individuals seeking debt relief in jurisdictions
with more lenient bankruptcy laws ("bankruptcy tourism").
1.8 The Commission recommends that some amendments
to the Regulation are needed to modernise, improve and clarify
it, as set out under the headings which follow below (draft amending
provisions are included where available).
1.9 Before examining those recommendations, three
other matters should be highlighted:
- the legal base: the
legal base proposed for the draft Regulation (document (b)) is
Article 81 TFEU (Judicial Co-operation in Civil Matters). The
Government's views of the "opt-in" implications of this
for the UK are discussed later in this Report;
- applicable law: there
are no amendments suggested in the report (and so no provisions
in the draft Regulation) on determining choice of law because
consultees were generally supportive of the current approach in
the Regulation although there were some concerns about differences
in domestic labour laws preventing insolvency office-holders from
taking a consistent approach to employees in different Member
States (in terms of modifying or terminating employment contracts).
The Commission considered that this could only really be solved
through harmonisation of those laws, which was outside the scope
of the proposed reform; and
- the Commission's impact assessment:
the Commission's impact assessment[4]
considers two options for insolvency reform. Option A, which
the Commission prefers, updates the existing Regulation as per
the recommendations in the report and draft Regulation (documents
(a) and (b)). Option B looks at possibilities for the harmonisation
of national laws and proceedings (and this is further considered
in the Communication (document (c)).
BROADENING THE SCOPE OF THE REGULATION
1.10 In its report, the Commission recommends
changing the definition of insolvency proceedings in Article 1(1)
of the Regulation, which is based on terminal insolvency and distribution
of assets, to:
- cover business rescue,[5]
restructuring and other pre-insolvency proceedings (all increasingly
used by Member States);
- resolve discrepancies between
the definition and the procedures listed in the Annex of the Regulation,
currently the subject of cases pending in the Court of Justice
of the European Union ("CJEU"); and
- include a wider range of personal
insolvency proceedings, including debt, which either do not exist
in Member States or are expressly excluded from the Regulation
by them as without such proceedings being recognised under the
Regulation, debtors can remain liable to foreign creditors.
1.11 However, an outstanding issue relates to
insolvency proceedings located outside the EU, which are out of
scope. Whilst several Member States (including the UK) have enacted
laws based upon the UNCITRAL Model Law or with similar features,
others have no specific laws for international insolvency. Consultees
were divided on whether a non-uniform approach to non-EU proceedings
was problematic.
1.12 In the draft Regulation, the definition
of insolvency proceedings is widened in line with the report's
recommendations, principally by including within the Regulation
an extended list of insolvency proceedings covered by it.
CLARIFYING RULES ON JURISDICTION FOR OPENING INSOLVENCY
PROCEEDINGS
1.13 Regarding the COMI (centre of main interest)
test the Commission finds in its report that:
- a significant majority of consultees
supported its use to determine Member State jurisdiction for "main"
insolvency proceedings;
- the COMI of individuals is not addressed by the
Regulation, leading to inconsistencies between Member States in
determining this, some applying "habitual residence",
others applying national concepts;
- it can be open to manipulation where debtors
relocate prior to filing for insolvency proceedings and the evaluation
study revealed cases of "bankruptcy tourism", citing
regions including the UK as attracting debtors from Germany and
Ireland;
- the approaches of Member States' courts to determining
jurisdiction based on COMI and to recording their decisions have
varied so much as to create problems for foreign creditors who
are not able to challenge the decision to open proceedings and/or
to be informed of decisions in sufficient time; and
- Member States' courts generally
respect the prior opening of main proceedings in another Member
State (according to the evaluation) with some exceptions, such
as the appointment of a liquidator in Germany. 51% of respondents
to the consultation agreed that the definition of opening insolvency
proceedings in the Regulation should be amended to include proceedings
opened without a court decision.
1.14 The Commission concludes in the report that
rules for determining the jurisdiction for opening insolvency
proceedings need to be clarified.
