THE NEW INSOLVENCY REGULATION IN A SMALL

NUTSHELL

A brief summary of the recast European Insolvency Regulation by Eberhard Nietzer as a supplement to his presentation at the meeting of the International Insolvency Institute’s Judicial Committee on June 17, 2017, in London.

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THE NEW INSOLVENCY REGULATION IN A SMALL

NUTSHELL – INFORMATION FOR THE READER

(1) Links: All text formatted blue and underlined includes links. The link targets on the “Table of Contents” slide are slides within this presentation. The link targets on the other slides are websites.

(2) Abbreviations used in this presentation:• WA = Whereas (referring to the whereas clauses at the beginning of the

European Insolvency Regulation)• Art. = Article (referring to articles of

(EIR))• ECJ = European Court of Justice• MS = Member State

(3) Terminology: Unless indicated otherwise, the terminology in this presentation corresponds to the terminology used in the EIR (e.g. “insolvency practitioner”)

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THE NEW INSOLVENCY REGULATION IN A SMALL

NUTSHELL – TABLE OF CONTENTS

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I. SCOPE

1. The new regulation entered into force on June 26, 2015, and applies to all proceedings opened as of June 26, 2017 (Art. 84 and 92).

2. Personal Scope:Debtors whose COMI is located within the EU (WA 25), regardless if the debtor is an individual or an entity, a businessperson or a consumer (WA 9).

3. Territorial Scope:European Union not including Denmark, not limited to merely EU-internal sets of facts, however (

4. Article 1 determines the substantive scope.

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I. SCOPE (ART. 1)

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Judicial or administrative collective proceedings including interim proceedings that are based

on laws relating to insolvency or the adjustment of debt.

Objectives:

Rescue, adjustment of debt, reorganization or liquidation.

Alternative 1

The debtor is totally or partially divested of its assets and an insolvency practitioner is

appointed.

Alternative 2

The assets and affairs of a debtor are subject to control or supervision by a court.

Alternative 3

A temporary stay of individual enforcement proceedings is granted by a court or by operation

of law, in order to allow for negotiations between the debtor and its creditors, provided that

the proceedings in which the stay is granted provide for suitable measures to protect the

general body of creditors, and, where no agreement is reached, are preliminary to one of the

proceedings referred to in alternatives 1 and 2.

II. INTERNATIONAL JURISDICTION (ART. 3)

Main proceedings with the court of COMI

Definition of COMI (Art. 3 (1) sentence 2): The center of main interests is the place where the debtor conducts the administration of its interests on a regular basis and which is ascertainable by third parties ( )

The relevant moment for determining COMI is when the petition is received by the court ( ).

COMI is presumed to be where the registered office (of a legal entity) or the principal place of business (of a self-employed individual) or the habitual residence (of any other individual) is located. Example for the Rebuttal of the Presumption: ECJ in

(marginal numbers 52 and 53)

Suspect periods 3 or 6 months.

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II. INTERNATIONAL JURISDICTION (ART. 3)

Effects of the opening of proceedings at the location of COMI:

•EU-wide universal scope for main proceedings

(WA 23, Art. 20 (1))

•Principle of Recognition (Art. 19)

•International jurisdiction also includes annex proceedings

(actions deriving directly from insolvency proceedings and closely

linked with them, Art. 6, WA 35).

•Definitions: “opening judgment” Art. 2 (7), “time of the opening”

Art. 2 (8)

•Conditions and formalities for “opening” determined by national

law of the MS ( [link target is an analysis by the ABI])

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II. INTERNATIONAL JURISDICTION (ART. 4, WA 27)

Irrespective of the presumption laid down in Art. 3, the court is to examine sua sponte whether the center of the debtor's main interests is within its jurisdiction.This obligation of the court takes effect as soon as the petitioner has submitted all the facts establishing the international jurisdiction of the court having received the petition.The court has discretion on how to perform this examination.WA 32: The court may require additional evidence to corroborate the alleged international jurisdiction and hear the creditors if its domestic law so permits.German law, for example, permits the court to question eyewitnesses and expert witnesses.Art. 4 (1) sentence 2 constitutes an obligation of the court to explain the basis of its international jurisdiction.

