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# 52012SC0416

**COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Revision of Regulation (EC) No 1346/2000 on insolvency proceedings /\* SWD/2012/0416 final \*/**

  

COMMISSION STAFF WORKING DOCUMENT

IMPACT ASSESSMENT

Accompanying the document

Revision of Regulation (EC) No
1346/2000 on insolvency proceedings

Disclaimer: “This
report commits only the Commission's services involved in its preparation and
does not prejudge the final form of any decision to be taken by the Commission”

Table of Contents

TABLE OF CONTENTS

COMMISSION STAFF WORKING DOCUMENT IMPACT
ASSESSMENT Error! Bookmark not defined.

1........... Background and Policy Context...................................................................................... 7

2........... Procedural issues and
consultation of interested parties.................................................... 8

2.1........ Impact assessment study and
expertise............................................................................ 8

2.2........ Consultation of the IAB.................................................................................................. 8

2.3........ Stakeholders' consultation............................................................................................... 8

2.4........ Analysis of Fundamental Rights....................................................................................... 9

3........... Problem definition........................................................................................................... 9

3.1........ The key problems identfied in the
evaluation of the application of the Regulation............... 9

3.2........ Problem group 1: Problems
relating to the scope of the current Regulation...................... 10

3.2.1..... The Regulation does not cover
national insolvency proceedings which aim at rescuing companies          11

3.2.2..... The
Regulation does not effectively cover the full range of personal insolvency
schemes of Member States        13

3.2.3..... The
Regulation does not effectively deal with the insolvency of groups of companies....... 14

3.3........ Who is affected by problem group
1 and what is the extent of these problems?.............. 16

3.4........ Problem group 2: Problems in the
implementation of the Regulation................................ 18

3.4.1..... No definition for COMI and
consequent difficulties relating to determining jurisdiction for opening
insolvency proceedings (the concept of COMI) and forum shopping...................................................................................................... 18

3.4.1.1.. Determination of jurisdiction.......................................................................................... 18

3.4.1.2.. COMI shift................................................................................................................... 19

3.4.2..... Relationship
between the main and the secondary proceedings under the Regulation....... 21

3.4.3..... Difficulties in practical
implementation relating to lack of publicity of the decisions relating to an
insolvency procedure and to lodging of claims   23

3.5........ Who is affected by problem group
2 and what is the extent of these problems?.............. 25

3.6........ EU right to act.............................................................................................................. 28

3.6.1..... Legal basis................................................................................................................... 28

3.6.2..... Principle of subsidiarity................................................................................................. 28

4........... Policy objectives for the
revision of the EIR................................................................... 28

5........... Policy options............................................................................................................... 29

5.1........ Option A...................................................................................................................... 31

5.2........ Option B...................................................................................................................... 33

5.3........ Discarded options/elements........................................................................................... 33

6........... Evaluation of the Impacts of
Policy Options................................................................... 34

6.1........ Baseline scenario (Status Quo)...................................................................................... 34

6.2........ Option A: Modernizing the
framework for cross-border insolvency proceedings............. 35

6.3........ Option B: Towards approximation
of national insolvency laws and proceedings.............. 40

7........... Comparison of the options and
summary of the preferred option.................................... 42

8........... Monitoring and evaluation............................................................................................. 44

Annex 1: Glossary of Legal Terms and
abbreviations................................................................... 46

Annex 2: Executive summary of the outcome of
the public consultation......................................... 48

OVERVIEW OF MAIN FINDINGS......................................................................................... 49

Annex 3: Data on enterprises and insolvencies
in the EU.............................................................. 52

Annex 4: Information on personal insolvency
proceedings in Member States................................. 57

Annex 5: Hybrid proceedings in Member States
and their inclusion in Annex A of the Insolvency Regulation       59

Annex 6: Information on insolvency registers
in the Member States............................................... 67

Identification: AP: 2013 JUST 012; Lead DG: DG Justice

1.           Background
and Policy Context

At a time where the
European Union is facing the biggest economic crisis in its history, the
European Council has repeatedly emphasised the Union's role in promoting
sustainable growth while pushing for financial consolidation. Growth has
therefore been put at the heart of the Commission's agenda in the area of
justice (“Justice for Growth”).

One of the measures
supporting economic activities in the area of justice as set out in the
Commission's Action Plan implementing the Stockholm Programme[1] is the revision of
Council Regulation (EC) No 1346/2000 on insolvency proceedings (the
“Regulation” or “EIR”). The Regulation establishes a legal framework for
cross-border insolvencies in the European Union. From 2009-2011, an average of
200,000 firms went bankrupt per year in the EU, resulting in direct job losses
each year of 1.7 million. About one-quarter of these bankruptcies have a
cross-border element, and so fall under the EIR. As firms that trade
cross-border tend to be larger than average, the share of the number of jobs
affected is likely to be greater than the share of bankruptcies, even before
taking into account the effects on creditors of these firms.

The Commission has put
the revision of the EIR in its Work Programme for 2012. The revision links in
with the EU's current political priorities to promote economic recovery and
sustainable growth, a higher investment rate and the preservation of
employment, as set out in the Europe 2020 strategy. The reform will also
contribute to ensuring a smooth development and the survival of businesses, as
stated in the Small Business Act[2].
The Annual Growth Survey 2012 announces the revision of the EIR, emphasising
the importance of improving the effectiveness of cross border insolvency rules.[3] The revision is
also one of the key actions listed in the Single Market Act II[4].

The review of the
Regulation also links in with the broader issue of improving the efficiency of
justice in the European Union. In its experience with the Member States under
an economic recovery programme, the Commission has identified the key role of
judicial reforms, including reforms of national insolvency laws, as a means to
promote economic recovery. This was reflected in the European Semester in 2012
by recommendations made to certain Member States relating to efficient
insolvency proceedings. In October 2011, the European Parliament raised the
same issue when adopting a resolution calling for the revision of the
Regulation and further recommending the harmonisation of specific aspects of
insolvency law and company law.

The revision of the
Regulation will be adopted together with a report on its application, in line
with the review clause of the Regulation[5].

2.           Procedural
issues and consultation of interested parties

2.1.        Impact
assessment study and expertise

DG Justice contracted
two external studies to support the impact assessment: an evaluation study
performed by the Consortium Heidelberg/Vienna University and an impact
assessment study by the Consortium GHK/Milieu. The reports and results of these
studies have been used for this Impact Assessment.[6]

In May 2012, DG Justice
set up an expert group of 20 individual experts in the field of cross-border insolvencies.
The group met five times from May to October 2012 and provided input on the
problems, the options and helped on the drafting of the revised Regulation.

An IA Steering group
was established in April 2012. Two meetings were organised on 3 May and 6
September 2012 and were attended by SG, SJ, ENTR, DGT, EMPL, COMP, MARKT,
SANCO, CNECT, and ECFIN. The feedback received from the DGs has been taken into
account throughout the report.

2.2.        Consultation
of the IAB

This impact assessment
report was presented to the Commission's Impact Assessment Board on 3 October
2012. The Board recommended streamlining the problem definition by grouping the
presented problems and sub-problems. The Board also suggested providing more
information on the Member States' insolvency regimes, in particular as regards
the hybrid and pre-insolvency proceedings. The presentation of objectives and
options was asked to be rechecked to follow the streamlined problem
definitions. As regards objectives, more operation objectives were to be
identified. Furthermore, the IA Board recommended to present more expressly the
analysis of advantages/disadvantages of the planned measures as well as to
strengthen the existing quantification e.g. of the administrative burdens.
Finally, the Board proposed improving the presentation of stakeholders' views
in the relevant parts of the report. The recommendations and suggestions are
reflected in particular in chapters 3 to 6 that were further elaborated
compared to the earlier version commented on by the IA Board and by the
inclusion of a new Annex 5 on hybrid and pre-insolvency proceedings.

2.3.        Stakeholders'
consultation

Stakeholders have been
consulted as follows:

·
Public consultation on the future of European
Insolvency Law (29 March – 21 June 2012);[7]

·
European Judicial Network in civil and
commercial matters, meeting of Contact Points on 27 April 2012 and national
insolvency experts;

·
Meetings with business organisations such as
UEAPME, Business Europe.

·
Meetings with insolvency practitioners' organisations,
such as INSOL Europe.

The public consultation
contained 31 questions related to the scope and the functioning of the
Regulation. 134 answers were received from stakeholders in 25 Member States.
While there are certain differences in opinion depending on the group of
stakeholders (public authorities, businesses, legal practitioners), the answers
to the consultation confirm the problems and options that the Commission had
identified in the questionnaire. In particular, a majority of respondents consider
that while the EIR works relatively well in general, it should accommodate
national pre-insolvency procedures, it does not work for the insolvency of a
group of companies, and finally, the absence of mandatory publication of
decisions relating to insolvency procedures is a problem. A summary of the
public consultation is in Annex 2.

The opinions of the
stakeholders have been taken into account throughout the IA process in the
determination of the problems, in particular on the extent of the problem and
the most affected groups, and further, in the identification of possible
solutions.

2.4.        Analysis
of Fundamental Rights

With the Lisbon Treaty, the Charter of
Fundamental Rights of the European Union (“the Charter”)[8] has become legally binding[9].
This means that the EU's institutions, as well as the Member States when
implementing Union law, have to respect the rights, observe the principles and
promote the application of the Charter in accordance with their respective
powers[10].
For this reason, all legislative proposals proposed by
the Commission are subject to systematic and rigorous monitoring to ensure
their compliance with the Charter[11].
When assessing the impact of the envisaged initiative to improve cross-border
insolvency proceedings, this report pays particular attention to fundamental
rights in order to ensure that the proposed schemes fully respect the rights
and principles set out in the Charter, in particular those in Article 17 (right
to property), Article 16 (freedom to conduct a business), Article
47(2) (right to a fair trial) and Article 8 (protection of personal
data). The basic rights and freedoms protected by the Treaties as well as
the Charter, in particular the free movement of persons, services and
establisment, Article 15 of the Charter, are also very relevant for this
measure.

3.           Problem
definition

3.1.        The
key problems identfied in the evaluation of the application of the Regulation

The EIR establishes uniform EU level rules
for jurisdiction, the recognition and enforcement of insolvency-related
decisions, and applicable law. It also provides for some coordination of
different proceedings relating to the same debtor. In short,

·
The Regulation applies to legal and natural
persons, whenever the debtor has assets or creditors in more than one Member State.

·
Jurisdiction for opening main insolvency
proceedings lies with the court where the debtor has its centre of main
interest (COMI). The opening decision and all other decisions issued by that
court in the insolvency proceedings are recognised and enforced in all other
Member States;

·
Secondary proceedings can be opened in any Member State where the debtor has an establishment, i.e. any place where the debtor carries
out economic activity. The effect of secondary proceedings is limited to the assets
located in that Member State. The liquidator of the secondary proceedings has
to cooperate with his counterpart in the main proceedings (and vice-versa) in
order to coordinate the proceedings; and

·
The law applicable to the insolvency proceedings
is, in principle, the law of the opening of proceedings. This law determines,
in particular, the ranking of claims and the procedural rights of the creditor.

Adopted in May 2000,
the EIR applies since 31 May 2002.[12]
It is binding for all Member States except Denmark.[13] The Regulation
unified the private international law rules related to insolvency proceedings
for all Member States as regards cross-border insolvencies inside the EU.
However, it should be stressed that the Regulation did not harmonise the
substantive insolvency legislations of the Member States, but insolvency laws
vary from country to country. The different national solutions relating to
certain aspects of insolvency laws are presented in Annexe 5.

Ten years after its
entry into force, the Commission has evaluated the practical application of the
Regulation. While the EIR is generally considered to operate successfully in
facilitating cross-border insolvency proceedings within the European Union, the
evaluation shows that a range of problems exists in the implementation of the
Regulation and that the Regulation does not sufficiently reflect current EU
priorities and national practices in insolvency law, in particular in promoting
the rescue of firms in difficulties.

The evaluation of the
EIR has highlighted the following key problems:

(1)
Obstacles to the rescue of
companies and to the free movement of entrepreneurs and debt-discharged
persons;

(2)
Difficulties in determining
the appropriate jurisdiction to open proceedings;

(3)
Inefficiencies of
cross-border procedures;

(4)
No legal framework to cover insolvency of groups
of companies.

This section analyses
the four problems, linking them together as they are interrelated. This means
grouping the above problems around two themes, first problems regarding the scope
of the Regulation and second, problems revealed in the implementation of the
Regulation.

3.2.        Problem
group 1: Problems relating to the scope of the current Regulation

The first set of
problems covers issues relating to gaps in the current scope of the Regulation,
such as lack of provisions on pre-insolvency schemes, of provisions on debt
discharge procedures for natural persons as well as of specific rules on groups
of companies.

Indeed, the current Regulation covers
“collective insolvency proceedings which entail the partial or total divestment
of the debtor and the appointment of a liquidator”[14]. The debtor can be a natural
or a legal person, a trader or a private individual[15]. The Regulation contains a
list of national procedures which fulfil these criteria in its Annex A. It is
for each Member State to decide whether it wants to notify a particular
national procedure to be included in Annex A of the EIR.

Since the Regulation was enacted, many
Member States have modernised their insolvency laws by introducing new
procedures which aim at rescuing businesses, providing a second chance to
honest entrepreneurs and allowing a debt discharge for private persons. Many of
these new procedures are not covered by the Regulation and their effects are
not recognised in other Member States. Moreover, although a large number of
cross-border insolvencies involve groups of companies, the Regulation does not
contain specific rules dealing with the insolvency of a multi-national
enterprise group.

3.2.1.     The
Regulation does not cover national insolvency proceedings which aim at rescuing
companies

The EIR's definition of
insolvency proceedings does not cover national procedures which provide for the
restructuring of a company at a pre-insolvency stage (“pre-insolvency proceedings”)
or leave the existing management in place (“hybrid proceedings”). However, such
proceedings have recently been introduced in most Member States and are
considered to increase the chances of successful restructuring of businesses. They enable financially distressed enterprises
to become again competitive and productive participants in the economy, thereby
benefitting not only their creditors but society at large.

The benefits of
business rescue can be summarized as follows:

·
Maximisation of asset value: The rescue of a company allows preserving the value of its
technical know-how and business goodwill whereas liquidation is limited to the
value of the company's physical assets[16].

·
Better recovery rates for creditors, i.e. the percentage of their debt that
creditors get back: In France, the median recovery rates for liquidated firms
are less than one‐third of those for “rehabilitated” firms (31% vs. 96%); the same is
true also for the UK, even though the difference between the median recovery
rates seems smaller.[17]

·
Saving jobs.
Saving companies saves jobs. This is an important benefit given that the total
number of insolvency related job reductions in 2009 is estimated at 1.7
million.[18]

·
Lower costs: the
costs of pre-insolvency and hybrid insolvency proceedings are on average lower
than that of traditional insolvency proceedings.

·
Avoidance of reputational
risks and directors’ liability,[19]
allowing entrepreneurs to continue their activities.

·
Encouraging entrepreneurship: fear of bankruptcy and its consequences acts as a deterrent to
entrepreneurship;[20] efficient pre-insolvency and hybrid insolvency proceedings ease
entrepreneurs’ fears and encourage entrepreneurial activity.

The aim of these rescue
proceedings is to help the recovery of fundamentally sound firms that face
temporary difficulties; they are not intended to prevent the exit of
inefficient firms from the market, as this would impede the growth of more
efficient competitors and hamper structural changes in the economy.

The Heidelberg study
revealed that almost two thirds of Member States have pre-insolvency or hybrid
proceedings which are not covered by the Regulation with the consequence that
there is no EU-wide recognition of their effects, notably the stay of
individual enforcement actions. As a result, the following problems occur:

·
Foreign creditors can continue with
individual enforcement actions against the company
and its assets; individual enforcement action can jeopardize the success of the
rescue or restructuring. This possibility can in particular be used by
dissenting foreign creditors (the so-called ‘holding-out’ problem).[21]

·
Foreign creditors will be less willing to
fully engage in restructuring negotiations or
consent to rescue plans involving a certain reduction of their claims; as a
consequence, the opportunity of rescuing the company may be lost.[22]

·
Opportunities for the continuation of
businesses through pre-insolvency and hybrid proceedings are reduced and jobs
are lost.

These problems are
reflected by the views of respondents to the public consultation in which 51%
of those who expressed an opinion felt that the lack of coverage of pre-insolvency
or hybrid insolvency proceedings is problematic. 59% also agreed the EIR
should accommodate national pre-insolvency procedures, with academics, public
authorities and insolvency practitioners
particularly in favour of this. Views were mixed on exactly which proceedings should be covered and in particular
where court oversight should be required.

Examples of problems
raised included cases differing views of Member States on which proceedings
could be covered by the EIR; uncertainty relating to schemes of arrangement
available to UK firms in financial difficulty and how they are recognised at EU
level and risks to workers interests.

Case example: Rechtbank 's Gravenhage, judgment of 10 June 2010[23]

A Dutch national had lived for several years in Germany and had taken out loans from several German banks to invest in the German property
market. After his return to the Netherlands, his business went into financial
difficulties and he was unable to repay the instalments on the loans. He
eventually filed a petition with the court in The Hague requesting the opening
of debt reorganisation proceedings under the Dutch Bankruptcy Act. In these
proceedings, a debtor can request the court to oblige dissenting creditors that
have not consented to an offer made by the debtor to do so if the judge
considers that they are unreasonably withholding their consent from the
proposed arrangement (“cram down”). However, the court refused to grant the
requested order, arguing that since the debt reorganisation proceedings were
not covered by the EIR, the cram-down of dissenting creditors would not be
recognised in Germany, where the debtor's creditors were located, and therefore
be ineffective. The Dutch entrepreneur had to apply for insolvency and have his
business liquidated.

The case illustrates that the fact that a
national pre-insolvency, hybrid or personal insolvency procedure is not covered
by the EIR can prevent the successful rescue of business or reorganisation of
personal debt in cross-border situations.

