Eurofood Fight Forum Shopping under the E.U. Regs

Eurofood Fight Forum Shopping under the E.U. Regs

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The name "Parmalat" hit worldwide financial headlines in December 2003, with reports of fake bank letters and arrests of executives. Some commentators dubbed it the "Enron of Europe." Insolvency proceedings were filed in Italy, Brazil, Ireland, the United States, the Czech Republic and Hungary. The Italian court appointed Enrico Bondi extraordinary administrator of Parmalat S.p.A. He was soon filing lawsuits against banks and promising reorganization. Creditors angled to maximize their recoveries in a global game of insolvency chess.

When the headlines fade and the creditors are paid (if at all), Parmalat could be a defining case in European corporate insolvency law. This is so because creditors of Eurofood IFSC Limited, a subsidiary of Parmalat, filed insolvency proceedings in Ireland, but an Italian court took control of Eurofood's insolvency a few days later.

The Eurofood Story

On Nov. 5, 1997, Eurofood was incorporated in Ireland as a wholly owned subsidiary of Parmalat. Eurofood had four directors—two were Italian and two were Irish. The company's registered place of business was Dublin, Ireland, where it received tax benefits. Eurofood's purpose was to enter into financial transactions. In this capacity, Eurofood issued $180 million in bonds. Eurofood transferred the bond proceeds to Parmalat's Brazilian and Venezuelan subsidiaries.

In the fall of 2003, Parmalat and Eurofood began to have financial troubles. On Nov. 12, 2003, one of the Italian directors resigned. On Christmas Eve 2003, Parmalat was admitted to extraordinary administration proceedings by the Italian Ministry of Productive Activities. On Dec. 27, 2003, the Civil and Criminal Court of Parma (Parma court) determined that Parmalat was insolvent and placed the company into extraordinary administration under Italian law.

The second Italian director of Eurofood resigned on Jan. 20, 2004. By this time, Eurofood was near failure. On Jan. 23, Eurofood wrote a letter to one of its main creditors, Bank of America N.A. (BofA). This letter informed BofA that Eurofood only had access to the public press information concerning the financial position of the Parmalat group. Eurofood closed the letter by informing BofA that Parmalat management would meet on Jan. 27, 2004, to consider the possibility of appointing new directors to Eurofood. Eurofood added that any "alteration to the structure of the current Board of Directors of Eurofood may...impact on the location of Eurofood's management and the jurisdictions in which certain procedures in respect of Eurofood may be commenced."

BofA acted decisively on Jan. 27, 2004, when it filed an Irish winding-up petition against Eurofood. The Irish judge appointed Pearse Farrell provisional liquidator and gave him power to act immediately, take possession of all of Eurofood's assets, manage its affairs, open a bank account in Eurofood's name and retain the services of a solicitor. The court scheduled a final hearing on the petition for winding-up for Feb. 23, 2004.

Back in Italy, Eurofood was admitted to extraordinary administration on Feb. 9, 2004, and Mr. Bondi was appointed extraordinary administrator. On Feb. 12, 2004, Mr. Bondi filed a required report about Eurofood (the "Bondi Report") and requested a finding that the company was insolvent. The next day Mr. Bondi's solicitors served Mr. Farrell with notice of a hearing scheduled for Feb. 17, 2004, in Parma, Italy, to determine if Eurofood was insolvent. On Feb. 16, 2004, Mr. Farrell filed a motion in the Irish court, requesting permission to participate in the Italian hearing and for an earlier final hearing on the Irish winding-up petition. The Irish court allowed the Irish administrator to travel to Italy, but denied his request for a new hearing date on the Irish winding-up petition.

The Parma court held a hearing on whether Eurofood was insolvent on Feb. 17, 2004. At this hearing, the Parma court granted the Irish liquidator permission to file a supplemental opposition to the petition the following day; Mr. Bondi filed a counter-brief on Feb. 19, 2004. On Feb. 20, 2004, the Parma court issued its decision, declaring Eurofood insolvent and finding that its "center of main interest" was in Italy. On March 23, 2004, the court in Ireland refused to recognize the Parma court's ruling, opened a main insolvency proceeding in Ireland and held that Eurofood's "center of main interest" was Ireland.