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II. INTERNATIONAL JURISDICTION (ART. 5)

Judicial review of the decision to open main insolvency proceedings “on grounds of international jurisdiction”.

Such review may be requested by the debtor and by the creditors.

As the regulation is silent on the details of that review process, those details are to be determined by the law of the Member State where the petition is filed.

Example: The German

(link target is a German explanation of the act)

provides under § 4 that the debtor and each creditor may file a special type of

appeal within 2 weeks.

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II. INTERNATIONAL JURISDICTION (ART. 3)

Conflicting Claims of Jurisdiction

WA 65 clarifies that the decision by the first court should be recognized in the other Member States automatically and without being reviewed. WA 65 in conjunction with Art. 19 establish the principle that the opening of insolvency proceedings by a court of a Member State with jurisdiction pursuant to Article 3 is recognized in all Member States.

This principle is also represented in Art. 3 (3) which provides that all proceedings opened after the first proceeding are secondary proceedings.

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II. INTERNATIONAL JURISDICTION (ART. 3)

Conflicting Claims of Non-jurisdiction:

If the court of a Member State has negated its jurisdiction in a decision, that decision is automatically recognized pursuant to Art. 32. Example in German Law:

If the court of another Member State has declined to open insolvency proceedings claiming that the German courts had international jurisdiction under Art. 3 (1), a German insolvency court is not permitted to dismiss the petition on the basis of claiming that the courts of that other Member State had jurisdiction (

for the old regulation, Art. 102c § 2 (2) German Insolvency Code Introductory Act for the new regulation).

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II. INTERNATIONAL JURISDICTION (ART. 6)

So-called “Annex Proceedings”

The term is not defined, avoidance actions are mentioned as an example, however.

Guidelines for defining supplementary proceedings can be found in the Whereas provisions:

WA 16: Proceedings which are based on “laws relating to insolvency”

WA 35: “Actions concerning obligations that arise in the course of the insolvency proceedings, such as advance payment for costs of the proceedings” are considered to be supplementary proceedings, while “actions for the performance of the obligations under a contract concluded by the debtor prior to the opening of proceedings” are not.

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II. INTERNATIONAL JURISDICTION

EIR - BRUSSELS I REGULATION

provides that this regulation does not apply to insolvency proceedings.Criterion for Distinction between Proceedings Based on Law Relating to Insolvency and Other Proceedings: Does the action immediately arise from the insolvency proceedings or is it closely connected to those proceedings?Case Law by the ECJ:

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II. INTERNATIONAL JURISDICTION

EIR - BRUSSELS I REGULATION

Three criteria for treating a proceeding as insolvency-specific can be carved out of this case law as follows:

•The transaction in question is not only made occasionally or at the periphery of an insolvency but has a legal basis within the realm of insolvency law proper.

•The transaction in question is based on general legal principles of private law (e.g., avoidance) that have been modified by specific provisions of the respective applicable insolvency laws.

•The transaction strives at improving the position of all of the creditors.

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III. APPLICABLE LAW (ART. 7 – 18)

Basic Principle (Art. 7)

The laws of the Member State in which the proceedings are opened govern the insolvency proceeding and its effects (subsection 1) and determine the requirements under which the proceedings are opened, carried out, and closed (subsection 2).

Rights in rem, set-off rights and other constellations of cases mentioned in Art. 8 - 18 are exempt from the effects of the insolvency proceedings, however.

The gist of these articles is that rights in rem and security interests as well as some contractual rights are under certain conditions not affected by the opening of the insolvency proceedings.

Art. 18 provides that the effects of the insolvency proceedings on pending litigation and arbitration are exclusively determined by the laws of the MS in which the litigation or arbitration is pending.

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IV. SECONDARY PROCEEDINGS

(ART. 34 ET SEQ.)

A Secondary proceeding is a territorial proceeding opened after the main proceeding has been

opened.

Art. 37 Standing to File a Petition for Secondary

Proceedings:

• Insolvency practitioner of the main proceeding

• Individuals and government agencies authorized

to do so under the laws of the Member State in

which the petition for secondary proceedings is to

be filed.

