Insolvency, Partnership & Company Law – Cross Border Insolvency – The European Union Council Regulation on Insolvency Proceedings (#1346/2)

20 Apr 2003

By : Sarah McCann

The new European Regulation on Insolvency Proceedings came into force on 31 May 2002 and introduces two new types of insolvency proceedings – main proceedings and secondary proceedings. The introduction of this new system aims to reduce the difficulties relating to jurisdiction which can occur when an individual or company has assets across the breadth of Europe.

On 29 May 2000 the EU Council adopted the Regulation on Insolvency Proceedings (“the Regulation”), which came into force on 31 May 2002 and applies to all Member States with the exception of Denmark. The Council considered that:

“the proper functioning of the internal market requires that cross-border insolvency proceedings should operate efficiently and effectively and this Regulation needs to be adopted in order to achieve this objective…” (Preamble, paragraph (2)).

The idea of a uniform system for the conflict of jurisdictions and recognition of judgments is to be welcomed, given the fact that the activities of companies and individuals are increasingly having more and more cross-border effects. However, it is important to note that this Regulation does not seek to harmonise Member States’ national insolvency laws and is not intended to be the first step to a Europe-wide insolvency system.

The scope of the Regulation is determined by Article 1(1) which states that it is to apply to

“collective insolvency proceedings which entail the partial or total divestment of a debtor and the appointment of a liquidator.”

The insolvency proceedings which are covered by this definition in England are set out in Annex A to the Regulation and, as it currently stands, are:-

  • Winding up by, or subject to the supervision of, the court;
  • Creditors voluntary winding up (with confirmation by the court); q Administration;
  • Voluntary arrangements under insolvency legislation;
  • Bankruptcy and sequestration

There is provision in Article 45 of the Regulation for this list to be extended; however at present it can be seen that one of the most notable absences is that of administrative receivership. In the light of the curtailment of the use of administrative receivers by s.250 of the Enterprise Act 2002 this is perhaps not surprising.

The Regulation applies to both individuals and companies. However, certain undertakings are expressly excluded from the effect of the Regulation by virtue of Article 1(2); namely insurance undertakings, credit institutions, investment undertakings which provide services involving the holding of funds or securities for third parties, and collective investment undertakings. The rationale behind this is given in the preamble at paragraph (9): on the whole such undertakings are

“subject to special arrangements and, to some extent, the national supervisory authorities have extremely wide-ranging powers of intervention.”

Two types of insolvency proceedings are provided for by the Regulation – Main Proceedings and Secondary Proceedings.

Main Proceedings

Article 3(1) states that the courts of the Member State where the centre of a debtor’s main interests (“CMI”) is situated has jurisdiction to open main insolvency proceedings and creates a rebuttable presumption that a company’s CMI is its registered office. These proceedings will have universal scope, affecting all the debtor’s assets and creditors wherever they may be located.

CMI is not further explained in the body of the Regulation itself but paragraph (13) of the preamble states that it

“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.”

It is likely that in complex cases the issue as to what constitutes the CMI will be one of the main points of dispute, and it is certainly possible to imagine a scenario where there will be scope for arguing that a debtor has a CMI in more than one Member State. It will be interesting to see how such cases are resolved since the Regulation allows for only one set of main proceedings.

The English courts have already begun grappling with the issue of jurisdiction to open main proceedings. In the recent case of Re: Brac Rent-A-Car International Inc [2003] EWHC (Ch) 128 decided on 14 January 2003 Mr Justice Lloyd granted an administration order on the petition of the Company but, recognising that “the question of jurisdiction is novel and of some importance”, provided a full judgment as to his reasons for holding that he had jurisdiction to make such an order. The facts of the case were that the Company was incorporated in the United States and had its registered office in Delaware. However, it had never in fact traded from the US but instead almost exclusively from the UK. Mr Justice Lloyd quite rightly recognised the fact that whether or not he had jurisdiction required reference to the Regulation and in particular turned on Article 3. He held that according to the literal reading of the Regulation, and also adopting a purposive approach, the only test was whether the debtor’s CMI was in a relevant Member State and not where the debtor, being a legal person, was incorporated. Consequently the courts of a Member State have jurisdiction to open main insolvency proceedings where a corporate debtor is incorporated outside the EC if its CMI was within that Member State, as was held to be the case in this instance. The potential effect of this judgment cannot be overstated.

Secondary Proceedings A Member State where the debtor’s CMI is not situated has jurisdiction, conferred by Article 3(2), to open insolvency proceedings against the debtor after the main proceedings have been opened, only if the debtor “possesses an establishment within the territory of that other Member State…”. These proceedings are known as secondary proceedings, since unlike main proceedings they are restricted to the debtor’s assets in that Member State (see Article 27).

“Establishment” is defined in the Definitions section of the Regulation found at Article 2 as “any place of operations where the debtor carries out a non-transitory economic activity with human means and goods”.

Territorial proceedings may be commenced before the opening of the main proceedings under Article 3(4) only where main proceedings cannot be commenced due to the law of that particular Member State or where the opening of territorial proceedings is requested by a creditor who has his domicile, habitual residence or registered office in the Member State where the establishment is situated or whose claim arises from the operation of that establishment. These territorial proceedings will be subordinate to any main proceedings that follow and can be converted into secondary winding up proceedings by the liquidator (described as the “office holder” under the Regulation).

Choice of Law

Article 4(1) of the Regulation lays down the general rule as regards which national insolvency law is to govern proceedings and states “the law applicable to insolvency proceedings and their effects shall be that of the Member State within the territory of which such proceedings are opened”. In other words, regardless of whether the proceedings in a Member State are main proceedings or secondary proceedings, the law of that Member State shall apply. Article 4(2) goes on to say that the applicable law shall “determine the conditions for the opening of those proceedings, their conduct and their closure…”.

Few would be surprised to learn that this general rule is subject to certain exceptions. These are to be found in Articles 5 to 15 and deal with various matters including rights in rem, set-off, retention of title, land contracts, payment systems and financial markets, moveable registered property and contracts of employment.

Recognition and Duty to Co-Operate and Communicate

Chapter II of the Regulation deals with mutual recognition in insolvency proceedings, which is one of the key aims of the Regulation. Article 16(1) provides that any judgment of a court opening insolvency proceedings pursuant to its jurisdiction under Article 3 as discussed above is to be recognised in all other Member States from the time that it becomes effective in the Member State in which it is given. Thus, this principle applies to both main proceedings and secondary proceedings alike. Article 17(2) goes on to state that those proceedings referred to in Article 3(2), i.e. secondary proceedings, may not be challenged in other Member States. The only basis upon which it appears that the Regulation allows judgments in main proceedings to be challenged is if “the effects of such recognition or enforcement would be manifestly contrary to that State’s public policy, in particular its fundamental principles or the constitutional rights and liberties of the individual.” (Article 26)

It is obvious why co-operation and the communication of information is seen as a necessary corollary to recognition, and this has been happening to a certain extent across the common law countries hitherto. However, the Regulation goes a step further and states in Article 31 that the liquidator in the main proceedings and the secondary proceedings shall be “duty bound” to both co-operate and communicate relevant information.


Member States should regard the objectives of the Regulation as worthwhile and hope that it is capable of fulfilling these aims. There are obvious potential problems in relation to the definition of certain terms, in particular that of the CMI. However, as a first step the Regulation should be welcomed by insolvency practitioners.


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