Beginning May 31, 2002, in most of the European Union (EU) countries, the regulation on insolvency proceedings will come into effect.¹ Its origin goes back to the '60s: In 1968, the Brussels Treaty on international jurisdiction and mutual recognition and enforcement of decisions in civil and commercial matters was introduced. Article 1(2) of this treaty excluded insolvency proceedings because during the preparations since 1960, these were seen as a special subject requiring separate treatment. The Insolvency Regulation aims to fill this gap and, therefore, provides for rules regarding jurisdiction, applicable law and recognition of insolvency proceedings and judgments. Since it also contains conflict-of-law rules (private international law), the EU Insolvency Regulation goes beyond the traditional scope of the Brussels Treaty.²

In Europe, several attempts to regulate cross-border insolvencies have been made during the last decades, most notably the European Convention on Insolvency Proceedings from 1995.³ The convention was signed by 15 member states, but due to political controversies, the United Kingdom withheld its signature. As part of a policy adapted in the Treaty of Amsterdam (1998), in which the authorized bodies in the EU would directly create international private law, especially international private procedural law, the contents of the 1995 convention were brought to life again, albeit in a different legal form. The requirements of the convention are that all member states must ratify the convention and all must empower a court to give rulings on interpretation. In the 1995 convention, these are conferred upon the Court of Justice of the European Communities. The content of the convention, which has hardly been changed, is now subject of the EU Insolvency Regulation, which has as its basis Art. 65 and 67 (judicial cooperation) of the EC Treaty. Being a regulation, it automatically applies in the EU without any involvement of member states that would have to approve or would have to enact specific implementing legislation. The jurisdiction of the European Court automatically flows from the EC Treaty.⁴ Also, the Brussels Treaty will become a regulation. The Insolvency Regulation applies in all EU countries except Denmark.⁵

Goal and Scope of the Regulation

The Insolvency Regulation applies to collective insolvency proceedings "...which entail the partial or total divestment of a debtor and the appointment of a liquidator (Art. 1, §1)." Under Article 2(a) and (c), insolvency proceedings covered by the regulation must also have been expressly entered by the state concerned, in lists covered in Annexes A and B (List A includes reorganization proceedings and winding-up proceedings, list B includes winding-up proceedings). Only those proceedings expressly entered in the list will be considered insolvency proceedings as covered by the regulation and therefore will be able to benefit from its provisions. The term "liquidator" used in the regulation has a very broad concept. Under Article 2(b), it includes any person or body whose function it is to administer or realize the assets or supervise the management of the debtor's business. Even a court itself may fulfill this role. The persons or bodies considered to be liquidators by the regulation are set in the list in Annex C to the regulation.

The goal of the regulation is to strengthen in the EU the legal protection of persons and legal entities therein established. The member states desire to secure the simplification of formalities governing the reciprocal recognition and enforcement of the judgments of the courts or tribunals. Therefore the EU Insolvency Regulation contains provisions to:

1. determine the jurisdiction of a court or of certain authorities with regard to the intra-community effects of insolvency proceedings;
2. create certain uniform conflict-of-law rules for such proceedings;
3. ensure the recognition and enforcement of judgments given in such matters;
4. make provisions for the possibility of opening secondary insolvency proceedings;
5. guarantee information for creditors and rights to lodge claims; and
6. create duties for liquidators in several proceedings to communicate and to cooperate with each other.

The Regulation shall apply only to insolvency proceedings opened after its entry into force, which is, as indicated, May 31, 2002. Insurance undertakings, credit institutions, investment undertakings, holding funds or securities for third parties and collective investment undertakings are excluded from the scope of the regulation. The excluded entities and undertakings are not defined in the regulation, but by other instruments of EU community law.⁶

Principal Features

A very short summary of the contents of the regulation, which contains 47 articles, follows. The regulation is preceded by an extensive preamble that serves as an explanatory memorandum to the framework of the regulation.⁷

The general provisions (Chapter 1, Articles 1-15) establish the area of application of the regulation. As far as the jurisdiction is concerned, the regulation is based on the general principle that "the courts of the member state within the territory of which the center of the debtor's main interests is situated shall have jurisdiction to open insolvency proceedings (Art. 3, §1)." For a company or legal person, the center of its main interests is the place of its registered office (Art. 3, §1, last line). In addition, the court of another state shall have jurisdiction only if "the debtor possesses an establishment within the territory of that other member state (Art. 3, §2)." However, the effects of the latter proceedings are restricted to the assets of the debtor situated in the territory of the other member state (Art. 3, §2, last line).

