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The European Union has created a single market where companies can easily operate in several countries. But this economic freedom raises a thorny question: what happens when a company operating in several Member States runs into serious financial difficulties or goes bankrupt? Without common rules, chaos would quickly ensue, with competing procedures, contradictory decisions and a great deal of uncertainty for everyone. It is to avoid this that the EU has set up a specific framework to manage these situations: the European Regulations on insolvency proceedings (the most recent being Regulation (EU) 2015/848). This article explains the main principles of this European system.
Why specific European rules?
Before these regulations, each country applied its own national rules, even for international bankruptcies. This led to several problems:
- Multiplication of procedures : The same company could be subject to separate and parallel bankruptcy proceedings in each country where it had operations or assets, with decisions that were sometimes incompatible.
- Lack of coordination : Administrators or liquidators appointed in one country found it difficult to act in another country to recover assets or manage the situation globally.
- Uncertainty for creditors : It was difficult for creditors to know where and how to declare their claims, and what would happen to them.
- Risk of forum shopping: Some companies might be tempted to artificially move their headquarters or assets to the country whose bankruptcy law seemed most favourable to them, to the detriment of their creditors.
The main aim of the European regulations is therefore to establish a a coordinated and predictable system to deal with bankruptcies with a cross-border dimension within the EU. It is not a question of unifying national bankruptcy laws (which remain very diverse), but of clearly determining :
- Which court has jurisdiction to open the main proceedings?
- How decisions taken in one Member State are recognised and have effect in the others.
- Which law applies to the various issues raised by the procedure.
Which companies and which procedures are affected?
The European system does not apply to all companies or to all situations of difficulty. Several conditions must be met.
The essential geographical criterion: the Centre of Main Interests (COMI) in the EU
For insolvency proceedings to fall within the European framework, the company's "Centre of Main Interests" (or COMI) must be located at in a Member State of the European Union (with the exception of Denmark, which does not participate in this system).
COMI is defined by Regulation 2015/848 (Article 3) as the place where the debtor habitually manages his interests and which can be verified by third parties. This is a key concept, which aims to identify the company's true economic and management centre, where its main partners (customers, suppliers, bankers) expect it to be managed.
To simplify matters, the regulation establishes presumptions (which can be reversed if the reality is different):
- For a company : The COMI is presumed to be the place of its registered office. If the registered office is purely administrative ("letterbox") and the effective management and principal activity take place elsewhere, the presumption may be rebutted in favour of the place of the actual registered office, provided that this is objectively demonstrable and recognisable by third parties. European case law (Interedil) stresses the importance of the location of the actual central administration.
- For self-employed individuals (shopkeeper, craftsman, liberal profession): The COMI is presumed to be his main place of business.
- For another individual (an individual): The COMI is presumed to be the place of its habitual residence.
The location of the COMI is decisive because it is the basis for the competence to initiate the main proceedings.
Types of procedures covered
The European framework applies to public insolvency proceedings (or a risk of insolvency) aimed at the recovery, adjustment of debts, reorganisation or liquidation of the company.
Annex A of Regulation 2015/848 specifically lists the national procedures in each Member State that fall within this scope. For France, these are :
- Safeguarding
- Accelerated Backup
- Accelerated Financial Safeguarding
- Bankruptcy
- Judicial liquidation
Visit excluded procedures that do not meet these criteria, in particular :
- Procedures confidential (such as the mandat ad hoc or the French conciliation, unless it is approved and published).
- Certain specific procedures that are not listed in Annex A (for example, the procedure for dealing with the excessive indebtedness of individuals in France).
Excluded debtors
Certain business sectors are subject to specific European rules and are therefore excluded from the general scope of the Insolvency Regulations. This is mainly the case for :
- From insurance companies.
- From lending institutions (banks).
- Of certain investment firms and collective investment schemes.
These entities are subject to specific European Directives that govern their reorganisation or liquidation.
The main principles of the European system
The European framework is based on a number of essential pillars.
The "main" procedure: a single, universal jurisdiction
Where a company has its COMI in a Member State, the courts of that State are only competent to open the so-called "main" insolvency proceedings. These main proceedings have a universal scope In theory, it covers all the debtor's property and assets, wherever they may be in the European Union. The applicable law the main proceedings and their effects is, in principle, that of the State in which the proceedings are opened (this is referred to as the "State of enforcement"). lex concursus). We'll cover this in more detail in a later article.
Secondary" or "territorial" procedures: limited jurisdiction
If, in addition to its COMI in country A, the company has a "establishment in another EU country B, the courts of country B may open so-called "secondary" insolvency proceedings (if main proceedings are already opened) or "territorial" insolvency proceedings (if no main proceedings are opened, subject to certain conditions).
An "establishment" is defined as any place of operations where the debtor carries on (or has recently carried on) an economic activity on a non-transitory basis, with human resources and assets (Article 2 of Regulation 2015/848). A simple post office box or the isolated presence of an asset is generally not enough. A minimum organised and stable structure is required (branch, agency, office, etc.).
Unlike the main proceedings, the secondary or territorial proceedings have a more limited scope. strictly limited scope Insolvency proceedings: they only concern the debtor's assets located within the territory of the Member State in which they are opened. Its main objective is to protect local interests (creditors of the establishment, local employees, etc.).
Automatic mutual recognition
This is one of the pillars of the system. A decision to open insolvency proceedings (main or secondary), taken by the competent court of a Member State, must be automatically recognised in all other Member States (except Denmark), with no special formalities required (Article 19 of Regulation 2015/848). No need to go through an exequatur procedure, as is the case for judgments coming from countries outside the EU.
This principle is based on mutual trust between the legal systems of the Member States. The major consequence is that the legal effects of proceedings opened in one country (e.g. suspension of proceedings against the debtor, divestiture of the debtor's assets in favour of a liquidator) apply immediately throughout the Union.
The need for coordination
Since there may be a main procedure and one or more secondary procedures concerning the same company, the regulation imposes a obligation to cooperate and communicate between the various insolvency practitioners (judicial representatives, liquidators, etc.) and the courts involved. The aim of this coordination is to ensure consistent and effective management of the company's overall insolvency, while respecting the primacy of the main proceedings and taking account of local issues in secondary proceedings.
Navigating the intricacies of European insolvency procedures requires a good understanding of these principles. Knowing where your company's or your partners' COMI is located, understanding the difference between main and secondary proceedings, and knowing the mutual recognition rules is essential to anticipate the consequences of cross-border insolvency. If your company has activities or creditors in several EU countries, anticipating the applicable rules is fundamental. Contact our firm to assess your situation and take advantage of a consultation. tailored advice on cross-border bankruptcy.
Sources
- Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast).
- Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings (historical relevance and for proceedings opened before 26/06/2017).
- Case law of the Court of Justice of the European Union (CJEU).
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