1.15 In the draft Regulation, the clarification
is achieved by setting out, in the recitals to the Regulation,
the basis for determining where a debtor's COMI is located, this
proposed approach reflecting the current CJEU approach to COMI.[6]
BETTER COORDINATION OF SECONDARY AND MAIN PROCEEDINGS
1.16 In its report, the Commission explains that
the respondents' evaluation of secondary proceedings as provided
under the Regulation shows that:
- allowing them to be opened
in a different Member State to that opening "main" proceedings,
where the law of the "main" Member State cannot be applied
due to disparities between the two legal systems, is problematic
even where liquidators in each Member State co-operate;
- requiring them to be liquidation proceedings
inhibits business rescue, where, for example, sale as a going
concern is being managed in the main proceedings, but local secondary
liquidation proceedings are opened in respect of a part of the
business in another Member State;
- there are no specific rules for opening them;
- courts cannot refuse to open them even where
it would not be in the interests of local creditors;
- liquidators in main proceedings have no say on
their opening;
- there is no duty to cooperate between courts
and liquidators or vice versa, and the existing duty to cooperate
between liquidators is vague (though the Commission notes the
ability of liquidators in UK "main" proceedings to undertake
to respect creditors' rights in secondary proceedings).
1.17 The Commission concludes in its report that
the efficiency and coordination of secondary proceedings with
main proceedings need to be improved through new rules on court-to-court
cooperation, enabling secondary proceedings to be rescue proceedings
instead of only liquidation proceedings, and enabling new rules
for the protection of local creditors' rights.
1.18 In the draft Regulation, the Commission's
proposals apply these recommendations and additionally give office-holders
in main proceedings more rights when secondary proceedings are
pending.
IMPROVEMENT IN PUBLICITY AND TRANSPARENCY OF PROCEEDINGS
1.19 In its report, the Commission highlights
that 75% of consultees view the absence of mandatory publication
and registration of decisions opening insolvency proceedings as
problematic, particularly leaving foreign creditors unaware of
proceedings and unnecessary parallel proceedings being opened
in different Member States.
1.20 Only registration of insolvency proceedings
of companies and other legal entities, not individuals, is mandatory
in every Member State. As only 14 Member States (including the
UK) publish decisions in an insolvency register accessible to
the public with limited electronic access, it is difficult for
foreign creditors to monitor any available registers. A majority
of consultees considered that all Member States should be required
to register the opening judgment in an insolvency register and
that national registers should be interconnected.
1.21 The Commission concludes in the report that
additional requirements should be introduced to publish relevant
court decisions in cross-border insolvency cases in a publicly
accessible electronic register and to interconnect national insolvency
registers via the European e-justice portal. These recommendations
are introduced as provisions in the draft Regulation.
FACILITATION AND STANDARDISATION OF LODGING FOREIGN
CREDITOR CLAIMS
1.22 Since the Regulation makes no provision
for the lodging of claims, foreign creditors have problems due
to difficulties with language, costs, varying time limits and
a lack of information.
1.23 Foreign creditors, according to the evaluation,
have been time-barred from lodging a claim due to short deadlines
and lack of notice of proceedings, and there is evidence that
individuals and SMEs may choose to forgo a debt due to the high
cost of lodging claims, due to translation costs.
1.24 The report recommends introducing standard
forms for foreign creditors to use when lodging claims and this
recommendation is applied in the draft Regulation.
COORDINATION OF GROUP COMPANIES' PROCEEDINGS
1.25 The report notes that the lack of specific
rules on cross-border insolvencies in the Regulation means that:
- individual courts have to decide
the COMI of subsidiaries as recent CJEU rulings[7]
have shown that it cannot be assumed that it is the same as the
group parent; and
- the efficient administration of multinational
group companies is hindered, a view supported by almost 50% of
consultees.
1.26 The report concludes there should be better
coordination of the insolvency proceedings relating to different
members of a group of companies. In the draft Regulation, the
Commission therefore proposes rules requiring court and office-holder
communication and cooperation to ensure that group proceedings
are better coordinated and not undermined by fragmented, competing
proceedings in different Member States.
