Pursuant to Article 3 of the EC Regulation on Insolvency Proceedings (the Regulation),¹ the courts of the Member State where a debtor has its center of main interests (COMI) shall have jurisdiction to open main insolvency proceedings with respect to that debtor. A judgment opening main insolvency proceedings is automatically recognised in all other Member States,² subject to the right of those Member States, under Article 26, to refuse recognition if the effects of such recognition would be manifestly contrary to that Member State's public policy. The concept of COMI and the extent to which a Member State's public policy can prevent automatic recognition were considered in the recent case of Re SAS Rover France.³

Background

SAS Rover France, incorporated in France, was a member of the MG Rover group of companies. Its parent company, MG Rover Overseas Holdings, and ultimate parent, MG Rover Group, were both English companies and had been put into English administration proceedings. SAS Rover France acted as a distribution company in France for cars manufactured by the MG Rover Group.

On 18 April 2005, on the application of the company, SAS Rover France was placed into U.K. administration by an order of the U.K. court along with the MG Rover national sales companies in Germany, Ireland, Belgium, the Netherlands, Italy, Portugal and Spain. The court found that SAS Rover France had its COMI in England and that the administration proceedings were, therefore, "main" proceedings under Article 3 of the Regulation.

Ten days later, the French public prosecutor intervened in French proceedings as guardian of the French public interest and gave notice that, applying Article 26 of the Regulation, France did not as a matter of public policy recognise the appointment of the English administrators, that they had no powers in France and that SAS Rover France should not be considered subject to any insolvency proceedings. After hearing the argument, the French commercial court considered that Judge Norris QC of the English High Court was correct to find that COMI was in England, and in addition, that there was no public policy reason not to recognise the proceedings.

COMI

Under Article 3 of the Regulation, a company is presumed to have its COMI in the place where it has its registered office. Recital 13 to the Regulation states that a debtor's COMI should correspond to the place where the debtor conducts the administration of its interests on a regular basis and is therefore ascertainable by third parties.

Case law has shown, however, that the presumption in Article 3 is easily rebutted. Three factors determining COMI have emerged regularly in decisions of courts in various jurisdictions: objectively, the place where the management resides; subjectively, the place where creditors could foresee the company would have its COMI; and implicitly, the place where other group companies have their COMI, even though there is no basis in the legislation for this to be taken into account. Each factor was present in the SAS Rover France case, among others.

In the English High Court decision opening main proceedings, Judge Norris QC observed that the board constitution of each of the national sales companies invariably included at least one U.K. resident director, whereas by contrast there appeared to be no other nationalities common to their boards. Five of the national sales companies had a board with a U.K. resident majority. Clearly, this objective factor was an important one for the judge: It was first in his list of factors pointing to an English COMI. Implicitly though, comparison between the various companies shows the importance he attached to the group COMI in determining the COMI of the individual companies.

The English judge also felt that the subjective test was met: He determined that creditors would look to England rather than the individual national sales company to deal with their debts due from the national sales companies. He agreed with the proposed administrators that all stakeholders in the MG Rover Group and the national sales companies were looking to Longbridge (in England) for solutions to the management of the collapse of the MG Rover Group.

Relevance of Group COMI

The implicit importance of group COMI was referred to as a general consideration by Judge Norris QC:

[T]he general overview is that the national sales companies clearly together form a subsidiary network within part of an international group structure. They are not individual discrete commercial undertakings... In each individual case, the choice lies between England and the country of incorporation of the national sales company. I am satisfied that in each case their centre of main interests is in England and not in their countries of incorporation.

The administrators elaborated on this group analysis before the French commercial court. They submitted that the management of the affairs of SAS Rover France by the English administrators in the context of the global insolvency proceedings would allow restructuring over a longer period and coordination with other European distributors and, therefore, a better realisation of the assets.

The French commercial court ruled that the MG Rover name was known around the world as attaching to cars made in England and that car dealers in France (the major creditors) knew they were part of an integrated network because they placed their clients' orders using the group's IT network. Thus, it was established that third parties could have ascertained that the COMI of SAS Rover France was in England.

This contrasts with the first-instance decisions of both the French and German courts in SAS Isa Daisytek,⁴ which ruled that the English court had gone too far in interpreting the notion of COMI when it found that the French and German subsidiaries were mere establishments of the English parent and that all 17 group companies had their COMI in England. Both decisions were overturned on appeal.

Public Policy

The public prosecutor strongly resisted the finding of COMI in England before the French court, stating that SAS Rover France carried on its business in France; that its customers and employees were in France; that it complied with all French employment, tax and accounting rules; and that the source of capital for the business and the nationality of its principal supplier were not sufficient criteria to establish COMI elsewhere. He also indicated that the fact that no business address in England was apparent from the French companies' register prevented third parties from ascertaining that the COMI of SAS Rover France was other than the place of its registered office.

He submitted "in the name of France" to mean that the opening of main insolvency proceedings in England offended French public policy and that Article 26 of
the Regulation should be applied. That provision states:

[A]ny member state may refuse to recognise insolvency proceedings opened in another member state or to enforce a judgment handed down in the context of such proceedings where the effects of such recognition or enforcement would be manifestly contrary to that state's public policy, in particular its fundamental principles or the constitutional rights and liberties of the individual.

However, the French commercial court disagreed. It referred to the decision of the European Court of Justice in relation to the Brussels Convention in the case of Krombach v. Bamberski,⁵ where it was held that:

recourse to the public policy clause...can be envisaged only where recognition or enforcement of the judgment delivered in another contracting state would be at variance to an unacceptable degree with the legal order of the state in which enforcement is sought inasmuch as it infringes a fundamental principle. In order for the prohibition of any review of the foreign judgment as to its substance to be observed, the infringement would have to constitute a manifest breach of a rule of law regarded as essential in the legal order of the state in which enforcement is sought or of a right recognised as being fundamental within that legal order.

