In a judgement here, published on 30 August 2007, Judge Burton Lifland in the US Bankruptcy Court (Southern District of New York) declined to recognise the Cayman Islands provisional liquidations of two Bear Stearns' Hedge Funds as foreign main proceedings.

Although registered in the Cayman Islands, the two companies' Centres of Main Interest were in the USA so the provisional liquidations could not be main proceedings.

Neither could they be foreign non-main proceedings as neither company had an establishment in the Cayman Islands.

The decision specifically uses the UNCITRAL Model Law and the European Insolvency Regulation to interpret the provisions of Chapter 15 of the US Bankruptcy Code. It also disagrees with parts of the Sphinx decision. Eurofood is cited.

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Does the appointment of a schwacher vorläufiger Insolvenzverwalter (a “weak” preliminary administrator) under German law normally entail the partial or total divestment of the debtor as set out in Article 1(1) of the European Insolvency Regulation?

I had understood from various German sources that it did not, and that therefore such an appointment would not normally constitute insolvency proceedings under the Regulation. Moreover, this is not an uncommon English view. In Hans Brochier Ltd vs Exner ([2006] EWHC 2594 (Ch)), Warren J found, although the point was not argued, that

"It is common ground [between the parties, one of whom is of course a German administrator] that under German law there is a preliminary appointment. . . . The German proceedings are therefore not open for the purposes of the Regulation”.

In the unreported decision of MG Rover Deutschland GmbH (in administration) (Chancery Division (Birmingham District Registry) 14 August 2006), coincidentally the day before the Brochier hearing, Norris HHJ held that the appointment of a preliminary administrator did not commence (in this case secondary) insolvency proceedings in Germany. Again, this was common ground between the parties, including the German administrator, but was not argued before the court. Allen & Overy’s commentary Duplicate officeholders - too many cooks spoil the broth? notes that the German court had held that the appointment opened preliminary secondary proceedings, a concept for which the Regulation does not provide.

The Eurofood ECJ decision addresses the question of opening of proceedings, but adds to the current debate by interpreting “divestment” (see below, emphasis added):

"52. As the Commission of the European Communities has argued, it is necessary, in order to ensure the effectiveness of the system established by the Regulation, that the recognition principle laid down in the first subparagraph of Article 16(1) of the Regulation, be capable of being applied as soon as possible in the course of the proceedings. The mechanism providing that only one main set of proceedings may be opened, producing its effects in all the Member States in which the Regulation applies, could be seriously disrupted if the courts of those States, hearing applications based on a debtor's insolvency at the same time, could claim concurrent jurisdiction over an extended period.

"53. It is in relation to that objective seeking to ensure the effectiveness of the system established by the Regulation that the concept of 'decision to open insolvency proceedings' must be interpreted.

"54. In those circumstances, a 'decision to open insolvency proceedings' for the purposes of the Regulation must be regarded as including not only a decision which is formally described as an opening decision by the legislation of the Member State of the court that handed it down, but also a decision handed down following an application, based on the debtor's insolvency, seeking the opening of proceedings referred to in Annex A to the Regulation, where that decision involves divestment of the debtor and the appointment of a liquidator referred to in Annex C to the Regulation. Such divestment involves the debtor losing the powers of management which he has over his assets. In such a case, the two characteristic consequences of insolvency proceedings, namely the appointment of a liquidator referred to in Annex C and the divestment of the debtor, have taken effect, and thus all the elements constituting the definition of such proceedings, given in Article 1(1) of the Regulation, are present.”

I have recently heard it suggested that since, when appointing a schwacher vorläufiger Insolvenzverwalter, the German insolvency court will routinely restrict the debtor’s powers to deal with its assets, giving such powers instead to the preliminary administrator, such an appointment will entail at least partial divestment of the assets.

It seems likely to me that the only viable approach to this issue is to consider the German court’s order in each case to ascertain whether there has been the partial or total divestment required by Article 1(1) for insolvency proceedings to have been opened for the purposes of the Regulation, but I would welcome opinions from those who know more about German insolvency law and practice than I do.

Can you answer the question?