In addition, concerns
have been raised that a few Member States have included proceedings in Annex A,
which actually do not fulfil the criteria of the EIR. Following the ruling of
the CJEU in the Eurofood case, a court cannot challenge the
validity or appropriateness of any proceedings included in the Annex of the
Regulation. This situation creates a risk to mutual trust since some
courts do not consider it appropriate to recognise certain proceedings, yet
they are required to.

3.2.2.     The Regulation does not effectively cover the full range of personal
insolvency schemes of Member States

The growth of personal
over-indebtedness in Europe since the late 1980s has led to many Member States
introducing personal insolvency schemes, including debt discharge proceedings[24]. Such personal insolvency scheme can be
applicable either to individuals as entrepreneurs or consumers or both of them,
depending of the Member State's political choices. This development reflects
the increasing awareness that insolvency and the ensuing personal debt is a
significant obstacle to entrepreneurship because entrepreneurs often finance
their business using personal loans, possibly secured against their houses. The
introduction of the possibility to obtain a debt discharge also aims to counter
the negative social impacts which private over-indebtedness has on the
individuals concerned and their families.

The Regulation covers
the insolvencies of natural persons, and some MSs have indeed already notified
procedures that apply to "consumer insolvencies". There seem to be no
problems in the application of the Regulation to these proceedings in practice.
However there is an obstacle to the coverage of further national personal
insolvency procedures by the Regulation. While several personal insolvency procedures
are covered by the Regulation, a considerable number of others are not[25]. This situation is
partly because the proceedings do not match the EIR's definition - e.g. the
Scandinavian procedures and some common law systems, because they do not foresee
the appointment of a liquidator -, were only recently introduced or are not
considered to fall within the scope of the Regulation by the respective Member
States.

As a consequence,
some personal insolvency schemes are not recognised in other Member States and there is a heterogeneous situation in the
EU. The diversity of national laws adds complexity to the issue: Some Member
states have no personal insolvency schemes at all. Other have personal
insolvency schemes that apply both to self-employed or sole-traders and
consumers. A third group has schemes only for consumers and include
self-employed and sole-traders in company insolvencies, whereas a fourth group
has separate schemes for consumers, self-employed and sole traders.

The current situation
is a problem because it can result in debtors remaining liable to foreign
creditors. However there is no good reason why the Regulation should
discriminate between the personal insolvency proceedings available at national
level and why it should cover some but not the others. Where a debt discharge
procedure is not covered by the Regulation, the debt discharge has no effect
against foreign creditors of the individual. Consequently, an honest
entrepreneur, who has been discharged from its debts in one Member State may be
prevented from starting a new business in or trading with another Member State,
thereby affecting his freedom of establishment or to provide services and to
conduct business. The problem can also discourage debtors who have benefitted
from a debt discharge at home to live or seek employment in another Member State, thereby affecting the free movement of persons and workers. The fact that the
EIR does not cover some personal insolvency schemes therefore constitutes an
obstacle to offering a second chance to honest entrepreneurs and
debt-discharged persons, and allowing them to make full use of the
opportunities of the single market. This is in contradiction with EU policies
on entrepreneurship.

Half of respondents to the public
consultation (49%) agreed that the EIR should apply to private
individuals/self-employed, while one third (34%) disagreed, with those in
favour including judges, insolvency practitioners and academics. Some
respondents did not think an expansion should include consumers.

3.2.3.     The Regulation does not effectively deal with the insolvency of
groups of companies

The basic premise of
the Regulation is that insolvency proceedings relate to a single legal entity
and that, in principle, separate proceedings must be opened for each individual
member of the group. There is no compulsory coordination of the independent
insolvency proceedings opened for a parent company and its subsidiaries. The
Regulation has no provision allowing corporate groups to reorganise together or
– where this is not possible – at least to coordinate their liquidation.
Neither liquidators nor courts are under a duty to coordinate the independent
proceedings opened for each group member. While it is possible for the
liquidators in the respective main proceedings to coordinate their work in
order to maximise the value of the group's assets or the prospects for
successful restructuring, judges in many Member States are currently prevented
from cooperating with each other because there is no legal basis authorising
them to do so.

The lack of specific
provisions for group insolvency is problematic because it often diminishes the
prospects of successful restructuring and reduces the value of the group's
assets. An individual group member may not be economically viable outside the
group structure because the group is structured in a way that indispensable
assets, e.g. intellectual property rights, or activities, e.g. cash management,
are pooled in a different member of the group. In such cases, it will be
difficult if not impossible to reorganise different group members separately.

Similarly, a
significant part of the value of a group may lie in the cooperation of its
members, e.g. distribution networks tailored to particular production patterns,
operational and financial management, or simply business goodwill such as brand
recognition. This value is lost when assets and affairs of related group
members are liquidated separately rather than as a package. The following case
is an example of how such piecemeal liquidation can lead to value destruction:

Case example: The insolvency of KPNQwest[26]

The KPNQwest group owned cables running through a number of States and across the Atlantic Ocean. However, cables in Member States were owned by subsidiaries registered in those States. When the Dutch parent company, KPNQwest N.V., went into bankruptcy many of the subsidiaries had to enter insolvency proceedings as well. As a result it proved very difficult to coordinate the sale of the cables. The subsequent disintegration of the group likely resulted in much lower proceeds than if assets of the enterprise had been sold as a whole.

Case-law has tried
different ways to overcome the lack of specific provisions on group insolvency:

In the first years
after the entry into force of the Regulation, some national courts interpreted
the Regulation's rules on jurisdiction broadly so as to bring insolvency
proceedings for all members of the group, including those located in another Member State, before the court at the parent company's registered office. The courts
concerned generally justified such a consolidation of insolvency proceedings on
the grounds that the subsidiaries’ commercial decisions were controlled by the
parent company[27].
This approach has obvious advantages in terms of efficiency but was also
criticised for not respecting the legitimate expectations of creditors who did
not contemplate the application of the parent company's law to the insolvency
proceedings and, in particular, the ranking of their claims when entering into
commercial relationships with the subsidiary[28].

The 2006 CJEU's Eurofood
decision considerably reduced the scope of application of the possibility for
such procedural consolidation and reinforced the rule that each legal entity
should be treated separately[29].
According to the Court, control of corporate direction alone does not suffice
to locate the centre of economic interest of a subsidiary with its parent
company, rather than at its own registered address. After Eurofood, it
is still possible to open insolvency proceedings over a subsidiary in the Member State where the parent company has its registered office, but only if the factors
showing that the subsidiary's COMI is located at the seat of the parent company
are objective and ascertainable by third parties. This means in practice that
courts have to examine a complex bundle of factors, including whether the
financing of a subsidiary is taken care of by the parent company, whether the
parent company controlled the operational business (e.g. by approving purchases
above a certain threshold) and the hiring of staff, whether certain functions (e.g.
the management of the IT equipment or the visual/business identity) were
centralised[30].
Essentially, these conditions will only be fulfilled in the case of heavily
integrated companies.

Another approach taken
in practice is the appointment of the same insolvency practitioner in the
proceedings of all members of the group involved, or of insolvency
practitioners who have previously worked together successfully on group insolvencies[31]. Such best
practices may reduce the problems outlined above. However, without specific
rules on group insolvency, the success of such measures will depend on the
willingness of the respective insolvency practitioners and judges to cooperate.

The reason for the lack
of specific rules on enterprise groups in the Regulation is threefold: when the
Convention that later became the Regulation was negotiated in the 1980s and
1990s, the phenomenon of groups of companies was not as widespread it is today.
The drafters of the Insolvency Convention conceived multinational operations to
be structured predominantly as “establishments” in other Member States rather than independent legal entities. Moreover, at that time, the reorganisation or
rescue of companies was not a prevailing option in the domestic insolvency laws
of Member States and liquidation was the norm. Finally, the creation of rules
for groups of companies raised complex problems and it may have been considered
politically and practically prudent to postpone it to a later date[32]. The UNCITRAL
Model Law on cross-border insolvency which was adopted two years after the
European Insolvency Convention in 1997 also does not contain any rules on group
insolvency[33].

Half of respondents to
the public consultation (49%) felt the EIR does not work efficiently for
multinational group insolvencies with one third (30%) feeling it does.

3.3.        Who
is affected by problem group 1 and what is the extent of these problems?

The problems set out above affect all
parties involved in insolvency procedures. Debtors are affected in their
capacity to rescue and continue their business (which impacts on their freedom
to conduct business in the EU); creditors are affected as the problems reduce
the value of the assets and their recovery rate. SMEs, which tend to be heavily
dependent on one or a small number of large customers, can be particularly
affected by the liquidation of one of them. Employees are affected because they
lose their jobs if a restructuring fails due to the problems outlined. Tax and
social security authorities (as creditors) see the chances of contribution
payments by companies reduced.

On the other hand, the
gaps in coverage of personal insolvencies primarily affect the individual
debtors whether they are professionals, sole traders or consumers. However,
doubts over the recovery of assets and difficulties that can occur with
restructuring plans also reduces the readiness of foreign businesses and banks
to grant credit to natural persons. Ultimately, given the impacts of
indebtedness on entrepreneurship and on individuals including their family
life, health and work, this will have impacts on society and on the economy.

Between 2009 and 2011,
more than 200,000 companies, or about 1% of all EU companies, went bankrupt per
year in the EU[34],
which means more than 550 companies go bankrupt every day. It is estimated that
about 1% of these insolvencies concern companies which are member of a
multi-national group of companies. This means that more than 2 100 companies (2050
SMEs and large enterprises) are affected by inefficiencies in handling group
insolvency (for details see Annex 6).

The job losses are
estimated to be about 1.7 million per year. It is estimated that 25% of
European companies (about 5 Million) have customers, creditors or business
partnerships (subsidiaries, joint ventures or branches) in other Member States
and are therefore potentially affected by the Regulation as debtors or
creditors in case of an insolvency. About 50,000 companies (1% of 5 Million)
per year will be debtors and at least twice as many will be creditors in a
cross-border insolvency to which the EIR applies. As to the relevance of
secondary proceedings, there are close to 700 enterprises with foreign
establishments entering into insolvency procedures every year. Insolvency
proceedings for these companies can potentially trigger secondary proceedings
in the Member States where their establishments are located. (See Annex 3 for
further details).

Cross-border insolvencies particularly
affect large companies because these are more likely to do business across
borders than SMEs. The insolvency of a large company has significant effects on
the European economy because large companies, although only representing 0.2%
of European companies, provide 30% of jobs in the EU and produce 41% of gross
added value. Essentially, the larger a company, the more likely it is to be a
member of a group. According to the April 2011 report of the Reflection Group
on the Future of EU Company Law, the international group of companies has
become the prevailing form of European large-sized enterprises, in which
business activity is typically organised and conducted through a multinational
network of subsidiaries. About 20% of large enterprises (ca. 8,500) have
foreign subsidiaries or joint ventures[35].
By contrast, only 5% of EU SMEs have reported that they have subsidiaries or
joint ventures abroad. Nevertheless, with over twenty million SMEs in the EU as
a whole, this means that there are more than one million SMEs in Europe which have subsidiaries or joint ventures abroad[36].

Moreover, large companies will often source
their supplies from smaller companies, possibly located in a number of Member
States, so that the insolvency of a large company can have sizeable knock-on
effects, as the following example shows:

The bankruptcy of MG Rover

MG Rover was a British manufacturer. The company was formed in 2000 out
of the car-making and engine manufacturing assets of the original Rover Group.
When the company went into liquidation in 2005 more than 6,000 workers at MG
Rover lost their jobs and as many as 25,000 jobs were reported to have been
lost in related supply industries, meaning that the total number of job losses
brought on by MG Rover's collapse was somewhere in the region of 30,000.

Where pre-insolvency
and hybrid proceedings exist, companies increasingly resort to them rather than
to traditional insolvency proceedings because they are considered to be
particularly effective in rescuing troubled businesses. Since the French sauvegarde procedure was introduced in 2006, the number of enterprises
resorting to it has reached more than 1000 per year. While this number may seem
small compared with the 58,195 companies that had recourse to the traditional
insolvency proceedings (redressement judiciaire and liquidation
judiciaire) in 2011, many sauvegarde proceedings apply to big and
medium-sized companies and enterprises, meaning that their impact on employment
and the economy at large is out of all proportion to the number of companies
making use of these proceedings[37].
The positive economic effect of pre-insolvency and hybrid proceedings is also
corroborated by data from the OECD which shows that the rate of loss of
manufacturing companies is lower in countries where those proceedings are
available (1.8 versus 2.6%)[38].

As regards personal
insolvencies, it is estimated that for the 17[39]
Member States with personal insolvency schemes, there were around 470,000
insolvencies in 2011 (for details see Annex 5). On the basis of this figure,
the number of personal insolvencies which are currently not covered by the EIR
can be estimated at about 200,000 per year[40].
Not all of these individuals will want to make use of their freedom to move to
another Member State but for those who do, the absence of the recognition of
their debt discharge in another Member State would constitute a significant
deterrent.

3.4.        Problem
group 2: Problems in the implementation of the Regulation

Various difficulties have been experienced
in the practical implementation of the EIR, concerning e.g. difficulties with
the definitions and difficulties when the main and secondary proceedings run in
parallel. There are also problems in practice caused by lack of transparency or
by lack of facilitation of lodging claims.

3.4.1.     No
definition for COMI and consequent difficulties relating to determining
jurisdiction for opening insolvency proceedings (the concept of COMI) and forum
shopping

3.4.1.1.  Determination
of jurisdiction

The Regulation grants jurisdiction to open
main insolvency proceedings to the courts of the Member State where the debtor
has its centre of its main interests (“COMI”). The concept of COMI is crucial
for the functioning of the EIR because, subject to the opening of secondary
proceedings, the entire international insolvency case will be handled in the
Member State of the COMI and be subject to that State's insolvency law.

The EIR does not offer a definition of
COMI. It only contains a presumption that the COMI of a company is located at
the place of its registered office. A recital clarifies that COMI should
correspond to the place where the company “conducts the administration of its
interest on a regular basis and in a manner ascertainable by third parties”[41].

The concept of COMI has considerable merits
because the emphasis on the real seat rather than on mere formalities ensures
that the case will be handled in a jurisdiction with which the debtor has a
genuine connection rather than in the one chosen by the incorporators. COMI has
also been chosen as a jurisdictional standard by UNCITRAL in its Model Law on
cross-border insolvency.

While there is general support for the
concept of COMI as such – 77% of the respondents to the public consultation
approved the use of COMI to determine jurisdiction for main proceedings – its
application in practice has given rise to difficulties[42]. 51% considered that the
interpretation of the term COMI by case-law caused practical problems, with the
most critical being private individuals/self-employed (67%), banks (75%), judges
(58%), and insolvency practitioners (61%). While some felt clarifications given
by the ECJ have been very helpful to achieve a more uniform application of the
term, the COMI standard has been criticised for being too vague and unclear,
making it difficult for the parties concerned to predict the decision on
jurisdiction and for the courts involved to decide in a coherent manner.[43] It has also been reported (for
example, in the Heidelberg study) that national courts are not sufficiently
aware of the jurisprudence of the CJEU.

Furthermore, the procedural framework for
determining jurisdiction in many Member States has been criticised as being
deficient. There is no routine examination of jurisdiction in several Member
States[44].
Even where there is, judges often do not specify whether the proceedings are
main or secondary proceedings under the EIR. In addition, many national
procedures do not give creditors the possibility to make their views heard,
because there is no hearing on the opening of proceedings or no effective means
to challenge the opening decision.

The problems of the procedural framework
make it difficult for a judge seized with a request to open proceedings to
determine whether proceedings have already been opened in another Member State and, if so, which type of proceeding is still “available” to be opened by him.
This risks the opening of parallel main proceedings with ensuing conflicts of
competence. These issues also facilitate forum-shopping by debtors applying for
the opening of proceedings in a Member State with a more favourable insolvency regime
(see immediately below).

3.4.1.2.  COMI
shift

The EIR's jurisdiction rules have also been
criticised for allowing forum shopping by companies and natural persons through
abusive COMI-relocation. It does indeed happen that a debtor relocates its COMI
to another Member State but not all such relocations can be considered abusive.

There are various reasons for moving COMI
to another country. Most of these are not directly related to insolvency: the
move may be driven by the desire to benefit from the better market conditions,
working opportunities, tax regime or company law of another country.

In relation to companies, such moves
have been accepted by the Court of Justice as a legitimate exercise of the
freedom of establishment. Thus, the Court of Justice clarified in its Centros
decision that doing business in a Member State through a company incorporated
in another Member State is covered by the freedom of establishment, even if the
company's registered seat was chosen to avoid the minimum capital requirement
rules of the Member State of the company's real seat and it was never intended
to conduct business in the State of incorporation[45]. There are also cases of
companies relocating their COMI specifically with the aim of benefitting from a
more favourable foreign insolvency regime. Such COMI shifts often occur with
the consent or at the instigation of the (senior) creditors in order to
facilitate the company's restructuring. There are several cases where COMI
relocation to the UK allowed the successful restructuring of a company because
of the flexibility which English insolvency law grants companies in this
respect[46].

COMI-relocation has also been reported with
respect to over-indebted natural persons. This phenomenon has been
termed “bankruptcy tourism” and has recently become popular with Irish debtors
moving – really or allegedly - to the UK to get a quicker discharge of their
debts (the discharge period currently being 1 year in the UK vs. 12 years in
Ireland, although reforms of bankruptcy laws currently being considered would
cut this to 3 years). The UK is also a popular destination for over-indebted
persons from Germany and Eastern Europe. Cases of bankruptcy tourism are also
reported from northeast France where German nationals seek to obtain a quicker
discharge of their debt, and from Latvia where over-indebted Lithuanians seek
relief in the absence of a personal insolvency regime in their home
jurisdiction[47].
Bankruptcy tourism is problematic because a debtor takes advantage of a more
favourable insolvency regime in another jurisdiction without genuinely
relocating to the other Member State, to the detriment of his creditors who are
prevented from enforcing their claims. A genuine relocation to another Member State is an exercise of the right to freedom of movement and establishment and
justifies the application of the insolvency regime of that other country; a
sham move does not.