The law applicable to insolvency proceedings under the regulation is that "of the member state within the territory of which such proceedings are opened (Art. 4, §1)." This applicable law is generally referred to as lex concursus or lex forum concursus. This rule on conflict of laws is valid both for the main proceedings and for local proceedings (secondary or independent territorial proceedings). The law applicable to the state of the opening of the proceedings determines all the effects of the insolvency proceedings, both procedural and substantive, on the persons and legal relations concerned. This law governs, e.g., all the conditions for the opening, conduct and closure of the insolvency proceedings, the admissibility of claims, and the rules on distribution and preferences, etc. These substantive effects are in a broad sense quite typical in insolvency law and are also necessary for the insolvency proceedings to fulfill its aims. See Art. 4, §2(a)(m). The exceptions to the application of the law of the state of the opening are referred to in Articles 5-15 of the regulation. The opening of an insolvency procedure does not affect the following: third-parties' rights in rem (Art. 5), set-off (Art. 6), reservation of title (Art. 7), contracts relating to immovable property (Art. 8), payment systems and financial markets (Art. 9), contracts regarding employment (Art. 10), effects on rights subject to registration (Art. 11), and community patents and trademarks (Art. 12). The articles provide further for conflict of rules regarding detrimental acts, protection of third-party purchasers and the effects of insolvency proceedings on lawsuits pending. So, e.g., rights in rem of creditors of third parties with respect to (in)tangible and (im)movable assets belonging to the debtor that "are situated within the territory of another member state at the time of the opening of proceedings," are not effected by the lex concursus, but are dealt with by the law of that other member state.⁸

In Chapter II (Recognition of Insolvency Proceedings, Articles 16-26), "recognition" means that the judgment produces the same effect in the member states, as under the law of the state of the opening of the proceedings. One of the key issues of the regulation is granted by Article 16: Insolvency proceedings opened in the opening state where the debtor has its center of main interests will be (automatically) recognized in all the other states. Nevertheless, such recognition does not prohibit opening secondary proceedings in a state where the debtor owns an establishment (Art. 16, §2). This recognition includes terminating the debtor's authority to dispose of the assets. It also puts an end to a judgment executing in favor of individual creditors. The chapter describes furthermore, among others, the powers of a liquidator and the publication of the opening judgement in another member state or in public registers.

As already has been pointed out, opening a main insolvency proceeding in the opening state where the debtor has its center of main interests does not preclude opening secondary proceedings in other member states where the debtor is established. Secondary proceedings can be said to serve mainly two seemingly mutual incompatible purposes: (1) they protect creditors, usually local creditors, from the main proceedings, and (2) at the same time, they assist and support the main proceedings. These are the subject of Chapter III (Secondary Insolvency Proceedings; Articles 27-38). A secondary proceeding only can be winding up proceedings as covered by Annex B. It may be requested by the liquidator in the main proceedings or by any other person authorized to do so under local law. For example, a creditor who thinks that his chances are better in local proceedings than in the main proceedings in another state, may request such.

Chapter IV (provision of information for creditors and lodgment of their claims; Articles 39-42) gives any creditor the right to lodge claims in writing if his residence is located in a member state other than the state of the opening of proceedings. This provision is meant also for the tax authorities and social security authorities (Art. 39).⁹ The chapter further provides for a duty to inform known creditors in the other member state and the language to be used in the specific notice.

The last chapter (Chapter V, transitional and final provisions; Articles 43-47) provides that the Insolvency Regulation shall apply only to insolvency proceedings opened after its entry into force (Art. 43), which will be (Art. 47) May 31, 2002. Ten years later, there will by an evaluation report (Art. 46). The annexes can be amended in quite a simple manner (Art. 45).

EU Insolvency Regulation and the Americas

When the EU Insolvency Regulation goes into effect, it will establish a cross-border insolvency regime within the European Union for cases where the debtor has the center of its main interests in a state-member of the EU. The regulation does not however deal with cross-border insolvency matters extending beyond a state member of the EU into a non-member state. Until the last decade, these type of cases, if they occurred, had to be dealt with by applying the involved countries' international insolvency provisions and/or their international private law. Only a few cases could be resolved based on bilateral treaties or regional conventions. In several major incidental cases, solutions were found through the mechanism of inter-court cooperation and "concordats" with involved parties (See, e.g., Maxwell, Olympia & York, BCCI, Everfresh Beverages, Nakash, Livent and Loewen). On May 31, 1997, the United Nations Commission on International Trade Law (UNCITRAL) accepted a model law regarding cross-border insolvency. This model law aims to urge and inspire a way to adapt the national insolvency law; the UNCITRAL Model Law can be implemented voluntarily by each country. The EU Insolvency Regulation and the Model Law differ in (regional) scope, structure (no annexes) and nature (states will tailor-make the model law according to national needs). In key principles, there are differences; e.g., in the EU Regulation, a liquidator may automatically exercise all powers conferred on him by the member state's lex concursus, but under the model law, a "foreign representative" only has power after recognition, and—remarkably—the EU Regulation does not cover specific cross-border cooperation between judges.¹⁰ Nevertheless, the model law is quite generally seen as the world standard for fair regulation of cross-border insolvency cases, recognizing the need for cooperation between courts, institutions and liquidators and for the recognition of foreign judgments. It offers to EU-states a complementary regime of considerable practical value. The model law, in (slightly) amended form, has been enacted by Mexico and South Africa. As of April 2001, Japan has amended its insolvency legislation with a series of provisions based on the model law.¹¹ In the United States, a new chapter 15 to the Bankruptcy Code (containing 32 sections almost mirroring UNCITRAL's Model Law) is pending, and in §14 of the Insolvency Act 2000 in the United Kingdom, it is provided that the secretary of state may by regulation make any provision that he considers necessary to the model law on cross-border insolvency.

