COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT pursuant to the second subparagraph of Article 251 (2) of the EC-Treaty concerning the common position of the Council on the adoption of a European Parliament and Council Directive on the reorganisation and winding-up of insurance undertakings

1986/0080 (COD)

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT pursuant to the second subparagraph of Article 251 (2) of the EC-Treaty concerning the common position of the Council on the adoption of a European Parliament and Council Directive on the reorganisation and winding-up of insurance undertakings

1. BACKGROUND

- On 23 December 1986 the Commission adopted a Proposal for a Directive on the co-ordination of laws, regulations and administrative provisions relating to the compulsory winding up of the direct insurance undertakings [1]. The Proposal was submitted to the Council on 23 January 1987 and to the European Parliament on 6 February 1987.

[1] COM (86) 768 final/2, OJ C 71, 19.3.1987.

- At its 248th plenary session on 23 September 1987 [2] Economic and Social Committee delivered a favourable opinion on the Proposal.

[2] OJ C 319, 30.11.1987, p.10.

- The European Parliament adopted a legislative resolution [3] embodying its opinion on the Commission's Proposal at its plenary session on 14 March 1989.

[3] PE 124.469/fin. Rapporteur P. Price.

- On 12 September 1989 the Commission adopted an amended proposal [4] in the light of its consultation of the Parliament and the Economic and Social Committee.

[4] COM (89) 394 final, OJ C 253, 6.10.1989, p. 3.

- After many years of negotiations in Council, which were discontinued and reassumed several times, on 10 October 2000 the Council adopted the common position [5] which is the subject of this communication.

[5] OJ...........

2. OBJECT OF THE PROPOSAL

The main object of this Proposal is to ensure that

- the only competent authority to open winding-up proceedings with regard to an insurance undertaking having its registered office in the Community should be the home Member State authority which should apply its own national legislation (principle of unity),

- the winding-up proceedings should include all the Community branches of the insurance undertaking regardless of the Member State in which they are situated (principle of universality) [6], and

[6] The Proposal is inspired in the "twofold principle of the unity of the proceedings and universality of its effects". COM (86) 768 final/2, explanatory memorandum.

- the protection of policyholders' rights, whose premiums supply the funds of the insurance undertaking, and the legitimate interest of other creditors should be reconciled in an appropriate way. [7]

[7] The proposal intends to "reconcile the need to guarantee the rights of policyholders, whose premiums supply the funds of insurance undertakings, with the legitimate interest of other creditors, in particular the employees". COM (86) 768 final/2 explanatory memorandum.

3. COMMENTS ON THE COMMON POSITION

3.1. General considerations

3.1.1. The common position adopted by the Council retains the essence of the Commission's initial Proposal (hereinafter "the Proposal"). As the Proposal the common position is based on the principles of unity, universality and protection of insurance creditors. The Commission agrees with the changes introduced by the Council and considers that they will contribute to improve the quality of the legislative text.

3.1.2. The common position takes full account of the spirit of the amendments adopted by Parliament in its first reading. Furthermore, due to the long time spent since the Proposal was adopted, the Council has carried out a necessary work of redrafting while fully respecting the principles of the original text. This redrafting was needed in order to adapt the wording of the Proposal to the legal framework introduced by the "third generation" of insurance directives (Third Life and Non Life Insurance Directives [8]) as well as to ensure consistency with other Community legal instruments in the field of insolvency such as the Council Regulation on Insolvency Proceedings (hereinafter "Insolvency Regulation) [9] and the parallel proposal on winding-up of credit institutions [10]. It should be noted that, although the common position and the Insolvency Regulation are based on different principles, many technical issues in both instruments are identical and should be treated consistently.

[8] Directives 92/96/EEC (OJ L 360, 9.12.1992, p.1) and 92/49/EEC (OJ L 228, 11.8.1992, p.1).

[9] Council Regulation (EC) n°1346/2000 of 29 May 2000 on insolvency proceedings (OJ L 160 of 30 June 2000).

[10] Amended proposal for a Council Directive concerning the reorganisation and winding-up of credit institutions and deposit guarantee schemes [COM (88) 4 final; OJ C 36 of 8.2.1988]. A common position on this Directive was adopted by the Council on 17.7.2000.