The problem of abusive COMI relocation can
be illustrated by the following case:

Case example Sparkasse Velbert v. Benk[48]

Mr. Benk was a German notary who had run into financial
difficulties, notably owing €3 Mio to his bank, the Sparkasse Velbert.
Enforcement proceedings by the Sparkasse against Mr Benk's real estate and
pension fund in Germany were pending. In June 2009, Mr. Benk was suspended from
his practice as a German notary because of his unsound financial situation and
filed for bankruptcy in the UK later that month. Mr Benk alleged COMI in the UK claiming that he had lived in Birmingham since late 2008 and exercised a professional activity as
a sports photographer. The discharge order was granted on 17 June 2010
following which Mr. Benk moved back to Germany.

On appeal by the Sparkasse, the High Court carried out an in-depth
examination of the circumstances of the case. It discovered that Mr. Benk had
relocated with the help of a German relocation agency which had assisted him
with renting a furnished room in Birmingham as well as purchasing and
registering a car in the UK. Moreover, Mr. Benk's business as a sports photographer
was loss-making from day one as his only client was an old friend from Germany and he had not even owned a camera in the first months in his new “job”. The court
concluded from the evidence that Mr Benk’s COMI was in Germany at the time of the presentation of the bankruptcy petition because he had neither his
habitual residence nor his professional domicile in England, as his presence in
England was only temporary and the photography business was merely
window-dressing, with no potential for any significant degree of permanence.
Consequently, the discharge order was annulled and the Sparkasse could continue
enforcing its claim against Mr. Benk. However, the appeal cost the Sparkasse about
€50000 in lawyers' fees because on appeal, it is the creditor who has to prove
that a COMI shift was not genuine. The high costs of appealing a court decision
in the UK deter many creditors from challenging a debt discharge for their
debtor because they are not sure to be able to recover the legal costs from the
insolvent debtor.

The problem of forum shopping is
essentially driven by differences in national insolvency and company laws. In
the absence of harmonisation at EU or international level, Member States'
insolvency laws and procedures vary considerably and offer a range of
advantages and disadvantages to companies and individuals. For example, the
flexible regime for restructuring companies offered by English law, and, in
particular, the pre-packaged administration sales which enables a company to
restructure by wiping out some of its creditors and converting into a new
company shorn of its liabilities[49],
attracts companies from other European jurisdiction. Even more strikingly,
periods for the discharge of personal debts vary widely across the EU: in some
Member states there is no discharge at all (e.g. Bulgaria), meaning that
debtors remain liable for life, while in others it is possible to obtain
discharge within a few or even one year (e.g. UK).

Half of the respondents (49%) indicated evidence
of abusive relocation of COMI with less than one third (29%) feeling there
was no abusive relocation. The most common situation cited was moves to UK in particular from Ireland and Germany with relief of the debtor and the promotion of rescue
culture towards businesses in the UK being suggested as drivers.

3.4.2.     Relationship between the main and the secondary proceedings under
the Regulation

The EIR allows
secondary proceedings to be opened where the debtor has an establishment but
provides that secondary proceedings must be winding-up or liquidation
proceedings, that is, cannot be restructuring or rehabilitation proceedings. This requirement has triggered criticism that
the EIR is oriented towards liquidation rather than rehabilitation, and is
therefore incompatible with today's “corporate rescue” culture. A vast majority
of stakeholders consider this to be a problem.

The narrow scope of
secondary proceedings can constitute an obstacle to the successful restructuring
of a company having branches in several Member States, thereby diminishing the
total value of the debtor's assets and destroying jobs. This sub-problem
therefore reinforces the first sub-problem that the current Regulation
constitutes an obstacle for the
continuation of business and the saving of jobs.

The problem can be
illustrated by a case which is currently pending before the Court of Justice of
the European Union:

Case example: Bank Handlowy and Ryszard Adamiak v. Christianopol sp.zoo
(C116/11)

Christianapol is a Polish company specialised in
the production of furniture. It is part of the Cauval Industries Group with its
head office in France to which it supplies all its production. The group
suffered from the recession and went into financial difficulties. In an attempt
to rescue the group, several members, including Christianapol, filed for
sauvegarde proceedings in France. These proceedings aim at permitting
solvent companies to restructure themselves under court protection at a pre-insolvency
stage. They are covered by the Regulation although concerns have been raised as
to whether they comply with the definition

One
of the Polish creditors of Christianapol, Bank Handlowy, applied for secondary
proceedings in Poland where the company's furniture factory was located. The
winding-up of the factory would have prevented the successful implementation of
the restructuring plan elaborated in the French sauvegarde proceedings.
This problem prompted the Polish court to seek a preliminary ruling from the
CJEU.

In her conclusions of 24 May 2012,
advocate-general Kokott strongly encouraged the European Legislator to modify
the Regulation:

55. « L’exposé de la juridiction de renvoi
montre clairement qu’une procédure secondaire de liquidation peut gêner, voire
mettre en échec les objectifs d’une telle procédure de redressement [procédure
de Sauvegarde]. Ce résultat n’est effectivement pas souhaitable. Si l’on
songe en particulier que la législation en matière d’insolvabilité de nombreux
États membres s’est éloignée des procédures de liquidation «pures» au profit de
procédures de redressement et de réorganisation, et compte tenu des ajouts qui
ont été de ce fait apportés à l’annexe A du règlement ces dernières
années, intégrant également de plus en plus de procédures de redressement, il
apparaît que ces procédures sont de plus en plus importantes et devraient, par
conséquent, également relever du champ d’application du règlement.

56. Indépendamment de ces ajouts apportés à
l’annexe, le texte même du règlement n’a cependant pour le reste subi aucune
modification, ce qui peut concrètement générer des contradictions ou des
problèmes pratiques, comme en atteste cette affaire. »

Moreover, the opening
of secondary proceedings can jeopardize the efficient administration of the
estate: Under the current Regulation, main insolvency proceedings have EU-wide
effect and encompass all of the debtor's assets. Secondary insolvency
proceedings can be opened in any other Member State where the debtor has an
establishment. The system of secondary proceedings was introduced to protect
the interests of local creditors and/or to facilitate the administration of
complex cases. In practice, however, secondary proceedings can obstruct both
the effective administration of the estate and the successful reorganisation of
a company, because the opening of secondary proceedings removes part of the
assets from the control of the insolvency administrator of the main
proceedings. Secondary proceedings also increase the costs of proceedings because
an additional insolvency practitioner has to be paid.

The problems arising
from a lack of coordination between main and secondary proceedings are
illustrated by the following case:

Case example: The liquidation of Alitalia By August 2008, the well-known airline Alitalia was heavily insolvent. In September of the same year, extraordinary administration proceedings aiming at reorganising the company were opened in Italy and an administrator was appointed. Since Alitalia's COMI was in Italy, these proceedings were main proceedings for the purposes of the EIR. The administrator found a buyer for the company's assets which, however, took over only those employees indispensable for the operational activity. All other employment contracts were terminated but the administrator reached an agreement with the employees which provided for a payment of an equivalent of 3 months' salary in compensation for the failure to comply with the information and consultation requirements under the Directive on Transfer of Undertakings. The administrator kept one of the company's UK bank accounts with funds sufficient to make the compensation payment to the 46 UK employees. In November 2008, secondary proceedings over the UK branch of Alitalia were opened in the UK. The UK liquidator blocked the distribution of the monies to the UK employees, arguing that under UK law employees had no priority rights and divided the sum among all of Alitalia's UK creditors. This argument was approved by the High Court[50]. As a consequence, the Italian administrator was obliged to pay the UK employees from the funds of the Italian estate to the detriment of other unsecured creditors.

This shows that the
opening of secondary proceedings can jeopardize the efficient administration of
cross-border insolvency because the main administrator is no longer in control
of assets located in the country where secondary proceedings have been opened.

When secondary
proceedings are opened, all actors involved report that there is a lack of
coordination between the main and secondary procedure. In order to ensure the
coordination of proceedings opened in several Member States, the Regulation
obliges insolvency practitioners to communicate information and cooperate with
each other. Several guidelines for practitioners on cooperation and
communication in cross-border insolvencies have been developed by associations
of practitioners[51].
In practice, this cooperation works well when the practitioners have common
interests and/ or have developed a working relationship but is more difficult
where this is not the case.

However, cooperation
between liquidators alone does not suffice to ensure efficient coordination of
cross-border proceedings. There are no similar duties of cooperation between
the courts and between insolvency administrators and the courts. As a result,
the judge in the main proceedings is not informed of relevant developments in
the secondary proceedings before deciding on further actions and vice-versa.
Further the judge who exercises control of the activities of the liquidator in
the main or secondary proceedings has no means to control the coordination.

The failure to
co-ordinate can result in numerous problems and impacts which reduce the
efficiency of proceedings, and increase their length and costs. Ultimately,
chances to maximise the value of the assets may be lost. Problems are
disagreements over the distribution of assets, difficulties in achieving
restructuring plans, and a lack of notice or information about proceedings
which prevents creditors from effectively participating in them.

Difficulties in
cooperation may arise when the liquidators of the main and secondary
proceedings are effectively in competition with each other to maximise assets
for their creditors, despite the fact that a coordinated approach may result in
greater overall returns. The additional cost of cooperation, language barriers
and national procedural rules preventing the disclosure of information may also
be a source of difficulties in cooperation.

Finally, the absence of
rules in the EIR for cooperation between judges makes this cooperation between
practitioners difficult to control.

3.4.3.     Difficulties
in practical implementation relating to lack of publicity of the decisions
relating to an insolvency procedure and to lodging of claims

The good functioning of
cross-border insolvency proceedings relies to a significant extent on the
publicity of all relevant decisions relating to an insolvency procedure. In
particular, a court opening insolvency proceedings needs to know whether the
company or person is already subject to insolvency proceedings in another Member State.

The Regulation leaves
it up to the insolvency practitioners to decide whether to request publication
and registration of the opening judgment in another Member State, or up to Member States to impose mandatory publication and registration. Today there is
no systematic publication or registration of the decisions in the Member States
where a proceeding is opened, nor in Member States where there is an
establishment. There is also no European Insolvency Register which would permit
searches in several national registers.

Therefore there is
always the risk that a judge does not know that a procedure has already been
opened in another Member State. This situation results in judicial battles and
wrong decisions that cannot be reversed once the assets have been liquidated.

The lack of information on existing proceedings has
resulted in unnecessary concurrent proceedings being launched. Even if the
problem is resolved on appeal, parallel proceedings may have been going on for
several weeks, thereby entailing not only legal uncertainty about who has the
power to direct the debtor's estate but also legal costs for determining the
procedure which takes priority.

The problem is illustrated by the German – UK case set out below:[52]

Case example: Opening of parallel insolvency proceedings[53] A temporary insolvency administrator, charged with the divestment of a debtor, was designated by a German court. Four days after the designation, main insolvency proceedings were opened in England. Upon appeal by the German liquidator, the Croydon County Court held that the designation of a temporary main insolvency administrator had to be recognised as if the main proceedings had been opened in Germany and, since the opening of the German proceedings occurred prior to the opening of the English proceedings, reversed the decision opening proceedings in England.

Further, when the
decisions are not publicly available in the EU, there is always the risk that
unknown creditors are unaware of the on-going procedure, and further that
potential customers, employers or banks do not know that a company or a person
is subject to an insolvency proceeding or debt-discharge scheme.

For the good
coordination of proceedings, the information contained in the decision, such as
the type of procedure, the name of the administrators, their tasks and mandate,
are also essential elements. This information is also necessary for the
efficient lodging of claims for creditors in another Member State. Today it is sufficient to publish only notice of the opening decision.

It is also essential
that the decision closing a procedure, e.g. a liquidation or debt discharge, be
accessible, as being registered as insolvent may have serious consequences on
the capacity of persons/companies and on their rights. The Regulation currently
takes now account of this issue. A ruling of the ECtHR against Italy has held
that the entry of a debtor's name in the bankruptcy register without any subsequent
possibilities of updating or deleting it had prevented the applicants from
developing their social and business relationships with the outside world which
resulted in violation of the right to respect for their private life.[54]

There is widespread support
for the conclusion that the failure to publish the opening of proceedings in a
public registry reduces considerably the ability of stakeholders to know about
proceedings. The public consultation results showed that the vast majority of
respondents (86%) who expressed an opinion agreed that the absence of mandatory
publication of the decision opening proceedings is a problem.

The evaluation study
and respondents to the public consultation (in particular the European
Association for SMEs) have reported that creditors experience difficulties in
lodging claims under the Regulation.

In the first place, it
is sometimes difficult for creditors to obtain information on the opening of
proceedings and the person designated as insolvency practitioner. Furthermore,
liquidators do not always inform creditors in due time about their right to
lodge a claim. This may entail the total loss of the claim if it is lodged
after deadlines under national law have expired. In some Member States,
deadlines for lodging claims are very short and do not take into account the
additional time a cross-border filing may require. Creditors also complain
about being insufficiently informed about the formalities regarding the lodging
of their claim and about how to contest decisions by the liquidator to reject a
claim. In addition, it is not clear under the current Regulation whether claims
must be lodged in the language of the country in which the proceedings are
conducted.

As a result, foreign creditors lodging
their claims often have to bear not only translation costs but also legal costs
in order to obtain advice on the foreign insolvency law. Moreover, in certain
Member States, representation by a lawyer in the lodging of claims is
mandatory. The costs and difficulties act as a deterrent for small creditors.

Case example[55]

A foreign creditor had not been informed in time by the French
administrator of the insolvency proceedings and therefore was unable to lodge a
claim within the proscribed deadline. The French Court of appeal dismissed the
creditor's claim, arguing that the Regulation did not provide for extensions to
deadlines under national law and that French national law did not provide for
remedies against a violation of the duty to inform creditors under Article 40
EIR.

3.5.        Who
is affected by problem group 2 and what is the extent of these problems?

The problems relating to determining
jurisdiction for opening insolvency proceedings and forum-shopping affect in
the first place creditors and their expectations as to the law applicable to
the insolvency. It is again mostly creditors, both of the main and secondary
proceedings, who are affected by the coordination problems as there is no
maximisation of assets and the recovery rate is smaller. Viable companies and
their employees are also affected as any plans for restructuring the business
are thwarted by the opening of secondary proceedings.

The transparency and claiming problems
affect all stakeholders:

·
Judges, as they are not informed of other
proceedings being opened already, with the risk of the wrong decisions being
made. They can lack of information before taking decisions and also lack of
means to control the coordination.

·
Insolvency practitioners, as the burden of
publication relies heavily on them. They are faced with a variety of practices
and obligations in each Member State. This increases their costs at the expense
of all creditors. There are also problems when they are unable to cooperate and
maximise the efficiency and the value of assets.

·
Existing creditors, as the information about
insolvency proceedings in which they might be involved is not readily available
and might prevent them from lodging their claims.

·
Potential new creditors including consumers who
are not informed of their situation

·
Debtors (companies and natural persons), as the
decision closing the proceedings is not always publically known or available.

·
All foreign creditors and in particular SMEs are
affected with claiming problems, since the costs of translation and legal
advice are often too high for them.

As regards the extent of the problems, issues
relating to determining COMI are a frequent source of litigation although
practitioners confirm that COMI litigation is becoming less frequent. Research
on the basis of 500 cases reviewed concluded that COMI issues arise in 40-50%
of the cases albeit sometimes not as a contested issue but simply as a
statement of the court satisfying itself of its jurisdiction[56]. A study carried out by a UK academic revealed that the COMI concept is actually applied with some consistency
throughout the EU[57].

There are no comprehensive figures as to
the examination of jurisdiction in insolvency cases. According to the
Heidelberg/Vienna study, judges in several Member States do not routinely
examine their jurisdiction.[58]
Research carried out by a Polish judge of the decisions opening insolvency
proceedings in the district court of Poznan revealed that although about 60% of
the cases contained an international element making the EIR applicable, judges
only examined their international jurisdiction in about 1% of the cases[59].

The extent of abusive COMI-relocation is
difficult to quantify, partly because of diverging views as to whether a COMI
relocation is actually abusive and partly because due to the deficiencies in
the procedural framework not all abusive COMI-shifts are detected. In the area
of personal insolvency, the problem is limited to a few regions in the EU – UK, north-eastern France and – to a lesser extent - Latvia. In France, the court of appeal of
Colmar delivered 24 judgments between 2009 and 2011, all but one[60] rejecting applications from
German nationals seeking to open insolvency proceedings in France. As to the UK, a survey suggests that out of about 200 bankruptcy orders relating to
foreign nationals in the two years ending 31 March 2010, 14 orders have been
annulled on the grounds that there was no real relocation to the UK ; in about
half of the cases there were circumstances to suggest that the relocation may
not be real[61].
This means that there are less than 100 cases per year in the UK in which the COMI-shift could be considered to be abusive. The recent Irish
financial crisis may have increased these statistics but evidence on the
numbers of Irish flocking to the UK remains anecdotal. A newspaper identified 55
Irish residents relocating to the UK with the help of an Irish solicitor to
escape more than € 1bn of debt[62].

The use of secondary
procedures has declined since the EIR was enacted because companies tend to
organise their cross-border activities through subsidiaries rather than
branches. However, the use of branches remains the norm in the aviation sector,
with big assets and many employees. It is estimated that about 700 companies
with branches in another Member State go bankrupt every year; some of these
companies will have more than one branch abroad. In practice, secondary
proceedings are also sometimes opened in cases of group insolvencies to
liquidate assets of the subsidiary in situations where main proceedings for the
subsidiary have been opened at the seat of the parent company. Secondary
proceedings are not opened in every case: the assets of the branch may not
justify the opening of secondary proceedings, there may be no local creditors
requesting such opening, or the main liquidator may have reached an agreement
with the local creditors. There are no exact figures of the number of secondary
proceedings opened in the EU. On the basis of the number of companies with
branches, it can be estimated that there are several hundred cases per year.

