Cross-border insolvency confusion must end

HOW DO YOU DEFINE where a company has collapsed?

That question was one of the key highlights in the responses to an Insolvency Service (IS) consultation into suggested improvements to cross border insolvency regulation, which has been in use since May 2002.

The profession is seeking a clearer outline on how to judge which country is responsible for a collapsed business if it trades across Europe. In theory the decision should be relatively easy for an insolvency practitioner. Wherever the centre of main interest (COMI) is, the business can enter into insolvency.

For insolvency practitioners (IPs), confusion over COMI can end up costing time and money, because it can draw out the length of an administration. A UK-based IP in the middle of a multi-national administration could receive appeals that the process should take place in a different country. While the appeal is taking place no other work can be done, slowing down the process, the IP also cannot charge for this time used.

If a business is registered in the UK, trades, has a head office and suppliers here as well, then the UK is the COMI. However, if a business trades and has a head office in France, its suppliers in Germany, its lender in Spain and is registered in the UK, where does the business enter insolvency proceedings?

Respondents to the consultation want a clearer and more unified approach across European member states on COMI guidelines. This will allow IPs to continue a multi-national administration without fear of appeal and prolonging an insolvency process.

At the moment most COMI decisions in the UK are made through the courts, said Chris Laughton, insolvency partner at Mercer & Hole and president of European insolvency trade body INSOL Europe.

The problem with changing legislation is that it could end up being either too basic and liable to create workarounds, or too detailed and complex. Laughton suggests the method the UK has at the moment where each decision is made on a case by case basis through the court is already the best option for IPs.

However, other experts predict there needs to be some clarification soon, otherwise IPs could be faced with cost problems when dealing with multi-national collapses in the future, as larger businesses are now starting to struggle.

The UK has previously been labelled the so-called restructuring capital of Europe. The UK’s insolvency proceedings are considered mature, flexible and can offer some of the best returns to creditors in Europe. IPs need clarification on COMI rules as some large organisations have moved to the UK to take advantage of insolvency proceedings. If there is no clarification an IP can be appointed to a case and later find out the COMI is actually in another country. The only way for an IP to recover fees accrued is to become a creditor, where repayment is usually between 5p – 50p in the pound.

There are a variety of options open to a struggling business in the UK (see box). A company doesn’t necessarily have to enter administration. It could instead go into a Company Voluntary Arrangement, where it would repay creditors a percentage of their debt while continuing to trade. Countries such as Italy are unable to provide these options.

Insolvencies in the UK also give more powers to creditors than other European countries. If a creditor is unhappy with the type of insolvency process the IP is taking, the IP’s fees or if they want to appeal the decision for the COMI of a business to be in this country, it can be appealed through UK courts. However, in countries such as France and Greece this is not possible.

Finding out if insolvency proceedings have already begun elsewhere in Europe is also a problem that needs to be addressed, experts suggested.

If UK-based practitioner starts an administration here, but one has already begun in another jurisdiction, that can be seen as “tresspassing” and incur serious reprimands on the IP from their licensing body or the courts.

In one example a judge asked David Rubin, a partner at David Rubin & Partners, to investigate where a business’ COMI was before he made a decision on whether it was the UK or not. On investigation Rubin found the COMI was not in the UK and he could have faced serious repercussions of tresspassing if he had begun them here.

Chris Laughton believes INSOL Europe can help IPs with this issue. In September this year it will re-launch a Europe-wide register where members and professional bodies can register their insolvency case. The register can be used by any of the 1,100 members across Europe, and all IPs. There are also plans for the register to be open to the public.

This register represents a more co-ordinated approach to insolvency in Europe and it is this unified approach that the EC needs to consider when reviewing the regulation in 2012.

The Insolvency Service will continue discussions with the profession and submit its findings to the EC prior to its review of the cross-border insolvencies rules on 1 June 2012.

INSOLVENCY OPTIONS
* Administration – A struggling business that is unable to continue trading is taken over by and insolvency practitioner (IP). The IP will then either continue to trade the business while restructuring and marketing it for sale, or put it in liquidation. A company in administration can be sold off in parts or as a whole and funds are distributed to the creditors.
* Liquidation – A company has collapsed and is dissolved. The assets are sold by an IP and any funds received from the sale are passed to the creditors.
* Company Voluntary Arrangement – An IP arranges for the creditors to receive a percentage of the debt and can renegotiate contracts with suppliers such as rent agreements with landlords. The company can continue to trade while a CVA is being sought. For a CVA to be approved 75% or more of creditors by value must vote in favour of it.
* Pre-packed administration – An IP markets the business for sale prior to it entering into an administration. It is sold the same day as it enters administration.

FIRST REFUSAL
Tim Carter, partner at law firm Stevens & Bolton and head of insolvency, suggests one of the main problems without a clear definition could be that suppliers may refuse to work with multi-national companies. There would be an issue about their rights in the event of their clients collapse.

Creditors will want to know what rights they have to pursue money owed to them if a multi-national becomes insolvent. The economy would benefit from a more harmonised approach instead of a creditor having to swot up on each member states’ insolvency laws.

“We need a more uniform approach and to remove each member states discretion of the decision of the COMI,” he said.

“If the COMI is elsewhere and main proceedings in a different country how are the stakeholders to know how the COMI will be judged?”

When the current legislation came into effect in 2002 COMI wasn’t as big an issues as there hadn’t really been any large failures said David Rubin, senior partner at business recovery firm David Rubin & Partners. He claims his firm is doing more cross border insolvency work now than it ever has in its 30 year history.