Requirements: Establishment of the debtor (Art. 3 (2) in conjunction with Art. 2 (10)): non- transitory economic

activity with human means and assetsand a minimum degree of organization (ECJ Interedil)

The effects of the secondary proceeding are limited to the assets situated in the Member State in which the

proceeding has been opened (Art. 34 sentence 3). The generally unionwide-universal effects of the main

proceeding are invalidated to the extent covered by the effects of the secondary insolvency proceeding.

If the debtor’s insolvency was required for the main proceeding to be opened, the judge in charge of the

secondary proceeding does not re-examine whether the debtor is insolvent (Art. 34 sentence 2).

Art. 35 provides that the secondary proceedings are governed by the laws of the Members State in which

these proceedings have been opened.

All creditors, not only the local creditors in terms of Art. 2 (11), are permitted to file claims in the secondary

proceedings (Art. 45).

As German law requires that the costs and expenses of the proceedings be covered by the debtor’s assets, a

German court may require the petitioner to pay the costs in advance (Art. 41).

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IV. SECONDARY PROCEEDINGS

Examples of advantages and disadvantages:

•The sale of an active business as a going concern may become complicated.

•The sale of a business as a whole under the main proceedings may be frustrated by the liquidation of an establishment under the secondary proceedings.

•Secondary proceedings may serve as a bar against attempts by individual secured creditors to seize collateral located outside the territory of the Member State in which the main proceedings have been opened.

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IV. (SYNTHETIC) SECONDARY PROCEEDINGS

Basis: Rover II Decision by the High Court of Justice, Birmingham

Two ways to avoid secondary proceedings:

• Undertaking by the insolvency practitioner of the main proceeding pursuant to Art. 36 (1) to honor

the distribution and priority rights creditors would have relative to assets located in the Member State in which secondary proceedings could be opened

if secondary proceedings had been opened in that Member State

when distributing those assets or the proceeds obtained by liquidating those assets.

• Temporary stay of the opening of secondary insolvency proceedings not exceeding three months.

If no secondary proceedings are opened as a result of an undertaking pursuant to Art. 36, that status is described as synthetic or virtual secondary proceedings.

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IV. (SYNTHETIC) SECONDARY PROCEEDINGS

Formal Requirements:•Official Language of the MS in which SP could have been opened (Art. 36 (3))

•Written form (Art. 36 (4))

Required Prior Consent (Example Germany):•The German Act on the Implementation of the EIR provides in § 11 that the insolvency practitioner shall not give such an undertaking without prior consent of the creditors’ committee or the interim creditors’ committee if the undertaking constitutes a particularly important transaction (provided such a committee has been established).

Required Subsequent Approval•The undertaking is subject to the approval by the local creditors (Art. 36 (5))

•The approval process is governed by the laws on qualified majority and voting that apply to the adoption of restructuring plans under the law of the Member State where secondary insolvency proceedings could have been opened, in Germany, e.g., the provisions regarding the voting on insolvency plans ( ). § 17 of the German Act on the Implementation of the EIR provides that the voting process is moderated by the insolvency practitioner of the main insolvency proceedings.

ConfirmationJudicial confirmation of the undertaking is not required by the EIR itself. Local laws may require such consent, however. If a majority cannot be achieved without a cram down, a German insolvency practitioner needs confirmation by a German court.

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IV. (SYNTHETIC) SECONDARY PROCEEDINGS

Legal Consequences of the (approved and, thus, binding) Undertaking

•The undertaking is a bar to petitions for secondary proceedings unless the petition is made within thirty days of receipt of the notice that the undertaking has been approved, Art. 37 (2).

The court having received a petition for secondary proceedings is to immediately notify the insolvency practitioner of the main proceedings thereof.

Thus, that insolvency practitioner can file a motion under Art. 38 (2) to avoid a secondary proceeding.

Judicial Considerations when Ruling on Such a Motion:

Is the extent to which the creditors are satisfied after the debtor’s assets in the MS in which secondary proceedings could be opened have been distributed or liquidated close to what they would have received if secondary proceedings had actually been opened there?

When making that comparison, the judge should take into account that the undertaking has been approved by a qualified majority of the local creditors.

