European Union: The Encroaching Jurisdiction of the European Bankruptcy Regulation

Last Updated: February 2 2005
Article by Richard W. Wright

In May 2002, the European Bankruptcy Regulation (Council Regulation (EC) 1346/2000 of 29 May 2002) ("the Regulation") came into effect. It applies to all members of the European Union other than Denmark, including those states that have recently joined. The principle object of the Regulation is to determine matters of insolvency/ bankruptcy jurisdiction between member states, but the result of such determination potentially has serious effects on matters other than jurisdiction.

It is vital to appreciate that the Regulation is not confined to companies which are incorporated within the European Union. Potentially the Regulation applies to any corporations, wherever incorporated, including the United States. The essential question which any court in a European Union member state is obliged to ask in order to decide whether it has insolvency jurisdiction under the Regulation is, where is the centre of main interest (the "COMI") of the company concerned. If the court in any member state determines that the COMI of an insolvent corporation is within its territory then it will, so far as European law is concerned, have jurisdiction to wind up the affairs of that company, and those proceedings will be regarded under European law as "main" insolvency proceedings. Accordingly, in principle the courts of any European country (save for Denmark) are able to wind up foreign companies. This jurisdiction has been exercised by English, Italian and German Courts.

There is no clear definition of the meaning of COMI in the Regulation. Article 3 states that "in the case of a company or legal person the place of the registered office shall be presumed to be the centre of its main interest," but goes on to state that the presumption can be rebutted. The presumption does not in the decided cases appear to have been regarded as that important by the courts. The Preamble to the Regulation states "the centre of main interest should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties." However, in decisions of the Parma Court in Italy relating to members of the Parmalat Group, the Italian Court has emphasized the importance of where ultimate control of the company resides, and in finding that it had jurisdiction over companies incorporated in Ireland, the Dutch Antilles, Germany and Luxembourg, the court relied upon the fact that the companies were ultimately subsidiaries of Parmalat S.p.a, and that a number of directors of those companies were Italian. In particular, they placed Eurofoods (IFSC) Limited ("Eurofoods") into the Italian extraordinary administration procedure and classified those proceedings as "main" proceedings. In England, the courts have taken into account factors such as the following to support jurisdiction under the Regulation:

  • A company’s administration was carried out in England;
  • The finance function was carried out in England;
  • Contracts of a foreign company were negotiated by people operating from England;
  • A German company’s financial information was compiled in accordance with English accounting principles;
  • Activities of a German company required approval from an English company higher up the Group chain;
  • Information technology and support were run from England;
  • Management strategy was decided in England;
  • A foreign incorporated company had most of its employees in England.

A combination of some or all of the above-mentioned factors has persuaded English Courts to wind up foreign incorporated companies, for example companies which were members of the Daisytek Group, BRAC Rent-a-Car International Inc. (a Delaware company and a member of the Budget Group), and a Spanish subsidiary of Enron Europe.

In Eurofoods, the Irish Court disagreed with the approach of the Italian Courts, which as stated had applied the principle of ultimate control, and contrary to the decision of those courts determined that the COMI of Eurofoods was in Ireland. Accordingly, the Irish Court placed Eurofoods in liquidation in Ireland and regarded these proceedings as "main" proceedings. They relied on the fact that the day-today administration of Eurofoods was carried on by personnel of the Bank of America in Dublin, and that although under Irish law it was a requirement that Eurofoods provide services to non-resident persons or bodies (in this case to Venezuelan and Brazilian entities), its business had to be and was conducted within the International Financial Services Centre of Dublin and subject to supervision by the usual Irish regulatory authorities, including the Irish Revenue Commission. Reliance was also placed upon the views of bondholders whose evidence was that they had always considered the COMI of Eurofoods was in Ireland. There is therefore currently a dispute of jurisdiction between the Irish and the Italian Courts, which the Irish Courts have referred to the European Court of Justice.

The approach of the Italian Courts, which has to some extent been mirrored in a couple of cases by the English Courts, namely that jurisdiction should be decided upon the basis of ultimate shareholder/director control, raises potentially serious problems for creditors and indeed debtor companies themselves. Creditors who enter into complicated off-shore financial transactions with companies which are ultimately subsidiaries or intimately connected with companies incorporated and carrying on business in a European Union country should appreciate that a European Court may exercise insolvency jurisdiction over such companies despite the fact of incorporation outside the European Union. If that exercise of power occurs and the insolvency courts of a European country open main proceedings in its jurisdiction, as far as that European Court is concerned, the principle law applicable to those proceedings will be its own insolvency law. Consequently, as a general rule, matters such as set-off; the effect of insolvency proceedings on current contracts; the adjudication of contractual claims; the void-ness, void-ability or unenforceability of legal acts; and the rights of the trustee or other office holder to institute proceedings against creditors or other third parties may all be determined by such European Court’s law. There are potential exceptions open to creditors to possibly avoid such a jurisdiction, but the legislation is obscure and there is no decided case law on it. Accordingly, creditors may well end up dealing with an insolvency jurisdiction quite different from that applicable to the jurisdiction in which the debtor was incorporated and with which the creditor is familiar. For example, if a creditor deals with a debtor incorporated in Cayman, in the event of insolvency, the creditor would expect its affairs to be wound up in accordance with the insolvency laws of Cayman, which are not that dissimilar to the laws of England. However, if an Italian Court determines the COMI of that debtor is in its jurisdiction, then Italian law will apply. It should be appreciated that the insolvency laws applicable in Continental European countries, particularly those in relation to set-off, are different to the laws of England or the United States of America.

While it may be thought that a creditor could disregard orders of a court in a European Union country, such action may not be possible if the creditor has a business or assets there, or its officers from time to time are within that jurisdiction. It should also be appreciated that the courts of all other European Union countries will recognise the jurisdiction exercised by a European Union Court opening "main" proceedings. Consequently, an entity must be wary of the potentially broad applicability of this Regulation. 

This article is presented for informational purposes only and is not intended to constitute legal advice.

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