The costs of secondary
proceedings vary considerably between legal systems. Costs essentially consist
of liquidator's fees and court costs. In some countries, the fees charged by
liquidators are based on a percentage of the monies recovered (typically 3% or
5%), in others, they are based on an hourly rate (e.g. around €250 per hour in
the Netherlands).[63]
Costs of proceedings are also significantly higher in systems where creditors'
committees are involved than in systems where this is not the case.

Problems of
coordination have been reported by judges and insolvency practitioners. Results
of the public consultation and of the evaluation study provide strong
indications that the current provisions on coordination are insufficient. 70%
of those expressing an opinion in the public consultation were dissatisfied
with the coordination between main and secondary proceedings, with 61% stating
that the duty to cooperate does not work efficiently and effectively. In
addition 75% of those expressing an opinion stated that the lack of a duty of
cooperation between practitioners and the foreign court, or between the courts,
has created problems. Similar results were reported in the initial findings of
the Heidelberg report with 61% of those expressing an opinion stating that
co-operation was inefficient.

Turning to the extent
of transparency problems, in all but two Member States, information about
insolvency proceedings is collected at a central point, but the procedures for
registration and the accessibility of the information to the public vary
considerably. While insolvency proceedings of legal entities are registered in
every Member State, insolvencies of individuals are only registered in some. In
some Member States, the information is published in a register (either in a
separate insolvency register, in others, in a commercial register) or in an
official bulletin. Some Member States publish the court decisions opening and
closing insolvency proceedings in the relevant register, others publish only
information on the status of the company or individual (e.g. “in liquidation”)
and, partly, the name of the liquidator and the competent court, without
registering the court decision itself.

Currently, only 14
Member States publish decisions relating to insolvency in an insolvency
register accessible online by the public free of charge[64]. In 9 other Member States, some information on
insolvency is available in an electronic register or database, e.g. a company
register or an electronic version of the official bulletin. Detailed
information on national insolvency registers is in Annex 6.

Finally, the average
cost of lodging a claim for a foreign creditor has been estimated at between
€2,000 and €5,000 in a cross-border situation. This sum covers the costs for
reviewing the file, defining priority rights, compiling documents, liaising
with the court and trustee[65].

46% of those who
expressed an opinion in the public consultation considered there were problems
with lodging claims. Crucially, a significant proportion of key
stakeholders who will often be the entities making claims felt there was a
problem – 83% of private individuals/ self-employed and 75% of banks.

3.6.        EU
right to act

3.6.1.     Legal
basis

The original EIR was adopted under Article
61(c) TEC stipulating that the Council shall adopt measures in the field of
judicial cooperation in civil matters and Article 67(1) TEC defining the
legislative procedure to be followed. Following the entry into force of the
Lisbon Treaty, any revision to the EIR will be based on Articles 81(2) (a), (c)
and (f) TFEU. Article 81(1) TFEU provides that ‘The Union shall develop
judicial cooperation in civil matters having cross-border implications, based
on the principle of mutual recognition of judgments and of decisions in
extrajudicial cases. Such cooperation may include the adoption of measures for
the approximation of the laws and regulations of the Member States’, and
related Article 81(2) TFEU under points (a), (c) and (f) empowers the EU to
adopt measures aimed at

–
ensuring the mutual
recognition and enforcement of judgments between Member States;

–
the compatibility of the
rules applicable in Member States concerning conflict of laws and of
jurisdiction; and

–
the elimination of obstacles
for proper functioning of civil proceedings.

The adoption of the
measures will take place in ordinary legislative procedure.

3.6.2.     Principle
of subsidiarity

The development by the
EU of more efficient cross-border insolvency rules is in complete compliance
with principle of subsidiarity. First, the issue being addressed has
transnational aspects, which cannot satisfactorily be dealt by the Member
States’ individual action. The need to establish rules for the insolvency of
companies operating on a cross-border basis, including groups of companies, is
well recognized by all Member States and the international community. This is
especially true in view of the increasing number of companies and
traders/self-employed persons that operate in more than one Member State, the rise in the number of groups of companies, and the constantly growing number of
companies that have to make recourse to insolvency proceedings because of the
economic crisis. The objective of facilitating the expansion of cross-border
operations for businesses in the internal market cannot be fully achieved if
the way cross-border insolvency proceedings operate is not amended to better
reflect developments since 2000. Furthermore, action at the EU level would
produce clear benefits (compared to Member States’ action) in terms of
effectiveness as the amended Regulation will rectify the deficits identified in
the previous Regulation, thus rendering its application more effective.

4.           Policy
objectives for the revision of the EIR

The general and
specific objectives for the revision of the Regulation in relation to the
problems described above are summarised in the following table:

General Objective

To improve the efficiency of the European framework for resolving cross-border insolvency cases in view of improving the functioning of the internal market and its resilience in economic crises.

Specific Objectives

To ensure EU-wide recognition of national insolvency-related proceedings contributing to rescuing businesses, protecting investments, preserving jobs and encouraging entrepreneurship; and providing a second chance to honest entrepreneurs and over-indebted consumers; To increase legal certainty for creditors, thereby encouraging cross-border trade and investment; To improve the efficient administration of cross-border insolvencies that protects the interest of all creditors and other interested persons, including the debtor; To improve the efficiency of handling the insolvency of members of a multi-national group of companies, thereby maximising the value of their assets and facilitating rescue.

Operational Objectives

To address the problem of scope of the Regulation that does not take into account the increased use of non-liquidation oriented proceedings (e.g. pre-insolvency and hybrid proceedings); To set up a process that enables the Regulation better to adapt to the evolution of national insolvency law and to allow secondary proceedings to be restructuring, pre-insolvency and hybrid proceedings; To clarify the rules relating to jurisdiction for opening insolvency proceedings without prejudice to the rights of companies' and natural persons’ legitimate exercise of the freedom of establishment and movement in the Union; To reduce the number of cases where the determination of jurisdiction has been an issue; To improve the procedural framework for taking the decision on jurisdiction and ensuring the possibility for judicial review for interested parties; To reduce the number of secondary proceedings opened outside of the main jurisdiction; To improve coordination between courts and practitioners, both prior to the opening of and during the proceedings; To increase transparency by requesting mandatory publication of all relevant decisions in each Member State; To increase number of insolvency related decisions that have been made public; To improve access to justice, in particular for SMEs, by devising measures to facilitate the lodging of claims; To create a specific legal framework for group insolvency

5.           Policy
options

There are three composite policy options
that have been identified as to tackle with the above problems in order to
achieve the above-mentioned objectives: These are

1) Status Quo, or
baseline scenario;

2) Option A,
modernising the existing Regulation while preserving the current balance
between creditors and debtors and between universality versus territoriality;
and

3) Option B, modifying
the fundamentals of the Regulation and requiring some approximation or
convergence of national insolvency laws and proceedings.

The elements (or
suboptions) of which these composite options consist are explained below
against the problems that have been streamlined into four categories (after the
table). Certain elements are common to both options A and B: both options would
provide for an extension of the scope, for the introduction of national
insolvency registers and for the simplified procedures for lodging a claim

Problem || Status Quo (Baseline scenario) || Option A “Modernizing the framework for cross-border insolvency proceedings” || Option B “Towards approximation of national insolvency laws and proceedings”

Limited scope of the Insolvency Regulation || The scope and definition of the EIR do not cover pre-insolvency, hybrid and most personal insolvency proceedings || First element: Extend the scope of the EIR to include hybrid proceedings, pre-insolvency proceedings and personal insolvency proceedings and do away with the requirement that secondary proceedings have to be winding-up proceedings

No rules for groups of companies || Second element: Coordination of main proceedings through general cooperation mechanisms, with the possibility, when appropriate, to nominate a lead insolvency practitioner || Second element: Single court competent for all main proceedings; single insolvency administrator appointed for all members of the group (“procedural consolidation”)

Difficulties in implementing the Insolvency Regulation || No obligation to publish and not all MS have an electronic insolvency register || Third element : Require that Member States publish all relevant decisions of insolvency proceedings in a national electronic register and define common categories for interconnection of national registers through the e-justice portal

No standard forms for lodging of claims. The procedures are entirely left to national law || Fourth element: Introduce procedures and standardised form and at EU level for the lodging of claims and encourage Member States to set-up electronic means for the lodging of claims

Jurisdiction remains at the COMI, which is defined by case law || Fifth element: Improve the procedural framework and train judges on the EIR. || Fifth element: Harmonise elements of national insolvency laws

The coordination is limited to coordination between practitioners || Sixth element: Maintain secondary proceedings but improve coordination with the main proceedings prior to the opening and during secondary proceedings || Sixth element: Abolish secondary proceedings

5.1.        Option
A

First element:
Extend the scope of the EIR to include hybrid proceedings, pre-insolvency
proceedings and personal insolvency proceedings and do away with the
requirement that secondary proceedings have to be winding-up proceedings

Under the first element
of Option A, the definition of insolvency proceedings would be broadened to
include hybrid, pre-insolvency and personal insolvency proceedings. National
insolvency procedures notified by Member States and which fall under the
definition included in the Regulation would be listed in the Annex. The
definition would require, in particular, that the insolvency proceeding entail
some degree of court supervision, as a necessary condition for recognition
based on mutual trust. The Commission would be tasked with ensuring that only
proceedings which comply with the definition are listed in the Annex of the
Regulation.

In addition, the
current requirement that secondary proceedings have to be “winding-up
proceedings” would be abolished in order to include proceedings promoting
restructuring in the scope of secondary proceedings.

Second element:
Coordination of main proceedings through general cooperation mechanisms, with
the possibility, when appropriate, to nominate a lead insolvency practitioner

Option A would retain the entity-by-entity
approach of the Insolvency Regulation but provide for a coordination of the
insolvency proceedings concerning members of the same group.

The coordination would apply in three
respects:

(1)
There would be an
obligation of the liquidators of the different main proceedings to communicate
and cooperate, notably by trying to develop a reorganisation plan for the
insolvent members of the group. This obligation would build on the existing
mechanism for coordination between liquidators in main and secondary
proceedings.

(2)
Secondly, the Regulation
would oblige the courts competent for the different main proceedings to
communicate information and cooperate, e.g. by appointing the same liquidator
or several liquidators which have indicated they can cooperate with each other.

(3)
Thirdly, the liquidator
in the main proceedings for one group member would be under a duty to
communicate and cooperate with the courts competent for the proceedings
relating to another group member.

For certain companies, e.g. wholly-owned
subsidiaries, the coordination mechanisms above would be complemented by the
possibility to grant a “leading role” to the liquidator of the parent company.
The “lead” liquidator would have the power to direct the reorganisation of the
insolvent group members, in particular, by requesting the competent court to
order a stay of the process of liquidation of a subsidiary, to obtain
information from the other liquidators or courts involved or to propose a
restructuring plan.

Third element:
Require Member States to publish decisions opening and closing insolvency
proceedings as well as other decisions issued in the proceedings in a national
electronic register and define common categories for the interconnection of
national registers through the e-justice portal

Option A would require
all Member States to set up and maintain an electronic register for insolvency
decisions, both for companies and private persons. It would further define
common categories for the interconnection of national registers through the
e-justice portal[66]
. The interlinking of national registers would lead to the creation of a
generally accessible and comprehensive EU database of insolvency proceedings
allowing creditors, shareholders, employees and courts to determine whether
insolvency proceedings have been opened in another Member State.

Fourth element:
Introduce procedures and a standardised form at EU level for the lodging of
claims and encourage Member States to set-up electronic means for the lodging
of claims

Option A would define a
standard form in all EU languages that could be used for the lodging of claims
by all creditors in a cross-border proceeding. It would also define some EU
procedures for the lodging of claims in order to ensure that national laws take
into account the cross-border dimension of certain proceedings, e.g. reasonable
time for lodging a claim, sanction when practitioner did not respect the
procedure, information to creditors on the fate of their claim.

This element of Option
A would also encourage Member States to set-up electronic interfaces for the
lodging of claims that would be available to foreign creditors. These could be
set up through private means and not necessarily by public authorities.

Fifth element:
Improve the procedural framework and train judges on the EIR

Under Option A, the EIR would clarify the
definition of COMI by codifying certain elements of the CJEU case-law. The
Regulation would also provide that the court opening insolvency proceedings is
obliged to examine ex officio its basis of jurisdiction and to specify
in the opening decision whether the proceedings are main or secondary
proceedings. Where the COMI-shift has occurred recently and debts remain in the
original Member State, the courts would be obliged to examine already at first
instance, i.e. prior to pronouncing the debt discharge, whether the relocation
is genuine. This could be done by, e.g. requesting further documents from the
debtor or hearing foreign creditors. In addition, creditors would have an
effective remedy against the decision opening insolvency proceedings; in
particular, they would be informed of the decision in due time to be able to
challenge it.

In addition, judges would be trained about the Regulation and about the
case-law of CJEU on COMI.

Sixth element:
Maintain secondary proceedings but improve coordination with the main
proceeding prior to the opening and during secondary proceedings

Option A would

·
Require that the court hears the practitioner of
the main proceeding, prior to the opening of secondary proceedings.

·
Enable the court to postpone or refuse the
opening of secondary proceedings if this would obstruct the effective
administration of the estate and further benefit local creditors. The
liquidator and the courts may further undertake to treat local creditors as if
secondary proceedings had been opened (“synthetic secondary proceedings”).

·
Oblige courts and insolvency practitioners to
cooperate with one another, as well as courts to communicate and cooperate
between themselves.

5.2.        Option B

Those elements that are common to both
options A and B are already explained above; they are

–
First element: Extend the scope of the EIR.

–
Third element: Require Member States to publish
decisions in a national electronic register.

–
Fourth element: Introduce procedures and a
standardised form for the lodging of claims.

As regards the elements specific to Option
B, second element: single court competent for all main proceedings and single
insolvency administrator appointed for all members of the group (“procedural
consolidation”) would contain a single insolvency administrator appointed
for all members of the group (“procedural consolidation”), whereby the
insolvency proceedings for all members of the group would be consolidated in a
single court at the place of the COMI of the parent company. The same
insolvency practitioner would be appointed in all main proceedings of the
subsidiaries.

Fifth element: Harmonise elements of
national insolvency laws would involve a harmonisation
of certain aspects of national insolvency procedures, in particular, debt
discharge periods, conditions and rules for opening proceedings, rules on
hearing of creditors and effective remedy.

Finally, there is sixth element: Abolish
secondary proceedings to Option B. This would abandon secondary proceedings
and have one, single main insolvency proceeding with EU wide effect dealing
with the parent company and all branches and establishments.

5.3.        Discarded
options/elements

There were certain
other elements identified or proposed by stakeholders as possible options to
solve the problems. In particular, there was an option of introducing a
suspension period in relationship to the removing of COMI (relating to lack of
definition): This option would provide that following a shift in COMI to
another Member State, jurisdiction remains for a certain period (e.g. 1 year)
with the courts of the Member State of origin.

A preliminary screening
of the options have led to discarding an element under option A addressing the
difficulty to determine jurisdiction as follows: Introducing
a suspension period is not sufficiently effective
to achieve the desired objectives: this element primarily aims at preventing
forum-shopping by providing that jurisdiction for opening insolvency
proceedings stays with the original Member State for a certain period of time
(e.g. 1 year) after the COMI has shifted. However, it is doubtful whether this
element would effectively achieve this objective because it may be expected
that the legal advisors of big companies will find a way to circumvent the
suspect period or to hold out until it has elapsed. Moreover, the element does
not improve legal certainty for creditors because it would replace the current
uncertainty relating to the determination of COMI by a new uncertainty relating
to the time the COMI shifted. New creditors would have difficulties to
determine whether the suspension period was still running – with the
consequence that the law applicable to their claims would be the one of the
Member State where COMI was previously located – or whether it had already
ended; also, the judge's assessment of the moment of the COMI shift could very
well vary from that of the creditors. Consequently, such element would not
improve legal certainty with respect to the Status Quo.

6.           Evaluation
of the Impacts of Policy Options

6.1.        Baseline
scenario (Status Quo)

The situation under the
Status Quo, i.e. without any measures taken, would evolve as follows:

Problem Group 1: Problems relating to
the scope of the Regulation

The insolvency laws of
Member States have evolved in the past ten years to respond to new economic
thinking and realities and it is likely that this process will continue. In a
few years one can expect virtually all Member States to have pre-insolvency and
hybrid procedures, as well as personal insolvency procedures. Consequently,
problem 1 is likely to increase, with more national proceedings falling outside
the scope of the Regulation because they do not match the EIR's definition and
the Regulation being increasingly out of tune with the reality in the Member
States.

Further, the EIR having
been adopted before the entry into force of the Lisbon Treaty, the mechanism
for updating its Annex which lists the national procedures within the scope of
the EIR is inconsistent with the Treaty. The updated Annex is adopted via a
Council Regulation upon notification of Member States, while there is no
explicit mechanism for controlling the content.

The Status Quo in
relation to insolvencies of groups of companies only allows for efficient
handling of the insolvency of heavily integrated groups where the COMI of the
subsidiary is located at the registered office of the parent company. For all
other groups, maintaining the Status Quo would have no effect on the problem
identified and would not contribute to achieving the objectives set out above.

Problem Group 2: Problem in the
implementation of the Regulation

The problem of forum-shopping is likely to
decrease to some extent even in the absence of EU action because regulatory
competition and a focus on enabling ‘second chances’ will inevitably drive some
convergence in national legislation, which will reduce incentives for forum
shopping. Thus, the Council Conclusions of May 2011 endorsing the
recommendation of the Second Chance group to provide a three year discharge
period have already been followed by some Member States. However, the current
differences in Member States' approaches to insolvency and, in particular, the
issue of personal insolvency, make complete convergence in the short and medium
term unlikely so incentives for forum-shopping will remain.

