Cross Border Restructuring and Insolvency Update - May 2015

Re Olympic Airlines SA

The Supreme Court considered the meanings of "economic activity" and "establishment" under article 2(h) and 3(2) of Regulation 1346/2000. An English Court could only open secondary insolvency proceedings in respect of a foreign company which had its Centre Of Main Interests in another Member State if it was conducting business activities in the UK which extended to dealing with third parties and did not merely consist of acts of internal administration.

Olympic Airlines SA ("the Company") was wound up on 2 October 2009 by the Athens Court of Appeal. The Company was the principal and sole employer in a pension scheme ("the Scheme") which was wound up when the Company entered Liquidation. However, there was a deficit of £16m in the Scheme which the Company was bound to make good under the Pensions Act 1995. On 20 July 2010, the Trustees of the Scheme ("the Appellants") presented a winding up petition against the Company in England on the grounds that the Company was unable to meet this liability (in order that the Scheme could qualify for entry into the Pension Protection Fund under section 127 Pensions Act 2004.) A prerequisite of entry was that a "qualifying insolvency event" must have occurred, which at this time meant the opening of insolvency proceedings in the UK. Therefore, the question arose as to whether the English Courts had jurisdiction to commence secondary insolvency proceedings. The answer centred on the meanings of "economic activity" and "establishment" under Regulation 1346/2000 on Insolvency Proceedings.

Whether an English Court has jurisdiction under section 221 Insolvency Act 1986 to wind up a foreign company which has its COMI in another EU Member State depends upon the application of Article 3(2) of Regulation 1346/2000. In order to have jurisdiction, the debtor must possess an "establishment" within the territory of the Member State which seeks to open insolvency proceedings. This is defined within Article 2(h) as "any place of operations where the debtor carries out a non-transitory economic activity with human means and goods".

The Company had a number of offices in the UK but, at the date of presentation of the petition, only its former head office in London was still occupied by the Company. In September 2009, it had ceased flight operations and on 14 July 2010, the employment contracts of UK members of staff were terminated, except for three members of staff who were retained on short term ad hoc contracts. The responsibilities of the General Manager and Finance and Purchasing Manager were largely to assist the Greek Liquidator with the winding up of the UK branch.

The English High Court was satisfied that the Company's UK activities could qualify as "non-transitory economic activities" for the purposes of the definition of "establishment". However, the English Court of Appeal overruled the decision, finding that the economic activity had to involve more than just activities relating to the winding up of the Company. Subsequently, the Pension Fund (Entry Rules) (Amendment) Regulations 2014 amended the Pensions Act 2004 to the effect that the Scheme would qualify for entry into the Pension Protection Fund five years after the commencement of the primary proceedings (i.e. 2 October 2014). The  Appellants however, sought to establish that the qualifying insolvency event took place at an earlier date due to the potential liability of the Appellants to pay back overpaid benefits to the Pension Protection Fund. They therefore had to establish that the English Court had jurisdiction to wind up the Company in 2010.

After an analysis of the preceding case law and the 1996 Vergos-Schmidt Report, the Court found that Article 2(h) must be read as a whole and the relevant activities must be (i) "economic", (ii) "non-transitory", (iii) carried on from a "place of operations" and (iv) using the debtor's assets and human agents. This suggested that there had to be a fixed place of business, and the carrying on of a business activity consisting of external dealings with third parties, rather than just internal administrative activities. The "mere internal administration of its winding up" would not qualify where the company was no longer carrying on business.  The Court held that in this case the Company did not have an "establishment" in the UK for the purposes of Article 3(2). It was not carrying on business activities in the UK at the relevant date, and the staff who were retained in the London branch were merely assisting with internal administrative matters in preparation for the winding up of the Company.

This case highlights the need to demonstrate some external business activity with third parties for the purposes of demonstrating "establishment" under Regulation 1346/2000, and therefore jurisdiction under S221 Insolvency Act 1986.

Lutz v Bäuerle [2015] EUECJ C-557/13

The ECJ clarified the interpretation of Article 13 of the EC Regulation on Insolvency Proceedings ("the Regulation") in relation to actions to set aside a transaction.

Mr Lutz purchased a car from a German company, trading through an Austrian subsidiary, which was never delivered. Mr Lutz brought proceedings in Austria for reimbursement and an enforceable payment order was issued against the Company. The Company subsequently applied to the German Court to open insolvency proceedings. The Austrian Court later authorised Mr Lutz to enforce the payment order and attached three of the Company's Austrian bank accounts after the Company had entered into insolvency proceedings in Germany. Payments were made to Mr Lutz by the Austrian bank. The Liquidator brought a claim against Mr Lutz to set the transaction aside and recover the sums paid.

Article 4 of the Regulations provides that the law of the Member State where the insolvency proceedings are opened applies, amongst other matters, in relation to "claw back" proceedings.

Article 13 provides an exception to this where the defendant to the "claw back" proceedings can show:-
1) The act which is the subject of the "claw back" proceedings is subject to the law of a Member State other than that of the State of the opening of proceedings;
2) That law does not allow any means of challenging that act in the relevant case.

Relying on Article 13, Mr Lutz argued the Liquidator's claim had not been made within the appropriate time limit, as Austrian law provides for a statute of limitation of one year to bring an action to void a transaction, which had already expired. German law provided for a three year limitation period, and the claim had been brought in that time.

The ECJ decided the right to attach bank accounts by virtue of the enforceable payment order constituted a 'right in rem' within the meaning of Article 5, which was established before the opening of the insolvency proceedings and as such could benefit from special protection. The ECJ further explained that creditors' and third parties' legitimate expectations before the opening of an insolvency proceeding in a Member State other than where the insolvency proceeding is opened, have to be protected. As such, creditors and third parties have the right to use all defences (substantive or procedural) available under the law governing the action being challenged. 

The ECJ ruled that:

1. Article 13 provided a defence, even though the payment challenged by the Liquidator was made after the main insolvency proceedings had been opened.

2. Article 13 must be interpreted as meaning that the defence also applies to limitation periods or other time-bars relating to actions to set aside transactions under the law governing the act challenged by the liquidator.

3. The relevant procedural requirements for an action to set a transaction aside are to be determined, for the purposes of the application of Article 13, according to the law governing the act challenged by the liquidator.

As such, Mr Lutz's defence succeeded and the Liquidator was time barred from bringing his claim. This case provides useful clarity on the application of Article 13, and insolvency office holders looking to challenge actions with a cross border element should be aware of the applicable foreign laws before seeking to set aside such a transaction.

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