European Insolvency Regulation

The Irish court and the Parma court each held that the center of Eurofood's main interest was in its respective jurisdiction. The European Insolvency Regulation does not permit this result. The European Insolvency Regulation was designed "to avoid incentives for the parties to transfer assets or judicial proceedings from one member state to another, seeking to obtain a more favorable legal position (forum shopping)" and to "achieve the aim of improving the efficiency and effectiveness of insolvency proceedings having cross-border effects...." See Counsel Regulation 1346/2000, recital 4 and 8, O.J. L 160 30.6.2000, p. 1.

The European Insolvency Regulation provides for recognition and cooperation among the various member states. The framework of Article 3 allows for "main insolvency proceedings" in the member state where a debtor has its "center of main interests." Id. at Art. 3(1). The "center of main interest" is not defined. However, Article 3(1) provides that in the case of companies, "the place of the registered office shall be presumed to be the centre of its main interests in the absence of proof to the contrary." Id. at Art. 3(1). Recital (13) of the European Insolvency Regulation further provides that the "centre of main interest" shall correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties. Id. at Recital (13). There can only be one center of main interest. See In re BRAC Rent-A-Car International Inc., [2003] 2 All E.R. 201 (Ch.).

Member states where a debtor does not have its center of main interest, but does have an "establishment within the territory," may open a "secondary proceeding" that is limited to a winding-up, not reorganization, of the debtor's assets within the territory where the secondary proceeding is opened. European Insolvency Regulation at Art. 3(2). "Establishment" means "any place of operations where the debtor carries out a non-transitory economic activity with human means and goods." Id. at Art. 2(h).

If a court has opened a main proceeding in the member state where a debtor has its "center of main interest," then any subsequent proceeding must be a secondary proceeding. Id. at Art. 3(3). If a debtor seeks to open a main proceeding in a member state where it does not have its center of main interest, then the court in that member state should not open a main proceeding, but may only open a secondary or territorial proceeding to wind up the assets of the company in that jurisdiction. Under Article 16 of the European Insolvency Regulation, any ruling under Article 3 with respect to opening an insolvency proceeding shall be recognized by all other member states from the time that it becomes effective. Id. at Art. 16(1).

Court Rulings: The Eurofood Fight

The Irish court and the Parma court both determined that Eurofood had a registered office in Dublin, where it had a certificate to conduct business. They both determined that Eurofood had four directors, two each in Ireland and Italy. They both also recognized that the company was managed by BofA under the terms of a management agreement. They agreed Eurofood existed solely to engage in certain financial transactions with BofA, guaranteed by Parmalat. The two courts also agreed that Eurofood was hopelessly insolvent.

The two courts did not agree on everything, however. For example, the Irish court found that all the board of directors meetings, except one, were conducted in Ireland. The Parma court, on the other hand, relying on the Bondi Report, decided that the Italian directors attended board meetings by telephone from Italy. Mr. Bondi argued that the two Irish directors were on an executive committee. The Irish Supreme Court rejected this notion based on its review of Eurofood's articles, but the Parma court accepted it.

The Parma Court Decision

The Parma court first examined the jurisdictional question under both Italian law and the European Insolvency Regulation and concluded that "apart from the location of the registered office in another member state, the management activities and the propulsive centre of the company were situated at the offices of Parmalat S.p.A. in Collecchio (Parma), where the directors of the latter worked and...also the directors of Eurofood with executive powers operated." In re Eurofood IFSC Ltd., slip op. (Lovell's Translation 20 Feb. 2004) at 3.

The Parma court stated that the two executive directors in Italy actually managed the company—specifically, the transactions Eurofood engaged in, and that these two directors traveled to Ireland only in "exceptional cases." Id. at 4-5. The Parma court stated that Eurofood had no employees in Ireland and no presence there, but only a domicile. Id. Finally, the Parma court, quoting from the Bondi Report, stated that Parmalat had guaranteed the Eurofood transactions and that the creditors would not have bought the bonds absent this guarantee. Id. at 6.