Does the appointment of a schwacher vorläufiger Insolvenzverwalter under German law normally entail the partial or total divestment of the debtor as set out in Article 1(1) of the European Insolvency Regulation?

Or these supplementaries?

• Is this a straightforward point depending on the order given by the insolvency court in each case?
• If so, is there a normal scope for such orders, which stops short of divestment?
• Or is it a question of interpretation - does Vermögensbeschlag have the same connotations as divestment?
• And does the Eurofood decision’s clarification of divestment assist in answering the question? 

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The famous decision on COMI (Centre of Main Interests) and the opening of main insolvency proceedings under the European Insolvency Regulation, which involved an Irish subsidiary of the Italian Parmalat group, is not the easiest to find quickly on the internet, so here's the link:

Eurofood IFSC Ltd, European Court of Justice Case C-341/04, Judgement of the Court (Grand Chamber), 2 May 2006

and here's the preceding Advocate General's Opinion:

Opinion of Advocate General Jacobs, 27 September 2005

For a selection of commentaries, try the following links:

• eir-database.com: Commentary on Case C-341/04
• A&L Goodbody (solicitors for the Irish Provisional Liquidator): Eurofood ECJ Decision - Guidelines on COMI
• Weil, Gotshal & Manges (lawyers acting for the Italian Extraordinary Administrator): European Court of Justice Establishes Approach for Determining Debtor's Center of Main Interests
• Linklaters: Eurofood - the ECJ ruling on the determination of COMI
• Freshfields Bruckhaus Deringer: The Eurofood IFSC Case

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The UNCITRAL Model Law on Cross-Border Insolvency should enhance cross-border assistance for non-EU officeholders and creditors in British insolvency proceedings.

Introduced in England and Wales, and Scotland, on 4 April 2006 it was first applied in the English High Court on 23 November 2006 in Re Rajapakse (unreported) when a US Chapter 7 Trustee sought the court's assistance to recover assets in England.

Cooperation in cross-border insolvency proceedings within the EU is governed by the European Insolvency Regulation.

Chapter 15 of the US Bankruptcy Code similarly introduces the UNCITRAL Model Law into US law.

Richard Howard's post Global Bankruptcy Mutual Assistance addresses the question in relation to Great Britain by outlining the core provisions of The Cross-Border Insolvency Regulations 2006.

We address foreign creditors' rights in the UK in a previous post here, and you can find out more about the UNCITRAL Model law here.

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A version of this article first appeared in Recovery, Autumn 2004.

A little knowledge is a dangerous thing, and I hope this outline doesnít over-encourage practitioners to be too cavalier about exercising powers abroad pursuant to Article 18 of the European Insolvency Regulation!

We are all encountering foreign debtors and creditors more frequently and my aim is to give a quick guide about what to expect when you follow rule number one of cross-border insolvency work: seek specialist advice.

General similarities between insolvency regimes across Europe include the approval by creditors and/or the court of a plan following a moratorium in proceedings equivalent to court-appointed administration. Matters such as notice periods and voting rights vary and the differences are too detailed to cover here. Most jurisdictions also have a solvent liquidation procedure similar to a membersí voluntary liquidation, as well as a court (compulsory) liquidation procedure.

Belgium

Two main procedures:

• Bankruptcy (equivalent to compulsory liquidation)

• Judicial composition (debtorís petition; relatively rare; equivalent to court-appointed administration and incorporating a 6ñ9 month moratorium and a reorganisation plan)

Two other main types of insolvency appointment:

• Provisional liquidator

• Ad hoc representative (a confidential, pre-insolvency appointment, similar to a mandataire ad hoc in France)

Close supervision of the proceedings by the commercial court covering the debtorís registered office.

Germany

A ësingle gatewayí system where filing is mandatory (criminal sanctions for breach)within three weeks of cash flow insolvency; reorganisation filing is possible on grounds of ëimminent illiquidityí.

Provisional administrator on the local court list is appointed on filing; Insolvenzgeld (money for wages) paid by the state to the provisional administrator out of a levy on employers whilst the Insolvenzplan is prepared.