The Government's views on the report and the draft
Regulation (documents (a) and (b))
Overall position on the report and draft Regulation
1.27 In an Explanatory Memorandum of 11 January
2013 on the report, the Minister for Employment Relations and
Consumer Affairs at the Department for Business, Innovation and
Skills (Jo Swinson) notes that, in feedback already received from
UK stakeholders,[8] the
general view was that the existing Regulation worked well in facilitating
cross-border insolvencies in the EU and that it had had some beneficial
effects for the UK beyond this:
"There have been some COMI relocations to the
UK to access our corporate insolvency procedures because they
are perceived to provide better outcomes than may be achieved
in some other Member States. Many of the largest pan-EU insolvency
proceedings have been dealt with under the existing Regulation
in the UK. This has benefitted UK insolvency professionals from
the fees generated, and UK creditors whose claims will have been
handled under our domestic insolvency law."
1.28 However,
as both stakeholders and the Government concede that some amendment
of the Regulation is needed to address particular problems that
had arisen since its introduction, she says of the report:
"The Government is generally supportive of the
principles underpinning the Commission's proposals, many of which
are aligned to the existing principles of the UK insolvency regime."
1.29 Repeating the support of the Government
and the anticipated support of UK stakeholders[9]
for the changes now drafted in the proposed Regulation, but also
recognising the potential impact of the changes on all those involved
in cross-border insolvencies, the Minister says that, in any event,
the Government plans to issue a Call for Evidence in January 2013
on the draft Regulation.
1.30 In terms of the wider timetable for the
proposal, the Minister says that it is expected to be on the Council's
agenda under the current Irish Presidency and will be considered
by the JURI committee of the European Parliament over the next
few months.
LEGAL IMPLICATIONS OF THE DRAFT REGULATION
Subsidiarity
1.31 The Minister says that the Government does
not consider that the draft Regulation infringes the principle
of subsidiarity, saying that action at EU level in the form of
an amending Regulation is necessary to achieve: "Modification
of the current rules of the existing Regulation relating to scope,
jurisdiction for opening insolvency proceedings, provisions concerning
secondary proceedings, publication of decisions and the lodging
of claims..." and the "interconnection of national electronic
insolvency registers".
Changes to domestic insolvency law
1.32 Regarding the impact of the draft Regulation
on UK law, the Minister notes that although the proposal will
not require implementation in UK domestic law, it is likely that
amendments to existing UK laws will have to be made on issues
such as the publication of judicial decisions in UK insolvency
proceedings, the disclosure of the basis for jurisdiction when
UK proceedings are opened, and the content and form of claims
submitted by foreign creditors in UK proceedings.
"Opt-in" question
1.33 The Minister notes that the legal base proposed
for the draft Regulation is Article 81 TFEU (Judicial Co-operation
in Civil Matters). This is a Title V (Area of Freedom, Security
and Justice) provision and, accordingly, the Minister confirms,
the proposed legislation will not be applicable to the UK unless
it "opts-in" pursuant to Article 3 of Protocol 21 to
the TEU and TFEU.
Fundamental Rights
1.34 The Minister comments that the draft Regulation,
just like the current Regulation, will engage and be compatible
with Article 16 (the freedom to conduct a business), Article 17
(the right to property) and Article 47 (the right to an effective
remedy) of the Charter of Fundamental Rights. She also notes
that requirements in the draft Regulation involving the maintenance
and inter-connection of publically accessible electronic insolvency
registers engages Article 8 (protection of personal data), but
that the draft Regulation addresses this by requiring Member States
and the Commission to comply with existing EU data protection
laws[10] when processing
personal data under it.
POLICY IMPLICATIONS OF THE DRAFT REGULATION
1.35 Conscious of the beneficial impact of insolvency
corporate "forum shopping" for the UK, the Minister
notes that the UK has also been a destination for individuals
seeking debt relief with relatively small numbers of incidences
of "bankruptcy tourism" to the UK (around 200 per annum)
with court orders annulled wherever the relocation of COMI has
been found to be a sham.