Although the EU Insolvency Regulation bears some uncertainties and leaves some issues unresolved, its result fills an embarrassing 40-year-old blind spot in the broader framework of EU civil and insolvency law, and for that reason only, it should be welcomed.

Footnotes

¹ Council regulation (EC) No 1346/2000 of May 29, 2000, on insolvency proceedings, Official Journal (OJ) L 160, 30/06/2000, p. 0001-0013. See http://europa.eu.int/eurlex/en/lif/dat/2000/en_300R1346.html. Return to article

² See OJ 1998, C27/1, for the (consolidated) text. Return to article

³ See Flecher, Ian F., Insolvency in Private International Law (1999), at 246. Return to article

⁴ Bearing this in mind, most literature is still valuable. See (only English language sources) Balz, Manfred, "The European Convention on Insolvency Proceedings," 70 American Bankruptcy Law Journal (1996) at. 485; McKenzie, Donna, "The EC Convention on Insolvency Proceedings," European Review of Private Law (1996) at 181; Fletcher, Ian F., supra n. 3 at 255. For a short commentary to the insolvency regulation, see Wessels, Bob, "International Insolvency, Chapter 5 (European Union Regulation on Insolvency Proceedings)," in Bob Wessels (ed.), "Corporate Rescue and Insolvency (loose leaf, Kluwer Law International)." Return to article

⁵ Just for the readers' memory, these countries are Austria, Belgium, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden and United Kingdom. Denmark has opted out, although it recently expressed its wish to be bound by most of the contents of the regulation through the means of a separate treaty. Based on recent experience, Norway and Switzerland are not members to the EC Treaty. Return to article

⁶ See Directive 2001/17 EC on the reorganization and winding-up of insurance undertaking (OJ L 110, 20/04/2001, p. 0028-0039), and Directive 2001/24 EC on the reorganization and winding-up of credit institutions (OJ L 125, 05/05/2001, p. 0015-0023). Unlike a regulation, a directive will go through a legislative implementation process in each individual member state. The implementation dates are April 20, 2003 (insurance), and May 5, 2004 (credit institutions), respectively. See http://europa.eu.int/eur-lex/en/lif/dat/2001/en_301L0017.html and http://europa.eu.int/eur-lex/en/lif/dat/2001/en_301L0024.html. For background to the latter, see Hüpkes, Eva H.G., The Legal Aspects of Bank Insolvency. A Comparative Analysis of Western Europe, the United States and Canada (2000). Return to article

⁷ It was agreed that the 1995 Convention would be accompanied by an explanatory report. A draft report of 184 pages was delivered by Miguel Virgós and Etienne Schmit in July 1996, but this has never been approved by the EC Counsel of Ministers. The status of the report, which has not been published in public or official sources, is fuzzy, but nevertheless it can be regarded as an authoritative interpretation to the regulation. See Virgós, Miguel, "The 1995 European Community Convention on Insolvency Proceedings: an Insider's View," Forum Internationale nr. 25 (1998). Return to article

⁸ Which makes it of utmost importance to be sure about the validity of a right in rem in a specific country; see, e.g., Presoly, Christian, "Forms of Guarantee in Spanish Civil Law: How to Have a Safe Collateral in Spain Irrespective of the New European Insolvency Proceeding," International Corporate and Commercial Law Review 2001, at. 158. Return to article

⁹ In the EU, therefore, a foreign judge acts as a "tax collector." For a comparative overview of countries that are limiting or abolishing tax priorities, see Morgan, Barbara K., "Should the Sovereign be Paid First? A Comparative International Analysis of the Priority for Tax Claims in Bankruptcy," 74 American Bankruptcy Law Journal (2000) at 461. Return to article

¹⁰ The model law contains model provisions that are lacking in the EU Regulation; e.g., Art. 8 (interpretation), Art. 12 (discrimination of foreign creditors) and Art. 21 (granting relief). Some subjects of the EU provision are not reflected in the model law, such as Art. 19 (proof of appointment), Art. 21 (publication of judgment of opening proceeding and of appointment) or Art. 22 (judgment to be registered any public register). Return to article

¹¹ See Fujimoto, Mie, "Japan's New Law on Recognition of and Assistance in Foreign Insolvency Proceedings," ABI Journal, July/August 2001 at 14. Return to article