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ECJ's ruling on the opening of secondary insolvency proceedings under the Insolvency Regulation - Cross Border Restructuring and Insolvency Update - September 2014

In Burgo group SpA v Illochroma SA (in liquidation) - [2014] All ER (D) 114 (Sep), the European Court of Justice ("ECJ") considered the impact of Council Regulation (EC) No 1346/2000 of 29 May 2000 ("Insolvency Regulation") when opening secondary insolvency proceedings.

The ECJ has ruled that courts of a member state may apply their own national laws and discretion when deciding whether to open secondary proceedings under the Insolvency Regulation. However the conditions for opening secondary proceedings must not be discriminatory on the grounds of nationality, place of residence or registered office.

The ECJ also decided secondary proceedings could be opened in a member state where the debtor had an establishment and its registered office in that state but not its COMI.

Article 3(2) of the Insolvency Regulation provides that where main proceedings have been opened in one member state, secondary proceedings may be opened in another member state where the debtor has an establishment. The effects of the secondary proceedings shall be restricted to the assets of the debtor situated in the territory of that member state.

Under Article 28, the law applicable to the secondary proceedings is that of the member state where the secondary proceedings are opened.

Article 29 provides that the opening of secondary proceedings may be requested by the Liquidator in the main proceedings or by any other person or authority empowered to request the opening of insolvency proceedings under the laws of the member state of the secondary proceedings.

Illochroma was the subject of main insolvency proceedings in France. The company had been incorporated in Belgium and had its registered office there. An Italian creditor, Burgo Group, sought to commence secondary proceedings in Belgium.

The Belgian court referred these issues to the ECJ for a preliminary ruling, and requested clarification on whether the opening of secondary proceedings could be subject to discretions of the relevant member state court under its national laws.

The ECJ ruled that a company having its registered office in one member state, but its COMI in another, does not prevent secondary proceedings being opened in the member state of the registered office.

The ECJ ruled that Article 29 had to be interpreted by considering which person or authority was empowered to seek the opening of secondary proceedings and should be determined on the basis of the national laws of that member state. The right to seek the opening of secondary proceedings could not, however, be restricted to creditors who had their domicile or registered office within that member state, or to creditors whose claims arose from the operation of that establishment.

This ruling reiterates that secondary proceedings should not be regarded as purely local in purpose or outlook: local law and court discretion may apply and be exercised, but these must be neither discriminatory nor exercised in a discriminatory manner.

The court noted that secondary proceedings protect a diversity of interests, and not merely local interests, and may serve different purposes besides the mere protection of local interests. It noted that member states must not impose conditions in relation to the opening of secondary proceedings which are contrary to the principles of EU law such as non-discrimination and sincere cooperation.

New guidelines to aid cross-border cooperation in EU insolvency proceedings

The final draft of the EU Cross-Border Insolvency Court-to-Court Co-operation Principles and Guidelines ("Guidelines"), which will be rolled out on a trial basis, has been released. It has the aim of introducing a standard set of guidelines for use in the framework of the EU Insolvency Regulation.

The creation of the Guidelines seeks to build on the existing development of "judicial comity" to increase communication and the cooperation of courts and liquidators in the administration of estates involving the same debtor or parallel proceedings. The creation of the Guidelines is considered as a development in keeping with the EU's aims of ensuring harmonised rules for business rescue.

The project that created these non-binding Guidelines was funded by the European Commission and the International Insolvency Institute, and came about after the need for improved cross-border communication was highlighted in recent cases such as Lehman Brothers. Careful attention was paid to maintaining consistency with other guidelines previously developed such as the Global Guidelines for Cooperation in International Cases, created in 2012, which have been cited in judgments handed down by the Supreme Court of England and Wales and The United States Court of Appeals for the Third Circuit.

The 18 Guidelines tailored for use within the EU are now ready to be rolled out on a trial basis and a selection of EU Judges will receive training on their trial implementation.

The Guidelines' principal aim is to develop court-to-court communication and coordination, to take into account litigants' legitimate interests, and to decrease costs while increasing the efficiency and effectiveness of the administration of cross border insolvency cases. The Guidelines, while not legally binding, will introduce practical solutions to provide a consistent framework for such communication, most likely in the form of protocols or best practices. Such guidance is intended to be of particular interest to those Member States whose dealings with the Insolvency Regulation are in their infancy, and where court systems vary in resources available or where understanding of the impact of insolvency rulings on international business is low.

Spanish Insolvency reform underway following significant review

On 5 September, Spain passed new legislation amending the existing Insolvency Act, effective immediately. The primary amendments are to arrangements made between debtors and creditors which aim to rescue a business and allow continued trading, and to liquidations. Modifications include removing the limit of a maximum of 50% reduction in overall debt, and the limit of a 5 year moratorium. Where an insolvent business is sold there is now an automatic subrogation on the purchaser to the insolvent company's contractual position. The significant amendment from the creditor's perspective is the classification of 'privileged creditors' which allows majorities within each class of creditor to outvote dissenting creditors in the same class.

Italian court upholds U.S. ruling on Parmalat damages to Citibank

An Italian court has upheld a U.S. ruling for Italy's Parmalat to pay Citibank damages in a case relating to the bankruptcy over a decade ago. Parmalat collapsed as a result of a €14b accounting hole and claimed that Citibank had been involved in those irregularities. The Superior Court of New Jersey ruled that Parmalat was to pay Citibank damages of $431m for false statements and fraud. Citibank sought recognition of the U.S. ruling in Italy and the Bologna Court of Appeal have recognised this ruling.

All monies legal charges - Ashwood Enterprises Ltd v The Governor and the Company of the Bank of Ireland

The Bank of Ireland loaned £27m to Inis Development Limited which was used to develop a property held by Inis's directors on trust for Ashwood. The loan was secured with an all monies third party legal charge over the property. The Bank extended further loans totalling £10m to Inis, unrelated to the property, for which Ashwood argued that the all monies charge did not secure. The English High Court held that a reasonable person, with all the background knowledge reasonably available at the time the charge was executed, would have understood the parties to have intended it to extend to all the liabilities to the bank and not to confine them to the £27m facility.

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