3.1.3. Furthermore the common position has increased the scope of the Proposal by applying its principles of unity and universality not only to compulsory winding-up but to any kind of winding-up proceedings whether they are compulsory or voluntary and whether they are or are not founded on insolvency. Moreover the scope of the directive has been expanded to cover reorganisation measures adopted by the competent authorities in order to preserve or restore the financial soundness of an insurance undertaking provided that such measures affects pre-existing rights of parties other than the insurance undertaking. The common position provides therefore a comprehensive coverage of the cases in which an insurance undertaking is in a crisis situation or decides to close business. In this way the protection of creditors and insurance creditors has been improved.

3.1.4. The main amendments introduced in the common position in comparison with the Commission proposal are commented in detail below.

3.2. Parliament's amendments reflected in the common position

The amendments adopted by Parliament and accepted by the Commission during the first reading of the Proposal aimed at reinforcing the publicity of the winding-up proceedings in order to protect creditors (amendment n°1) and at ensuring that such proceedings produce their effects over all the Community territory according to the principle of unity of the winding-up (amendments n° 2 and 3). The spirit of the Parliament's requests has been fully incorporated into the common position.

3.2.1. Following the spirit of the Parliament's amendments the common position contains a number of provisions (Articles 14, 15, 17, and 18) in order to ensure the principle of publicity of winding-up proceedings. Similar provisions apply to the reorganisation measures covered by the Directive.

As provided for in Article 14 the decision to open winding-up proceedings must be published: 1) according to the home Member State legislation procedures, 2) in the Official Journal of the European Communities and 3) by any other means decided by the Member States' supervisory authorities within their respective territories. This Article also stipulates that the publication shall specify the authority of the home Member State competent for the opening of the winding-up proceedings, the applicable law and the liquidator appointed.

In addition to the aforementioned publication, Article 15 provides for individual notification of the decision to all known creditors who are resident in the Community. This provision also stipulates the content of the information to be provided. Article 17 specifies the languages and the form to be used for this notification.

Furthermore, Article 18 obliges the liquidators to keep creditors regularly informed of the progress of the winding-up proceedings.

3.2.2. As recommended by Parliament the principle that the winding-up proceedings opened by the home Member State competent authority will produce their effects over all the Community territory (principles of unity and universality) has been clarified and completed. It is covered in particular by Articles 8 and 9 of the common position. Similar provisions have been included with regard to reorganisation measures (Article 4).

As provided for in Article 8 only the competent authorities of the home Member State shall be entitled to take the decision to open winding-up proceedings. It is stated that this decision "shall be recognised, without further formality, within the territory of all other Member States and shall be effective there as soon as the decision is effective in the Member State in which the proceedings are opened". Article 9 provides that the decision to open winding-up proceedings, the winding-up proceedings themselves and their effects shall be governed by the home Member State legislation.

3.3. Other changes introduced by the Council in the common position

In addition to carrying out an overall redrafting of the wording of the proposal as explained in paragraph 3.1 above, the common position has introduced other changes in particular:

3.3.1. Definition of winding-up proceedings [Article 2 (d)]

The definition of winding-up proceedings in the common position includes any collective proceedings involving realisation and distribution of the assets of the insurance undertaking under the intervention of an administrative or judicial authority. The common position is therefore not limited to "compulsory" winding-up as was the original Proposal. It lays out a broad definition which includes any winding-up proceedings concerning an insurance undertaking whether they are or are not founded on insolvency and whether they are voluntary or compulsory.

A broad definition of winding-up ensures a comprehensive cover by the Directive. In this way any winding-up of a Community insurance undertaking will be carried out in an organised manner and according to rules agreed at European level. Creditors in that situation will be granted appropriate legal guarantees of information, publicity and non-discrimination. This comprehensive coverage of the Directive is positive for the Internal Market in general and for the protection of creditors in particular.

3.3.2. Inclusion of reorganisation measures [Articles 1 1, 2 (c) and 3]

By contrast with the initial and the amended Proposal the common position applies not only to winding-up proceedings but also to reorganisation measures.

The "reorganisation measures" covered in the common position must fulfil the following conditions: first, they should aim at preserving or restoring the financial situation of the insurance undertaking; second, they must affect pre-existing rights other than the insurance undertaking itself (third parties). The first condition is necessary to distinguish reorganisation measures from the proceedings aimed at realising and distributing the assets of the insurance undertaking ("winding-up proceedings"); the second condition excludes from the scope of the directive other possible measures which, because they exclusively affect the insurance undertaking itself and do not have impact on third parties' rights, do not require special safeguards.

