Restructuring and Insolvency in European Union (EU) 2024

Restructuring and Insolvency in European Union (EU) 2024 – The EU Supreme Court

RESTRUCTURING AND INSOLVENCY 2024

EUROPEAN UNION

Charlotte Ausema, Juliette Willems, Marvin Knapp, Susanne Hoerrmann

(Freshfields Bruckhaus Deringer)

GENERAL

Legislation

1. What main legislation is applicable to insolvencies and reorganizations?

The European Union is a unique economic and political partnership among 27 European countries that together cover much of the continent. The first step towards forming the European Union was the creation of the European Economic Community in 1958, which covered six countries: Belgium, France, Germany, Italy, Luxembourg and the Netherlands. Since then, a huge single market has been created and continues to develop.

The following countries are currently members of the European Union: Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain and Sweden. The United Kingdom left the European Union on 31 January 2020 and entered into a transition period that ended on 31 December 2020. Since 1 May 2021, a Trade and Cooperation Agreement between the European Union and the European Atomic Energy Community, on the one hand, and the United Kingdom of Great Britain and Northern Ireland, on the other hand, has been in force.

The agreement comprises, among other things, a free trade agreement with close cooperation in the economic, social, environmental and fisheries areas, and an overarching governance framework.

At EU level, there are a number of different legislative frameworks in operation in the insolvency context, but by far the most important is the Recast Regulation on Insolvency Proceedings (Regulation (EU) 2015/848). It came into force on 25 June 2015 and became effective on 26 June 2017. The Recast Regulation replaced the EC Regulation on Insolvency Proceedings (Council Regulation (EC) No. 1346/2000) for insolvency proceedings opened after 26 June 2017.

The second piece of important legislation at EU level is Directive (EU) 2019/1023 (the Restructuring Directive). It was formally adopted on 20 June 2019 and came into effect on 17 July 2019. EU member states had to implement the Restructuring Directive within two years, that is, by July 2021 (although some member states were given a further year to implement the measures pursuant to paragraph 2, article 34 of the Restructuring Directive).

The Recast Regulation

The Recast Regulation applies to those insolvency proceedings commenced in a member state of the European Union (except for Denmark) on or after 26 June 2017 that are listed in Annex A to the Recast Regulation. The EC Regulation continues to apply to proceedings commenced before that date. The Recast Regulation does not seek to harmonize the substantive insolvency law of the different member states, but aims to establish common rules on cross-border insolvency proceedings, based on principles of mutual recognition and cooperation.

It distinguishes between two types of proceedings: main insolvency proceedings and territorial or secondary proceedings. Main proceedings are opened in the courts of the member state within the territory of which the debtor has its center of main interests (COMI). The Recast Regulation defines COMI as the place where the debtor conducts the administration of its interests on a regular basis and is ascertainable by third parties.

The Recast Regulation contains a rebuttable presumption that a company’s COMI will be the place of its registered office, in the absence of proof to the contrary. Where a company’s central administration is in a different member state to that of its registered office, and where a comprehensive assessment of all relevant factors establishes, in a manner that is ascertainable by third parties, that the company’s actual center of management and supervision and of the management of its interests, are located in that other member state, it should be possible to rebut the registered office presumption.

Under the Recast Regulation, where a company’s registered office has been shifted up to three months preceding the request to open the proceedings, the rebuttable presumption that the COMI is at the same place as the company’s registered office will no longer apply. Instead, evidence will need to be provided to demonstrate where the company’s COMI is located. In the case of Interedil Srl v Fallimento Interedil Srl and Intese Gestione Crediti SpA (Case C-396/09), the Court of Justice of the European Union (CJEU) confirmed that COMI must be interpreted in a uniform way by member states and by reference to EU law and not national laws.

The date on which a debtor’s COMI is decided is the date when the request to open the main proceedings is made (cf article 3(1) of the Recast Regulation). Any subsequent changes are therefore irrelevant. The CJEU held that the court of a member state with which a request to open main proceedings has been lodged retains exclusive jurisdiction to open such proceedings even if the debtor’s COMI is moved to another member state after that request has been lodged, but before that court has delivered a decision on it: cf Galapagos BidCo Sàrl v DE in its capacity as liquidator of Galapagos SA and others (Case C-723/20).

Main proceedings will encompass all of the debtor’s assets, regardless of where they are situated, and will affect all creditors.

Secondary and territorial proceedings can be opened in a member state other than the one where the debtor’s COMI is located, provided that the debtor has an ‘establishment’ in that jurisdiction. The Recast Regulation defines an establishment as a place of operations where the debtor carries out or has carried out a non-transitory economic activity with human means and assets in the three-month period before the request to open the main proceedings. Secondary proceedings can only be opened once the main proceedings have already been opened.