Although the use of
branches as a means to structure cross-border activities has declined since the
time when the EIR was enacted, secondary procedures will remain relevant
proceedings under the EIR because they can also be used in the context of group
insolvency if the subsidiary's COMI is located at the registered office of the
parent company. In practice, insolvency practitioners have sometimes managed to
avoid the opening of secondary proceedings by undertaking to treat the local
creditors as if such proceedings had been opened (so-called “synthetic
secondary proceedings”). This solution is accepted by the courts in the UK but is not permitted under the procedural laws of most other Member States.

The problems of
coordination are expected to increase as more cross-border restructurings are
being attempted to try to rescue viable business and save jobs. Without an
obligation on courts to coordinate between themselves and with the insolvency
practitioners, current experience shows that this coordination will not
function effectively.

The problems related to
the publicity and the absence of registers will partially improve by the
interconnection of national company registers at EU level by the recently
adopted Directive 2012/17/EU on the interconnection of central, commercial and companies'
registers which is planned for 2017 at the latest. The Directive

1.           creates the
interconnection of national business registers through a European portal;

2.           requires that the register
shall, through the system of interconnection of registers, make available,
without delay, the information on the opening and termination of any winding-up
or insolvency proceedings of the company;

3.           ensures that companies
have a unique identifier allowing them to be unequivocally identified in
communication between registers through the system of interconnection of
central, commercial and companies' registers.

However, the Directive
solves the problem of publicity only partially because

1.           in most Member States the
register does not cover all companies (only limited liability companies);

2.           the Directive does not
include natural persons, sole traders or self-employed; and

3.           the information provided
is not sufficient: it is not enough to know that a company/person is subject to
an insolvency proceeding; courts and creditors need additional information, in
particular the name and address of the liquidator, the type of insolvency
procedure and the exact powers of the liquidator and the extent to which the
debtor has been divested.

The problem with the
EIR will not be solved sufficiently by the interconnection of business
registers.

Regarding the lodging
of claims, standardised national forms are being developed. However, no
standard European form could be imposed without intervention by the legislator,
and the difficulties faced by foreign creditors described above will remain A
few Member States are putting in place electronic interfaces for the lodging of
claims[67]
which could – if the (linguistic) needs of foreign creditors are taken into
account – significantly facilitate the lodging of claims. However, it is
unlikely that all Member States will embark on such projects in the short or
medium term.

6.2.        Option
A: Modernizing the framework for cross-border insolvency proceedings

Effectiveness in achieving the
objectives

Strengths: Option A
will be effective in achieving the objectives.

Weaknesses: Theoretically
there is a risk that extending the scope to cover a higher number of insolvency
schemes would have an effect on forum shopping.

The new scope of the
EIR and EU-wide recognition of hybrid, pre-insolvency and personal insolvency
schemes will be effective as the new rules for determining which schemes fall
within the scope of the EIR will ensure that the scope of the EIR remains in
synch with national developments and that these are taken into account in a
more consistent manner.

Improving the procedural
framework for determining the jurisdiction, together with training of judges,
would considerably improve legal certainty in this area. Routine examination of
jurisdiction before opening insolvency proceedings will allow judges to request
further proof from the applicant debtor in case of doubts as to whether COMI is
really located in that Member State or to give creditors the opportunity to be
heard on the issue before opening proceedings. It would discourage sham claims
as to jurisdiction or false statements of affairs by the debtor, thereby
reducing the possibilities for forum shopping. It would also facilitate the
tasks of courts seized with a request relating to the same debtor to determine
which type of proceedings is still “available”. The coordination of
proceedings, whether secondary proceedings or parallel proceedings, publicly
available information on all proceedings, and standardised forms for lodging
claims will all contribute positively to the efficiency and fairness of
cross-border proceedings, protecting the interests of all parties and improving
access to justice.

The risk of forum
shopping by debtors seeking to relocate abusively their COMI in countries where
pre-insolvency schemes and discharge of debt exist is limited in practice by the
criteria laid down by domestic insolvency law for opening proceedings, as well
as the powers of national courts to examine the circumstances of the case.

Impacts on Fundamental Rights

Strengths: Option A
will improve the rights of persons involved in cross-border insolvencies (right
to property, freedom to conduct business and right to engage in work, freedom
of movement and residence, and right to an effective remedy).

Weaknesses: It will
also affect their rights of protection of personal data and right to property,
in a way which is proportionate to the objectives. Measures need to be put in
place to ensure compliance with Directive 95/46/EC on data protection.

Right to property: Hybrid, pre-insolvency and personal insolvency
schemes affect the rights to property of creditors compared to liquidation
procedures, because these schemes are all based on some form of arrangement
between the debtor and a majority of creditors. In these schemes, dissenting
creditors can be overruled by the majority. This impact on the right to
property is considered to be proportionate to the objective of rescuing
businesses and saving jobs, not the least since it has been shown that the
median recovery rate for creditors may be significantly higher in case of
restructuring as compared to liquidation.

The reduction in
abusive forum-shopping combined with a right for all creditors of judicial
review of the jurisdiction, would improve the protection of the creditor's
right to property because there would be fewer cases where his claim was lost
or diminished in value due to the shift of his debtor's COMI to another
country.

Freedom to conduct
business and right to engage in work: The EU-wide recognition of personal insolvency schemes
and ensuing debt discharge will impact positively on the freedom to conduct
business and right to engage in work in the EU as it facilitates the
possibility of a second chance for debt-discharged entrepreneurs and natural
persons. Further the EU-wide recognition of national hybrid and pre-insolvency
proceedings will positively affect the freedom to conduct businesses for
companies, as these proceedings will be recognised by all their creditors
EU-wide.

Freedom of movement
and of residence: The EU-wide
recognition of personal insolvency schemes and ensuing debt discharge will
impact positively on the freedom of movement and of residence of natural
persons within the EU as the arrangements of the schemes, including payment
plans and possible debt discharge would be recognised by all creditors and
other authorities.

Protection of
personal data: The inclusion of
data on companies, but also especially natural persons and other debtors who
are subject to insolvency proceedings within public electronic registers
constitutes a data processing activity. Thereby it affects the right to the
protection of personal data. The obligation of Member States to comply with
Directive 95/46/EC is self-evident, but needs to be referred to expressly in
the amending Regulation as Regulation 1346/2000 does not refer to it in any way.
Information on the opening and closing of proceedings is necessary on the one
hand to allow the debtors to exercise their right of free movement or the right
to conduct business in another Member State, and on the other to protect
potential creditors, customers or employers. It is also necessary for the good
and efficient administration of the proceedings themselves. For this impact to
be considered necessary and proportionate with respect to the objectives of the
policy, specific provisions will need to be introduced in the amending
Regulation to justify the necessity and purpose of each category of data to be
published by Member States. Further, the right to access to data subjects
encompassing the right to rectification and erasure will need to be highlighted.

Finally, access to the
data in the register of another Member State, especially data on natural
persons subject to insolvency proceedings, must be for legitimate reasons. The
usage and processing of this data shall be regulated.

Right to an effective
remedy: This option would
improve the situation with respect to creditors’ right to an effective remedy
and fair trial. It would ensure that creditors in another Member State have the possibility of judicial review of the decision opening insolvency proceedings,
either by being heard before the decision is taken or by being effectively able
to challenge it.

Economic Impacts

Strengths: Option A
will have a positive impact on economic growth, investment and the Single
Market. By providing greater
legal certainty, preventing unnecessary bankruptcies, reducing obstacles to
second chance for entrepreneurs, improving the availability of information, and
cutting litigation costs, it will contribute to improving the conditions for
investment in Member States. All these improvements are likely to have a
positive effect on cross-border transactions, whether contracts, partnerships,
acquisitions, or developments of new branches/subsidiaries.

Weaknesses: There is
a risk that giving a second chance to debtors would impact other entrepreneurs'
access to affordable credit.

Hybrid and
pre-insolvency schemes rescue more company value, help viable businesses to
survive temporary financial difficulties, improve recovery rates for creditors,
and contribute to saving jobs. There are 50,000 cross-border insolvencies per
year, meaning that at least twice as many companies are involved in
cross-border insolvency proceedings and could benefit from broadening the scope
of the EIR. SMEs will especially benefit from the EU-wide recognition of hybrid
and pre-insolvency schemes. The rescue of large businesses requires the
business to go on during the procedure and therefore requires that creditors
such as suppliers are still being paid. This would benefit many SMEs that tend
to be heavily dependent on one or a small number of large customers. Moreover,
ensuring that the effects of personal insolvency schemes are recognised
throughout the EU will reduce obstacles to second chance for entrepreneurs.

Rescue procedures,
second chance and discharge of debt are deemed to encourage moral hazard, debt
forgiveness and subsequent increase of credit cost where such proceedings would
not be sufficiently tightened and closely monitored. However the organisation
of the judicial systems is a competence of Member States; the option only aims
at the recognition of such national proceedings in the EU.

Allowing secondary
proceedings to participate in restructuring and pre-insolvencies will further
facilitate the survival of viable businesses, as will the efficient
coordination of parallel proceedings for a group of companies. This will
benefit the business as a whole but also the branches/establishments of parent
companies that would have a possibility to be rescued on their own. This is
particularly relevant for SMEs that are establishments/subsidiaries of parent
companies, as it would allow them to be re-organised or acquired when the
parent company goes insolvent and they have a viable business. Maximisation of
assets and value of companies will also be supported by these provisions.

Effective and less
expensive lodging of claims will benefit all companies as creditors. It is
estimated that the costs for lodging a claim by a foreign creditor would be at
least halved to a mean value of less than €1,000 compared with the current
average of between €2,000 and €5,000. This reduction in costs should
particularly benefit SMEs as foreign creditors, for which the additional costs
of lodging claims abroad entail important costs with regard to their turnover
and cash-flow and may even deter them from lodging the claim.

The publication of all
relevant decisions in national insolvency registers will benefit companies as
creditors. They will have the means to be informed of the on-going insolvency
proceedings, thereby being able to take all necessary measures including the
lodging of claims. It also benefits companies as potential customers or
suppliers as they can anticipate and possibly avoid potential difficulties in
fulfilling contracts.

Cooperation between
insolvency practitioners would entail certain additional costs, but these costs
would be offset against the savings which the cooperation would achieve.

Social Impacts – Impact on employees

Option A will
facilitate the preservation of jobs, as viable businesses are able to continue. The impact
will be more significant for employees of large companies (more than 250
employees) as these are more likely to be involved in EU insolvency procedures.
Also, the survival of branches/establishments is particularly important for
saving jobs whenever manufacturing or job-intensive activities tend to be
situated in another Member State than the parent company, and this would be
supported by extending the scope of secondary proceedings.

There is no evidence of
any additional impact on the situation of employees as to the law applicable to
their contracts of employment, the guarantees and protection already provided by
Directive 2008/94/EC[68]
in the Status Quo. There is a need to avoid the automatic opening of local
secondary proceedings for the purpose of the payment of wage claims, as this
happened to be counter-productive in the Alitalia case. Instead, the
reassurance given by the main liquidator in the proposed "synthetic"
secondary proceedings should include the protection of workers' rights.

Impacts on Member States

Option A will have a
low impact on national insolvency laws, mostly procedural, while it will
contribute to the development of rescue schemes in all Member States. It has costs for the insolvency register and the
training of judges. However, these will be justified by the expected benefits for
society of increased efficiency and quality of cross-border insolvency
procedures, even if these lead to the rescue and restructuring of only a small
percentage of the tens of thousands of cross-border bankruptcies and associated
job losses and lost output.

It will have an
indirect consequence on the Member States who do not have national hybrid and
pre-insolvency proceedings (11) (BG, HU, LT, NL, SK, SI, SV, IRL, PT, CY, FI)
as it will increase the pressure to adopt such proceedings. Further, it would put
pressure on Member States which do not have personal insolvency proceedings (9
MS), second, it will encourage in the medium term some convergence in the
personal insolvency proceedings (for whom, purpose, discharge periods…) as
today the EU landscape is very diverse.

The scrutiny procedure
to include national proceedings in the Annex and the information to be provided
on these national procedures will have a positive impact on the judicial
systems of Member States and on the European area of justice as a whole by
increasing confidence and mutual trust of judges in the procedures from other
Member States.

Member States will not
have to bear any additional costs due to standard forms as they will only
entail costs for the EU Institutions.

There exist no specific
data on the administrative burden relating to the new information obligation to
publish all court decisions. However, such a requirement may be attenuated and
confined to those decisions which most Member States publish anyway in order to
reduce additional costs.

Specific Costs

Training of insolvency judges will be
incurred by national public administrations, i.e. Member States’ budgets. Part
of these costs could be taken on by the EU as part of the programme on training.
Member States will also incur costs related to the development, upgrading, and
interconnecting of national insolvency registers, as set out in the table
below:

Action || Estimated cost

Training of judges || €950 - 1300/judge €7 - 10 million (10% of all judges) for all Member States

National electronic insolvency register || Development of new insolvency register: €0.5 - 1 million (per MS concerned) Upgrading existing insolvency register: €100k - 300k (per MS concerned) Maintenance: €100k- 150k per MS per year

Interconnection of national registers || Development central interconnection) : €0.5 - 1 million (EU budget) Maintenance central interconnection: €100k - 300k per year (EU budget) Development and maintenance (per MS): €50k /year

The costs for the
national register distinguish costs between those Member States that need to
develop a new system or profoundly change the architecture of their current
system, and Member States that need only to upgrade an existing system. The
former (as FR, FI) are not favourable to a compulsory register; the later have
concerns that additional obligation is put on the courts (UK) and that the obligation extends to natural persons (SE, FI). Nevertheless the majority
of countries that have currently a register do not oppose the plans, e.g. AT
sees some benefits in a cross-border situation. The interconnection of national
registers in the framework of the e-Justice Portal would affect both
Member States and the EU budget, and comes in addition to the costs of the
national registers. However the Commission will ensure that the risk of
parallel overlapping network of registers is minimised because the revised
Regulation would allow Member States to build on the network established by
Directive 2012/17/EU in order to avoid the costly creation of new registers.

The requirement that
courts cooperate and communicate with each other would entail some additional
costs in terms of working time and possible costs of translation. As a specific
impact, the requirement to hear the main liquidator before opening secondary proceedings
would entail certain costs for the court but these costs are likely to be
outbalanced byte guidance the liquidator can give the court in determining
whether to open secondary proceedings. About 10% of the 50,000 cross-border
insolvencies per year involve establishments and subsidiaries. That means that
judges will have additional coordination work for up to 5,000 cases per year
(compared with the total of about 200,000 insolvencies per year in the EU).
Thus, the number of cases involved is relatively small compared to the total
number of insolvency cases, and the costs of additional working time would,
moreover, be at least partly offset by savings of working time achieved by a
more efficient flow of information which the cooperation between courts would
bring about. Costs for translation of documents or other may be borne by the
proceedings. Based on average costs of translation of €30 per page, the
translation costs can be estimated at between €90 and €300, depending on the
length of the court decision to be translated. Additional costs incurred by
courts are also likely to be compensated by a decrease of legal dispute
resulting from the proposed procedural improvements and the consequent
diminution of judicial claims.

6.3.        Option
B: Towards approximation of national insolvency laws and proceedings

Effectiveness in achieving the
objectives

Option B will be
very effective in achieving the objectives. It will address the underlying problems of the EIR.

Having a single
proceeding for companies with establishments and for groups of companies, would
ensure efficient handling of the insolvency proceedings because they would be
consolidated before a single judge, administered by a single insolvency
practitioner and governed by a single law, that of the state of the opening of
proceedings. There would be no efficiency losses due to multiple proceedings
being opened in different jurisdictions or divergences of opinion between
different liquidators involved. They also have positive economic impacts on
companies as debtors.

Impacts on Fundamental Rights

Similarly to option
A, option B will improve the rights of persons involved in cross-border
insolvencies (right to
property, freedom to conduct business and right to engage in work, freedom of
movement and residence and right to an effective remedy). It will also
affect their rights of protection of personal data, in a way which is
proportionate to the objectives. Measures need to be put in place to ensure
compliance with Directive 95/46/EC. Finally, to avoid disproportionate impacts
on the right to property, measures allowing the fair treatment of all
creditors, such as harmonised European provisions on the treatment of foreign
creditors will need to be put in place.

Right to property: Option B would change the approach towards the
rights of the creditor, as, in contrast to the Status Quo, the ranking of
creditors will no longer be determined by the law of the seat of the company
with whom he established a legal relationship.

Weaknesses: Having a single proceeding for companies with
establishments and for groups of companies has significant negative
repercussions on the right to property of the creditors of establishments or
subsidiaries with respect to the Status Quo. The creditors of establishments or
subsidiaries, that could be in particular local SMEs, but include also
employees, social security and tax authorities, would lose all possibility to
open a local insolvency proceeding governed by the law of the state of the
establishment/subsidiary. This negative impact on creditors would in turn also
mitigate the economic and social benefits of these options. The impacts on the
right to property seem disproportionate with respect to the objectives. In
order to reduce this important negative impact on some creditors, option B
would have to be accompanied by measures allowing the fair treatment of all
creditors, such as harmonised European provisions on the treatment of foreign
creditors (of an establishment or subsidiary in another Member State).

Freedom to conduct
business and right to engage in work: Option B may affect the freedom of companies to conduct
business and to organise themselves, because there would be only one procedure
for a group of companies.

Freedom of movement
and of residence: The positive
impacts of Option B are similar to Option A.

Protection of
personal data: The impacts on
the right to protection of personal data are similar to Option A

Right to an
effective remedy: The
harmonisation of the procedural framework for cross-border insolvencies and national
insolvencies would improve the rights to an effective remedy.

Economic Impacts

Similarly to Option A,
Option B will have a positive impact on economic growth, investment and the
Single Market.

