EC's insolvency plans not totally harmonious

by Kevin Reed

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18 Dec 2012

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THE EUROPEAN'S COMMISSION'S intentions are good.

EC insolvency rules have been in place since 2000. But the world moves on, and the big players in the market, namely the corporates, creditors, insolvency practitioners and lawyers, have tried to plug the legislative gaps through thrashing things out in the courtrooms.

Now the commission wants to bring its rules up to date. The key issues have been around complex cross-border insolvencies – namely, who is in charge, and of what? Adding greater transparency to the insolvency process would be achieved by harmonising rules, says the EC in its latest draft proposals. An ‘insolvency list' would be created to make it easier to keep track of which businesses and individuals have been made insolvent.

Honest entrepreneurs should be given help to recover more quickly from insolvency proceedings, where "fraudulent and irresponsible" defaulters should receive more punitive treatment.

The EC's direction of travel has generally been commended by insolvency professionals. That the EC's proposals lean heavily on the views of stakeholders, of whom the majority approve the use of a ‘centre of main interest' (COMI) to establish which jurisdiction is in charge of a particular insolvency, illustrates that the commission has listened.

But there are concerns, and UK practitioners could suffer negative consequences as a result of the commission's plans.

Where market players have gone through the hard yards of fighting to have precedent set through the European Court of Justice on a case-by-case basis, they wonder why anything needs to change in terms of establishing from which jurisdiction an insolvency can be run.

"The European Court of Justice has done a pretty good job of defining COMI all by itself," says Schultze & Braun insolvency lawyer Dr Christoph von Wilcken. "Tinkering with this area risks causing a lot of unnecessary confusion."

The key issue for many at the sharp end is how they will face up to different interpretations and models implemented on a country-by-country basis, which would inevitably lead to another round of costly and time-consuming legal battles.

"There is a risk that the proposals, in their current form, could make it more difficult to use some techniques which have over the last few years been used successfully to rescue companies," says Richard Bussell, Linklaters banking and restructuring & insolvency partner.

And the UK has proved a popular destination for stricken businesses to set up ‘Schemes of Arrangements', where a non-insolvency-based debt restructuring is binding for creditors if the majority vote in its favour. The commission wants other countries to follow suit. If they do, then the UK will have no advantage over its peers.

With some describing the draft proposals as "baffling" and saying they "may create uncertainty", it seems there will be a strong current towards maintaining the status quo – where its suits.

Image credit: Shutterstock

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