Finance

Definition of Insolvency Proceedings

Definition of Insolvency Proceedings

Definition of Insolvency Proceedings

When an individual or organization can no longer meet its financial obligations with its lender or lenders as debts become due. Insolvency can lead to insolvency proceedings, in which legal action will be taken against the insolvent entity, and assets may be liquidated to pay off outstanding debts.

 Purpose of the Regulation

The main purposes of the Regulation are to impose rules governing the jurisdiction in which an insolvency proceeding in the EU can be opened and subsequently administered, and to set rules for the recognition in other member states of those insolvency proceedings and the enforcement of those proceedings.

The Regulation will have no practical effect on the vast majority of cases dealt with by official receivers unless the debtor has any affairs in other EU countries.  This does not mean that the Regulation will not apply to those cases – it will apply by virtue of the fact that the debtor’s centre of main interests (see Part 5) is in England and Wales- which is, of course, within the EU.

Before the Regulation came into force, the ability of a liquidator or trustee in bankruptcy to recover assets situated in other EU member states was subject to the voluntary co-operation of third parties or by pursuing the claim through local courts.  The Regulation guarantees that qualifying insolvency proceedings (see paragraph 41.15) will be recognised automatically, and that the powers of a liquidator (see paragraph 41.12) appointed under main insolvency proceedings (see paragraph 41.25) will be enforceable in all EU member states, provided no territorial or secondary proceedings (see paragraph 41.26) have been, or are, opened in that state.

Definitions

To have a proper understanding of the provisions of the Regulation it is necessary for certain terms contained within the text to be defined.  These are covered inparagraphs 41.10 to 41.16.  The language and terms used by the Regulation will be more familiar to official receivers as those used in dealing with a company winding-up by the court (for example, liquidation covers the realisation of the assets of both bankrupts and companies).

 Definition of insolvency proceedings

“Insolvency proceedings” are defined as collective proceedings which entail the partial or total divestment of a debtor and the appointment of a liquidator (see paragraph 41.12) [note 1] [note 2].

In respect of proceedings opened in the UK these are:-

  • winding up by or subject to the supervision of the court,
  • creditors’ voluntary liquidation (where the proceedings have been confirmed by the court – see Part 3),
  • administration,
  • voluntary arrangements under insolvency legislation and
  • bankruptcy or sequestration proceedings.

The full list of foreign insolvency proceedings to which the term can be applied can be found in Annex A to the Regulation [note 3].

It should be noted that the Administration of the Insolvent Estate of a Deceased Person is considered to be included under the reference to “Bankruptcy and Sequestration”.

a Winding-up in the public interest not considered ‘insolvency proceedings’ for the purposes of the Regulation

It has been held that a winding-up in the public interest (see Chapter 2, Part 1) is not an insolvency proceeding to which the Regulation would apply.  This is because a winding-up in the public interest was not conditional on the company being insolvent and, since the scope of the Regulation is confined to insolvency proceedings, it does not apply to winding-up proceedings brought on public interest grounds [note 3a].

 Definition of winding up proceedings

The Regulation defines “winding-up proceedings” as the collective proceedings which entail the partial or total divestment of a debtor and the appointment of a liquidator and which involve realising the assets of the debtor [note 4].  For the UK, these are:-

  • winding up by or subject to the supervision of the court,
  • creditors’ voluntary liquidation (where the proceedings have been confirmed by the court– see Part 3),  and
  • bankruptcy or sequestration.

The full list of foreign insolvency proceedings to which the term can be applied can be found in Annex B to the Regulation [note 5].

Definition of liquidator

In the context of the Regulation, the term “liquidator” means any person or body whose function is either to administer or liquidate the debtor’s assets or administer his/her affairs [note 6].  Therefore, for the purpose of this chapter the term liquidator can be taken to include liquidators, administrators, trustees, official receivers, assignees and supervisors of voluntary arrangements in respect of insolvency proceedings opened in the UK.  The full list of foreign office holders to whom the term liquidator may be applied is in Annex C to the Regulation [note 7].

