Insovency of Corporate Groups French Approach to the EU Regulation Adopts U.K. View of COMI

Insovency of Corporate Groups French Approach to the EU Regulation Adopts U.K. View of COMI

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Web posted and Copyright April 1, 2006, American Bankruptcy Institute.

Editor's Note: Bravely, given the mixed press often accorded to the French bankruptcy system, this month we focus on a recent decision in France in an international case. As some readers may know, the notion of "centre of main interests" (or "COMI"—the "o" in COMI must be pronounced as in "OK" and not as in "odd") has been exercising EU-based bankruptcy specialists for several years. Most of the innovative treatment of the COMI concept was endorsed and then inspired by decisions of the U.K. courts. Some have been critical of this approach, branding it "forum shopping" and/or illustrative of a new-age form of imperialism. Encouraged by this initial reaction, there are now many U.K. cases that have followed and indeed expanded on this approach, and it is now well-accepted that the concept of COMI is a very useful tool in centralising the focus of a multinational EU restructuring. And now it is the turn of France. In this edition of European Update, the essence of the U.K. approach is warmly embraced by the French Commercial Court. As one might expect, there is a French nuance to the case, but the message is clear: The presumption that COMI is in the jurisdiction of incorporation is to be viewed as of little significance throughout the EU. U.S. practitioners will find this of more than passing interest when making use of chapter 15.

On 15 Feb. 2006, the French Commercial Court of Nanterre rendered eight decisions, all concerning the implementation of the EU Regulation on Cross-Border Insolvency Proceedings. At present, only two out of the eight judgments are available, but it is understood that the other six reflect the same approach to interpreting the EU Regulation.

The Facts

On 31 Jan. 2006, EMTEC RPS Professional Products, a Belgian company (EMTEC Belgium), and MPOTEC GmbH, a German company (EMTEC Germany), filed a petition to open insolvency proceedings before the Commercial Court of Nanterre in view of the opening of insolvency proceedings. The judgment provideds that the petition was specifically for the opening of main insolvency proceedings. In a very detailed and in-depth analysis of the facts of the case, the court described a management structure whereby the decision-making process took place in France.

The group of companies was largely administered through a French company, EMTEC International SAS, which was responsible for the group's overall management, strategy, financing and accounting, and purchase management, and the creation, design and marketing of the various products sold by the entities within the group. The main costs of doing this were financed under a service agreement with each group company and charged in proportion to the turnover of each company.

Another French company, EMTEC France, was responsible for the management of cash flow and stock. A third French company, EMTEC RPS International SAS, was responsible for selling the products on behalf of all of the subsidiaries within the group.

The subsidiaries' cash flow was centralised at EMTEC France under the authority of the French financial director of the group, an employee of EMTEC RPS International SAS. It should also be noted that the directors of both EMTEC Belgium and EMTEC Germany were French residents.

Conclusion: Subsidiaries' Centre of Main Interests (COMI) Is Located in France

Unsurprisingly, the French Commercial Court ruled that both EMTEC Belgium and EMTEC Germany had their COMI in France. The analysis developed in order to arrive at this conclusion warrants close study.

At the beginning of the judgments, the court stated that the interpretation of the EU Regulation would be made "by application" of the decision rendered by the ECJ in the Staubitz-Schreiber decision and by Advocate General Jacobs in his opinion in the Eurofood case. The drafting of each of the judgments suggests that the European case law was considered to be binding and that the Commercial Court of Nanterre considered that, as a national court, it was bound to render decisions consistent with European case law. While such a stance is not surprising for ECJ or European Court of Human Rights decisions, such an acknowledgment of the weight of the decisions of other European courts is surprising and unexpected in the context of French procedural rules. Taking into account the decisions rendered by foreign courts on a European regulation (or international treaty) is a good and coherent approach; French courts are, however, only obliged to follow the interpretations set out by the French Supreme Court. One could hardly submit that the French Commercial Court of Nanterre was bound to abide by an interpretation of a specific provision in the EU Regulation made by another European court.

The court set out the criteria used by European courts when considering in which jurisdiction to locate the COMI in the context of an insolvency of a group of companies: (1) where the board of directors meets, (2) the applicable jurisdiction for the main contracts, (3) where client business is conducted, (4) where the commercial policy of the group is defined, (5) the jurisdiction in which there is a requirement for prior approval of the parent company for certain financial undertakings by the subsidiaries, (6) the location of the lending banks, and (7) where the centralised management of the purchases, human resources, accounting and IT resources is conducted. The court mentioned that the creditors must be in a position to anticipate the substantive risks associated with a possible insolvency of the borrower, especially in light of the rule providing that the opening of insolvency proceedings in one jurisdiction implies the application of the law of such jurisdiction.

The court noted that the insolvency of EMTEC Belgium was provoked by the insolvency of the French entities (EMTEC International SAS and EMTEC France), thus evidencing the law of financial autonomy and confirming that the creditors should have known, at the time of establishing the financing, that the reimbursement of the loans would be dependent upon the sound financial situation of the French entities.

The court emphasised that the need for centralised main proceedings is heightened for the EMTEC group by the fact that the group's main asset is its European network of large-scale distribution. The court also stressed that the place where the central administration is conducted must not be confused with the place where the company develops its business or owns its assets.