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IV. (SYNTHETIC) SECONDARY PROCEEDINGS

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Additional Legal Consequences of the Undertaking

Art. 36 (2)

Sentence 1

With regard to the assets located in the MS in which secondary

proceedings could have been opened, the law of that MS governs

• the distribution of the proceeds from the liquidation of those

assets

• the ranking of the claims

• the rights of the creditors with regard to items pertaining to the

estate

Art. 36 (7)

Sentence 1

The insolvency practitioner is to notify the creditors in advance of the

intended distribution.

Art. 36 (7) in

connection with Art.

36 (1) sentence 1,

and Art. 36 (2)

sentence 2

The above only applies to assets located in the MS in which

secondary proceedings could have been opened at the time when

the undertaking was given.

IV. (SYNTHETIC) SECONDARY PROCEEDINGS

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Additional Legal Consequences of the Undertaking

Art. 36 (2)

Sentence 2

The point in time at which the undertaking is given determines which items are

affected by the undertaking.

How are items to be treated that were removed from the territory of the MS in

which secondary proceedings could have been opened before the undertaking

was given?

Absent any article providing otherwise, such items are no longer a part of the

partial insolvency estate of the synthetic secondary proceedings.

WA 46: The insolvency practitioner in the main proceedings should not be in a position to

improperly liquidate or relocate assets situated in the Member State where an

establishment is located.

Therefore, the liquidation or relocation of items that would have become a part of

the partial estate of the synthetic secondary proceedings can only be given

consideration if the insolvency practitioner violated his duties by such liquidation

or relocation. Accordingly, Art. 36 (10) provides that the insolvency practitioner is

(only) liable for damages to local creditors resulting from non-compliance with the

obligations and requirements set out in Art. 36.

IV. (SYNTHETIC) SECONDARY PROCEEDINGS

Opening of Secondary Proceedings in Spite of an

UndertakingThe insolvency practitioner of the main proceeding can request judicial review

of the decision to open secondary proceedings if he can show that the court

did not observe the conditions and requirements of Art. 38. Alternatively, he

can request that a different type of proceeding listed in Annex A is opened

instead of the type of proceeding requested originally.

The EIR does not provide for judicial review of a decision to dismiss a petition

for secondary proceedings because an undertaking has been given. Local

laws may provide for such review, however.

The insolvency practitioner of the main proceedings has to surrender items to

the insolvency practitioner of the secondary proceedings which he has

removed from the territory of the MS in which secondary proceedings have

been opened after having given an undertaking (Art. 36 (6)).

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IV. (SYNTHETIC) SECONDARY PROCEEDINGS

Compliance with the Terms of the Undertaking (Art. 36 (7) - (10)).•Notification of the local creditors of the intended distribution

•If the intended distribution is inconsistent with the terms of the undertaking or applicable law, the local creditors may challenge that distribution before the courts of the MS in which the main proceedings were opened.

•Local creditors may resort to the courts of the MS in which the main proceedings were opened and pray that the court take all suitable measures available under the laws of the MS in which the main proceedings were opened to guarantee that the insolvency practitioner of the main proceedings comply with the terms of the undertaking.

•Local creditors may resort to the courts of the MS in which secondary proceedings would have been opened to guarantee compliance with the terms of the undertaking by interim measures or preservation measures.

•The insolvency practitioner of the main proceeding is liable for damages resulting from non-compliance with his obligations and requirements within the meaning of Art. 36. International Jurisdiction: The courts of the MS in which the main proceedings have been opened.

•The undertaking itself cannot be used to directly enforce claims. Only the decisions made by the courts establish the basis for the enforcement of claims.

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IV. SECONDARY PROCEEDINGS: SPECIAL POWERS OF THE

INSOLVENCY REPRESENTATIVE OF THE MAIN PROCEEDING

Please use my presentation on the Special Powers of the Insolvency Practitioner in the Main Insolvency Proceedings

for this topic by clicking the link below:

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V. INSOLVENCY PROCEEDINGS OF MEMBERS OF

A GROUP OF COMPANIES

• Definition of the term “group of companies” in Art. 2 (13) (parent company and all subsidiaries)*

• Definition of the term “parent company” in Art. 2 (14) (company directly or indirectly controlling one or more subsidiaries + reference to )

• No procedural consolidation with one court. Exception: WA 53 (COMI of all companies is in one MS)

• No substantive consolidation, i.e., no joint proceeding over the assets of several entities and no consolidation thereof in one estate.