The insurance directives already contain provisions harmonising certain re-organisation measures [11]. The common position does not harmonise all possible reorganisation measures existing in the national legislation. Rather it provides for rules so that such measures may be applied in a co-ordinated way over the Community. Such a co-ordination is beneficial for policyholders and other creditors since winding-up proceedings can be prevented.

[11] Articles 20 of Directive 73/239/EEC (OJ L 228, 16.8.1973, p.12) and 24 of Directive 79/267/EEC (OJ L 63, 13.3.1979, p. 12).

It is not desirable that all reorganisation measures are submitted to the same rules concerning publicity. For this reason the common position excludes from the general obligation of publication certain reorganisation measures which exclusively affect the rights of shareholders or members or employees of an insurance undertaking. In other words, when the creditors of the insurance undertaking are not affected by the reorganisation measures, the common position does not carry any publication obligation unless the law applicable to such reorganisation measures (home legislation) provides otherwise.

3.3.3. Appropriate balance between the rights of insurance creditors and those of other creditors: treatment of insurance claims (Articles 10 and 12 and Annex)

The Proposal provided for a single method ("special privilege") for the treatment of insurance claims in the winding-up of an insurance undertaking: the exclusive affectation of the assets representing the technical provisions to insurance creditors.

However a large majority of Member States were not in a position to accept such harmonisation which affected the delicate political balance existing in their national legislation with regard to the different categories of creditors in a winding-up (e.g.: ordinary creditors, insurance creditors, employees, social security, fiscal authorities, rights in rem [12] etc). This problem was the main reason why the discussion on this directive came to a deadlock for many years in Council.

[12] This is a legal expression to cover those types of situations where a creditor may have a prior and specific right over a particular asset. An example is a mortgage on a property. The latter may be part of the general portfolio of assets of an insurance company but in the event of failure to pay the mortgage payments, the creditor would have an over-riding right to the asset i.e. the property.

In order to avoid this obstacle the common position has completed the Commission Proposal by adding a second method ("general privilege"), optional for the Member States, for the protection of insurance creditors. The Commission believes that both methods, which reflects the existing systems in most Member States, may be considered as providing an equivalent protection to insurance creditors.

Article 10 of the common position provides that Member States may choose between two optional methods: either granting insurance claims absolute precedence over any other claim with respect to assets representing the technical provisions of the insurance undertaking ("special privilege") or granting insurance claims a special rank over the whole assets of the insurance undertaking (they can only be preceded by claims on salaries, social security, taxes and rights in rem) ("general privilege").

Certainly the two optional methods, which provide insurance creditors an equivalent level of protection, are not identical. Each of them has its pros and cons. The "special privilege" confers insurance creditors a higher position in the ranking than the "general privilege" as insurance claims must prevail over any other claim. However the "special privilege" only concerns the assets representing the technical provisions while the "general privilege" refers to all assets of the insurance undertaking. Both methods ensure an appropriate level of protection of insurance creditors as well as an suitable balance with other creditors of the insurance undertaking.

Furthermore, an additional guarantee for the insurance creditors has been provided in Article 12 of the common position in the case of the "general privilege" system. Member States who apply this method shall require every insurance undertaking to cover, the claims which may take precedence over insurance claims (claims on salaries, social security, taxes and rights in rem which are registered in the insurance undertaking's accounts) by assets free of any liability meeting the same conditions as the assets representing the technical provisions. Such a coverage by assets must exist at any moment and independently from a possible winding-up. This additional guarantee aims at ensuring that "super-privileged claims" will at any moment be supported with sufficient assets and do not jeopardise the payment of insurance liabilities.

It should also be noted that the broad definition of "insurance claims" in the common position [Article 2 (k)] should have a positive impact on the protection of insurance creditors since such a definition determines the scope of application of the two optional methods. Indeed an important effort has been made in the common position to specify the insurance claims to be covered. All amounts owed by the insurance undertaking arisen from an insurance operation have been included in the definition. Besides claims held by insured persons, policy holders and beneficiaries, claims held by insured persons having direct right of action against the insurance undertaking have also been considered as insurance claims. Moreover, the definition includes the premium owed by the insurance undertaking as a result of the non-conclusion or cancellation of an insurance operation.