Interestingly, and correctly, the court also mentioned that the French theory distinguishing the actual and the fictitious head offices (siege social reel et siege social fictif) cannot be applied for the purpose of interpretation of Article 3(1) of the EU Regulation (as has been suggested by some French commentators). Indeed, interpretation of European rules must not be made on the basis of national theories, but rather such interpretation must be made on an autonomous basis.

Dicta in the French Decision

Obiter dicta are not usually included in decisions by French courts. Indeed, the French Civil Code explicitly prohibits French courts from making general rulings that exceed the scope of the matter submitted to them. This is one of the main elements that differentiates civil law systems such as France from common law systems.

However, one suspects that for educational purposes, the decisions rendered by the court in the EMTEC matter contain a broad analysis of the EU Regulation that sometimes exceeds what may have been strictly necessary to grant the relief sought in the insolvency petition.

First, the court reiterated the analysis set out in the ISA-Daisytek SAS1 and MG Rover2 cases, according to which a European local court cannot examine the decisions previously delivered by another European court on the location of the COMI, except in order to check consistency with the local public policy. The court also specified that the concept of domestic public policy must be construed narrowly.

Secondly, the court emphasised the need for "transparent" cooperation between main and secondary proceedings in the context of a group of companies, when the COMI is located in the jurisdiction in which the head offices of the controlling entity are located and secondary proceedings are opened, in order "to take into account the legitimate interests of local creditors and employees." This statement is repeated three times in the decision. Notably, the court indicated that the opening of secondary proceedings would allow local creditors and employees to have access to their judge and their law (emphasis in the original text of the decision). The fact that one finds no equivalent references in decisions made elsewhere in the EU is an indication of the historical tendency of French bankruptcy law to pay due regard to the interests of local creditors and employees. In the same vein, the court also emphasised that secondary proceedings would allow the ranking of the local creditors to be defined and the employees to be protected in accordance with local rules, and that the employees of EMTEC Belgium would be duly represented and heard by the court.

The French Approach to the EU Regulation

Over the past few months, French courts have demonstrated an interesting and enthusiastic approach to the EU Regulation. Five characteristics of the French approach are illustrated below.

First, the French approach can be seen as orthodox in that the French courts have recognised and accepted the weight of the decision first rendered and have resisted the temptation to challenge foreign decisions that held that French companies had their COMI abroad (ISA-Daisytek and MG Rover cases). The principle of mutual trust applies in the context of the EU Regulation, and the public policy exception cannot be invoked too broadly.

Secondly, the French approach is pragmatic. Indeed, the appeals court in ISA-Daisytek has ruled that the opening of secondary proceedings had to be legitimately justified. Specifically, it had to be demonstrated that secondary proceedings would provide benefits—in particular, protection to local creditors or realisation of assets (in the MG Rover case). In other words, even if the opening of main insolvency proceedings does provide a basis for the petition to open secondary proceedings, local courts should not be bound to open such secondary proceedings regardless of the interest at stake. Bluntly, secondary proceedings must be worth the additional costs and complexity involved.

Third, the French approach is European. French courts have been paying considerable attention to European case law. This is evidenced in the EMTEC matter, where the court expressly "applies" European case law, refers to common law concepts and explicitly puts forward the need to implement an autonomous application of the EU Regulation. It may be worth mentioning that in France it is generally thought that the French Supreme Court is awaiting the ECJ decision in the Eurofood case before delivering judgment in the ISA-Daisytek matter. In this context, the implementation of the EU Regulation is therefore clearly not a national matter.

Fourth, the French approach considers interests that are generally viewed as less relevant in other jurisdictions, particularly employees' interests. It is well-known that consideration of such interests is one of the main features of French regulation and case law.3 In the EMTEC case, the court again makes it plain that such secondary proceedings may be useful in some instances in order to take into account the interests of the employees.

Finally, the French approach can be seen as proactive. Practitioners should be aware that the French insolvency proceedings listed in the Annexes of the EU Regulation will shortly be amended in order to reflect the bill that reforms French insolvency law, which entered into force on 1 Jan. 2006. One of the main innovations of this reform is a new "safeguard" procedure, which can to some extent be compared to the U.S. chapter 11 procedure that is familiar to the many readers of this Journal. An amendment to the Annexes of the EU Regulation is currently in progress and should result in these safeguard proceedings qualifying as "main" proceedings for the purpose of the EU Regulation. This may produce significant effects, since the safeguard proceedings can be opened prior to the actual (cash flow) insolvency of the debtor. Accordingly, proceedings may be opened in France much earlier than under the present system. The combination of this new procedure and the ("first in time") priority rule set out in the EU Regulation may provide attractive tools for commencing multiple proceedings in France at a very early stage.

Footnotes

1 Commercial Court of Pontoise, 26 May 2003, unreported.

2 [2005] EWHC (Ch), 18 April 2005.

3 Although it is often thought that this consideration is excessive and jeopardises the efficiency of French bankruptcy law, it should be noted that attempts to invoke these interests as a bar to the recognition of the main insolvency proceedings have recently failed (e.g., in the ISA-Daisytek matter).

Journal Date: 
Monday, May 1, 2006