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The Eurofood Decision of the European Court of Justice

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Editor's Note: In the last issue of the Journal, Sandy Shandro of Freshfields (London) described the Eurofood decision of the European Court of Justice (ECJ), particularly in the matter of establishing the location of the Center of Main Interests (CoMI) and related jurisdictional questions. This article discusses the other import issues submitted to the ECJ.

The European Court of Justice (ECJ) issued its Eurofood ruling on May 2, 2006.1 This ruling resulted from the referral by the Supreme Court of Ireland2 of five questions of EU law, based on the EU Insolvency Regulation (EU Regulation),3 preliminary to the Irish Supreme Court deciding a pending appeal on the Dublin High Court's decision to open a main insolvency proceeding4 for Eurofood IFSC Ltd. in competition with a parallel main insolvency case for the same entity in Parma, Italy.5 The two parallel main proceedings arose because each court decided that Eurofood's center of main interests (CoMI) was located in its own country.

Consequence of Appointing a Provisional Liquidator

The ECJ next turned to the inquiry of whether the Dublin court's appointment of a provisional liquidator constituted "a judgment opening insolvency proceedings for Eurofood within the meaning of Article 16(1). The clear import of this question was to inquire as to whether the Jan. 27, 2004, decision of the Dublin High Court appointing a provisional liquidator took priority over the Feb. 9, 2004, decision of the Italian Minster for Production Activities admitting Eurofood to extraordinary administration, pursuant to Article 16(1).

A ruling in Ireland's favor on this point would give the Dublin proceeding jurisdictional priority over the Parma proceeding, even assuming that everything was done properly in connection with the Parma proceeding. Irish law lacks a step in the commencement of an insolvency proceeding that is designated as a "judgment to open" such a proceeding. Furthermore, under Irish law, the precise point where an insolvency proceeding is opened, for the purposes of the EU Regulation, apparently varies from case to case. The ECJ decided to bypass this formal gap and to focus on the substance of what constitutes a decision to open an insolvency proceeding.

The ECJ ruled that Article 1(1)6 of the EU Regulation requires that to qualify for recognition, a national insolvency proceeding have four characteristics: (1) it must be a collective proceeding, (2) it must be based on the debtor's insolvency, (3) it must result in at least a partial divestment of the debtor, and (4) it must involve the appointment of a liquidator.7 Whether a statute qualifies under this provision is not left to judicial decision: Annex A to the Regulation specifies the statutes for each EU country (except Denmark, where the EU Regulation is not applicable) that meet this qualification, and Annex C lists the titles of the liquidators in each country who meet the definition in Article 2(b).8

The ECJ recognized that priority, for recognition purposes under Article 16(1), is based on which decision on opening a main proceeding is handed down first.9 However, the Regulation does not define with sufficient precision what constitutes a "judgment to open insolvency proceedings."10

The ECJ noted that the conditions and formalities for opening an insolvency proceeding are determined by domestic national law, not the EU Regulation, and they vary considerably from one EU country to another.11 In some countries, the proceedings are opened very soon after the submission of the application, while in other countries it may take a substantial period of time before a decision to open a case is made.12 The ECJ also noted that a "provisional" opening may be in place for several months.13 In contrast, the ECJ declared that in order to assure the effectiveness of the recognition provisions of the EU Regulation, it is necessary that recognition be applied as soon as possible in the course of the proceedings.14

The principle that only one main proceeding is permitted would suffer serious disruption, the ECJ noted, if competing courts could claim concurrent jurisdiction for a main proceeding over an extended period.15 Thus, the phrase "opening of insolvency proceedings" must be interpreted in light of the objective of assuring the effectiveness of the Regulation.16

For example, the urgency of recognition is highlighted in the context of the application of the moratorium or automatic stay resulting from the filing of an insolvency case in an EU country. Article 16(1) exports the home country moratorium (i.e., that of the country where the case is filed) in a main proceeding to all other EU countries. A court in another country needs to know immediately if a proceeding is pending when the first main insolvency case is filed or commenced thereafter is subject to the home country moratorium. Similarly, such a court needs to know whether assets that may be involved in its own case are in custodia legis in the home country court.

A decision to open an insolvency proceeding under the law of an EU country, the ECJ held, includes any decision under a statutory scheme referred to in Annex A that meets the formal criteria of Article 1(1) and appoints a liquidator of the kind specified in Annex C.17 It does not matter, the ECJ held, that the liquidator is initially appointed on an interim basis.18

The clear import of this interpretation, again not drawn out in detail by the ECJ, is that the Jan. 27 decision of the Dublin High Court to appoint a provisional administrator constituted the opening of a main insolvency case for Eurofood that was entitled to recognition from that date forward by the courts in Italy. The decision by the court in Parma to open a main proceeding for Eurofood on Feb. 19, 2004, thus violated the EU Regulation.