1.36 She then provides a preliminary assessment
of the policy implications of the main proposals, formed from
stakeholder feedback obtained prior to the publication of the
draft Regulation.[11]
Broadening the scope of the Regulation
1.37 The Minister says that widening the scope
of the Regulation will enable new types of business rescue and
hybrid procedures to be added to the lists of procedures defined
in the Regulation. She says:
"In principle this could facilitate increased
rescue of viable, but distressed, businesses in the EU. The primary
benefit of having proceedings listed in the Regulation is that
there is automatic recognition of those proceedings in other Member
States. This enables dealings with assets, employees, creditors
and other stakeholders to be more efficient in terms of speed
and cost as the need for separate proceedings or further court
recognition is removed. If more businesses are rescued rather
than liquidated, the single market will benefit from less dissipation
of economic value and fewer jobs lost. UK stakeholders will benefit
from these conditions, as will those in all Member States."
1.38 She explains that although the UK's main
business rescue procedures, administration and company voluntary
arrangements, are already listed in the existing Regulation, the
Minister notes the proposed inclusion of the Companies Act "Scheme
of Arrangement"; this is not an insolvency procedure, but
used to rescue distressed businesses through debt restructuring.
She warns that stakeholders' opinions will be sought by the Government
on the implications of the inclusion of such schemes, saying:
"It is vital that Member States be allowed to
determine which of their own domestic procedures are in or out
of the Regulation. The Commission's proposal appears to address
this point in Article 45(2) which retains the existing system
whereby only Member States can request the inclusion of a procedure
in the Regulation."
Clarifying rules on jurisdiction for opening insolvency
proceedings
1.39 The Minister says that the Government supports
increased legal certainty for all involved in insolvency proceedings
resulting from this proposed clarification.
1.40 She notes that the Commission's proposals
also seek to address concerns over forum shopping, particularly
"bankruptcy tourism", by requiring courts to explain
their decision on jurisdiction and on opening proceedings in a
particular location. In addition, creditors are given the right
to challenge this decision through judicial review. This mirrors
practices increasingly found in UK courts where third party evidence
(from creditors) may be sought on the question of COMI prior to
opening bankruptcy proceedings.
1.41 However, the Minister sounds a note of
caution saying that the "...requirement under the proposal
will add some time and cost to the process for opening proceedings..."
and although the Government will seek stakeholder evidence on
this question, she "...anticipated that the additional cost
will be small for each case and offset by wider benefits to stakeholders
from increased legal certainty".
Better coordination of secondary and main proceedings
1.42 The Minister says that the extension of
secondary proceedings to include rescue proceedings is expected
to be widely supported by UK stakeholders and will help with the
rescue and rehabilitation of companies with cross-border operations.
Improvement in publicity and transparency of proceedings
1.43 The Minister notes that it is important
that information on both main and secondary proceedings is readily
available to interested parties, such as potential lenders and
particularly creditors. She explains that this "...is because
there have been instances under the existing Regulation where
two sets of main proceedings have inadvertently been opened in
different jurisdictions because of the difficulties in obtaining
information, leading to wasted time and costs".
1.44 She continues that the requirement to publish
relevant court decisions in cross-border insolvency cases in a
publicly accessible electronic register may involve cost for the
UK[12] in having to further
develop existing registers. But she comments that "...it
is possible that the benefits to stakeholders from free access
to better information than is currently available will offset
these additional publication costs. Government will be seeking
evidence from stakeholders on this question".
Facilitation and standardisation of lodging of
foreign creditor claims
1.45 The Minister says that the proposed introduction
of a standardised claim form for foreign creditors will be:
"an addition to the rules that currently exist
in UK insolvency law. The proposal could be beneficial to UK businesses
claiming in insolvency proceedings in other EU countries, however."
Coordination of group companies' proceedings
1.46 These proposals, according to the Minister,
"offer a pragmatic solution to a complex issue and UK stakeholders
have expressed support for such an approach".
