European Parliament proposals block rescue of companies

Law Society of England and Wales president Nicholas Fluck has written to the Vice-President of the European Commission to call for a rejection of the European Parliament’s changes to EU insolvency rules put forward by the Commission to extend cross-border insolvencies to rescue proceedings.
Law Society president Nicholas Fluck said: “The Parliament’s changes fundamentally contradict the objective of rescue. In an economic crisis this is illogical. Rescuing a company rather than liquidating it works to the benefit of both debtors and creditors and it helps safeguard jobs and growth.”
The European Parliament has removed out of court proceedings from the scope of the EU legislation and introduced a so-called three-month ‘look-back’ period that would make companies that exercise their right to free movement subject to the laws of the originating member state.
Nicholas Fluck added: “Excluding out of court proceedings undermines the global efforts by the World Bank, IMF and the European Commission to promote and rescue companies as these types of proceedings are both cheaper and faster than court-driven ones. Keeping a business afloat secures jobs and promotes the interests of creditors. In the UK, where out of court proceedings form a crucial part of insolvency laws, the recovery rate is among the highest in the world, returning 88.6 cents on the dollar to creditors.
“Subjecting companies that operate cross-border to the rules of another member state to where they are based at the time of entering into insolvency proceedings creates a great deal of legal uncertainty by not knowing exactly which country’s laws they fall under. This could prevent them from exercising their right to move cross-border and start rescue proceedings. This kind of a barrier to free movement raises the question of whether this is in line with the treaties.”
In December 2012, the European Commission proposed to revise Regulation 1346/2000 on insolvency proceedings (the insolvency Regulation) to extend its scope to include pre-insolvency proceedings aimed at the rescue of a company.
The Law Society of England & Wales welcomed the Commission proposal as it recognises the growing trend and importance of taking early action to prevent business failure. Extending the Regulation to such processes means that the proceedings will be given automatic and immediate effect across EU which is essential in today’s market where many businesses have cross-border interests.
The European Parliament’s draft report produced by the Legal Affairs Committee is on the Parliament’s plenary agenda for adoption on 4 February 2014. The Legal Affairs Committee made changes to the Commission text that would effectively exclude out of court proceedings from the scope of the Regulation. This would mean that out of court proceedings opened in a Member State in accordance with its national insolvency laws in relation to a company with cross-border operations will not be recognised in other Member States. The result would be that there could be no main proceedings in relation to that debtor under the Regulation, but only territorial proceedings (which would only receive limited recognition in other Member States). To seek recognition without the Regulation, parties would have to fall back on private international law. This would significantly increase legal uncertainty and the costs of proceedings to the disadvantage of both debtor and creditors. It would also undermine any potential efforts to save a corporate in financial difficulties; such matters are highly time-sensitive and potential investors would have long fled by the time disputes over jurisdiction would be solved.
The three-month ‘look-back’ period undermines the existing jurisdiction rule which is that of COMI: Centre of Main Interest. In cases of corporate entities, the presumption is that COMI is where the company is registered. However, this can be rebutted based on the commercial realities of a business and as developed by numerous decision of the Court of Justice of the European Union. It is unclear how the look-back period would apply in practice; as a business wishing to move this degree of legal uncertainty might prevent it from doing so, creating a barrier to the right of movement and of establishment.

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