8 Insolvency proceedings
| Committee's assessment
| Legally and politically important |
| Committee's decision | Not cleared from scrutiny; further information requested (36248), 10284/14 + ADD 1
|
| Document details | Draft Regulation amending Regulation No. 1346/2000 on insolvency proceedings
|
| Legal base | Article 81 TFEU; co-decision; QMV
|
| Department | Business, Innovation and Skills
|
Summary and Committee's conclusions
8.1 Cooperation in the administration of EU cross-border
insolvencies and mutual recognition of the insolvency proceedings
of Member States is currently managed by the Insolvency Proceedings
Regulation (IPR). The IPR applies whenever a debtor, whether a
natural or legal person, has their centre of main interests (COMI)
in an EU Member State.
8.2 The IPR does not harmonise national insolvency
laws; insolvency proceedings are subject to the national law of
the Member State where the debtor has its COMI (with the possibility
of any number of secondary proceedings in any Member State where
the debtor has an establishment). The insolvency law of the Member
State of the main proceedings then applies throughout the EU except
where secondary proceedings have been opened in which case the
insolvency law of that Member State applies to the realisation
and distribution of assets to local creditors.
8.3 The Commission first sought to modernise the
IPR to address changes in the insolvency field since 2002, by
improving coordination of main and secondary proceedings, promoting
business rescue and increasing legal certainty and transparency
of proceedings in a draft amending Regulation published on 12
December 2012 (the original proposal).[32]
8.4 The UK's JHA opt-in applies to the proposal.
The original text was cleared from scrutiny on 12 June 2013 (following
a debate in European Committee on 4 March 2013) once it became
clear that the UK was opting in to the proposal (as notified on
10 April 2013), that participation was supported by the insurance
industry and other stakeholders and that the Government would
benefit from being free to negotiate the best deal for the UK
in the negotiations without the constraints of the scrutiny reserve
(see further paragraph 8.12).
8.5 Regular updating, particularly on developments
which might disadvantage the UK insurance industry, was a condition
of scrutiny clearance. Although we last reported on the original
proposal on 12 June 2013, we received a further update from the
then Minister for Employment Relations and Consumer Affairs (Jenny
Willott) on 23 June 2014 on the agreement of a General Approach
text on 6 June, supported by the UK. This followed the adoption
of a first reading position by the European Parliament which contained
various adverse elements (see paragraph 0.13).
8.6 The current Minister (Jo Swinson) has now deposited
the Presidency Note which went to the 6 June Council, with the
annexed compromise text, together with an Explanatory Memorandum.
Overall, the Government is supportive of the changes achieved
at General Approach as they align with the best interests of UK
business and creditors, though the Minister does outline some
consequential changes that will be required to UK law should the
proposal be adopted in its current form (see paragraph 8.25).
Trilogue negotiations are expected to commence in September or
October.
8.7 We thank the Minister for depositing the General
Approach text with a helpful and comprehensive Explanatory Memorandum.
8.8 We note that, after the initial consultation
with insurance industry stakeholders who were "unanimously"
supportive of participation in the draft Regulation, the Government
has continued to "informally consult stakeholders as discussions
have continued" who have "generally been supportive
of the compromise position, including the new proposals on group
co-ordination". We would be interested to learn from the
Minister what aspects of the compromise position have attracted
less support from consultees.
8.9 We request that the Minister continue to keep
us informed of developments resulting from trilogue discussions,
particularly any return to the adverse aspects of the EP first
reading position such as mandatory group insolvency proceedings
and "suspect periods", or any lessening of the degree
of Member State control set out in the text over which national
insolvency proceedings are to fall within the scope of the Regulation.
8.10 In the meantime, the document remains under
scrutiny.
Full details of the document:
Draft Regulation amending Council Regulation No 1346/2000 on
insolvency proceedings: (36248), 10284/14 + ADD 1.
Background and previous scrutiny
8.11 The full background to the original proposal
and our previous scrutiny of that proposal is set out in our Fifth
Report of 2013-14 and our Thirty-sixth and Thirtieth Reports of
2012-13.
8.12 In our last Report on the original proposal,
following notification that the UK intended to participate in
it, we concluded as follows:
"We noted in our first Report on the draft
Regulation the Government's overall support of the proposals.
