A guide to cross-border insolvencies

This article was first published by The Gazette on 28 January 2015, the full article can be found online here.

Imagine that you run a business supplying mobile phones to an international market.

ABC & Co (ABC) is a Romanian customer with a registered office in Bucharest, but which also has a number of warehouses in England, Wales and the US. You supplied stock worth £500,000 to ABC, but it is in financial difficulty, and has entered an insolvency proceeding in Romania.

Which rules govern how your debt will be dealt with?

The Insolvency Regulation

Council Regulation (EC) No 1346/2000 (the Insolvency Regulation) has been effective in England, Wales and Romania (and elsewhere) since 31 May 2002. It states that insolvency proceedings can be opened by the courts of an EU member state in which a debtor has its centre of main interests (COMI). For ABC, its COMI is presumed to be Romania, because its registered office is located there. These proceedings are known as ‘main proceedings’.

An office holder appointed in Romania will be able to exercise all the powers conferred on him by Romanian legislation in England and Wales. Therefore, they may realise the assets in the warehouses located in England or Wales and make distributions to creditors.

However, once main proceedings have been opened, it is possible to open secondary or territorial proceedings in another member state. As ABC has a number of warehouses in England and Wales, it would be possible to open secondary or territorial proceedings there in order to realise assets located there. With secondary or territorial proceedings open in England and Wales, the insolvency legislation of these countries applies, which may make available more familiar legislation for creditors, compared with legislation of other member states.

Prior to the opening of main insolvency proceedings in any member state, the right to open proceedings in a state in which the debtor has an establishment (territorial proceedings) is limited to local creditors, or where main proceedings can’t be opened under the law of the member state where the debtor’s centre of main interest lies. The debtor must possess an establishment within the territory of the state in which the territorial proceedings are opened, so their effects are restricted to those assets situated in that state.

The respective office holders in the main and secondary or territorial proceedings have a duty under the Insolvency Regulation to communicate and cooperate with each other. 

Model Law

In England and Wales, the Cross-Border Insolvency Regulations 2006 gave effect to the UNCITRAL Model Law on Cross-Border Insolvency (Model Law). A number of other countries, including Romania, are also signatories, and have given effect to the Model Law in their own jurisdiction. Given that there are assets in the US, a signatory to the Model Law, a liquidator appointed in Romania, may, pursuant to the Model Law, apply to the US courts for recognition of the Romanian proceedings as foreign main proceedings.

The Model Law provides, as a result of the recognition, an automatic stay on any proceedings commenced against the debtor's assets, execution on those assets, or any transfer of those assets located in the US. In other words, the debtor's assets are protected for the liquidator so that they can be realised, and appropriate distributions made to creditors.

The recognition of the proceedings may also enable the Romanian liquidator to use US insolvency legislation to maximise returns to creditors.

Section 426 Insolvency Act 1986

Suppose that ABC was in Australia. The courts in Australia, along with a number of principally Commonwealth countries, are able to apply for assistance from the courts in England and Wales pursuant to Section 426 of the Insolvency Act 1986. The courts tend to lend support wherever possible, and have a wide discretion to assist the foreign insolvency office holder to deal with assets and claims in cross-border insolvencies.

Common law

In the event that you are aware of assets located in another country to which the above does not apply, and any insolvency proceedings that have been opened have not realised those assets for the benefit of creditors, the courts may have a common law jurisdiction to assist.

The courts tend to apply the principle of modified universalism; that is, that there should only ever be one primary insolvency proceeding in relation to a debtor into which all creditors make their claims. However, if that proceeding is not resulting in a just outcome for creditors, the court may intervene to protect the interests of local creditors.

So as complex as the law on cross-border insolvencies can be, bear in mind that the English and Welsh insolvency regime provides many avenues to achieve the best results for both debtors and creditors.