Given that Article 10 of the Regulation provides that the effects of insolvency proceedings on employment contracts and relationships shall be governed solely by the law of the member state applicable to the contract of employment, and that the administrators had put in place measures to ensure that employees would be treated no differently than they would be in a French winding-up, the court considered that the recognition and enforcement of the English main proceedings was not capable of having effects manifestly contrary to French public policy.

Comment

The decision leaves open the possibility that there may be a case where the opening of main proceedings by a foreign court would be contrary to French public policy due to the basis on which the COMI had been determined. This is a particularly notable decision from the French commercial court, as the appeal on this very point of public policy is currently pending before the Cour de Cassation (France's highest court) in the Isa Daisytek case. The issue has even been raised in the French Parliament, resulting in a ministerial statement that while it was a matter for the courts, in the context of a group of companies, a finding that a subsidiary had a particular COMI because that was the COMI of its parent would be a misinterpretation of the Regulation and to recognise that decision would be contrary to French public policy. This may not be the last we hear from the French public prosecutor.

New Spanish Regulations on the Reorganisation and Winding up of Credit Entities

On April 24, 2005, a new law on the reorganisation and winding up of credit entities came into force in Spain (the Law).⁶ The Law implements Directive 2001/24/EC⁷ and governs the effects and peculiarities of reorganisation measures and winding-up proceedings⁸ affecting Spanish or other European Economic Area (EEA) credit institutions performing cross-border activities.

Credit Entities Authorised in Spain

With respect to the reorganisation and winding up of credit entities authorised in Spain with cross-border activities in other EEA Member States either through a branch or the free provision of services regime (Spanish Credit Agencies), the Law provides that:

• The Spanish judicial authorities shall determine the application of reorganisation measures or winding up proceedings to the Spanish Credit Entities (or to their branches located in other EEA Member States). The authorities shall communicate their decision, via the Bank of Spain, to the supervisory authorities of the EEA Member States in which cross-border activities are performed.
• Spanish law shall determine the regime and application of the reorganisation measures and winding-up proceedings affecting Spanish Credit Entities or their branches (including the determination of the assets subject to liquidation proceedings; the treatment given to existing agreements, judicial proceedings and assets purchased after the liquidation proceedings have been initiated; the powers of the affected credit institution and of the liquidator; the recognition and ranking of claims; the distribution of proceeds; the challenge of acts detrimental to the estate and of set-off; the conditions and effects of the termination of the liquidation proceedings; and the persons responsible for payment).
• Specific rules shall, however, determine the competent law to establish the effects of the initiation of reorganisation measures or winding-up proceedings on specific types of contracts or contractual provisions (for example, the effects on employment and contractual netting agreements shall be decided by the law governing such agreements and not by the law applicable to the adoption of the reorganisation measures and winding-up proceedings).
• The initiation of reorganisation measures or winding-up proceedings shall not affect:
  1. rights in rem held against the Spanish Credit Entity;
  2. a seller's retention of title rights in respect of goods sold to the Spanish Credit Entity whenever the affected assets are (at the time the reorganisation measures or winding-up proceedings are initiated) located in another EEA Member State; or
  3. a creditor's right to claim setoff in respect of its debt, provided setoff is allowed by the law applicable to that debt.
• There shall be rules on the publicity of proceedings on evidence of the appointment of the insolvency administrators, information to creditors and rights of creditors in the context of the adoption of the reorganisation measures and/or winding-up proceedings.

Spanish Branches of Non-EU Credit Institutions

In respect of any decision to adopt reorganisation measures and/or open winding-up proceedings over Spanish branches of non-EU credit institutions with cross-border activities in other EEA Member States, the Law sets out that the Spanish judicial authorities shall, via the Bank of Spain, notify the supervisory authorities of the EEA Member States in which the cross-border activities are performed of their decision. The administration of such measures and/or proceedings shall be coordinated with those supervisory authorities.

Spanish Branches of EEA Credit Institutions

In respect of reorganisation measures and winding-up proceedings adopted in other EEA Member States over Spanish branches of EEA credit entities:

• Such measures or proceedings shall be effective in Spain as soon as they are effective in the EEA Member State in which the measure is adopted or the proceeding is opened.
• The Bank of Spain shall, as soon as it has received notice from the competent supervising authority about the decision to take any reorganisation measure or open winding-up proceedings, publicise such decision in Spain.
• Persons or entities appointed by another EEA Member State's authorities with competence for reorganisation measures or winding-up proceedings and with powers to administer or manage such measures or proceedings may exercise the same powers in Spain as are recognised in their home country.

Footnotes

¹ Council Regulation (EC) No 1346/2000 of 29 May 2000 on Insolvency Proceedings. Return to article

² Article 16. Return to article

³ [2005] EWHC 874 (Ch) (unrep); Tribunal de Commerce de Nanterre (France), 19 May 2005 (unrep). Return to article

⁴ [2003] All ER 312. Return to article

⁵ (Case C-7/98). Return to article

⁶ Ley 6/2005, de 22 de abril, sobre saneamiento y liquidación de las entidades de crédito. Return to article

⁷ Directive 2001/24/EC of the European Parliament and the Council of 4 April 2001 on the reorganisation and winding up of credit entities. Return to article

⁸ The Law provides a definition for "reorganization measures" (i.e., the initiation of the insolvency proceedings under the Spanish Insolvency Act (Ley 22/2003, de 9 de Julio, Concursal)) and "winding up proceedings"(i.e., the initiation of the liquidation phase under the Spanish Insolvency Act) in Spain. Return to article