Impact of Procedural Irregularities on Recognition Obligation

The Irish Supreme Court also asked the ECJ to determine whether it was required to recognize an insolvency proceeding opened in another EU country where the procedure leading to the decision disregarded procedural rules guaranteed by the public policy of the country where the court is located.19 The ECJ ruled:

[O]n a proper interpretation of Article 26 of the Regulation, a Member State may refuse to recognize 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.20

In responding to this inquiry, the ECJ addressed both the public policy exception to the EU Regulation and the importance of considerations of fair legal process.

Public Policy

ECJ jurisprudence (case law), in the context of the Brussels Convention on the Enforcement of Judgments, permits recourse to a public policy exclusion only in exceptional cases21

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. The infringement would have to constitute a manifest breach of a rule of law regarded as fundamental within that legal order.22

This same case law, the ECJ found, applies to the EU Regulation, and permits application of the public policy exclusion only in exceptional cases.23

Thus, as a general principle, the public policy exclusion to the mandatory recognition of the opening of an insolvency proceeding in another EU country or the enforcement of any judgment in such a proceeding can be invoked only in extraordinary situations. While the ECJ did not rule on whether the Irish Supreme Court could properly invoke the public policy provision to deny recognition of the opening of the Italian main insolvency proceeding for Eurofood (because this conclusion was beyond the scope of the questions submitted), the clear implication is that the ECJ would not consider this a proper case to invoke public policy.

Fair Legal Process

Nonetheless, the ECJ noted, ECJ jurisprudence recognizes that everyone is entitled to fair legal process.24 This principle is inspired, according to the ECJ, by the fundamental rights forming an integral part of the general principles of EC law and the constitutional traditions common to the EU countries.25 In addition, it derives from the guidelines of the 1950 European Convention for the Protection of Human Rights and Fundamental Freedoms.26 The principle is also very similar to the "procedural due process" principle in U.S. law.

The right to be notified of procedural documents and the right to be heard "occupy 'an eminent position' in the organization and conduct of a fair legal process," the ECJ stated.27 In addition, the ECJ found that in the context of insolvency proceedings, the right of creditors and their representatives to participate in accordance with the "equality of arms" principle28 is particularly important.29

Any restriction on exercise of the right to be heard, the ECJ stated, "must be duly justified and surrounded by procedural guarantees ensuring that persons concerned by such proceedings actually have the opportunity to challenge the measures adopted in urgency."30

"Fair legal process" is an important issue in the Eurofood cases. The Dublin High Court took sufficient time to give Enrico Bondi, the Italian administrator appointed in the Italian Eurofood case (and also in all the other Parmalat cases filed in Italy), a full and fair opportunity to be heard before deciding that the Dublin case was the main case for Eurofood. In contrast, Bondi gave notice to Pearce Farrell, the Irish provisional liquidator, at 5:15 p.m. on a Friday afternoon of the Parma hearing on the opening of a main proceeding that was scheduled (and took place) the following Tuesday at noon. Furthermore, Bondi refused to provide to Farrell copies of the voluminous papers that he had filed in the Parma court.

The ECJ recognized that the application of these principles to the Eurofood case may be problematic. The ECJ cautioned the Irish Supreme Court not to insist that a fair legal process requires an oral hearing, and stated that the court "must assess, having regard to the whole of the circumstances, whether or not the provisional liquidator...was given sufficient opportunity to be heard" in the Parma court.

There is a very important collateral impact of the "fair procedures" decision of the ECJ in the Eurofood case. It is apparently the practice of the English courts to decide whether to open a main insolvency case as a first-day order, which is issued with no notice to creditors whatsoever.

On the issue of fair procedure, the impact in the Eurofood cases of the ECJ decision is not clear. The Irish Supreme Court and the Dublin High Court were both very seriously concerned with the procedures followed by the court in Parma. It is difficult to predict whether, "having regard to the whole of the circumstances," the Irish Supreme Court will decide that the procedures in the Parma court were fundamentally unfair, and to deny recognition of the decision there to open a main case for Eurofood. Given the ECJ's determination that the appointment of the temporary liquidator on Jan. 27 constituted an opening of a main case for Eurofood, the Irish Supreme Court may well find it unnecessary to reach this issue.