In any case the optional dual system for the treatment of insurance claims is a major advance for the protection of policyholders compared with the current situation. At present, policyholders in some Member States do not benefit of any privilege in the case of winding-up. Moreover, the possibility of territorial winding-up proceedings and the cost of legal disputes would considerably reduce the reimbursement of their claims.

3.3.4. Withdrawal of the authorisation (Article 13)

The common position adopts in this matter a balanced solution which takes account of the practice in the different Member State and keeps parallelism with the proposal on winding-up of credit institutions and the Insolvency Regulation. It provides that the opening of winding-up proceedings brings about the withdrawal of the authorisation granted by the home supervisors, unless such authorisation had been withdrawn before. Nevertheless the withdrawal of the authorisation does not impede the insurance undertaking from o carrying out the activities which may be necessary for the purposes of the winding-up.

3.3.5. Applicable law (Articles 4, 9 and 19 to 26)

As a logical consequence of the principle of unity, Article 9 of the common position provides that the winding-up proceedings and their effects are subject to the home Member State legislation (lex concursus). The same rule applies to reorganisation measures as provided for in Article 4. In order to clarify the practical application of this principle a non-exhaustive list of matters governed by the "lex concursus" is set out in Article 9 2, which follows the Insolvency Regulation.

The directive nevertheless cannot ignore the existence of different legal systems in the Member States. As it cannot harmonise fundamental aspects of civil law which would clearly fall outside its scope, it has to protect legitimate expectations and recognise certain pre-existing transactions created outside the home Member State. Therefore the common position provides for special rules on applicable law in the case of particularly significant rights and legal relationships. In this way it seeks to protect the certainty and safety of the transactions as well as the confidence in the markets.

In this complex matter the common position takes full account of the relevant provisions of the Insolvency Regulation which were established in Council by the Civil law experts of the Member States. Inconsistency between the Directive and the Insolvency Regulation in this matter would not be justified and would create considerable difficulties to the Member States for the implementation of both legal instruments into their national legislation.

In this regard the common position provides for the following special rules on applicable law:

(1) Effects on certain contracts and rights (Article 19)

The effects of the reorganisation measures and winding up proceedings on employment contracts, contracts conferring the right to make use or acquire immovable property and the rights on immovable property, ships or aircraft shall be governed by the law applicable to these contracts and rights. This means, for instance, that the effect of the winding-up on an employment or a real-state contract signed by the insurance undertaking before the opening of the winding-up proceedings (e.g. continuation or termination of the contract, compensation to be paid, etc) shall be ruled by the law applicable to the contract in question. This is needed in order to protect the legitimate expectations of the other contracting party (e.g. the employees) from the application of a foreign law ("lex concursus").

However, as indicated in recital n° 25 of the common position, any other issues such as the lodging, verification, admission and ranking of claims regarding such contracts and rights should be governed by the "lex concursus". This means, for instance, that while the legal situation of an employment contract and the rights and obligations of the parties as a result of the opening of the winding-up proceedings shall be governed by the legislation of the Member State of the law applicable to the contract, the execution of any claim concerning this contract over the insurance undertaking shall be carried out under the "lex concursus" in the framework of the winding-up proceedings.

(2) Third parties rights in rem (Article 20) and reservation of title (Article 21)

"Right in rem" is a legal expression to cover those types of situations where a creditor may have a prior and specific right over a particular asset. An example is a mortgage or a property.

When an asset belonging to the insurance undertaking, situated outside the home Member State in which the winding-up is opened, is subject to a right in rem in favour of a third party, the common position provides that such "right in rem" created in another Member State will not be affected by the opening of the winding-up proceedings. Since the position of the "rights in rem" in the bankruptcy legislation of the Member States is not harmonised, the common position, following the Insolvency Regulation, prefers to leave these "rights in rem" on assets situated outside the home Member State unaffected by the winding-up proceedings. The intention is to avoid that legitimate expectations of a creditor protected by a right in rem with regard to a transaction carried out under one Member State's legislation may be subordinated to the opening of winding-up proceedings in another Member State. It should be noted that the "rights in rem" are of considerable importance for the granting of credits.

In the case of a reservation of title in favour of a third party concerning an asset of the insurance undertaking situated outside the home Member State (which is a very similar legal situation to that of the "rights in rem") the common position follows the same solution as in the rights in rem for the reasons explained above.

(3) Set-off (Article 22)

Where under the rules on conflict of law the right to invoke the set-off arises from a national law other than the "lex concursus", the common position, following the Insolvency Regulation, allows the creditor of the insurance undertaking to retain this possibility as an acquired right against the insolvency proceedings. In this case the right of set off is not affected by the opening of proceedings.