FINANCIAL IMPLICATIONS OF THE DRAFT REGULATION
1.47 The Minister says that an Impact Assessment
Checklist has been produced. Further evidence of the impacts
from the Commission's proposals will be sought in the Call for
Evidence to be launched in January.
1.48 Noting the two options presented in the
Commission's impact assessment, the Minister informs us that the
Government supports the Commission's preference for option A,
modernisation of EU regulation of cross-border insolvency proceedings,
being opposed to harmonisation of domestic insolvency laws.
The Communication (document (c))
The Commission's case for future harmonising
legislation
1.49 The Commission argues that the disparities
between national insolvency laws impede efficient and effective
insolvency proceedings and that a new approach to insolvency and
business failure is needed to promote better business recovery
within the EU. The
document contains broad policy aspirations and does not yet make
any firm commitment to legislation nor provide a specific timetable
for the development of those aspirations.
1.50 The Communication is based on a study commissioned
by the European Parliament ("EP") which found that differences
in domestic insolvency laws create competitive inequalities and
other disadvantages for companies with cross-border activities
or ownership within the EU. The study concluded that the harmonisation
of specific areas of insolvency law would increase the efficiency
of insolvency and business recovery proceedings, improving returns
for creditors and increasing confidence in the EU's financial
infrastructure. The EP adopted a Resolution on 15 November 2011which
called both for the revision of the existing Regulation and for
the harmonisation of specific aspects of national insolvency legislation.
1.51 The Communication highlights six specific
areas (examined below) where the Commission asserts that different
treatment in national insolvency laws is problematic especially
for SMEs, who can be particularly affected as creditors in insolvency
due to the length of proceedings and national rules for the priority
of distributions to creditors. The possible solutions discussed
should, the Commission says, be the subject of further inter-institutional
dialogue with the EP and the Council, wider public consultation
and further analysis by the Commission of the impacts of differences
in national insolvency laws.
ENCOURAGING "SECOND CHANCES"
FOR "HONEST" BANKRUPTS
1.52 The Commission considers there is a need
to mitigate the consequences of insolvency (social, legal and
administrative) for "honest" as opposed to "fraudulent"
bankrupts to give them the chance to make a second start at a
business venture. In many Member States, the treatment of "honest"
and "fraudulent" bankrupts is the same and the Commission
says that more differentiation is needed, for example, by expediting
insolvency proceedings for 'honest' bankrupts.
MINIMISING AND STANDARDISING DEBT DISCHARGE PERIODS
FOR "HONEST" BANKRUPTS
1.53 To encourage "second chances"
and business restarts on a consistent and equal basis throughout
the EU, the Commission considers that shortening of debt discharge
periods for "honest" bankrupts is needed together with
the introduction of a standard three-year "automatic"
upper limit.
STANDARDISING RULES ON THE OPENING OF PROCEEDINGS
TO PROVIDE EQUAL OPPORTUNITIES FOR RESTRUCTURING.
1.54 Different domestic insolvency tests apply
throughout the EU (some based on actual insolvency, others on
imminent) meaning that companies in a similar financial position
might fail to meet the insolvency test in one Member State but
not another. This, the Commission considers, leads to unequal
restructuring opportunities for businesses. Some Member States
prescribe mandatory deadlines for debtors to file for proceedings,
the length of which can vary and restrict the ability to solve
financial difficulties (if too short) or delay the granting of
relief. The Commission considers that these problems could be
avoided by harmonisation of laws on opening of proceedings.
FACILITATING COLLECTIVE CROSS-BORDER INSOLVENCY PROCEEDINGS
FOR CREDITORS
1.55 Creditors expect to be able to apply for
collective insolvency proceedings against a debtor. However,
some jurisdictions prevent proceedings being opened against certain
(unspecified) categories of debtors whilst in other Member States
there are special conditions limiting the ability of certain creditors
to commence proceedings. The Commission considers that measures
to facilitate collective cross-border insolvency proceedings could
address those concerns.
