Insolvency without borders

Insolvency without borders

The collapse of Parmalat showed the quagmire a cross-border insolvency can create. But new rules should resolve much of the confusion and give foreign creditors access to the UK courts. Len Sealy examines the rules and reveals their implications

Many problems can arise when an insolvency extends beyond a single
jurisdiction, or when rival proceedings are instituted in more than one country
and the courts or office holders are unwilling to cooperate.

The recent collapse of the Italian-based Parmalat group provides one example.
An Irish subsidiary Eurofood had been set up to provide financial services for
the group. It was entirely based and managed in Ireland and, following its
insolvency, was put into liquidation by the Irish High Court.

Meanwhile, the Italian administers ostensibly relocated Eurofood’s management
to Italy with the aim of having an Italian court put in control of the
liquidation. The wrangling continues with the European Court of Justice yet to
give its final verdict. But there is no doubt that disputes such as this involve
delays and expense, at great cost to the creditors.

Historical difficulties
There have been a few international initiatives set up on a regional basis over
the years to tackle these difficulties, but with limited success. In Europe the
first major attempt on a wider scale was the Istanbul Bankruptcy Convention
(1990).

This failed to win sufficient support to come into force, but led almost
seamlessly to the adoption of the EC regulation on insolvency proceedings 2000,
which has been operative throughout the EU (with the exception of Denmark) since
May 2000.

In the meantime, attempts to reach agreement on the formation of a general
international convention made little headway, and attention was turned instead
to the framing of a ‘model law’.

A model law has no legislative force, but it is designed to serve as a
precedent that a government can use when enacting its own domestic legislation.
The UK government signalled its intention to do this by including an enabling
provision in the Enterprise Act 2002 and the new regulations complete the
exercise.

The model law will not be a total novelty for practitioners here because it
has several parallels in the EC regulation of 2000.

In relation to cross-border insolvencies within the EU, the EC regulation has
precedence over the new regulations. The main difference between the two is in
their approach.

The regulations are primarily an enabling measure, making things easier for
foreign office holders and creditors seeking access or recognition here, whereas
its EC counterpart, as well as doing this, imposes restrictions on the
jurisdiction of our courts and the powers of our office holders in any situation
where the debtor’s centre of main interests (COMI) is in another member state.

Both individual and corporate debtors are covered. As well as bankruptcies
and liquidations, they extend to administrations, IVAs and CVAs, but not to
receiverships. They apply in England, Wales and Scotland, but not in Northern
Ireland.

The rules also apply without restriction to all foreign insolvencies. It is
not a precondition that the foreign state concerned has also implemented the
model law.
The regulations are concerned with five main topics: access, recognition,
authorisation, concurrent insolvencies and co-operation.

Both the office holders in foreign proceedings and foreign creditors are
granted unrestricted access to our courts and for many purposes empowered to
participate in local insolvency proceedings with few formalities.

‘Recognition’ here means formal recognition by order of the court. This will
normally be based on the debtor having a place of business or residence or
assets here.

A foreign proceeding is to be accorded recognition automatically and with a
minimum of formality and this, if recognised as a ‘main’ proceeding (because it
is in the jurisdiction of the debtor’s COMI), will bring about an immediate stay
of all proceedings throughout the UK. The court may also order a stay in the
case of a foreign ‘non-main’ proceeding, but this is discretionary.

The office holder in a British insolvency proceeding may have their status
and authority confirmed by court order, so equipping them with the best possible
criteria for foreign accreditation.

The rules laid down here seek to impose an ordered structure very similar to
that of the EC regulation, but they come into operation only upon the
recognition of the foreign proceedings concerned.

If a foreign proceeding is recognised as the main one, non-main proceedings
here are restricted to assets, which are in the jurisdiction. But ‘ring-fencing’
of these
assets for the protection of local creditors is permitted.

Similarly, where recognition is accorded to two or more foreign proceedings,
if one is a main proceeding the others must play a subordinate role.

Chapter four of the regulations makes provision for co-operation and direct
communication between a British court and foreign courts or office holders.
Every effort is made to eliminate formalities and the involvement of
intermediaries, saving time and costs.

A worldwide movement
The full effects of the UNCITRAL model law will become apparent only over time.
The regulations should not be seen so much in terms of what we have done for
ourselves, but rather as a step towards the future and an example to others.

Already, some other leading players on the world’s trading and financial
stages (including the US and Japan) have enacted comparable legislation. As each
additional state adopts the principles of the model law, the full potential for
co-operation and unification will gradually be realised.

The cost of participating in foreign proceedings will be reduced, recoveries
for creditors enhanced and credit risks reduced. With better co-operation and
less delay the potential for rescuing viable businesses will be greater. We can
take pride in having been among the first to give a lead towards this worthwhile
end.

Len Sealy is co-author of the ‘Annotated Guide to the Insolvency
Legislation’

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