• These rules only apply to cross-border insolvencies of members of a group of companies (WA 62).

* The EIR uses the terms "parent undertaking" and "subsidiary undertaking"

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V. INSOLVENCY PROCEEDINGS OF MEMBERS OF

A GROUP OF COMPANIES

Cooperation between insolvency representatives and courts

•Insolvency representatives: Art. 56

•Courts: Art. 57

•Insolvency representatives and courts: Art. 58

These provisions are structural and linguistic replica of the provisions on the duties of cooperation

and communication between the insolvency representatives in the main proceedings and

secondary proceedings.

•Costs: Art. 59

•Rights of the insolvency practitioner in proceedings over the assets of other group members: Art.

60

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V. INSOLVENCY PROCEEDINGS OF MEMBERS OF

A GROUP OF COMPANIES

Group Coordination Proceedings Art. 61 et seq.•Close coordination of the individual proceedings for the purpose of an effective reorganization of the entire group (WA 54).

•Standing to apply: Each insolvency practitioner in a proceeding over the assets of a group member (Art. 61 (1)).

•Priority principle (the first application received by a court is relevant, Art. 62), exception: choice of forum agreement pursuant to Art.

66.

•Each insolvency practitioner may raise objections against the inclusion of “his” proceedings into the coordination proceedings and

against the individual proposed as a coordinator (Art. 64).

If such objections are raised, that proceeding is not included in the coordination proceedings.

•The court notifies the insolvency representatives appointed in proceedings over the assets of group members if

•the court holds that the coordination proceedings are practical,

•no creditors of any member of the group are adversely affected by the inclusion of the proceeding into the coordination proceedings

•and if the proposed coordinator meets the requirements provided in Art. 71. The court decides whether group coordination

proceedings are opened after the period of 30 days for objections (Art. 64 (2)) has expired (Art. 68).

•The coordinator is the pivotal person. This person needs to be qualified to hold the office of an insolvency representative under the

laws of any respective MS and must not himself have been appointed an insolvency practitioner in any of the related proceedings over

the assets of members of the group of companies (Art. 71). Moreover, a person with any conflict of interest with regard to any party

involved in any of the related proceedings (group members, their creditors, and appointed insolvency representatives) is not eligible as

a coordinator.

•Core Responsibilities of the Coordinator (Art. 72):

Recommendations for the coordinated conduct of the proceedings

Submission of a coordination plan with recommendations for the insolvency representatives on a package of measures to

resolve the group members’ insolvencies.

•Art. 74 demands that the insolvency representatives and the coordinator cooperate and communicate with each other.

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VI. COOPERATION AND COMMUNICATION

Please use my presentation

on the subjects of coordination, cooperation, and communications by clicking the link below:

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VII. INSOLVENCY REGISTERS AND PUBLICATIONS

• The MS are required to establish electronic insolvency registers networked at European level (Art. 24, 25).

• This information is to be easily accessible on the European e-Justice Portal.

• Objective:Information of commercial tradeEU-wide efficient provision of information for courts on opened main and

territorial proceedings in order to avoid parallel proceedings.

• Publication is only mandatory in cross-border cases. One foreign creditor qualifies a proceeding as cross-border.

• Publication only in the official languages of the MS making the publication

• The search engine to be provided must warrant, however, that the information can be found in all official languages of the European Union.

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VII. INSOLVENCY REGISTERS AND PUBLICATIONS

• Reconciliation of the public interest to find information and of data protection interests of individuals or entities. In particular with regard to consumers, the MS may give more weight to data protection interests:

• Options:• Access to information can be subject to additional search

criteria (Art. 27 (3)).• Access can be made conditional on the verification of a

legitimate interest (Art. 27 (4)).• MS may exempt information on consumers from publication on

the internet (Art. 24 (4).• Despite the implementation of insolvency registers networked

across the EU, the traditional publication methods are maintained to the extent provided in Art. 28 and 29.

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END OF PRESENTATION

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