EU Insolvency Regulation 2015 – the key changes
The recast EU Insolvency Regulation (REGULATION (EU) 2015/848 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 20 May 2015 on insolvency proceedings) entered into force on 26 June 2015 and will apply to proceedings that are commenced from 26 June 2017 onwards.
The significant steps in the legislative procedure and a document comparison between the 2002 EU Insolvency Regulation and the new 2015 version can be found at www.schubra.de/en/internationalaffairs/EIR_Recast_2015.php
We would now like to explain to you the key new features of the 2015 EU Insolvency Regulation in a series of newsletters running until June 2017. Having commented on the extension of the scope to hybrid and pre-insolvency proceedings in March, we will now look at the examination as to jurisdiction by the court and a review of the decision to commence proceedings.
We hope you find this interesting reading.
Dr Annerose Tashiro
EU Insolvency Regulation 2015 – What’s new? :
II. COMI – Definition, examination as to jurisdiction and challenges
We have seen (Newsletter of 21.03.2017) that material insolvency and the attachment of assets cease to be conditions of application for the commencement of collective proceedings as insolvency proceedings within the meaning of the 2015 EU Insolvency Regulation (EIR). The appointment of an insolvency administrator is now merely a procedural arrangement. It is considered sufficient to place the debtor under supervision or control by a court. Collective proceedings are now considered to include proceedings that include all or a significant part of the creditors to whom a debtor owes all or a substantial proportion of the debtor's outstanding debts. Publicity for proceedings is likewise made a precondition. The initiation of hybrid, pre-insolvency and preliminary proceedings will mean the commencement of EIR insolvency proceedings, Art. 2.7 EIR.
Examination and review of the decision to commence proceedings
The decision to commence proceedings by the courts is subject to more stringent requirements under the reform. These requirements are reflected in the explicit obligation of courts to examine jurisdiction, as stipulated in Art. 4, and the newly introduced right of creditors and debtors to challenge the decision, as specified in Art. 5. The legislators wanted to prevent abusive or even fraudulent application of the Regulation by means of forum shopping and, by doing so, accordingly impose the obligation on the parties involved (applicant and court).
Art. 4 now stipulates that the court which has to decide on the commencement of insolvency proceedings shall examine its jurisdiction explicitly and of its own motion in accordance with Art. 3 and shall specify the grounds on which the jurisdiction of the court is based. The key function results from the blocking effect of the main insolvency proceedings that were first commenced in accordance with Art. 3 (3) and the resulting automatic recognition of them and application of the lex fori concursus in all Member States in accordance with Arts. 19, 20 and 7.
Jurisdiction under Art. 3 – COMI (new?)
According to Art. 3 (1), the courts of the Member State within the territory of which the centre of the debtor's main interests (COMI) is situated shall have jurisdiction to commence main insolvency proceedings (collective proceedings), as had been the case even before the reform. Art. 3 (1) now includes the definition of COMI, which was to be found in Recital 13 prior to the reform: "the place where the debtor conducts the administration of its interests on a regular basis and which is ascertainable by third parties".
In the case of a company, the place of the registered office shall be presumed to be the COMI. A new provision is that the debtor cannot rely on this presumption if the registered office has been moved to another Member State within the 3-month period (retrospective period) prior to the application for the commencement of insolvency proceedings. Another aspect that has been made more stringent is the provision enabling the claimant to argue, on production of evidence, that the COMI is not located in the Member State of the registered office and, as a result, the jurisdiction of the courts at the location of the COMI shall apply. This is the case, for example, if the main office is not located in the Member State of the registered office and if the overall assessment of all relevant factors ascertainable by third parties lead to the conclusion that this is the COMI. The COMI shift is not excluded through this retrospective period, although it must then especially meet the criterion of being ascertainable by third parties. The recitals specify: This may require, in the event of a shift of centre of main interests, informing creditors of the new location from which the debtor is carrying out its activities in due course, for example by drawing attention to the change of address in commercial correspondence, or by making the new location public through other appropriate means.
In the case of an individual exercising an independent business or professional activity, the COMI shall be presumed to be that individual's principal place of business, i.e. the location pursuant to Art. 2 No. 10, where a debtor carries out or has carried out economic activity with human means and assets. The debtor cannot rely on this presumption if the principal place of business has been moved to another Member State within the 3-month period prior to the application for the commencement of insolvency proceedings. An individual exercising an independent business or professional activity is also entitled to rebut the legal presumption based on the above criteria.
In the case of natural persons, "insolvency tourism" has become a popular buzzword in recent years. Through the reform, legislators have now tried to close the loophole. Jurisdiction is assigned to the courts of the Member State in which the natural person has his/her habitual residence. In this case, a more stringent retrospective period of 6 months shall apply. The presumption shall not apply if the habitual residence was changed, through moving house, in order to submit the insolvency application in a new jurisdiction and, as a result, the creditors' interests are materially impaired. Conversely, the COMI may be different from the habitual residence if, for example, a majority of the debtor's assets is located in this other Member State.
Obligation of courts to examine jurisdiction, as stipulated in Art. 4
The reform introduces Art. 4 as a new provision. The court dealing with the application must carefully examine the presumption of Art. 3 or its rebuttal and, in case of doubt, request additional evidence from the debtor or applicant for the submission. A hearing of the creditors is also possible if the relevant insolvency proceedings law provides for this option.
The application for commencement of insolvency proceedings must therefore be based on the more stringent standards for examining jurisdiction by the courts, which are now under an obligation to do so ex officio. Applicants will be required to declare whether, in the previous 3 or, as the case may be, 6 months, the registered office, principal place of business or habitual residence was moved, to which reference is made in Art. 3 (1) sub-sections 2-4. It will be necessary to apply the criterion of being ascertainable by third parties as specified in Recital 28 for rebutting the presumption that the COMI is located at the registered office/principal place of business/habitual residence. In addition, Recital 30 sentence 2 requires a comprehensive assessment of all the relevant factors with regard to legal entities or individuals exercising a professional activity or an independent business. In order to avoid further delays to commencement of proceedings, the court's queries must be anticipated by the applicant.
Judicial review of the decision to open main insolvency proceedings Art. 5
Another new provision was the option of challenging the court's decision.
The debtor or any creditor may challenge before a court the decision commencing main insolvency proceedings in accordance with Art. 3 (1) and Art. 2 No. 7, on grounds of international jurisdiction, Art. 5 (1). Creditors and debtors may in particular question the circumstances of re-locating the registered office/principal place of business/habitual residence, as well as contesting the arguments produced to rebut the presumption that the COMI is at the location of the registered office/principal place of business/habitual residence, in order to challenge the decision to open insolvency proceedings. The form of the challenge is a matter for the national legislators.
Optionally, Member States may make provision that the decision to commence insolvency proceedings may also be challenged through an appeal by other parties involved in the proceedings or for reasons other than international jurisdiction. Whether this will be implemented, or to what extent, will be seen in June when the new EIR becomes applicable.
Dr Annerose Tashiro, German-qualified lawyer (Rechtsanwältin), (Registered European Lawyer)
Our next 2015 EU Insolvency Regulation (EIR): What's new? Newsletter will present the new features in relation to insolvency registers
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