EC’s insolvency proposals remove international trust

IT’S BEEN MORE THAN A YEAR since the Commission submitted a proposal to overhaul the Insolvency Regulation but some of the changes may have the opposite intended effect, and cause interruptions to rescue culture.

European Parliament voted in favour of some amendments to the Commission´s proposal earlier this month and this year the Council will presumably come to a conclusion on the matter. Part of the proposals, which were put forward in December, include the introduction of a web-based insolvency register for all insolvent businesses, and negating the need to open several cases in each country, because a case will be recognised by all member states.

If all runs well, we may see amendments to the Insolvency Regulation resolved by the end of 2014. The regulation itself is of great importance to the European economy and does not only play a decisive role in cross-border insolvencies and restructurings, but can affect any company with business interests in another member state.

Forum Shopping woes

Many of the proposed amendments intend to frustrate attempts of ‘forum shopping’, where a more attractive location is chosen to run the insolvency process. It is the most controversial topic since the regulation came into force. It seems that one of the main achievements of the regulation may fall victim to this rather emotional argument – the mutual trust that all Member States put into the court system of the respective other Member States.

Under the proposal creditors can, or the interested party with residence in a Member State different than the state where the insolvency proceedings are opened, can challenge the jurisdiction. This may not only mean a farewell to the declaration of mutual trust, which was always regarded as somewhat naive, but it may cause serious interruptions of rescue operations and may give leverage to parties pursuing very particular interests in such situations.

In other words, this may play into the hands of those who are interested in producing nuisance value. However, parliament backs the position of the commission in this respect.

Another topic currently under discussion is how to deal with groups of companies. The commission’s approach provides for the coordination of insolvency proceedings concerning different members of the same group of companies.

Bearing in mind that no such proceeding exists in any of the Member States, it seems a great step forward. However, this proposal has already come under criticism as too careful in its approach. Hence the European Parliament recommends a more ambitious approach giving an independent coordinator a greater say in the coordination of the different insolvency proceedings. While the discussions about the other issues seem almost completed, the proposal with respect to group insolvencies will probably see more profound changes.

Christoph Wilcken, partner, Schultze & Braun

Related reading