In response to the Irish Provisional Liquidator's arguments that Eurofood's center of main interest was in Ireland, the Parma court, relying on the Bondi Report, found that the "strategic and operational decisions" were made in Italy and that this fact was more important than the "compliance with formalities" as embodied in a management agreement, which provided that the Irish management would only provide "general consultancy rather than true autonomous management." Id. at 7. Thus, the Parma court concluded that "Eurofood was clearly a mere instrument of Parmalat S.p.A.'s financial policy and that the company was incorporated abroad with a merely formal office for the sole purpose of facilitating inter-group cash flows and consequently to obtain an undisputed tax benefit." Id. at 8. The Parma court also determined that the opening of a provisional liquidation in Ireland 10 days before the commencement of the Italian case did not result in the opening of a main proceeding in Ireland. The Italian court therefore determined it was not required to defer to the Irish court's proceeding as the main proceeding under §16 of the European Insolvency Regulation.

The Irish Court Decision

The court of first instance in Ireland held a final hearing on the winding-up petition after the Parma court ruled. The Irish court first discussed whether the opening of a provisional petition in liquidation on Jan. 27, 2004, constituted the opening of insolvency proceedings under the European Insolvency Regulation. See In the Matter of Eurofood IFSC Ltd., slip op. (Mar. 23, 2004) at 21. The Irish court concluded that as a matter of Irish law, the determination of whether Eurofood was subject to Irish insolvency proceedings, whenever decided, would relate back to Jan. 27, 2004. Id. Thus, it determined that the Irish proceeding was commenced before the Italian proceeding, requiring the Irish court to determine the center of Eurofood's main interest. Id. at 22. The Irish court held that it did not have to defer to the Parma court's ruling because there was no notice to Irish creditors of the hearing in Parma, which violated the creditors' right to a fair hearing.

Turning to the center of main interest analysis, the Irish court started with the presumption that the center of main interest is Dublin, the place of the registered office of the company in the absence of proof to the contrary. Id. at 23. The Irish court stated that if the registered office was not the center of main interest, then, under Article 13 of the European Insolvency Regulation, the court should determine the place where the debtor conducts the administration of its interests on a regular basis and is therefore ascertainable by third parties. Based on the evidence before it, the Irish court found that the "clear perception" of Eurofood's creditors "was that they were dealing with investments issued by a company that was located in Ireland and was subject to Irish fiscal and regulatory provisions." Id. at 28. The court further determined that there was "no evidence whatsoever that [the creditors] considered the company was run out of Italy." Id.

Mr. Bondi appealed the Irish court's decision. On appeal, the Irish Supreme Court affirmed the lower court's finding that the board meetings had occurred in Ireland and that the Italian directors attended meetings in person in Dublin. The Irish Supreme Court also determined that the center of Eurofood's main interests was in Ireland because there was extensive evidence Eurofood's creditors relied on the company being an Irish company. In a separate opinion, the Irish Supreme Court decided that it was a violation for the Parma court to conduct the hearing it did without providing sufficient notice to Eurofood's Irish creditors. The Irish Supreme Court certified five questions to the European Court of Justice (ECJ) and requested expedited consideration of the certified questions. The ECJ denied this request for expedited treatment. See Bondi v. Bank of America N.A., Case C-341/04 (Sept. 15, 2004).

The Potential Implications of the Eurofood Case

The Irish Eurofood case is now before the ECJ. The main issue is whether the Irish provisional liquidation commenced on Jan. 27, 2004, constituted the opening of an insolvency proceeding. If it did, then the Parma court was required to defer to the Irish court's decision under Article 16 of the European Insolvency Regulation. If it was not, then the Parma court opened a main proceeding and the Irish court should have deferred to it even if the Irish court disagreed with the Italian court's center of main interest findings. By ruling on this issue alone, the ECJ could avoid ruling on the center of main interest question.

If the ECJ does reach the center-of-main-interest question, it will be the first ECJ ruling on the center-of-main-interest issue. Thus, the ruling could affect corporate insolvencies in Europe by reducing (or further perpetuating) forum shopping under the European Insolvency Regulation.


In the Eurofood case, the Irish and Italian courts interpreted the same facts and referred to the same provisions of the European Insolvency Regulation, yet they reached irreconcilable conclusions. The simplest way for the ECJ to resolve the center-of-main-interest dispute is to rely on the text of Article 3 and find that the registered office in Dublin is presumptively Eurofood's center of main interest. Alternatively, the ECJ could establish a test for rebutting the center-of-main-interest presumption. The ECJ could also set out what evidence a court should consider in order to rebut the presumption. If the ECJ provides guidance on the center-of-main-interest test, the Eurofood case will be a significant decision in the international scene that could affect European insolvency law for years to come.

Journal Date: 
Tuesday, March 1, 2005