STANDARDISING PROCEDURES FOR CREDITORS RELATING TO
PROCEDURES TO FILE AND VERIFY CLAIMS
1.56 The Commission notes that there are differing
time limits for creditors to file claims or assert their rights
in proceedings, such as obtaining security over assets or receiving
information. Late filing of claims could affect a creditor's
ability to participate in distributions. Foreign creditors are
particularly vulnerable to differing procedures in other Member
States.
PROMOTING RESTRUCTURING PLANS
1.57 The legal framework differs significantly
between Member States, including the procedures for proposing
or adopting a plan and the requisite majorities required to approve
and modify them.
The Government's view of the Communication (document
(c))
1.58 In an Explanatory Memorandum of 11 January
2013, the Minister says that while the Government supports the
aims of modernising insolvency law, improving the efficiency of
proceedings[13] and ensuring
that the insolvency framework promotes growth, it is not in favour
of any EU move to harmonise domestic insolvency laws where such
a move would require changes to existing UK domestic insolvency
law which are not in the best interests of UK businesses and consumers.
However, she recognises that as legislation is not proposed in
the Communication, there are no immediate policy or financial
obligations arising out of it for the UK which would necessitate
any consultation or cost benefit analysis of the initiatives mentioned
at this stage.
1.59 She confirms that there is no timetable
for further dialogue and consultation proposed by the Commission
at EU level yet, though the Minister expects the Commission to
carry on working on the initiative throughout 2013.
1.60 The Minister then addresses each of the
six main areas examined by the Commission and we set out the Government's
responses under the following headings.
ENCOURAGING "SECOND CHANCES"
FOR "HONEST" BANKRUPTS
1.61 The Minister says that the Government supports
the Commission's aim in promoting second chance initiatives.
UK insolvency legislation is intended to promote a rescue culture
and does provide a 'second chance'.
1.62 She explains that under UK law, there is
no law preventing:
- an insolvent individual continuing
to trade during, for example, the period of their bankruptcy or
after discharge; nor
- the director of a failed company from going on
to act as a director of another company, provided that that person
is not subject to a disqualification order or undertaking nor
is bankrupt personally.
1.63 Also, she continues, in the UK, any person
who is made bankrupt is subject to certain restrictions, including
disqualification from acting as a director of a company, until
their discharge from bankruptcy. Although there is no "fast-track"
or special procedure for "honest" bankruptcies, UK law
does take a different approach to bankrupts whose conduct has
been culpable, reckless or dishonest; they can be subject to a
Bankruptcy Restrictions Order ("BRO") for up to 15 years.
A BRO, in order to protect the public, does not affect their
automatic discharge from bankruptcy but imposes ongoing restrictions,
including disqualification from acting as a director and a duty
to disclose the BRO when applying for credit, for the period it
is in force.
MINIMISING AND STANDARDISING DEBT DISCHARGE PERIODS
FOR "HONEST" BANKRUPTS
1.64 On the question of the existing provision
under UK law to provide "second changes" for "honest"
bankrupts, the Minister explains that an individual receives protection
from their creditors from the date of the bankruptcy order and
is automatically discharged from bankruptcy after one year, within
the three-year upper limit proposed by the Commission, unless
they fail to cooperate with the proceedings. She contrasts this
with other Member States bankruptcy laws which can be more severe
and provide for longer discharge periods (for example, up to nine
years in Germany).
STANDARDISING RULES ON THE OPENING OF PROCEEDINGS
TO PROVIDE EQUAL OPPORTUNITIES FOR RESTRUCTURING
1.65 The Minister comments that the UK has a
range of business rescue procedures available to distressed companies,
including administration and voluntary arrangements and that,
mostly, companies can access formal insolvency proceedings in
the UK if insolvent or imminently insolvent. There are other
forms of business rescue procedure for businesses unable to meet
this insolvency test, such as Schemes of Arrangement under the
Companies Act. In any case, the Minister says that:
"Many UK businesses are rescued by way an informal
turnaround, where a deal is struck between creditors and the need
to enter formal proceedings is avoided. There are no deadlines
for the mandatory filing of insolvency proceedings for individuals
or companies in the UK."