Since that initial favourable view, the UK has opted to participate
in the proposal, there is evidence of support for the proposal
from UK insolvency stakeholders, and negotiation of the proposal
is progressing in line with UK interests. Accordingly, we are
now content to clear this document. Should negotiations change,
leading to an adverse impact on the UK's insolvency industry,
we would expect to be informed as soon as possible"
Minister's letter of 23 June 2014
8.13 The then Minister informed us that:
· the first reading in the European Parliament
was completed on 4 February before the compromise text was adopted
for General Approach by the Council on 6 June;
· the text would now proceed to trilogue
under the Italian Presidency for whom the Regulation was key priority;
· the UK had been able to build alliances
with like-minded Member States to fend off positions taken by
other Member States which would have been detrimental to the UK
as the leading centre for business rescue and to the interests
of insolvency and restructuring industry and businesses;
· the compromise General Approach text:
— does not include a suspect period (supported
by the European Parliament in its first reading) — this
is where a debtor must have had their COMI in a Member State for
at least three months prior to the opening of insolvency proceedings;
— but does remove the presumption that
a non-trading individual or consumer debtor's habitual residence
is their COMI, entailing a detailed examination by the court where
jurisdiction is in question (being limited to consumer debtors,
this avoids adverse impact on business and the economy);
— includes provisions on group coordination
proceedings which allow for individual group members to opt out
where there is a conflict with domestic legislation or creditors'
interests; and
— amends procedures by which insolvency
procedures are nominated by Member States for inclusion in the
annexes to the Regulation;
· since June 2013, there have been four
read-throughs of the text in Council Working Group, attended by
UK officials who are in constant contact with UK stakeholders
as negotiations continue over the summer;
· there are several important areas of difference
between the EP's first reading position and that of the Council
working group which will be the subject of further discussion
in the trilogue:
— the "suspect" period where
a debtor or company has relocated prior to the opening of insolvency
proceedings;
— the mechanism for proceedings to be opened
out of court; and
— the nature of group coordination proceedings.
Our letter of 9 July 2014
8.14 We responded by saying that we continued to
support the Government's continuing efforts to maintain alliances
in order to protect the UK insurance industry and business from
any adverse changes to the text. We said we looked forward to
hearing from the Minister again on further developments in the
trilogue negotiations.
The current document
8.15 Although the versions of the current document
(and annex) deposited with us by the Government are marked "Limité",
we understand from departmental advisers that the restriction
was lifted on 4 June 2014.
8.16 The Presidency note outlines the main elements
of the compromise text and the justification for the changes.
In short, these comprise:
· Scope of the Regulation and amendment
of its Annexes: In order to clarify the
wider scope of the Regulation as proposed by the Commission, the
proceedings that are subject to the Regulation are to be definitively
listed in Annex A. To ensure full participation of Member States
in the amendment of the Annexes, amendments shall be achieved
by ordinary legislative procedure rather than by Commission delegated
acts.
· Termination of employment contracts:
Where insolvency proceedings have not been opened in the Member
States whose courts have jurisdiction to terminate or modify employment
contracts, the Regulation will grant jurisdiction to those courts,
notwithstanding that no proceedings have been opened.
· Insolvency Registers:
To address data protection concerns, Member States shall not be
required to publish details of insolvency proceedings concerning
individuals who have not or are not carrying on a business.
· Synthetic secondary proceedings:
In order to protect the interests of local creditors, any undertaking
offered to respect their rights as if secondary proceedings had
been opened shall be subject to qualified majority voting.
· Effect of stays of enforcement proceedings
on secondary proceedings: Where a temporary
stay of enforcement proceedings is granted by the Member State
where the debtor has their Centre of Main Interests, any court
considering an application to open secondary proceedings may stay
that application where it is satisfied that the interests of local
creditors are protected.
· Co-ordination of the insolvencies of
members of a group of companies: In addition
to the Commission's proposal for communication and co-operation
between insolvency office holders, the Regulation will provide
for the co-ordination of group insolvencies.
The Government view
8.17 In her Explanatory Memorandum of 28 July, the
current Minister addresses first the changes made in the General
Approach on the Scope of the draft Regulation and, in particular,
the question of control by Member States over which national insolvency
or rescue proceedings should be governed by the Regulation:
"The Commission proposed that the scope
of the Regulation generally should be widened to include both
hybrid (where the existing management are left in place) and pre-insolvency
restructuring proceedings; and that secondary proceedings should
be capable of being rescue proceedings rather than simply winding-up
proceedings.