Territorial proceedings can be opened where the main proceedings have not yet been opened. Territorial proceedings can be opened in situations in which there are objective factors preventing the main proceedings from being opened, or where territorial proceedings in a particular member state are requested by a creditor whose claim arises from a debtor’s establishment in that member state or by a public authority that, under the law of that member state, has the right to request the opening of insolvency proceedings.

If the main proceedings are opened, existing territorial proceedings are converted into secondary proceedings. Both secondary and territorial proceedings are restricted to the assets of the debtor situated in the territory of that member state. The office holders in the main and secondary proceedings have a duty to communicate and cooperate with each other.

The Recast Regulation also includes the concept of ‘synthetic’ secondary proceedings whereby local creditors can be protected without the need for secondary proceedings to be commenced.

The Recast Regulation is confined to provisions that govern jurisdiction of insolvency proceedings and judgments that are delivered directly on the basis of insolvency proceedings and are closely connected with such proceedings. If an action is not closely connected with insolvency proceedings (even if brought by an insolvency office holder or against an insolvent company), different regimes may apply, such as Regulation (EU) No. 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the Brussels Regulation), which is a recast of Council Regulation (EC) No. 44/2001, and came into effect on 10 January 2015.

The Recast Regulation and the Brussels Regulation are designed to complement each other – with insolvency proceedings being specifically excluded from the ambit of the Brussels Regulation.

The Restructuring Directive

The three main aims of the Restructuring Directive are:

• to ensure that member states have a preventive restructuring framework – which includes a restructuring plan;
• to ensure that entrepreneurs have a second chance through an effective debt discharge mechanism; and
• to ensure that member states put measures in place to raise the efficiency of restructuring, insolvency and discharge of debt procedures more widely.

The Restructuring Directive’s objectives are to contribute to the proper functioning of the internal market and remove obstacles to the exercise of fundamental freedoms. It aims to ensure that viable enterprises and entrepreneurs in financial difficulties have access to effective national preventive restructuring frameworks that enable them to continue operating.

In many ways, the Restructuring Directive seeks to be the European Union’s answer to the US Chapter 11 procedure. However, much depends on how member states have implemented it, as the Restructuring Directive provides for a framework with a range of options only. Therefore, it is up to each member state to make the provisions fit national law and, in doing so, member states can also choose how far-reaching the provisions will be.

Excluded entities and excluded assets

2. What entities are excluded from customary insolvency or reorganization proceedings and what legislation applies to them? What assets are excluded or exempt from claims of creditors?

The entities that are excluded from customary insolvency proceedings, and the legislation applicable to such entities, differ between member states. However, the Recast Regulation does cater for certain exclusions under EU-level directives, as described in further detail below.

At the domestic level

It is common in many continental jurisdictions for customary insolvency proceedings not to apply to the insolvency or reorganization of individuals or entities acting in a personal, non-commercial capacity. To these, specific separate regimes will apply. By contrast, in other jurisdictions (e.g, Germany) any natural or legal person is subject to the customary insolvency and reorganization laws.

At EU level

The Recast Regulation does not apply to the winding up of credit institutions or insurance undertakings, which are instead governed by Directive 2001/24/EC (the Credit Institutions Directive), which entered into force on 5 May 2001, and Directive 2009/138/EC on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), which entered into force on 6 January 2010, with the rules becoming applicable on 31 March 2015.

The Credit Institutions Directive

The aim of this directive is to facilitate reorganizations of or, if not possible, the winding up of branches of the same credit institution as a single legal entity. The directive makes special provision for the single reorganization or winding up of a failed credit institution within the European Union to be commenced in the credit institution’s ‘home member state’. Unlike under the Recast Regulation, there is no scope for any independent or secondary proceedings.

Solvency II

Similar to the Credit Institutions Directive, the aim of this directive is to ensure that there is a single set of common rules to facilitate the activities of insurance companies throughout the member states, to ensure that these companies can survive in difficult periods and to protect policyholders. Insurance companies must comply with capital requirements in relation to their risk profiles to guarantee that they have sufficient financial resources to withstand financial difficulties. The rules on reorganizing and winding up insurance companies are set out in Title IV of Solvency II.

If an insurance company becomes insolvent, the decision to reorganize or wind up the company is made by the relevant authorities in the EU country where the insurance company is registered. The supervisory authorities must inform their counterparts in all other member states about the decision, including any practical implications. The relevant reorganization measures or winding-up proceedings are automatically effective and apply across the member states and to any other EU branch of the insurance company.

Public enterprises

3. What procedures are followed in the insolvency of a government-owned enterprise? What remedies do creditors of insolvent public enterprises have?

Each member state within the European Union has its own provisions for the insolvency of a government-owned enterprise; there is no harmonized system within the European Union. In several member states, provided the government-owned enterprise is a private limited company, there is no difference in procedure compared to the insolvency of a privately owned entity. The insolvency of a government-owned enterprise would fall within the scope of the Recast Regulation.