FACILITATING COLLECTIVE CROSS-BORDER INSOLVENCY PROCEEDINGS
FOR CREDITORS
1.66 Creditors can open insolvency proceedings
against a debtor in the UK, says the Minister, unless a corporate
or individual debtor has been granted a moratorium to allow them
to propose a voluntary arrangement or, in the case of a company,
it has given notice of the intention to appoint an administrator.
These, granted for a short term, usually for a period of no longer
than 14 days, enable debtors to achieve either a voluntary arrangement
with creditors or to be rescued, in the case of administration.
Generally, a creditor may commence insolvency proceedings against
a debtor in the UK if they are owed a debt of more than £750
which is not paid within 21 days of serving a statutory demand
— this is the case where the debtor is self-employed, professional
or an individual with consumer debts.
STANDARDISING PROCEDURES FOR CREDITORS RELATING TO
PROCEDURES TO FILE AND VERIFY CLAIMS
1.67 The Minister explains that it is already
the law in the UK that notice must be given by UK insolvency office
— holders to all creditors (including foreign creditors)
at various points in the proceedings, as to their appointment,
dates and venues of meetings of creditors, how to make a claim
in proceedings and progress updates. Certain notices must also
be made in the appropriate Gazette, including notices of distributions,
which are freely accessible and searchable.
1.68 She then alludes to the Government's support
of a connected proposal in the draft Regulation (document (b))
on publishing of proceedings in an EU register and standardisation
of foreign creditors' claims forms and says: "This proposal
could be useful to UK businesses who are creditors in insolvency
proceedings in other EU Member States".
PROMOTING RESTRUCTURING PLANS
1.69 The Government, the Minister says, would
support the promotion of formal restructuring procedures across
the EU to better develop a culture of business rescue. She says:
"UK rescue proceedings have rules on the content
and form of restructuring plans, and Government would only support
moves to harmonise such rules at an EU level if it would benefit
UK businesses and consumers."
Our assessment
1.70 Although all of these three documents are
significant in different ways, they are linked by their inherent
importance to insolvency management. They all concern the need
for balance in promoting business rescue and in encouraging economic
recovery and growth in the UK and in the EU, whilst affording
adequate protection to SMEs ( in any capacity), creditors (other
businesses and consumers) and others (including employees).
1.71 The reforms proposed in the draft Regulation
offer potential benefits to those involved in insolvency proceedings,
in terms of coordinating main and secondary proceedings, promoting
business rescue and increasing legal certainty and transparency
of proceedings. We note the Government's recognition of these
benefits and overall support for the proposals.
1.72 However, the Government's initial assessment
and general acceptance of the proposed amendments to the existing
Regulation set out in document (b) (and partly informed by the
important evidential and policy background to the amendments set
out in the report (document (a)) may need further consideration
once responses have been received to the Call for Evidence and
in the light of its Impact Assessment. It is important that the
decision on whether the Government will exercise its Title V JHA
opt-in in respect of the draft Regulation is not just based on
established policy but also informed by such new evidence on the
existing operation of the Regulation and the anticipated operation,
costs and other implications for business and individuals alike
of the proposed amendments to be made, which is available within
the three-month time limit.
1.73 Although the Communication (document (c))
contains no formal commitment to legislation and therefore has
no immediate policy or financial implications for the UK, it is
sufficiently specific to go beyond mere horizon-scanning and reveals
a discernible aspiration to standardise at least some aspects
of EU insolvency laws in the future. The prospect of harmonisation
of insolvency laws, however distant, is a matter of considerable
concern. This is partly because of the potential legal and practical
impacts on UK businesses and individuals who are involved in insolvency
proceedings in any capacity. But it would also mean a loss of
national autonomy to regulate an important area of national law.