"Several Member States, including the UK,
were concerned that the wider scope of the Regulation could arguably
include proceedings that Member States did not wish to be included
in the Regulation. The Government highlighted one such proceeding,
being the Companies Act 'Scheme of Arrangement'. While not designed
as an insolvency proceeding it is capable of being used for restructuring
distressed businesses. In response to consultation, the majority
of UK stakeholders also argued that Schemes should not be subject
to the Regulation as it would harm functionality and damage the
usefulness of the scheme for rescuing distressed businesses, particularly
overseas companies whose contacts are governed by English law.
In addition, Debt Relief Orders could be also have been brought
within an amended scope. Debt Relief Orders are a low cost alternative
to bankruptcy that are intended to provide debt relief for those
with no assets, low levels of debt and no ability to make payments
to their creditors to access debt relief at a lower cost than
bankruptcy. With an application fee of only £90, the funding
model of Debt Relief Orders is not designed to handle the complexities
of cross-border debts.
"The wording of Article 1 stated that proceedings
that meet the criteria "shall be listed in Annex A",
which could be interpreted as any Member State being required
to nominate all proceedings which met the scope of Article 1.
"The compromise text states that proceedings
within scope of the Regulation 'are listed in Annex A'. This,
together with new recital text, seeks to make Annex A definitive
- if a proceedings is not in Annex A then it is not within scope
of the Regulation. There will also be new recital text to clarify
that neither the UK's Schemes of Arrangement, nor its Debt Relief
Orders should be within the revised scope. These amendments were
crucial given changes to the process for amending the annexes
as set out below."
8.18 The Minister explains the legal issues encountered
over the process for amendment of the annexes to the draft Regulation:
"The revised Regulation will have two annexes:
annex A lists the insolvency proceedings of each Member State
to which the Regulation applies; annex C the types of insolvency
office-holder who may act. The existing Annex B will be deleted.
"It was initially proposed that the annexes
would be amended by Commission delegated acts, but at the discretion
of a Member State to nominate procedures for inclusion or removal.
In other words, a Member State would have informed the Commission
what procedures it wanted added to or removed from Annex A and
the text would have provided that the Commission would act on
any such notification. The Council Legal Service has advised that
it is not compatible with the Treaties for the Commission to,
in effect, be told what to do in this way.
"It is crucial to most Member States, including
the UK, that Member States have the greatest possible influence
on what national proceedings are included in Annex A. The compromise
proposal is that the annexes will be amended by ordinary legislative
procedure, and so subject to negotiation in Council and with the
European Parliament. The Government understands that any such
amendment would be limited to the annexes and the process could
not be used to seek to amend other parts of the Regulation."
8.19 Jurisdiction is, potentially, problematic, given
previous support from the European Parliament and some Member
States for a three month "qualifying" or "suspect
period" in terms of the COMI concept. As the Minister explains:
"The jurisdiction of a Member State to open
'main' proceedings under the existing Regulation is determined
by the location of the debtor's centre of main interests or COMI.
The concept of COMI was introduced by the existing Regulation
and has proven to work well, having since been adopted by the
United Nations Commission on International Trade Law in its Model
Law on cross border insolvency. The existing Regulation contains
one rebuttable presumption as to COMI - in the case of a company,
COMI is presumed to be the place of the company's registered office.
The Commission proposal added two new rebuttable presumptions
for an individual: COMI either their place of business or, where
they do not carry on a business, their residential address.
"However, there are long standing concerns
about the practical application and testing of COMI which have
given rise to much debate about 'forum shopping', where a debtor
may seek a more favourable jurisdiction, particularly concerning
individual insolvency, by attempting a sham relocation.
"The Commission proposals sought to improve
the COMI test and legal certainty by incorporating ECJ case law
into the Regulation and expressly stating that courts must have
regard to certain factors when assessing jurisdiction.
"Several Member States sought more stringent
action, for example by expressly stating that the COMI of a debtor
must have been in a given jurisdiction for at least three months.
Without any discretion in its application, such a rule could also
apply to genuine relocations by a debtor, not simply those cases
where it was a sham. Such a measure was also adopted by the European
Parliament in its first reading position.