There is a very important collateral impact of the "fair procedures" decision of the ECJ in the Eurofood case. It is apparently the practice of the English courts to decide whether to open a main insolvency case as a first-day order, which is issued with no notice to creditors whatsoever.31

Corporate Groups

Eurofood, and especially the Italian court decisions on its CoMI, directly raise the issue of how to deal with the CoMI of corporate groups. A corporate group can normally deal with the financial difficulties of a particular member of the group (unless it is the principal operating entity) in the ordinary course of business. Thus, it is unusual for a single member of a corporate group to file an insolvency proceeding.

However, if the entire group encounters financial difficulty, as happened for the Parmalat group, a group-wide solution to the financial problems is often required. As a result, many of the group members will typically have to file insolvency proceedings.

If the insolvency proceedings of the group members are dispersed in a number of different countries, a group-wide solution to the financial problems is much more difficult to negotiate. If the proceedings are all filed in one court, on the other hand, there will be one judge to administer the cases and one set of lawyers and other professionals.

Most important, the insolvency proceedings will all be governed by one legal regime (except where conflict-of-law rules lead to the application of another country's law) and one set of legal procedures. In contrast, if proceedings are filed in a variety of countries, as happened in Parmalat, there are a variety of judges and a variety of groups of lawyers and other professionals.Most important, there are also different applicable legal regimes and different sets of legal procedures. The ECJ decision in Eurofood gives no assistance in dealing with this problem.

The ECJ stated, "each debtor constituting a distinct legal entity is subject to its own court jurisdiction."32 As a consequence, the CoMI of each legal entity must be determined separately from the CoMI of any related entity in the corporate group. This separate determination determines the proper national venue for the main proceeding for that particular entity.

 

Footnotes

1 Case 341/04, Eurofood IFSC Ltd, 2006 E.C.R. ___. (Eurofood-ECJ).

2 In re Eurofood IFSC Ltd., [2004) IESC 45 (Ir.).

3 Council Regulation 1346/2000, 29 May 2000, on insolvency proceedings, 2000 O.J. (L160) 1-18 (as amended).

4 According to the language used in the English version of the EU Regulation, a "proceeding" corresponds to a "case" under U.S. bankruptcy law. See, e.g., 11 U.S.C. §§301-03 (providing for the filing of a "case" under the bankruptcy statute).

5 See In re Eurofood IFSC Ltd., Parma Civil & Criminal Ct., Feb. 19, 2004 (unpublished opinion on file with author), aff'd., Trib. Amm. Reg. 10 June 2004, n. 6998/2004 (on file with author).

6 See EU Reg. Art. (1)(1), which provides: "This Regulation shall apply to collective insolvency proceedings which entail the partial or total divestment of a debtor and the appointment of a liquidator."

7 See Eurofood-ECJ |46.

8 EU Reg. Art. 2(b) defines a liquidator as "any person or body whose function is to administer or liquidate assets of which the debtor has been divested or to supervise the administration of his affairs. Those persons and bodies are listed in Annex C."

9 See Eurofood-ECJ |49.

10 See id. |50.

11 See id. |51.

12 See id.

13 See id.

14 See id. |52.

15 See id.

16 See id. |53.

17 See id. ||54, 58.

18 See id. |55.

19 EU Reg. Art. 26 provides: Any Member State may refuse to recognize 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.

20 Eurofood-ECJ |67.

21 See id. |62 (citing Case C-7/98 Krombach [2000] ECR 1-1935, ||19, 21).

22 See id. |63 (citing Krombach ||23, 37).

23 See id. |64.

24 See id. |65 (citing Case C-185/95 P Baustahlgewebe v. Comm'n, [1998] ECR I-8417, ||20, 21; Joined Cases C-174/98 P and C-189/98 P Netherlands v. Comm'n, [2000] ECR I-1, |17; Krombach, |226).

25 See id.

26 See id.

27 Id. |66.

28 "Equality of arms" is a concept that is unknown in U.S. law. However, it is generally known in the international legal community, and applies particularly in criminal prosecutions. Generally, it means that, "each party [must be] afforded a reasonable opportunity to present his or her case under conditions that do not place him at an appreciable disadvantage vis-a-vis his opponent." Prosecutor v. Brdjanin, Case No. IT-99-36-PT, Public Version of the Confidential Decision on the Alleged Illegality of Rule 70 at 2 (May 6, 2002).

29 See Eurofood-ECJ |66.

30 See id.

31 See, e.g., In re Daisytek-ISA Ltd., [2003] B.C.C. 562, [2004] B.P.I.R. 30, 2003 WL 21353254, Ch. Leeds (May 16, 2003) (UK).

32 Eurofood-ECJ |30.

Journal Date: 
Friday, September 1, 2006

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