 Definition of court

For the purpose of the Regulation, the term “court” can have a much wider meaning than that to which it typically applies in the UK.  Covered under the definition of “court” are the judicial body or any other competent body of a member state empowered to open insolvency proceedings or to take decisions in the course of such proceedings.  So, for example, the meeting of creditors which approves a voluntary arrangement can be a “court” for the purposes of the Regulation [note 8].

Definition of Establishment (amended March 2010)

“Establishment” is defined in the Regulation as any place of operations where the debtor carries out a non-transitory economic activity with human means and goods[note 9]; in other words, a physical place of business.

The word “goods” should be considered to have a wider meaning than normal.  It has been held that the use of the word “goods” in the English version of the Regulation may be due to a mistranslation of the French word “biens” or German word “vermogenswerten”, which can mean land as well as chattels.  Each language version of the Regulation is equally authoritative, so it is likely that courts would read the word “goods” as “assets” [note 9a].

Scope of application of the Regulation

The Regulation applies to collective insolvency proceedings which entail the partial or total divestment of a debtor and the appointment of a liquidator.  The types of proceedings in the UK to which the Regulation applies are outlined in paragraph 41.10.  It may also include cases where an administrator has been appointed out of court [note 10].

It should be noted, though, that the Regulation does not apply to receivership (which is not a collective procedure) or to members’ voluntary or public interest winding up (which are not based on the insolvency of the company).

Additionally, it does not apply to insolvency proceedings concerning insurance undertakings, credit institutions, investment undertakings which provide services involving the holding of funds or securities for third parties, or to collective investment undertakings.  The reason that the Regulation does not apply to these type of businesses is that not only are they often the subject of special national regulatory rules, but the sector is also the subject of a separate programme of rules harmonisation by the EU [note 11].

 Commencement of the Regulation

The Regulation came into force on 31 May 2002 [note 12] and applies only to insolvency proceedings opened after its entry into force.  The Regulation has no retrospective effect; the reference to proceedings being opened is to the time when the proceedings take effect.  The point at which proceedings take effect has been the subject of much debate and the matter has not as yet been tested in court.  It is likely that the date of the commencement of the proceedings will be the date provided for in the legislation of the relevant member state [note 13].

Application of the Regulation – jurisdiction of opening of proceedings

The Regulation [note 14] states that the courts of the member state within the territory of which the centre of the debtor’s main interests (“COMI”) (see Part 5) is situated shall have jurisdiction to open insolvency proceedings – and, therefore, dictate the law under which the proceedings are to be conducted (see paragraphs 41.25and 41.34).

Where the debtor’s COMI is situated within the territory of a member state, the courts of another member state have jurisdiction to open proceedings against that debtor only if the debtor possesses an establishment (see paragraph 41.14) within the territory of that other member state (these are referred to a secondary or territorial proceedings – see paragraph 41.26 for more information).

The aim of these provisions of the Regulation is that any person who has a financial relationship with a business or an individual can have certainty as to the law under which any related insolvency proceedings will be conducted, and can take decisions based on that knowledge.

 Application of the Regulation – recognition of insolvency proceedings

The Regulation [note 15] states that any judgement opening insolvency proceedings handed down by a court of a member state shall be recognised in all the other member states from the time that it becomes effective in the state in which proceedings were opened.

The purpose of this part of the regulation is to ensure compulsory and automatic recognition of all insolvency proceedings opened under the Regulation, with the result that the liquidator (see definition in paragraph 41.12) may take effective and speedy action to secure and protect assets of a debtor in another member state and minimise potential losses to creditors.

The recitals to the Regulation

In common with other Regulations issued by the European Union, the EC Regulation on Insolvency Proceedings has a preamble (referred to as the “Recitals”) that sets out the background, context and aims of the Regulation, and provide what may be termed as “explanatory notes”.

Insolvency Proceedings