On top of the economic
benefits of Option A, harmonised rules e.g. on certain procedures, on treatment
of foreign creditors and on discharge periods, will considerably increase legal
certainty for creditors, take away a large part of the incentives for abusive
forum-shopping, which will contribute to improving conditions for investment in
Member States and benefit the Single Market. Option B may further improve the
resilience of the Single Market in economic crises, as the effectiveness of
national insolvency laws is essential in alleviating the effects of the crisis.

Harmonised rules may also facilitate
investments from third countries.

As with Option A, Option
B will facilitate the survival of viable businesses by ensuring EU-wide
recognition of hybrid and pre-insolvency proceedings.

Having a unique
proceeding for companies with establishments or groups of companies will
simplify proceedings for companies as debtors and creditors, and would also
generate savings by reducing the number of insolvency administrators and courts
involved. It will also benefit SMEs that are establishments/subsidiaries of
parent companies and have a viable business, as they can be integrated in the
rescue of the whole company and they do not have to bear additional costs of a
local procedure.

Businesses, as debtors
and creditors, will benefit from more harmonized rules. These will have a
positive effect on cross-border transactions in the Single Market, whether
contracts, partnerships, acquisitions, developments of new
branches/subsidiaries. Indeed, business stakeholders (Eurochambers, UEAPME,
Business Europe) often complain about inefficiencies of national insolvency
laws. SMEs would particularly benefit from the harmonisation of discharge
periods throughout the EU. The great divergence of discharge periods, and in
particular the excessive length of discharge periods in certain Member states,
has been identified as a major obstacle to providing a second chance to SMEs.

Similarly to option A,
more effective and less expensive lodging of claims will benefit all companies,
and in particular SMEs, as creditors. The publication of all relevant decisions
in national insolvency registers will also benefit companies as creditors.

Social Impacts – Impact on employees

As Option A, also Option
B is likely to facilitate the preservation of jobs, as viable businesses
are able to continue. The impact will be more significant for employees of
large companies (more than 250 employees) as these are more likely to be
involved in EU insolvency procedures. Also, the survival of
branches/establishments is particularly important for saving jobs whenever
manufacturing or job-intensive activities are situated in another Member State than the parent company, and this would be supported by having unique
procedures that can efficiently define and implement a rescue plan for the
whole company or group of companies.

Impacts on Member States

Weaknesses: Option B
would entail a substantial element of harmonisation. It would therefore have an
important impact on Member States’ insolvency laws and on national judicial systems.

The harmonisation or
convergence of discharge periods would affect those Member States that have not
yet implemented the Council Conclusions of May 2011 on the Small Business Act.

Option B would modify
the rules on the applicable law and on the rights of creditors that are now
defined in the EIR. The harmonisation of certain procedural aspects, regarding
the opening of procedures, the availability of an effective remedy for
creditors, and on the ranking of creditors, will have important consequences on
national laws as the differences between national systems are important. The
approximation of national insolvency laws and procedures would therefore
require an in-depth comparative-law analysis of national insolvency laws and
procedures which would enable the Commission to identify the precise areas in
which procedural harmonisation would be necessary and feasible, and not too
intrusive to the national legislations and insolvency systems.

Costs relating to
training and to establishing, upgrading and interconnecting insolvency
registers would be incurred as in option A.

7.           Comparison
of the options and summary of the preferred option

The Status Quo would not solve the problems
identified and would allow the negative effects of the two groups of problems
to continue. Although a degree of regulatory convergence between Member States
might be expected in some areas, in others the problems are likely to become
more acute.

Option A has overall
positive impacts with respect to the baseline. It would effectively achieve the
policy objectives and address the problems identified, without intrusion in
national legislation or policies. It would increase the efficiency of
the Regulation, extend its scope to proceedings that aim at rescuing viable
business and saving jobs and promoting second chance, and make provisions for
groups of companies.

Option A will have a
positive impact on economic growth, investment and the Single Market. By
providing greater legal certainty, preventing unnecessary bankruptcies,
reducing obstacles to second chance for entrepreneurs, improving the
availability of information, and cutting litigation costs, it will contribute
to improving the conditions for investment in Member States. All of these
improvements will also have a positive effect on cross-border transactions,
whether contracts, partnerships, acquisitions, or developments of new
branches/subsidiaries.

Option A will benefit
all business, in particular groups of companies and SMEs as debtors and
creditors. It will increase efficiency, fairness and transparency of
cross-border insolvency proceedings and improve access to justice.

Option A imposes some
costs on Member States’ authorities related to insolvency registers and
training of judges, which is largely justified by the benefits and savings for
society of the increased efficiency and quality of cross-border insolvency
procedures.

Option A will have a
positive impact on mutual trust between Member States’ judicial authorities. It
preserves the current balance between debtor and creditor and between
universality and territoriality. However, one important cause of the problems
identified - inefficiencies and differences in the national insolvency laws
themselves - would not be addressed.

Option B is potentially
more effective than Option A in reaching the objectives and providing economic
and social benefits for the Single Market. It would increase the effectiveness
and efficiency of insolvency proceedings in the EU as a whole; it would create
elements of a fully universal system, going towards features of the regulation
of insolvency in the 50 States of the US under the US Insolvency Act.

Option B would be more
completely address the European Parliament’s Resolution of November 2011, in
which it gave recommendations to the Commission regarding the harmonisation of
specific aspects of insolvency proceedings on the basis that the internal
market would benefit from a level playing field, and that disparities between
national insolvency laws create competitive advantages or disadvantages and
difficulties for companies with cross-border activities, which could become
obstacles to a successful restructuring of insolvent companies and favour
forum-shopping.

However, option B’s
impact on national systems is more significant. The proposed changes go beyond
the modernising of the EIR, and would require an in-depth comparative analysis
of national insolvency laws, preventing the immediate implementation of option
B. In the meantime, the current problems would persist, and could even worsen.

Therefore, while there is a lack of
supporting evidence in favour of option B, option A seems a more proportionate
option at this stage. Accordingly the preferred option for the revision of
the Insolvency Regulation is option A:

 Extending the scope by revising the definition of insolvency proceedings: - to include hybrid and pre-insolvency, - and include debt discharge and those insolvency proceedings for natural persons which currently do not fit the definition, - and opening the scope of secondary proceedings to large categories of proceedings promoting restructuring. Task the Commission with ensuring that only procedures which comply with the definition are listed in the annex.

Improving the procedural framework: the EIR would clarify that the court opening insolvency proceedings is obliged to examine its basis of jurisdiction and to specify in the opening decision whether the proceedings are main or secondary proceedings; in addition, creditors would have a right to judicial review of the opening decision.

Enable the court to postpone or refuse the opening of secondary proceedings if this would obstruct the efficient administration of the estate. Require the court to hear the liquidator in the main proceedings prior to opening secondary proceedings.

Extend the cooperation requirements to courts by obliging courts of the main and secondary proceedings to cooperate between themselves and by obliging liquidators and courts to cooperate with each other.

Require Member States to publish all court decisions relating to cross-border insolvency cases in a publicly accessible electronic register; Oblige liquidators of the main proceedings to publish these court decisions in the insolvency register of other Member States where the debtor has an establishment or creditors; Enable definition of common entries for the interconnection of national registers.

Introduce standardized forms in all EU languages for the lodging of claims; Encourage Member States to set up electronic systems for the lodging of claims.

Coordinating main proceedings through general cooperation mechanisms: This option would retain the entity-by-entity approach of the Insolvency Regulation but provide for a coordination of the insolvency proceedings concerning members of the same group in three respects: (i) by obliging the liquidators of the different main proceedings to communicate and cooperate, notably by trying to develop a reorganisation plan for the insolvent members of the group; (ii) by obliging the courts competent for the different main proceedings to communicate information and cooperate, e.g. by appointing several liquidators which have indicated they can cooperate with each other; (iii) by obliging the liquidator in the main proceedings for one group member to communicate and cooperate with the courts competent for the proceedings relating to another group member. The coordination mechanisms above can be complemented by the nomination of a “lead” insolvency practitioner and court with the power to direct the reorganisation of the insolvent group members, when the structure and level of integration of the group allows for it. The “lead” insolvency practitioner would, in particular, have the power to request a stay of the process of liquidation of a subsidiary, to propose a restructuring plan and to obtain information from the other insolvency practitioners or courts involved. The “lead” insolvency practitioner could either be the liquidator of the parent company or an additional liquidator nominated by the “leading” court.

8.           Monitoring
and evaluation

In order to monitor the
effective application of the amended Regulation, regular evaluation and
reporting by the Commission will take place. To fulfil these tasks, the
Commission will prepare regular evaluation reports on the application of the
Regulation, based on consultations with Member States, stakeholders and
external experts. Regular expert meetings will also take place to discuss
application problems and exchange best practices between Member States in the
framework of the European Judicial Network in civil and commercial matters.

In most Member States,
there is no systematic collection of statistical data on the application of the
EIR, which makes it very difficult to measure how the Regulation operates for
cross-border insolvencies. The Commission will therefore include in the
revision of the EIR a requirement on Member States to provide
information on the application of the EIR in practice, notably on the number of
secondary proceedings and proceedings concerning groups of companies.

 Annex 1:
Glossary of Legal Terms and abbreviations

Term || Meaning

COMI || Centre of main interest of the insolvent debtor. For a company it is deemed to be the place of its registered office; for a private individual it is in general its habitual residence

EIR || Council Regulation (EC) No 1346/2000 on insolvency proceedings (or "European Insolvency Regulation")

Jurisdiction/international jurisdiction || Jurisdiction is the power conferred upon a court or tribunal to hear a specific case; international jurisdiction is the competence of the courts of a particular country to hear a case. The EIR only defines the international jurisdiction for opening insolvency proceedings

Main insolvency proceedings || Insolvency proceedings which have been opened in the Member State where the debtor has its centre of main interests

Secondary insolvency proceedings || Insolvency proceedings opened in the Member State where the debtor has an establishment but not its COMI.

Liquidator || Person or body whose function is to administer or liquidate assets of which the debtor has been divested or to supervise the administration of his affairs

Winding-up || Insolvency proceedings involving realising the assets of the debtor (liquidation), including where the proceedings have been closed by a composition or other measures terminating the insolvency, or closed by reason of the insufficiency of the assets

Insolvency practitioner || Liquidator

Insolvency proceedings Insolvency Bankruptcy || Collective proceedings –subject to court supervision, either for reorganisation or liquidation, which entail the partial or total divestment of a debtor and the appointment of a liquidator Inability to pay one's debts as they fall due Determination of insolvency made by a court of law with resulting legal orders intended to resolve the insolvency; another meaning is a synonym of winding-up/liquidation

Hybrid proceedings || At the border between out-of-court arrangements (contracts, conciliation) and formal judicial insolvency proceedings, they are a mix combining the advantages of both types of proceedings (flexibility, enforceability). In such proceedings the debtor can continue to manage its assets ("debtor in possession")

Pre-Insolvency Proceedings || Semi-collective proceedings (conducted between a debtor in financial distress and its main secured creditors) starting at an early stage prior to insolvency, in view of maximising the chance of successful reorganisation. They may be out-of-court arrangements or under the supervision of the court

Establishment || Any place of operations where the same debtor carries out a non -transitory economic activity with human means and goods or services

Branch || Establishment

Group of Companies || Consists of separate units, each with its own legal personality, its own assets, contracts and creditors. The companies of the group may have an integrated business, a market stronger position, an integration of assets or a financial integration (holding). In case of horizontal integration several units in different countries have similar activities; in the vertical integration each of the units is responsible for a separate activity in the process

Parent Company || Company which owns a majority of shares of its subsidiaries. It may determine the common policy of the group at its headquarters

Subsidiary || Companies owned and controlled by a parent company

Annex
2: Executive summary of the outcome of the public consultation

Regulation (EC) No
1346/2000 on Insolvency proceedings came into force in May 2002. It includes an
obligation on the Commission to review the application of the Regulation and to
make a proposal for adaption of the Regulation if needed in 2012. Such a review
is included in the European Commission’s 2012 work programme and has gained
greater impetus in view of the current financial crisis and the positive impact
that effective insolvency regimes can have on entrepreneurship and economic
growth.[69]

As part of the
Commission’s review, it is not only examining issues in relation to the
implementation of the Regulation but also considering whether the Regulation
continues to reflect current trends in insolvency practice. To this end, it
launched a public consultation on 30 March 2012 asking a total of 31 questions
related to the Insolvency Regulation as well as seeking broader opinions on
problems faced and possible solutions including how the Regulation might be
amended.

This report aims at
providing a general overview of the main results of the public consultation.

Overview of respondents

The public consultation was closed on 21
June 2012 having received 103 replies via the IPM tool. Additional replies were
received by email, including full responses to the consultation, comments on
specific points and documents. A total of 136 responses were recorded. For
statistical purposes, 126 responses were analysed since a number of responses
did not cover all questions and were not suitable for statistical purposes.

Replies have been
received from all Member States except Bulgaria and Malta with the UK (21%), Romania (20%) and Italy (12%) representing more than 50% of all respondents.

Replies were received from a wide range of
stakeholders with academics, legal practitioners and public authorities
providing the greatest number of replies.

OVERVIEW OF
MAIN FINDINGS

A narrow majority (52%) of respondents
agreed that the European Insolvency Regulation (EIR) operates efficiently
(Question 1), with legal practitioners, public authorities and academics
expressing the most positive views. Less favourable views were expressed by
private individuals/self-employed and bank/credit institution/investment funds.

SCOPE OF THE INSOLVENCY REGULATION: Pre
Insolvency, Hybrid Proceedings, private individual and extra EU Proceedings - (Question
3, 4, 5, 6)

Views were evenly balanced between those
who felt the lack of coverage of pre-insolvency or hybrid proceedings was
problematic (43%) and those who did not (42%). Nevertheless, a significant
majority (59%) felt the EIR should cover such proceedings with academics,
public authorities and insolvency practitioners particularly in favour of this.
Views were mixed on exactly which proceedings should be covered and in
particularly where court oversight should be required.

Examples of problems raised included cases
differing views of Member States on which proceedings could be covered by the
EIR; uncertainty relating to schemes of arrangement and how they are recognised
at EU level and risks to workers interests.

A majority of respondents (49%) agreed that
the EIR should apply to private individuals/self-employed, with 34%
disagreeing with those in favour including judges, insolvency practitioners and
academics. Some respondents did not think an expansion should include
consumers.

Opinion was evenly spread on whether the lack
of provisions for the recognition or coordination of extra-EU insolvency
proceedings had created problems with 44% agreeing and 37% disagreeing.
Most banks, judges, insolvency practitioners considered this as problematic.

Suggestions for improving the scope of the
EIR include removing the requirement of the appointment of an office holder;
clarifying the definition of COM; creating a special agency to address problems
of over indebtedness; harmonising rules on consumer insolvencies; incorporating
the UNICITRAL model law or at least some concepts of it into the EIR and
include pre-insolvency and hybrid proceedings in scope of EIR.

COMPETENT COURT TO OPEN INSOLVENCY
PROCEEDINGS (Question 7, 8, 9, 10)

A significant majority of respondents (77%)
approved of the use of the COMI to locate the main proceedings whilst
only 25% of banks approved. However 51% considered that the interpretation
of the term COMI by case-law caused practical problems, with the most
critical being private individuals/self-employed (67%), banks (75%), judges
(58%), and insolvency practitioners (61%).

Nevertheless, some felt clarifications
given by the ECJ have been very helpful to achieve a more uniform application
of the term whilst others felt the COMI concept should not be revised.

Almost half of the respondents (49%)
indicated evidence of abusive relocation of COMI with 29% feeling there
was no abusive relocation. The most common situation cited was moves to UK in particular from Ireland and Germany with relief of the debtor and the promotion of rescue
culture towards businesses in the UK being suggested as drivers.

44% of respondents reported no problems
with the interaction between the EIR and Brussels I which have not been
satisfactorily solved by case-law.

Groups of Companies - (Question 11)

Almost half of respondents (49%) felt the
EIR does not work efficiently for multinational group insolvencies with 30%
feeling it does.

CO-ORDINATION BETWEEN MAIN AND SECONDARY
PROCEEDINGS - (Questions 12, 13, 14, 15)

36% of respondents felt the division
between main and secondary proceedings was helpful with 37% disagreeing.
However, 48% were dissatisfied with the coordination between main and
secondary proceedings with 21% being satisfied. 40% also felt that the duty
to cooperate between insolvency practitioners did not work effectively
compared with 26% who thought they did. These concerns were reflected in the
fact that 53% felt that the lack of a duty of cooperation between practitioners
and the foreign courts or between courts had created problems with 18% stating
that it had not.

APPLICABLE LAW – (QUESTIONS 16-19)

A majority of respondents (55%) agreed the
EIR’s provisions on applicable law are satisfactory while 32% disagreed.
A majority (56%) also agreed that the exceptions in the EIR to the general
rule on applicable law are justified to protect legitimate expectations and
legal certainty whilst 19% disagreed. Almost half of the respondents (49%)
stated that the provision on rights in rem operates satisfactorily in
practice, while 25% said it did not. Views on the provision on detrimental
acts were rather divided, with 33% stating they operated satisfactorily in
practice, 37% stating they did not.

RECOGNITION AND ENFORCEMENT – (QUESTIONS
20-22)

40% of respondents thought that there were problems
of recognition and enforcement of the decision opening the proceedings or
with the recognition and enforcement of further decisions during the
proceedings whilst 34% disagreed

Only 23% of respondents stated that they
were aware of cases where a Member State has refused to
recognise insolvency proceedings or to enforce a decision on the grounds of
public policy (Question 21). 56% stated that they were not aware
of such cases.

Half of the respondents (51%) agreed that
the definition of the decision ‘opening insolvency proceedings’ should
be amended to take into account national legal regimes where there is not an
actual court opening the proceedings.