"The Government has serious concerns about
wording. It could be contrary to freedom of establishment, and
restricting the ability of companies and businesses to relocate
could impact on the rescue of viable but distressed businesses
and would harm potential for economic growth in the single market.
Any uncertainty concerning the enforceability of debt could have
a negative effect on lending to relocating businesses, and restricting
their access to finance could force a distressed but viable business
into liquidation and value and jobs lost as a result.
"The compromise text seeks to address these
concerns by focusing action on so called 'bankruptcy tourism',
suspending the rebuttable presumption in the case of individuals
who do not carry on a business. In the absence of a presumption,
the courts must examine the debtor's circumstances to determine
COMI. This is already the practice in UK courts where there is
doubt or uncertainty.
"By targeting action at individuals who
are not trading, the economic impact is minimised. As there is
no restriction on where COMI must be found, the court is able
to examine the facts and properly determine its jurisdiction.
In addition, there will be no bar to an individual seeking access
to debt relief when they have relocated to another Member State.
Having discussed the issue with members of the judiciary and other
stakeholders, the Government is satisfied that this will not impose
a greater burden on the courts, as UK courts already examine cases
to ensure that they have jurisdiction to open proceedings."
8.20 The Minister then explains how the interconnection
of insolvency Registers involved issues of transparency, efficiency
and data protection:
"One of the key benefits of the amending
Regulation was the requirement for Member States to establish
insolvency registers which would be freely accessible via the
internet, thereby improving the information available to creditors,
which would be interconnected and searchable in all official EU
languages through the European e-Justice portal. This would be
a valuable tool for businesses, both in terms of making lending
decisions and in identifying debtors who are subject to insolvency
proceedings, potentially avoiding wasted enforcement costs.
"For the UK, the new requirement is not
anticipated to be costly to implement. The UK already has insolvency
registers for individual insolvencies, and information about corporate
insolvencies is available at Companies House. The information
to be included in the interconnected registers is already available
in the case of individual insolvencies, and the Government is
continuing to discuss the most efficient way to implementing access
to corporate information.
"Several Member States had data protection
concerns about publishing information about individuals, including
their name, address and date of birth.
"The compromise text proposes that, provided
any known foreign creditors are informed of the opening of proceedings,
the publication of information concerning individuals who are
not trading is optional. This will not restrict the ability of
the UK or other Member States to continue to publish information
in the individual insolvency register or their equivalent. It
will not impose any additional costs UK businesses or creditors."
8.21 The Minister then explains how the UK practice
known as "synthetic secondary proceedings" has shaped
one of the changes agreed at General Approach:
"Secondary proceedings may be opened where
a debtor has an establishment such as a trading address in a Member
State, but their COMI is in another and main proceedings are opened
in that other Member State. The purpose of secondary proceedings
is to protect the interests of local creditors, so that assets
in the Member State of secondary proceedings are realised according
in to local law, and the local creditors of the debtor are paid
according to the order of priority of the insolvency law of that
Member State. Once the claims of local creditors are extinguished,
any surplus is payable to the office holder in main proceedings,
likewise local creditors are entitled to claim in the main proceedings
for any shortfall. Secondary proceedings may be applied for by
a local creditor or by the office holder in main proceedings.
"The UK insolvency profession has been at
the forefront of developing new practices to minimise the negative
impact secondary proceedings may have. Where there is an establishment
and creditors in another Member State, rather than apply for secondary
proceedings and incur costs in the process, the administrator
may give an undertaking to those creditors that he or she will
respect the priority rights of those creditors as if secondary
proceedings had been opened. This provides those creditors with
the same rights and protections, while saving the costs of applying
for secondary proceedings and the costs of the secondary proceedings
themselves. This practice became known as 'synthetic' secondary
proceedings, which are peculiar to UK law and administration because
of the discretion of the court to alter the order of priority
of payment to creditors.
"Given the potential cost savings and enhanced
distributions to creditors, the Commission sought to provide for
other Member States to use synthetic proceedings. However, some
Member States were concerned about how the rights of local creditors
could be protected if the office holder in main proceedings failed
to respect the undertaking.
"As those Member States were not satisfied
by the continuing ability of local creditors to apply for secondary
proceedings, notwithstanding any undertaking, the compromise text
provides for an undertaking to be approved by a qualified majority
of creditors. Once creditors are notified of the approval of the
undertaking, they have only 30 days in which to apply for secondary
proceedings. This retains the ability to propose synthetic proceedings
and the potential benefits."
