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When courts collide

Barrister Michael McParland explores European insolvency proceedings after Bank Handlowy.

Insolvency

An ECJ judgement at the end of 2012 has rather slipped under the radar  but anyone involved in cross-border insolvency needs to take note.  Fundamental issues about cross-border insolvency and what happens when proceedings emanate from different member states clash have been highlighted in the case of  Bank Handlowy w Warszawie SA, PPHU ‘ADAX’/Ryszard Adamiak v. Christianapol sp. z o.o. 

 

Disgruntled creditors

 

A corporate restructuring taking place in one country can be wrecked by foreign insolvency proceedings that pursue a different objective, for example a business turnaround versus liquidation. Within Europe, the Insolvency Regulation (EC) No.1346/2008 was intended to prevent such clashes happening by co-ordinating the measures to be taken regarding an insolvent debtor’s assets and preventing forum shopping by disgruntled creditors looking for more favourable treatment.
But can the Courts of a Member State still wind-up an insolvent company as part of secondary proceedings, when  the main proceedings in another Member State are focussed on corporate rescue and keeping the company in business? This was the key issue which was examined in the case.

 

In Bank Handlowy, rescue proceedings (procédure de sauvegarde) under the French Commercial Code had been opened in France in respect of a Polish company. This company was a wholly-owned subsidiary of a German company, which in turn was 90% owned by a French company. It seems most, and perhaps all, of the company assets were in Poland. Despite this, insolvency proceedings had been opened in France on the basis that the company had its centre of main interests (‘COMI’) there.
Under French law, the purpose of sauvegarde proceedings is to permit the financial restructuring of a company, to allow ‘the undertaking to carry on its business [poursuite de l’activité économique de l’entreprise], to save jobs [maintien de l’emploi] and to settle liabilities [apurement du passif].’

 

Rescue plan

 

The Commercial Code emphasises that such proceedings ‘shall give rise to a plan decided on by judgment at the end of a period of observation’.  The French court approved a rescue plan for the company under which its debts would be paid off in instalments over 10 years, and prohibited the transfer of the company and certain assets in Poland. The French court had also appointed a person to oversee the implementation of the rescue plan (commissaire à l’exécution du plan).
Following this, a Polish bank creditor of the company applied to the Polish courts for winding-up proceedings to be opened against the company as part of secondary proceedings brought under Article 27 (1) of the Regulation which provides that:

 

Insolvency proceedings

 

‘The opening of the proceedings referred to in Article 3(1) by a court of a Member State and which is recognised in another Member State (main proceedings) shall permit the opening in that other Member State, a court of which has jurisdiction pursuant to Article 3(2), of secondary insolvency proceedings without the debtor’s insolvency being examined in that other State. These latter [insolvency] proceedings must be among the proceedings listed in Annex B. Their effects shall be restricted to the assets of the debtor situated within the territory of that other Member State.’
Article 27 clearly allowed ‘secondary insolvency proceedings’ to be issued in Poland, restricted to the company’s assets there. Given that all assets were in Poland, this could affect everything. But could the Polish court wind the company up?
The European Court held, as the wording of Article 27 indicates, the Polish court could not examine whether the company was insolvent, (which would be a necessity if they were going to wind it up). Questions of insolvency were an issue for the French court conducting the main proceedings, and their decision was binding on the courts of other Member States.

 

Dominant role

 

The Court emphasised that the Regulation provides for a certain number of mandatory rules of coordination intended to ensure unity in the Community. Under the Regulation, the main proceedings had a dominant role in relation to the secondary proceedings. The liquidator in the main proceedings had certain prerogatives which allowed him to influence the secondary proceedings to ensure that the protective purpose of the main proceedings were not jeopardised. Under Article 33(1) of the Regulation, he could request an order for stay of the process of liquidation for up to three months, which may be continued or renewed for similar periods. Under Article 34(1), the liquidator could propose closing the secondary proceedings with a rescue plan, a composition or a comparable measure. Article 34(3) provides that, during the stay of the process of liquidation under Article 33(1) of the Regulation, only the liquidator in the main proceedings or the debtor, with the liquidator’s consent, may propose such measures.

 

Winding up

 

With the absence of express guidance in the Regulation, the Court thus decided the issue on the basis of the ‘principle of sincere cooperation’ laid down in Article 4(3) of the Treaty Establishing the European Union. This principle required the Polish court opening secondary proceedings to ‘have regard to the objectives of the main proceedings and to take account of the scheme of the Regulation, which … aims to ensure efficient and effective cross-border insolvency proceedings through mandatory coordination of the main and secondary proceedings guaranteeing the priority of the main proceedings.'

As a result, the subtle (but clear) direction to the Polish court was that their secondary proceedings must respect the objectives of the French main proceedings. No winding up could follow that direction. Clash resolved.
 


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Posted by:

Michael
McParland

30 May 2013

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