PUBLICATION OF PROCEEDINGS AND LODGING
OF CLAIMS- (QUESTIONS 23-25)

Three quarters of respondents (75%) agreed
that the absence of mandatory publication of the decision opening
insolvency is a problem. Those stakeholders who mostly thought it was a problem
belonged to the group of insolvency practitioners, companies and public
authorities.

46% of those who expressed an opinion
considered there were problems with lodging claims (question 24). Crucially, a
significant proportion of key stakeholders who will often be the entities
making claims felt there was a problem – 83% of private individuals/
self-employed and 75% of banks.

45% of respondents stated that there were no
difficulties with the EIR”s rules on languages for informing creditors and
lodging claims and 23% felt that there were problems.

DIFFERENCES IN NATIONAL INSOLVENCY LAWS
– (QUESTIONS 26-28)

Over half of the respondents felt that the differences
in national insolvency laws create obstacles for the administration of
proceedings or difficulties for companies with cross-border assets whilst 21%
disagreed. On the other hand 38% felt there were important inefficiencies in
their national insolvency law with 43% feeling there were not
inefficiencies. A majority (55%), however, considered that their national
insolvency laws strike an adequate balance between the need for efficient
proceedings and the parties’ right to an effective remedy. Only 23% of
respondents disagreed.

COSTS OF PROCEEDINGS – (QUESTIONS 29-31)

32% of respondents indicated that the costs
were disproportionate with regard to debt with 36% disagreeing. The issue of
disproportionate costs for natural persons and small firms was raised.
Similarly, close to a third (36 %) considered that the costs of cross-border
restructuring or reorganisation were not disproportionate and 21% felt that
they were.

Opinions were divided on the question of
whether there should be a simplified insolvency regime at reduced costs for
certain debtors in particular for self-employed persons and SMEs (Question
31), with 37% in favour of the idea, 36% against, and 27% expressing no
opinion. Stakeholders called for simplified proceedings and enhanced use of information
technology to expedite proceedings.

Annex 3: Data
on enterprises and insolvencies in the EU

Number of enterprises, employment and gross value added

According to the 2010/2011 Annual Report on EU Small and Medium
sized Enterprises[70]SMEs comprise 99.8% of all enterprises (20,796,192 SMEs) while large enterprises account only for 0.2% (43,034 large
enterprises). In employment terms, in the non-financial business economy[71] SMEs provide about two-thirds of workers with large enterprises
accounting for the remainder.[72] This means that large enterprises, despite their smaller number are
extremely important for the European economy as 33.1% of the working population
is employed by them. Table 1 provides an overview of the number of enterprises,
employment and gross value added in EU-27, by size class, in 2010.

Table 1 Number of enterprises, employment and gross value added in
EU-27, by size class, 2010 (estimates)[73]

|| Micro (1 – 9 persons employed) || Small (10 – 49 persons employed) || Medium (50 – 249 persons employed) || SMEs (1 – 249 persons employed) || Large (250 + persons employed) || Total

Enterprises || || || || || ||

Number || 19,198,539 || 1,378,401 || 219,252 || 20,796,192 || 43,034 || 20,839,226

% || 92.1 || 6.6 || 1.1 || 99.8 || 0.2 || 100

Employment || || || || || ||

Number || 38,905,519 || 26,605,166 || 21,950,107 || 87,460,792 || 43,257,098 || 130,717,890

% || 29.8 || 20.4 || 16.8 || 66.9 || 33.1 || 100

Gross Value Added || || || || || ||

EUR Millions || 1,293,391 || 1,132,202 || 1,067,387 || 3,492,979 || 2,485,457 || 5,978,436

% || 21.6 || 18.9 || 17.9 || 58.4 || 41.6 || 100

Source: Eurostat/National Statistics Offices of Member States/Cambridge
Econometrics/Ecorys

Note that the six largest EU economies, i.e., France, Germany, Italy, Poland, Spain and the UK represent over 70% of all EU-27 SMEs.[74]

Scale of cross-border business

It has been estimated that 25% of small and medium-sized enterprises
(SMEs) in Europe export and 29% import within the single market[75]. This means that 5000 000
European SMEs have transactions with consumers, creditors or business partners
from other Member States. Eurostat’s database of multinational enterprise
groups (Eurogroups Register — EGR) also adds to this picture: so far, it has
registered 299 570 legal units located in the EU Member States (314 031 in EU
and EFTA Member States) that belong to the 6 350 largest multinational
enterprise groups.

Insolvencies within the EU

According to the
Creditreform ‘Insolvencies in Europe 2011/12’ report, in 2011 164,895 corporate
insolvencies took place in EU-15 countries[76] and
39,423 in EU-12 countries excluding Cyprus (i.e., (Bulgaria, Croatia, Czech
Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia,
Slovenia)[77] which amounts to 203,318 corporate insolvencies within the EU-27
(excluding Cyprus).

Considering that there are
20,839,226 enterprises within the EU it can be estimated that almost 1% of all
companies went bankrupt in 2011

Given that 25% of companies operate cross-border, one can infer that
25% of insolvencies that is 50000 companies are subject to proceedings falling
within the scope of the EIR.

Table 2: Breakdown of
Enterprises by category (SMEs/Large) and foreign connections and respective
rate of insolvency

|| SMEs (1 – 249 persons employed) || Large (250 + persons employed) || Total || Number of insolvencies (calculations are based on an insolvency rate of 1%)

Entreprises || 20,796,192 || 43,034 || 20,839,226 || 208,392

Enterprises transactions with consumers, creditors or business partners from other Member States || 25% || || 5,000,000 || 50,000

Enterprises with foreign connections (subsidiaries, joint ventures) in the EU and third countries || 266,191 || 8,564 || 274,737 || 3000

Enterprises with foreign establishments (branches) within the EU || 64,052 || 1,792 || 65,844 || 700 (note that every insolvency can create several secondary proceedings)

Number of companies with foreign branches
and number of groups

(1) SME

According to the report on the ‘Internationalisation of European
SMEs’, 2% of SMEs in the EU-27 plus Croatia, Iceland, Liechtenstein, FYROM,
Norway and Turkey are active in foreign direct investment.[78]The incidence for the non-EU countries under examination is somewhat
higher, i.e., 3% of non-EU SMEs have invested abroad as opposed to 2% of EU-27
SMEs. Based on this figure it can be estimated that approximately 415,923
SMEs in the EU-27 have any type of foreign connections (subsidiaries, joint
ventures, branches and other unidentified connections).[79]

The same report indicates that most foreign establishments are
subsidiaries (42%) but considerable numbers are joint ventures (22%) and branch
offices(i.e., not separate legal entities) (20%).Note that these figures have
been estimated on the basis of data from all the countries under review (i.e.,
EU-27 plus Croatia, Iceland, Liechtenstein, FYROM, Norway and Turkey. However,
in view of the facts that the difference on the percentages of SMEs engaged in
foreign direct investment between the EU-27 and the non-EU countries under
review is not so significant it can be assumed that the percentages concerning
the SMEs having each type of establishment would be the same for the EU-27.
Consequently, it can be estimated that 83,185 SMEs in the EU-27 have foreign
branches [415,923 EU SMEs with foreign establishments multiplied by 20% of
enterprises with foreign branches] and 266,191 SMEs in the EU have foreign
subsidiaries and joint ventures [(415,923 EU-27 SMEs with foreign
connections multiplied by 42% of enterprises with foreign subsidiaries) +
[(415,923 EU-27 SMEs with foreign connections multiplied by 22% of enterprises
with foreign joint ventures)].

Most of the SMEs with foreign connections limit themselves to one
country (71%).[80] The size of the enterprise is directly related to the number of
SMEs that invest abroad. In the period 2006 – 2008, only 2% of micro
enterprises invested abroad as compared to 6% of small and 16% of medium-sized
enterprises. On average, SMEs active in foreign direct investments have 2.2
foreign partner countries (2 countries per micro/small enterprise and 2.4 per
medium-sized enterprise).[81] Again, even though these figures refer to the EU-27 plus Croatia,
Iceland, Liechtenstein, FYROM, Norway and Turkey it can be expected that they
would not significantly differ for the EU-27.

The ‘Internationalisation of European SMEs’ report however does not
specify the destination of these foreign establishments and therefore
alternative sources of information needed to be identified. The ‘2007
Eurobarometer - Observatory of European SMEs’ (‘2007 Eurobarometer’) concluded
that77% of European SMEs have foreign subsidiaries and joint ventures within
the EU.[82] A combination of the data of the two reports leads us to the
conclusion that 204,967 EU-27 SMEs have foreign subsidiaries and joint
ventures within the EU [(266,191 EU-27 SMEs with foreign subsidiaries and
joint ventures multiplied by 77% of European SMEs with foreign subsidiaries and
joint ventures within the EU).

The 2007 Eurobarometer does not include information on the
destination of foreign establishments (branches) of EU-27 SMEs. Arguably, it
could be submitted that the percentage of EU SMEs which chooses the EU as its
destination for its foreign subsidiaries and joint ventures is the same as that
of EU SMEs which chooses the EU as its destination for its foreign branches,
i.e., 77%. Therefore, it is estimated that 64,052 EU-27 SMEs have foreign
establishments (branches) within the EU [83,185 SMEs in the EU-27 with
foreign branches multiplied by 77% of European SMEs who choose as their
business destination the EU].

(2) European Large Enterprises engaged in foreign direct investment

The report ‘Internationalization of European SMEs’ does not contain
any data on the number of large enterprises engaged in foreign direct
investment. Therefore, this data will be estimated on the basis of the data
contained in the 2007 Eurobarometer. Note that these two reports were prepared
by different companies and therefore their methodology, and consequently their
conclusions, may differ.

According to the 2007 Eurobarometer 19.9% of EU-27 large enterprises
have some kind of turnover from foreign partnerships, i.e., 8,564 large
enterprises have any kind of turnover from foreign business partnerships
[43,034 of large enterprises in the EU multiplied by 19.9%].

Note that the definition of ‘foreign business partnerships’ under
this report does not seem to include branches. Therefore, in view of the lack
of information from other sources, for the time being it could be assumed that
the percentage of large enterprises having foreign branches would be at least
equal to the percentage of SMEs having foreign branches as specified in the
‘Internationalisation of European SMEs’ report. This would mean that at least 2,676
large enterprises have foreign establishments (branches) [under the
‘Internationalisation of European SMEs’ report 64% of EU-27 enterprises engaged
in foreign direct investments have foreign subsidiaries and joint ventures.
This means that the 8,564 large enterprises with foreign subsidiaries and joint
ventures represent the 64% of large enterprises engaged in any kind of foreign
direct investment, i.e., 13,381 large enterprises are engaged in foreign direct
investment. The percentage of enterprises having foreign branches under the
‘Internationalisation of European SMEs’ report is 20%; if the percentage is
similar for large enterprises, it would mean that at least 2,676 large
enterprises have foreign branches]

Furthermore, the 2007 Eurobarometer provides that 67% of EU-27 large
enterprises with foreign subsidiaries and joint ventures choose as their
destination the EU, i.e., 5,738 large enterprises have foreign subsidiaries
and joint ventures within the EU.

If the percentage of EU-27 large enterprises with foreign branches
which chooses as their destination the EU is similar to that of EU-27 large
enterprises with foreign subsidiaries and joint ventures which chooses as their
destination the EU it would mean that 1,792 EU-27 large enterprises have at
least one establishment (branch) within the EU [2,676 large enterprises
have foreign branches multiplied by 67%].

Annex 4: Information
on personal insolvency proceedings in Member States

PERSONAL INSOLVENCIES IN CERTAIN MEMBER STATES

Personal Insolvencies in certain Member States in 2011[83]

Member State || Number of Insolvencies in 2011 ||

Austria || 10,861 ||

Czech Republic || 17,600 ||

Finland || 3,531 ||

France || 56,079 ||

Germany || 129,800 ||

Latvia || 810 ||

Netherlands || 14,344 ||

Spain || 999 ||

Sweden || 8,051 ||

United Kingdom || 143,871 ||

Total Insolvencies || || 385,946

Median Insolvencies || Calculated as insolvencies half between the figure for Austria and Netherlands || 12603

Estimated total personal insolvencies in EU || Based on 17 Member States having personal insolvencies schemes. The median rate of 12603 is applied to 7 states || 385,846 + 88,221 = 474,067

·
In the UK, the number of consumer bankruptcy
cases between 2003 and 2008 tripled from 35,604 to 106,544.

·
In Germany, the new insolvency regulation, which
entered into force in 1999, led to an increase in the number of consumer
bankruptcy cases that were accepted at court from 1,634 in 1999 to 103,085 in
2007 and 95,730 in 2008.

·
In France, 159,967 applications were admitted to
the household debt commission situated at the French Central Bank and 87,673
amicable settlement plans were negotiated in 2008. The number of amicable
settlement plans used to be higher in 1998 – 2003 ranging between 63% and 69%.
This decrease is due to the fact that the number of personal reestablishment
procedures, providing for the discharge of debt before a judge, has doubled
from 16,321 in 2004, when the procedure was introduced, to 33,378 in 2008.

·
In Spain, consumer bankruptcy procedures were
introduced in 2004. In 2005, only 50 individuals applied for bankruptcy with
the numbers rising to 96 in 2007 and 374 in 2008, representing an increase of
648% in the number of applications despite the fact that discharge of debt is
not available under the Spanish legal system.

·
In the Czech Republic, the number of private
insolvencies rose dramatically – from around 10,600 in 2010 to 17,600 in
2011(an increase of 66 %).

·
In Latvia, the number of private insolvencies
rose from 246 in 2010 to 810 in 2011 (an increase of 254%).

·
Note that there are also countries where
consumer bankruptcy cases are seldom due to the legislative framework; in Ireland, in 2007 only 5 persons were declared bankrupt, 10 were discharged of their debt
and these numbers have not significantly changed throughout the years.

Annex 5: Hybrid
proceedings in Member States and their inclusion in Annex A of the Insolvency
Regulation

EU Member State || Pre-insolvency || Annex A || Hybrid || Annex A || Comments || Is it a problem that pre-insolvency and hybrid proceedings do not fall within the Regulation’ scope?

Austria || Proceedings under the Business Reorganisation Act (Untermehmensreorganisationasgesetz BGBI I 1997/114 or URG) || No || || || || No (URG proceedings are rare)

Belgium || Enquete Commercial (Commercial Investigation) (Article 12 LCE) Designation d’un mediateur d’enterprise (Article 13 LCE) Accord amiable (Article 15 LCE) Reorganisations judiciaire par accord amiable (Article 43 LCE) || No No No No || Designation d’un mandataire de justice (Article 14 LCE) Designation d’un administrateur provisoire (Article 28 LCE) || No No || || Yes

Bulgaria || None || || None || || || No answer

Croatia || || || || || ||

Cyprus || || || || || ||

Czech Republic || || || Reorganisation proceedings where the debtor remains in possession of his estate under the supervision of a trustee || No || || No

Denmark || || || || || ||

Estonia || || || Reorganisation Proceedings (Estonian Reorganisation Act) and debt adjustment proceedings for natural persons (Debt Restructuring and Debt Protection act). || || || Yes; this problem has appeared in case No. 3-2-1—114-11 of the Estonian Supreme Court (not possible for secondary proceedings to be reorgasniation proceedings)

Finland || || || || || ||

France || 1) Conciliation (Article L.611-4 to 611-15 of the French Commercial Code) 2) Mandate ad hoc (Article L. 611-3 of the French Commercial Code) || 1) No 2) No || || || || Yes

Germany || Schutzschirmverfahren (Protective shield proceedings, Section 270B of the Insolvency Act) || No || Eigenverwaltung (Sections 270 and 270a of the Insolvency Act) || Yes || Eigenverwaltung: even though it is a debtor-in-possession proceeding it is included in Annex A Schutzschirmverfahren: it is not included in Annex A as it applies at the pre-insolvency stage and is aimed at the preparation of insolvency proceedings (elaboration of a restructuring plan) || No answer

Greece || || || Reorganisation (Article 99 – 106ia of the Greek Bankruptcy Code) || No || Reorganisation is not included in Annex A despite the collective nature of the procedure || Yes

Hungary || No || || No || || || No

Ireland || || || || || ||

Italy || Piano di risanamento attestato (Article 67(3)(b) of Italian Insolvency Act): workout project certified by advisor but not binding for other creditors || No || Concordato preventivo (Article 161 – 182 Italian Insolvency Act): binding workout agreement approved by creditors’ majority voting under strict court supervision and sanctioned by a court Accordo di ristrutturazione dei debitti (Article 182bis of the Italian Insolvency Act): agreement with as many creditors representing 60% of the overall creditors and sanctioned by a Court || Yes No || Concordato preventivo is included in Annex A even though it does not require a debtor’s insolvency – it can be implemented in case of a debtor’s liquidity or financial distress. Accordo di ristrutturazione dei debitti: this procedure does not require a debtor’s insolvency, it can be implemented in case of a debtor’s financial distress Piano di risanamento attestato is not included in Annex A as it is not of a collective nature. || Yes

Latvia || Out-of-court legal protection proceedings: [NB: to be asked if these are pre-insolvency proceedings] || Yes || || || Out-of-court legal protection proceedings : these proceedings are a type of legal protection proceedings which are included in Annex A of the Regulation || No, as out-of-court legal protection proceedings are considered to fall within the Regulation’s scope

Lithuania || No || || No || || || No

Luxembourg || Gestion Controlee Concordat preventif (NB: to obtain more details on these proceedings to determine whether they are pre-insolvency or hybrid insolvency proceedings) || Yes || || || || No

Malta || || || Statutory scheme of compromise/arrangement: a scheme may be implemented within a liquidation proceeding and is binding upon its members and creditors if appropriately sanctioned. Company Recovery Procedure: this procedure is modelled after the administration procedure in the UK. When a company is unable or is likely to become unable to pay its debts, it may request the Court to place the company under the recovery procedure and to appoint a special controller to take over, manage and administer its business || No No || || Yes

the Netherlands || Out-of-court workouts in the Netherlands require the consent of all creditors and there is no reference to such proceedings in the Dutch Bankruptcy Code || No || No (for companies) || || || Yes: in Rechtbank’s – Gravenhage10 June 2010, LJN: BN9606, the Court did not issue an order according to Article 287a of the Dutch Bankruptcy Act (thereby blocking a successful workout) on the basis that the workout would not be recognized in other Member States

Poland || Rehabilitation proceedings (postepowanie naprawcze, Article 492 – 521 of the Bankruptcy and Rehabilitation Law): this proceeding applies to companies still solvent but in danger of insolvency || No || Forms of enforcement proceedings by administration or sale of the entire enterprise of the debtor (Article 10641 – 106413 and Article 106414 – Artucke 106423 of the Code of Civil Procedure): these proceedings are not linked to insolvency but they are of a collective nature || No || || No: Rehabilitation proceedings are barely used in practice but if they were used and were successful they could raise problems.

