CoMI Gives Leg Up to Country of Registry

CoMI Gives Leg Up to Country of Registry

Journal Issue: 
Column Name: 
Journal Article: 
The European Court of Justice (ECJ) has recently released its decision in In re Eurofood IFSC (Case C-341/04) on Council Regulation (EC) 1346/2000 on Insolvency Proceedings (EC Insolvency Regulation). It is the first major ECJ ruling on the operation of the EC Insolvency Regulation, in particular on the meaning of the centre of main interests (CoMI), the opening of insolvency proceedings and the public policy exception.

Beyond the strict confines of the EC Insolvency Regulation, this ECJ decision will serve as the most persuasive authority for the meaning of CoMI and the public policy exception in the UNCITRAL Model Law on Cross-Border Insolvency, not least because the concepts of CoMI and public policy in the Model Law have their origin in the European Union Convention on Insolvency Proceedings, which was subsequently reproduced as the EC Insolvency Regulation.

The Facts

Eurofood IFSC Ltd., a subsidiary of Parmalat SpA, is a company incorporated and registered in Ireland. It is a wholly owned subsidiary of Parmalat, a company incorporated in Italy that operated through subsidiary companies in more than 30 countries worldwide. Eurofood's principal objective was the provision of financing facilities for companies in the Parmalat group.

Eurofood's registered office is at the International Financial Services Centre, Dublin (IFSC). The IFSC was established to provide a location for internationally traded financial services to be provided only to nonresident persons or bodies. Eurofood carried on business at the IFSC as required by Irish law.

On Dec. 24, 2003, Parmalat was admitted to extraordinary administration proceedings by the Ministero delle Attivite Produttive (Italian Ministry of Productive Activities). Dr. Enrico Bondi was appointed as extraordinary administrator.

On Jan. 27, 2004, Bank of America presented to the High Court of Ireland (the Irish court) a petition for the winding up of Eurofood, alleging that Eurofood was insolvent. On the same day, Bank of America also applied ex parte for and obtained the appointment of Mr. Pearse Farrell as provisional liquidator to Eurofood.

On Feb. 9, 2004, the Italian Minister for Production Activities admitted Eurofood to the extraordinary administration procedure and again appointed Dr. Bondi as the extraordinary administrator. The next day, the Italian court made an order in which it acknowledged the filing of a petition to declare the insolvency of Eurofood and set Feb. 17, 2004, as the date for the hearing of that petition.

On Feb. 20, 2004, the Italian court gave judgment opening insolvency proceedings concerning Eurofood, declaring it to be insolvent, determining that the centre of its main interests was in Italy and appointing Dr. Bondi as extraordinary administrator.

On March 23, 2004, the Irish High Court ruled that according to Irish law, the insolvency proceedings with respect to Eurofood had been opened in Ireland on the date on which the application was submitted by the Bank of America NA, namely Jan. 27, 2004. Taking the view that Eurofood's CoMI was in Ireland, it held that the proceedings opened in Ireland were the main proceedings. It also held that the failure of Dr. Bondi to put Eurofood's creditors on notice of the hearing before the Italian court (despite that court's directions on the matter) and the failure to furnish Mr. Farrell with the petition or other papers grounding the application until after the hearing had taken place all amounted to a lack of due process such as to warrant the Irish courts refusing to give recognition to the decision of the Italian court on grounds of public policy under Article 26 of the EC Insolvency Regulation. Finding that Eurofood was insolvent, the Irish High Court made an order for winding up and appointed Mr. Farrell as the liquidator.

Dr. Bondi then made an appeal to the Irish Supreme Court. The Supreme Court decided to stay the proceedings and referred the following questions to the ECJ for a preliminary ruling:

1. Where a petition is presented to a court of competent jurisdiction in Ireland for the winding up of an insolvent company and that court makes an order, pending the making of an order for winding up, appointing a provisional liquidator with powers to take possession of the assets of the company, manage its affairs, open a bank account and appoint a solicitor all with the effect in law of depriving the directors of the company of power to act, does that order combined with the presentation of the petition constitute a judgment opening... insolvency proceedings for the purposes of Article 16, interpreted in the light of Articles 1 and 2 the EC Insolvency Regulation?
2. If the answer to Question 1 is in the negative, does the presentation, in Ireland, of a petition to the High Court for the compulsory winding up of a company by the court constitute the opening of insolvency proceedings for the purposes of that regulation by virtue of the Irish legal provision (section 220(2) of the Irish Companies Act, 1963) deeming the winding up of the company to commence at the date of the presentation of the petition?
3. Does Article 3 of the said regulation, in combination with Article 16, have the effect that a court in a Member State other than that in which the registered office of the company is situated and other than where the company conducts the administration of its interests on a regular basis in a manner ascertainable by third parties, but where insolvency proceedings are first opened has jurisdiction to open main insolvency proceedings?
4. Where

(a) the registered offices of a parent company and its subsidiary are in two different Member States,
(b) the subsidiary conducts the administration of its interests on a regular basis in a manner ascertainable by third parties and in complete and regular respect for its own corporate identity in the Member State where its registered office is situated and
(c) the parent company is in a position, by virtue of its shareholding and power to appoint directors, to control and does in fact control the policy of the subsidiary, in determining the CoMI, are the governing factors those referred to at (b) or (c) above?