8.22 Finally, turning to the issue of Group co-ordination
proceedings and the threat of the mandatory model favoured by
the European Parliament, the Minister comments:
"The existing Regulation makes no provision
for group insolvencies, whereas group structures are a rapidly
evolving feature of large scale cross-border insolvencies, whether
or not the whole of the group or only a part is subject to insolvency
proceedings.
"A key element of the Commission proposal
was to introduce a flexible framework for co-operation between
office holders and courts dealing with the insolvencies of companies
which are members of a group, providing a mechanism for the exchange
of information and the ability for office holders to propose a
restructuring plan for several group members that could enhance
asset realisations and ensure that value is not lost. The Government
regarded this as a pragmatic and sensible solution, particularly
the flexibility, rather than prescriptive rules which could quickly
be overtaken by the evolution of group structures.
"The European Parliament favoured a more
structured approach, providing for mandatory group co-ordination
proceedings that would replace the Commission's co-operation proposals,
involving the appointment of a group co-ordinator who would have
the power to direct office holders appointed in members of the
group to participate in a group restructuring plan. The Government
is concerned that a mandatory system of co-ordination would increase
the cost of administering a group insolvency, and that the costs
and benefits of co-ordination were unquantified.
"During negotiations the UK and several
other Member States supported the compromise approach that would
incorporate both the Commission's enhanced co-operation approach
and a voluntary framework for group co-ordination proceedings
that any company could opt out of. This retains the benefits of
flexible communication and co-operation, while allowing for a
more structured co-ordination plan where appropriate, and allowing
a company to opt out if co-ordination is not in the interests
of the creditors of that member of the group.
"The Government believes the compromise
represents the best interests of business and creditors, and maintains
the necessary flexibility in a developing area of insolvency law.
Group insolvencies have been discussed at international fora for
some time, for example at UNCITRAL, which is currently examining
methods of dealing with international group insolvencies."
8.23 Overall, on the basis that the Regulation is
adopted in the form of the compromise text, the Minister does
not anticipate that there will be any negative impacts on UK business.
Instead, the improved efficiency and the capacity for secondary
proceedings to be rescue proceedings would be beneficial to both
UK creditors of foreign debtors and distressed UK businesses.
8.24 Nor does she consider that the text infringes
fundamental rights, particularly given the new safeguards built
into the compromise text relating to the protection of personal
data pursuant to Article 8 of the Charter. Member States are not
obliged to publish in public accessible electronic insolvency
registers information relating to insolvent individuals who have
not been carrying on a business or at least are able to subject
provision of such information to controls; requirements of the
Data Protection Directive are also to be complied with within
the specific context of the draft Regulation.
8.25 Should the compromise text be adopted eventually
in its current form, the Minister anticipates that the impact
on UK law will be as follows. New rules (or revisions of rules)
will be required on:
· publication of judicial decisions in UK
insolvency proceedings;
· disclosure of the basis for jurisdiction
when UK proceedings are opened;
· publication/registration of information
regarding an insolvency;
· content and form of claims submitted by
foreign creditors in UK insolvency proceedings; and
· the facilitation of "Group coordination
proceedings".
8.26 There do not appear to be significant cost implications
identified by the Government's Impact Assessment, though the interconnection
of insolvency registers may cost, at EU level, in the region of
€1.5M (£1.2M) and, there may be possible costs arising
from any future work on domestic insolvency registers arising
from the interconnection.
8.27 In terms of next steps, the Minister says that
the Italian Presidency plans for working groups to refine the
recitals to the proposal and amendments to the annexes to reflect
its revised scope. Although there is common ground between the
Council and European Parliament on many aspects of the proposal,
the Minister anticipates that there will need to be further negotiations,
with trilogue discussions to begin in September/October.
Previous Committee Reports
None, but see: (34564) (17883/12): Fifth Report HC
83-v (2013-14), chapter 11 (12 June 2013); Thirty-sixth Report
HC 86-xxxvi (2012-13) chapter 2 (20 March 2013); Thirtieth Report
HC 86-xxx (2012-13) chapter 1 (30 January 2013).
32 (34564), 17883/12 Draft Regulation amending Regulation
No. 1346/2000 on insolvency proceedings Back
|