Portugal || || || || || ||

Romania || Mandat ad hoc is a confidential procedure for the renegotiation of the debtors’ debt || No (to be confirmed) || Preventive agreement which is a reorganization proceeding, supervised by the Court. The reorganization plan must be accepted by at least 2/3 of the creditors. || No || || No However, concerning preventive agreements problems may arise if creditors in other Member States can initiate liquidation proceedings

Slovakia || || || || || ||

Slovenia || NB: not clear from the national report which are the pre-insolvency and hybrid proceedings in Slovenia || || || || || No

Spain || || || Pre-insolvency schemes of arrangement || No || || Yes

Sweden || || || Skuldsanering (debt relief, available only for private individuals) || No || Skuldsanering is not included in Annex 1 as it does not entail the partial or total divestment of the debtor. || No However, with regard to skuldsanering proceedings, it could be positive if they were included within the scope of the Regulation

UK || || || Schemes of arrangement (part 26 of the Companies Act 2006) || No || || No

Annex
6: Information on insolvency registers in the Member States

Member State || Separate insolvency register || Electronic and publicly available || Free of charge || Other electronic database containing information on insolvency

Belgium || No || - || - || the Belgian Official Gazette

Bulgaria || Yes || No || - || register on liquidators and register of sales and auctions

Czech Republic || Yes || Yes || Yes ||

Germany || Yes || Yes || Yes ||

Estonia || No || - || - || the Estonian Commercial Register

Ireland || Yes, but limited to personal bankruptcies || No || - || records of the Company Registration Office

Greece || Yes || No || - ||

Spain || Yes || Yes || Yes ||

France || No || - || - || Database of registrars of the commercial courts (infogreffe)

Italy || Yes || No || - ||

Cyprus || No || - || - || -

Latvia || Yes || Yes || Yes ||

Lithuania || No || - || - || Register of legal entities

Luxemburg || No || - || - || The Business Register

Hungary || No || - || - || The Business register and the Company Gazette

Malta || No || - || - ||

The Netherlands || Yes || Yes || Yes ||

Austria || Yes || Yes || Yes ||

Poland || Yes || Yes || Yes ||

Portugal || Yes || Yes || Yes ||

Romania || Yes || Yes || Yes ||

Slovenia || Yes || Yes || Yes ||

Slovakia || Yes || Yes || Yes ||

Finland || Yes || Electronic but not publicly available; information has to be requested via the Legal Register Centre || No, an extract costs €10 ||

Sweden || Yes (various registers accessible through a single website) || Yes || Yes ||

United Kingdom || || || ||

England and Wales || Yes || Yes || Yes ||

Northern Ireland || No || - || - || Department of Enterprise, Trade and Industry (Online DETI)

Scotland || Yes || Yes || Subject to a fee ||

It follows from the table that there are

·
14 Member States which have electronic
insolvency registers

·
9 Member States which have information on
insolvency of companies or individuals available in another electronic database
which is publicly available

·
4 Member States which have neither.

[1]               COM(2010)171, 20.4.2010.

[2]               COM(2008)394,25.6.2008.

[3]               COM(2011)815

[4]               COM(2012)573,3.10.2012

[5]               Article 46 reads: “No later than 1 June 2012, and
every five years thereafter, the Commission shall present to the European
Parliament, the Council and the Economic and Social Committee a report on the
application of this Regulation. The report shall be accompanied if need be by a
proposal for adaptation of this Regulation.”

[6]               The reports of the studies are available in the
Europa-website of DG Justice: http://ec.europa.eu/justice/civil/document/index\_en.htm

[7]               http://ec.europa.eu/yourvoice/ipm/forms/dispatch?userstate=DisplayPublishedResults&form=Insolvency

[8]               OJ 2010 C 83/02, 389ss.

[9]               Cf. Article 6 TEU.

[10]             Cf. Article 51 (1) of the Charter.

[11]             Communication from the Commission “Compliance with the
Charter of Fundamental Rights in Commission legislative proposals. Methodology
for systematic and rigorous monitoring” COM (2005) 172; Report on the practical
operation of the methodology for a systematic and rigorous monitoring of
compliance with the Charter of fundamental rights”. COM(2009) 205.

[12]             For Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia, the Regulation applies as from
their accession in 1 May 2004 and for Bulgaria and Romania as from 1 January
2007.

[13]             Denmark has opted out from the whole area of judicial
cooperation in civil matters pursuant to Protocol (No 22) on the position of Denmark. UK and Ireland have possibility to opt-it to the instruments in the area of
judicial cooperation in civil matters on the basis of Protocol (No 21) on the
position of the UK and Ireland in respect of area of freedom security and
justice, and they are participating to the EIR.

[14]             Article 1 of the EIR.

[15]             See Recital 9 of the EIR.

[16]             A
Second Chance for Entrepreneurs, Prevention of Bankruptcy, Simplification of
Bankruptcy Procedures and Support for a Fresh Start’, Final Report of the
Expert Group (January 2011), DG Enterprise and Industry, available at http://ec.europa.eu/enterprise/policies/sme/business-environment/files/second\_chance\_final\_report\_en.pdf,
p. 7.; see also IMF, Orderly and Effective Insolvency Procedures (1999)
available at http://www.imf.org/external/pubs/ft/orderly/#genobj

[17]             Forum Shopping and the Global Benefits of Soliciting
Insolvency, p. 9 citing IMF, “2 – General Objectives and Features of Insolvency
Procedures”, p.8.

[18]             The Expert Group, “A Second Chance for Entrepreneurs,
Prevention of Bankruptcy, Simplification of Bankruptcy Procedures and Support
for a Fresh Start.” , Final Report for Directorate General Enterprise and
Industry (2011) (available at
http://ec.europa.eu/enterprise/policies/sme/business-environment/files/second\_chance\_final\_report\_en.pdf)

[19]             Nunez-Lagos, A., ‘The scenario and trends’, available
at http://www.eir-reform.eu/uploads/papers/PAPER%206-2.pdf,
p. 143.

[20]             A Second Chance for Entrepreneurs, Prevention of
Bankruptcy, Simplification of Bankruptcy Procedures and Support for a Fresh
Start

[21]             ibid.

[22]             ibid.

[23]             Full decision available at www.insolvencycases.eu .

[24]             Denmark (1984); France (1989); Finland (1993), Sweden
(1994), Austria (1993), Germany (enacted 1994 but not in force until 1999),
Belgium (1998), Netherlands (1997), Luxembourg (2000), England and Wales
(2002), Portugal (2004), Latvia (2008) (based partly on English model of
individual voluntary arrangement), Czech Republic (2008), Slovakia (2006),
Slovenia (2008), Poland (2009), Greece (2010) (based partly on German model),
Italy (2012), Ireland (on-going). Ramsay, I., ‘Between Neo-Liberalism and the
Social Market: Approaches to Debt Adjustment and Consumer Insolvency in the
EU’, EUI Working Papers 2011/09, available at http://cadmus.eui.eu/bitstream/handle/1814/18255/2011\_09.pdf?sequence=1
(accessed on 17 August 2012), p. 5.

[25]             Personal insolvency proceedings of AT, BE, CZ, DE, LV,
NL, PL and UK are covered in the EIR but some of these Member States have not
included all proceedings allowing a debt discharge of natural persons in the
annex, e.g. the Dutch schuldsaneringsregeling and the UK debt relief
orders and debt management plans are not covered. The personal insolvency
proceedings of EE, EL, FI, FR, IT, LT, LUX, PT, SK, SL and SV are currently not
covered in the Regulation; the EIR does not apply to DK. Moreover, some Member
States which have included personal insolvency schemes in the annex have not
included all their schemes.

[26]             Van Galen, R., ‘The European Insolvency Regulation and
Groups of Companies’, INSOL Europe       Annual Congress, October 2003, p. 2.

[27]             This approach began in England and was adopted by
courts in Member States such as France, Germany, Hungary and Italy, cf Christoph Paulus, Group Insolvencies – Some thoughts about new approaches, Texas
International Law Journal, vol 42, p. 819, 822.

[28]             The Regulation provides that the law applicable to the
insolvency proceedings and, in particular, the ranking of creditors is the law
of the State where proceedings are opened, i.e. usually the place of the
company's registered office. If proceedings are opened in a different country,
e.g. that of the parent company, creditors are faced with different rules than
those on which they based their risk assessment when entering into commercial
relations with the subsidiary.

[29]             Case C-341/04 Eurofood IFSC Ltd, 2006, at para
30.

[30]             See e.g. the decision of the High Court in Daisytek,
16.5.2003.

[31]             E.g. Nortel

[32]             See Bob Wessels, Multinational Groups of companies
under the EC Insolvency Regulation: Where do we stand, 2009 at www.bobwessels.nl; Alain Stomel, Answering
the call of the European Court of Justice in Eurofood, IES Working Paper
10/2011; Nicolaes W.A. Tollenaar, Proposal for Reform: Improving the ability to
rescue multinational enterprises under the European Insolvency Regulation, IILR
2011, p. 252.

[33]             A legislative guide on the treatment of enterprise
groups in insolvency was only adopted in 2010.

[34]             Estimates by Creditreform; see Annex 6 for details.

[35]             2007 Eurobarometer survey, for details see Annex XXX.

[36]             Internationalisation of European SMEs, EIM, report for
DG Enterprise and Industry.

[37]             GHK/Milieu report

[38]             GHK/Milieu report

[39]             Denmark is not counted because the EIR does not apply
to Denmark.

[40]             Exact figures exist for FI, FR, ES, SV and the UK. Given that only some UK schemes are covered by the EIR, only half of the UK personal insolvencies were counted. For the remaining five countries, the median rate of
12603 personal insolvencies was taken.

[41]             Cf Recital 13.

[42]             Asked whether the interpretation of the term COMI by
case-law causes problems in practice, a small majority of national reporters of
the Heidelberg/Vienna study answered in the affirmative. Most of those
answering in the negative did so because they were unable to report cases on
COMI from their jurisdiction, LT, LUX, MT, HU, SL, RO, NL (cf answers to
Question 7).

[43]             It has notably been argued that the assessment of
multiple factors required by the Court of Justice to determine COMI (e.g. in
CJEU C-396/09, judgment of 20.10.2011 Interedil Srl, para 53; C-341/04,
judgment of 2.5.2006 Eurofood, para 33-36) requires a complex analysis
which is prone to diverge between courts.

[44]             The EIR does not contain an express obligation for the
court opening insolvency proceedings to investigate the international
jurisdiction, although the CJEU held repeatedly that this obligation follows
from the system of the EIR.

[45]             CFEU, Case C-217/97, judgement of 9.3.1999, Centros
Ltd.

[46]             E.g. the companies Deutsche Nickel and Schefenacker
where COMI was shifted from Germany to the UK by way of a transfer of assets
and liabilities, thereby allowing the companies to apply for an English company
voluntary arrangement (CVA). The moves were vital for the survival of the
companies because the English CVA allowed a debt for equity swap and the
release of guarantees without which the group was were likely to have
collapsed, see Webb and Butler, p. 39; in the Damovo and Wind Hellas cases,
COMI was shifted from Luxemburg to the UK in order to benefit from the English
possibility of a pre-packaged administration sale.

[47]             This situation is likely to change with the
introduction of a new law on personal insolvency in Lithuania.

[48]             Decision of 29.8.2012 by Judge Purle QC, High Court,
Chancery Division, Birmingham District Registry, [2012] EWHC 2432 (Ch).

[49]             The English pre-packaged administration sale (or
prepack) is a procedure by which a company is put into administration and where
the administrators, immediately following their appointment, sell the business
and its assets under a sale that was arranged with their knowledge prior to
their formal appointment. The central appeal of a pre-pack lies in its speed
and its ability to preserve the value of the business because the sale of
solvent parts of the business can take place before the financial and
reputational damage that results from prolonged insolvency can occur.

[50]             Judgment by Justice Newey, High Court of Justice,
Chancery Division, Companies Court, 18.1. 2011, [2011] EWHC 15 (Ch).

[51]             The most recent example are the Global Principles for
Cooperation in international insolvency cases from the American Law Institute
and the International Insolvency Institute, elaborated by Ian Fletcher and Bob
Wessels (2012).

[52]             Other examples include Local Court (AG) Koln 6/11/2008, 487/07, NZI 2009, 133; AG Nürnberg 15.8.2006 and 1.10.2006

[53]             County Court Croydon 21/10/2008 1258/08, NZI 2009, 136

[54]             Albanese; Campagnano and Vitiello v Italy App no 77924/01, 77955/01 and 77962/01 (ECtHR 23

[55]             CA Bordeaux (Mankowski) 3/1/2011 No. 09/04655, IILR
2012, 72.

[56]             GHK/Milieu report.

[57]             Irit Mevorach, Jurisdiction in Insolvency: A study of
European Courts' Decisions, Journal of Private International Law 2009, p. 327,
352. The study analysed 104 decisions from several EU countries from 2002 until
2009.

[58]             For example Poland and the Czech Republic.

[59]             Anna Hrycaj

[60]             In this case, the court found that a German national
who had moved to France 5 years before his financial difficulties , had built a
house there and whose daughter had been entirely educated in France, had
genuinely relocated to France (CA Colmar, 19 May 2009, see Heidelberg study,
French country report (Cuniberti), Question 9.

[61]             GHK/Milieu report, p. 17; given that the majority of
foreign petitioners were German, the development has been commented as a “quiet
invasion” of German nationals petitioning for their own bankruptcy in England
and Wales; Walters and Smith, Bankruptcy tourism under the EC Regulation on
Insolvency Proceedings: A view from England and Wales.

[62]             Henry McDonald, ‘Irish Dodge Debts through UK ‘bankruptcy tourism’ The Guardian (Sunday 27 May 2010) (available at: http://www.guardian.co.uk/world/2012/may/27/irish-dodge-debts-uk-bankruptcy-tourism)

[63]             GHK/Milieu report,

[64]             These Member States are: AT, CZ, FI, DE, HU, LV, NL, PL, PT, RO, SI and SE. SK has established a register as a pilot project; the UK has a division of registers between Scotland, North Ireland and England and Wales. Information available in the E-justice portal: https://e-justice.europa.eu/content\_insolvency\_registers-         110-en.do
.

[65]             GHK/Milieu report,

[66]             The e-justice portal is intended
to be a “one-stop shop” in the area of justice, providing information and
improving access to justice throughout the EU.

[67]             Such a scheme is being developed for example by the
French association of liquidators and insolvency practitioners.

[68]             Directive 2008/94/EC of the European Parliament and of
the Council of 22.10.2008 on the protection of employees in the event of
insolvency of their employer, OJ L283, 28.10.2008, p.36.

[69]             Communication from the Commission: Commission work
programme 2012, delivering European renewal.

[70]             Wymenga P. et al, ‘Are EU SMEs
recovering from the crisis? Annual Report on EU Small and Medium sized
Enterprises 2010/2011’, Report for the European Commission, DG Enterprise and
Industry, available at http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/performance-review/files/supporting-documents/2010-2011/annual-report\_en.pdf (last accessed on 9 July 2012).

[71]             Note that the statistics in the
report mentioned in Wymenga P. et al, ‘Are EU SMEs recovering from the crisis?
Annual Report on EU Small and Medium sized Enterprises 2010/2011’ include NACE
Rev. 1.1., sections C to K thus exlcluding agriculture, forestry, fishing,
education, health, etc. ibid, p. 5, footnote 1.

[72]             ibid, p. 7 – 8.

[73]             ibid, p. 8.

[74]             Internationalisation of
European SMEs’, EIM, Report for DG Enterprise and Industry available at http://ec.europa.eu/enterprise/policies/sme/market-access/files/internationalisation\_of\_european\_smes\_final\_en.pdf, p. 23.

[75]             Around
7% of SMEs in the EU are involved in technological cooperation with a foreign
partner, another 7% are subcontractors to a foreign partner and 7% more have
foreign subcontractors. Some 2% of SMEs are active in foreign direct
investment. Most exports and imports by SMEs remain within Europe. See also
‘Internationalisation of European SMEs’, 2010:

[76]             Creditreform ‘Insolvencies in Europe, 2011/12’, available at https://www.uc.se/download/18.782617c713603ab70837ffd368/Europa\_statistik\_konkurser\_2011.pdf, p. 3.

[77]             Ibid, p. 31

[78]             ibid , p. 15. Enterprises are
considered to be active in foreign direct investment if they have foreign
establishments (subsidiaries, branch offices, joint ventures).

[79]             This estimation is based on
data from the 2010/2011 Annual Report on EU Small and Medium sized Enterprises
(20,796,192 SMEs in the EU-27 \* 2%).

[80]             Ibid, p. 21-22.

[81]             Ibid, p. 38

[82]             Eurobarometer – Observatory of
European SMEs 2007, see footnote 5, p.58.

[83]             Credit Reform – Insolvencies in Europe 2011/12; https://www.uc.se/download/18.782617c713603ab70837ffd368/Europa\_statistik\_konkurser\_2011.pdf

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