Three main procedures;

• Administration (not common and often leads to liquidation)

• Self-administration (very rare ëGerman Chapter 11í originally intended for small businesses and professional practices, but has been used, with an IP appointed to the main board, in some major restructurings)

• Liquidation

Frequently, the provisional administration is concluded (with the agreement of the secured creditors) with a business and asset sale, leaving the corporate shell to be wound up.

The Amtsgerichte (lower courts), which deal with minor criminal and civil matters including insolvency, have a very procedural system with judges who are generally somewhat younger and less experienced than we might be used to in the High Court and where academic commentaries rather than judicial precedent are followed.

Ireland

Comparatively similar to the UK with a system originating from the English Companies Act 1908, but revised in 1963 and from 1990 to 2001.

Liquidation:

• Voluntary (equivalent to creditorsí voluntary liquidation and similarly the most common procedure)

• Official (equivalent to compulsory liquidation)

• Provisional (which is recognised as liquidation for the purposes of the European Insolvency Regulation)

Receivership (equivalent to administrative receivership).

Examinership (equivalent to court-appointed administration but with a degree of debtor-in-possession).

The courtsí role and involvement is similar to the UK and (unlike all other European jurisdictions) IPs are generally accountants rather than lawyers.

Italy

Based on the Bankruptcy Act 1942; changes are under review.

Three main types of procedure:

• Bankruptcy (equivalent to compulsory liquidation ñ most common)

• Judicial moratorium or ëcontrolled administrationí (debtorís petition; moratorium only; exits are return to full solvency or bankruptcy; limited application; expensive; rare)

• Composition with creditors (some similarities to a company voluntary arrangement; also rare)

Very large companies may use the extraordinary administration procedure (often politically and administratively driven to avoid job losses or economic instability), the best known example of which, Parmalat, involved a tailored variation that was specially enacted ñ the Manzano Decree).

Strong local court involvement in all insolvencies.

Netherlands

Two procedures (system subject to review and may change in future):

• Bankruptcy (equivalent to compulsory liquidation)

• Moratorium (some similarities to courtappointed administration; debtor petitions; can file on prospective insolvency; enterprise run jointly by debtor and administrator; doesnít affect secured and preferential creditors; usually exited by liquidation)

Bankruptcy is often used to achieve a going concern sale of business and assets to overcome the provisions of the acquired rights directive (ie TUPE), which do not apply to Dutch liquidations.

Moratorium is often used as a defence to a bankruptcy petition, over which it takes precedence.

Court involvement is relatively limited after the appointment.

Spain

New law came into effect on 1 September 2004 replacing (for new cases) a variety of 19th and 20th century statutes.

The single framework with a specialist court system has two entry procedures:

• Voluntary (initiated by the debtor on current or imminent insolvency)

• Obligatory (within two months of actual insolvency)

The administration team ñ a lawyer, an accountant and a creditor ñ manage the company, report to the court and prepare a plan leading to:

• Restructuring; or

• Liquidation

The court is closely involved in the appointment, the creditorsí meeting, approving the plan and the procedure generally.

Scotland

A reminder of some of the principal differences between Scots and English insolvency law:

• Brumark and Spectrum Plus have never been an issue in Scotland where there is no fixed charge on book debts

• Court and provisional liquidations are more common than in England ñ the courts deal with petitions and hearings much more quickly

• There is no official receiver in Scotland (although the accountant in bankruptcy has some similar roles, particularly in relation to sequestration ñ ie bankruptcy)

• There are many legal nomenclature and procedural differences due to the general distinctions between Scots and English law

• Personal insolvency is devolved to the Scottish Executive so, unlike the corporate provisions, the personal insolvency provisions of the Enterprise Act do not apply north of the border.

Conclusion

This article hints at some of the differences between European insolvency regimes, most of which are too detailed or too deeply embedded in each countryís culture and legal history to describe briefly. But importantly it also emphasises the overall similarities, particularly amongst those jurisdictions whose insolvency regimes have been subject to recent revision.

In practice, assets and liabilities, profits and losses, and even the fundamentals of doing business may be similar, but local knowledge and local advisers are the key to resolving cross-border insolvency problems. Very often itís not what you know but (in the nicest possible way) who you know that counts.

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