The reason underlying this provision is to protect the legitimate expectations of the creditor. Indeed the possibility of set-off becomes a sort of guarantee governed by a law on which the creditor concerned can rely at the moment of contracting or incurring the claim. This provision applies to set-off with regard to claims incurred before the opening of the winding-up proceedings. The recognition of set-off between claims incurred after the opening of the winding-up proceedings shall be determined by the "lex concursus".

(4) Regulated markets (Article 23)

With regard to the impact of the Directive on transactions carried out trough regulated financial markets, the common position keeps consistency with the other Community legal instruments in the field of insolvency (the parallel proposal on winding-up of credit institutions and the Insolvency Regulation).

The effects of a reorganisation measure or the opening of winding-up proceedings on the rights and obligations of the parties in a regulated market shall be governed by the law applicable to that market. In this way the common position intends to avoid potential conflicts between the "lex concursus" and the law of the Member State of the market in order to protect the general confidence in the regulated markets.

(5) Detrimental acts (Article 24)

This provision should be read together with Article 9 2(l) of the common position which provides, as a general rule, that the validity of legal acts detrimental to the creditors shall be governed by the "lex concursus". This general rule is fully applicable, even in the cases mentioned above in which other law than the "lex concursus" governs a specific legal act: if such an act is detrimental to the creditors, the applicable law in order to assess its validity shall be the "lex concursus".

Article 24 of the common position contains however an exception to this general rule. It concerns legal acts carried out by the insurance undertaking before the opening of the winding-up proceedings which meet three conditions: (i) they are detrimental for the creditors in general, (ii) they are subject to a legislation other than the home Member State law and (iii) they cannot be challenged in the relevant case according to such legislation. When the person who has benefited from the contested act provides proof of the three aforementioned conditions the validity of these acts is subject to the legislation applicable to the act rather than to the lex concursus.

The aim of this provision is to safeguard legitimate expectations of third parties which entered into transactions with the insurance undertaking when such transactions may be challenged by the retroactive application of the winding-up proceedings or by actions of the liquidator. It should be noted that there are important differences between the Member States legislation with regard to the period and the conditions under which the validity of a legal act can be affected by the retroactive effects of the winding-up. In this situation the common position follows the Insolvency Regulation. It opts for the application of the law ruling the legal act in question in order to safeguard the certainty of the legal transactions rather than leaving the validity of the act to the decision of a foreign legislation (lex concursus).

This provision is not obviously aimed at protecting acts committed in fraud ("consilium fraudis"). One condition for its application is that the law applicable to the act does not allow any means for the act to be challenged. This condition cannot be met in the case of fraud since all Member States' legislation contain specific legal actions in order to declare null and void acts carried out in fraud, independently from the criminal penalties involved.

(6) Protection of third-party purchasers (Article 25)

This provision exclusively concerns certain acts concluded after the adoption of the reorganisation measures or the opening of the winding-up proceedings. When an insurance undertaking subject to a reorganisation measure or winding up proceedings concludes an act for a consideration of an immovable asset, a ship or aircraft, or registered securities, the validity of that act is governed by the law of the Member States where the property is situated.

The aim of this provision is to protect legitimate expectations of a third-party purchasers as well as to facilitate the liquidation of assets by the administrator or liquidator. If the validity of the purchase depended on a foreign legislation (home country legislation) purchasers would be reluctant to enter into transactions with insurance undertaking subject to a reorganisation measure or winding-up proceedings.

(7) Law suits pending (Article 26)

The effects of a reorganisation measure or the winding-up proceedings on a lawsuit pending against the insurance undertaking shall be governed by the law of the Member State in which the lawsuit is pending.

It is logical that the effect of the winding up on a lawsuit which had started before the winding-up remains subject to the same law until the lawsuit is finished and the judgement is adopted. However, as indicated in recital n° 26, the effects of such measures and proceedings on individual enforcement actions arising from these lawsuits should be governed by the home Member State legislation.

4. CONCLUSIONS

The Commission takes the view that the common position retains the key elements of the Commission's Proposal as well as those of the European Parliament amendments that were accepted by the Commission and incorporated in its Amended Proposal. The Commission can commend this common position to the European Parliament.

Done at Brussels,

For the Commission

The President