Conclusion
1.74 Any changes to the national
insolvency legal framework are of inherent importance to business
and individuals alike. This is particularly true in an economic
climate where there has been an increased incidence of insolvencies
and use of insolvency processes. As regards the draft Regulation
(document (b)), we note that the Government is generally supportive
of the proposal. Given the legal importance, we recommend the
draft Regulation for debate in European Committee C solely on
the question of whether the Government should opt-in to the proposal.
We ask for this debate to be held in sufficient time before 7
March 2013 (the eight-week deadline for Parliament to express
a view) so that the Government can take account of the views of
the House before deciding whether to opt in.
1.75 As this is an opt-in debate,
the draft Regulation will remain under scrutiny following the
debate. Accordingly, we ask the Government to update us on the
result of its Call for Evidence and the publication of its Impact
Assessment, and to do so before the date of the debate if possible.
We also keep the report (document (a)) under scrutiny, as it
forms important policy and evidential background to the reforms
set out in the draft Regulation.
1.76 The prospect of long-term
change to the national insolvency regime is, in our opinion, of
legal and political importance. The possibility of future harmonisation
of domestic insolvency laws, mooted by the Commission in the Communication
(document (c)), is of particular concern. We do not, therefore,
clear document (c). Instead, we ask the Minister to tell us what
steps she will be taking to make sure that the Government, together
with other like-minded Member States, is able to influence this
early, but formative, stage in the Commission's long-term thinking
on the future EU approach to insolvency proceedings and law.
Depending on its consequences, we may also recommend the Communication
for debate in due course.
1 Seeheadnote:HC23-i(1999-2000)chapter9(24November1999).FromtimetotimetheAnnexestotheRegulationhavebeenamendedsinceitcameintoforce-theAnnexeslistthenationalinsolvencyproceedingsandoffice-holders(liquidatorsandthelike)towhichtheRegulationapplies-andtherelevantamendinginstrumentshavebeensubjecttoscrutiny.Theseamendmentproposalshavebeenscrutinisedbyeitherourpredecessorsorus. Back
2
Theinsolvencylawofthe"mainproceedings"MemberStateisrecognisedandgenerallyappliestoassociatedassetsandcreditorslocatedinotherMemberStates,insteadoflocalinsolvencylaw. Back
3
Thereporttakesaccountofacomparativelegalstudy,carriedoutbytheUniversitiesofHeidelbergandVienna,onevaluationoftheRegulationin26MemberStates;athird-partystudytoassesstheimpactofamendingtheregulation;andaweb-basedpublicconsultationbetweenMarchandJune2012,withrespondentsfromallMemberStateswiththeexceptionofBulgariaandMalta.UKparticipationinthisconsultationwassignificant,representing20%ofrespondents. Back
4
See headnote: 17883/12 ADDs 1 and 2. Back
5
The Commission gives the example of UK Schemes of Arrangement
under the Companies Acts. Back
6
See case C-341/04 Eurofood; case C396-Interedil
and case C1/04, Staubitz-Schreiber. Back
7
See footnote 6; the cases of Eurofood and Interedil. Back
8
The Explanatory Memorandum explains that the UK government previously
issued a survey to UK stakeholders in 2009 on the functioning
of the existing Regulation. Insolvency practitioners, lawyers,
academics, judiciary, creditor groups and business organisations
were represented in the responses received. The general view
was that the Regulation worked well, but some amendment was needed
to address particular problems that had arisen since its introduction.
Similar views were expressed again by a range of UK stakeholders
earlier this year in response to a Commission online questionnaire
and the Commission's proposals address many of the points made
by UK respondents. Back
9
See footnote 8. Back
10
Data Protection Directive (95/46/EC) and EC Regulation 45/2001. Back
11
See footnote 8. Back
12
At the EU level, the proposal to interconnect Member States' domestic
insolvency registers is estimated by the Commission to cost €1.5
million (£1.2 million) over the project life (2014-20). Back
13
Both reflected by proposals in the draft Regulation (document
(b)). Back
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