5. Where it is manifestly contrary to the public policy of a Member State to permit a judicial or administrative decision to have legal effect in relation [to] persons or bodies whose right to fair procedures and a fair hearing has not been respected in reaching such a decision, is that Member State bound, by virtue of Article 17 of the EC Insolvency Regulation, to give recognition to a decision of the courts of another Member State purporting to open insolvency proceedings in respect of a company, in a situation where the court of the first Member State is satisfied that the decision in question has been made in disregard of those principles and, in particular, where the applicant in the second Member State has refused, in spite of requests and contrary to the order of the court of the second Member State, to provide the provisional liquidator of the company, duly appointed in accordance with the law of the first Member State, with any copy of the essential papers grounding the application?

Decision

The ECJ ruled as follows:
1. Where a debtor is a subsidiary company whose registered office and that of its parent company are situated in two different Member States, the presumption laid down in Article 3(1) of the EC Insolvency Regulation, whereby the CoMI of that subsidiary is situated in the Member State where its registered office is situated, can be rebutted only if factors which are both objective and ascertainable by third parties enable it to be established that an actual situation exists which is different from that which location at that registered office is deemed to reflect. That could be so in particular in the case of a company not carrying out any business in the territory of the Member State in which its registered office is situated. By contrast, where a company carries on its business in the territory of the Member State where its registered office is situated, the mere fact that its economic choices are or can be controlled by a parent company in another Member State is not enough to rebut the presumption laid down by that Regulation.
2. On a proper interpretation of Article 16(1) of the EC Insolvency Regulation, the main insolvency proceedings opened by a court of a Member State must be recognised by the courts of the other Member States, without the latter being able to review the jurisdiction of the court of the opening State.
3. On a proper interpretation of Article 16(1) of the EC Insolvency Regulation, a decision to open insolvency proceedings for the purposes of that provision is a decision handed down by a court of a Member State to which application for such a decision has been made, based on the debtor's insolvency and seeking the opening of proceedings referred to in Annex A to the EC Insolvency Regulation, where that decision involves the divestment of the debtor and the appointment of a liquidator referred to in Annex C to the EC Insolvency Regulation. Such divestment implies that the debtor loses the powers of management that he has over his assets.
4. On a proper interpretation of Article 26 of the EC Insolvency Regulation, a Member State may refuse to recognise insolvency proceedings opened in another Member State where the decision to open the proceedings was taken in flagrant breach of the fundamental right to be heard, which a person concerned by such proceedings enjoys.

Analysis

This decision will make it harder to rebut the presumption that CoMI is in the jurisdiction of a company's registered office, and thus more difficult to centralise the CoMIs of a number of companies incorporated in different jurisdictions in one EU jurisdiction.


[I]t will not be sufficient to produce evidence that economic choices are controlled by a parent company in another Member State... Once main proceedings have been opened, recognition of those proceedings as such in all other Member States is automatic and mandatory.

The starting point is that each company is "a distinct legal entity...subject to its own court jurisdiction." Although CoMI is unfortunately not actually defined in the body of the EC Insolvency Regulation, the ECJ found that one of the recitals made it plain that CoMI must be identified by reference to criteria that are "both objective and ascertainable by third parties." The need for legal certainty and, interestingly, foresee-ability as to which court has jurisdiction to open main proceedings was clear to the ECJ, particularly given the importance of the CoMI decision for the conduct of the proceeding. In the light of this, it will not be sufficient to produce evidence that economic choices are controlled by a parent company in another Member State. One also wonders whether it can still safely be said that a CoMI can be "moved" from one jurisdiction to another within a relatively brief period of time.

Once main proceedings have been opened, recognition of those proceedings as such in all other Member States is automatic and mandatory. If there is unhappiness with the finding of the first court to do so, appeals must be made to the appeal courts in that Member State. Any other result would be inconsistent with the "simplified mechanism" for recognition of decisions given in insolvency proceedings and the principle of "mutual trust" set out in Recital 22 of the EC Insolvency Regulation. There are no surprises in this.

To ensure effectiveness of the system, the ECJ went into detail on the sorts of national decisions that will amount to a "decision to open insolvency proceedings." The decision must so qualify as a matter of the national law of the Member State of the court that makes it; the proceedings must be collective, based on the debtor's insolvency and entail at least partial divestment of the debtor, and they must also prompt the appointment of a liquidator. All these factors were present in Eurofood. Had they not been present, the Italian court would arguably have been free to open main proceedings notwithstanding any doctrine of Irish domestic law relating the commencement of a liquidation back to the date of the presentation of the winding-up petition to the Irish court.

Finally, there is a friendly but firm slap on the wrist for Dr. Bondi and his advisers on the public policy point. Where what is in question is a fundamental right to be heard, a court that is in a position to deny such a right must not confine itself to the application of "its own conception of the requirement...and of how fundamental that requirement is in its legal order...." The reference to a need to have regard to the "whole of the circumstances" is to be read as a need for courts hearing matters of this sort to look beyond narrow domestic concerns.

As noted above, this ECJ decision will serve as the most persuasive authority for the meaning of CoMI and the public policy exception in the Model Law. This in turn should help promote a consistent application of the Model Law and thus achieve the Model Law's objectives.

Journal Date: 
Saturday, July 1, 2006