In some member states (e.g, Italy) public entities are exempted from insolvency, or insolvent companies owned by public agencies are not prevented from carrying on business, or both.

Protection for large financial institutions

4. Has your country enacted legislation to deal with the financial difficulties of institutions that are considered ‘too big to fail’?

There have been a number of legislative initiatives (in particular, after the onset of the global financial crisis of 2008) at EU level to attempt to provide more protection for large financial institutions and provide for a way that these could be rescued or reorganized in an orderly way. Set out below are the main pieces of legislation dealing with this topic. Various sector-based pieces of legislation complete the picture (e.g, rules on capital requirements).

The Financial Conglomerates Directive

The directive on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate (Directive 2002/87/EC), as amended (the Financial Conglomerates Directive), came into force on 11 February 2003 and introduced a prudential regime for financial conglomerates moving away from a purely sector-based approach to regulation and looking at systemically important institutions holistically. The directive provides for enhanced cooperation processes (including information sharing) between cross-sector and cross-border supervisors of financial conglomerates, including the appointment of a single lead regulator to act as coordinator and exercise supplementary supervision of each financial conglomerate. Also, the directive sets out supplementary capital adequacy requirements for certain entities within a financial conglomerate, as well as supplemental supervision of risk concentrations.

The Single Supervisory Mechanism and the Single Resolution Mechanism

In response to the Eurozone debt crisis, EU institutions agreed to establish a Single Supervisory Mechanism (SSM) and a Single Resolution Mechanism for banks, based on the EC roadmap for the creation of an EU banking union. The banking union applies to member states that are part of the Eurozone, but non-Eurozone member states can also join. As part of the initiative, Regulation (EU) No. 806/2014, which establishes uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms, and Council Regulation (EU) No. 1024/2013 (the SSM regulation) on the policy of prudential supervision on credit institutions were adopted.

The Bank Recovery and Resolution Directive

The European Union has put in place a framework for the recovery and resolution of credit institutions and significant investment firms that are considered to be ‘too big to fail’: Directive 2014/59/EU, as amended (the Bank Recovery and Resolution Directive or BRRD). The majority of the provisions of the BRRD entered into force on 2 July 2014.

The BRRD aims to provide national authorities with common powers and instruments to pre-empt bank and significant investment firm crises and resolve any financial institution in an orderly manner in the event of failure, while preserving essential bank operations and minimizing taxpayers’ exposure to losses. The BRRD establishes a range of instruments to tackle potential bank or significant investment firm crises at three stages:

• preparatory and preventive;
• early intervention; and
• resolution.

At the preparatory stage, the BRRD requires firms to prepare (and to annually update) recovery plans (also often referred to as ‘living wills’) and competent authorities to prepare resolution plans based on information provided by firms. The BRRD also reinforces authorities’ supervisory powers.

At the early intervention stage, the BRRD is intended to give powers to supervising authorities to take action to address upcoming problems. These powers include requiring a firm to implement its recovery plan (living will) and replacing existing management with a special manager.

At the resolution stage, the BRRD gives supervising authorities powers to ensure the continuity of essential services and to manage a firm’s failure in an orderly way. These tools include:

• a sale of (part of a) business;
• the establishment of a bridge institution (a temporary transfer of good assets to a publicly controlled entity);
• an asset separation (the transfer of impaired assets to an asset management vehicle); and
• a bail-in measure (the imposition of losses, with an order of seniority, on shareholders and unsecured creditors).

The sale of a business tool entails the sale of all or part of the failing entity to a private party. The bridge institution tool involves selling good assets or essential functions of the entity and separating them into a new bridge entity. The asset separation tool entails the bad assets of the firm being put into a ‘bad bank’ (this tool may only be used in conjunction with another resolution tool to prevent the failing entity from benefiting from an unfair competitive advantage).

The bail-in tool is effectively a process of internal recapitalization, whereby for instance certain eligible liabilities of the failing entity are canceled, written down or converted into equity, or the principal or outstanding amount of eligible liabilities is canceled or reduced (this does not apply to certain excluded liabilities such as financial collateral arrangements and liabilities to employees). The aim of the bail-in tool is to shift the costs of a failing entity from the taxpayer to the creditors and shareholders. The BRRD also requires member states to set up a resolution fund to ensure that the resolution tools can be applied effectively.

The BRRD provides several safeguards to protect the position of shareholders and creditors of a failed entity in the event that the resolution authority decides to use resolution tools. One of these is the ‘no creditor worse off’ principle. This principle means that the write-down or conversion of capital instruments of a failing entity, or the application of another resolution tool on a failing entity, may not result in its shareholders or creditors being worse off than they would have been had the entity been wound up under normal insolvency proceedings.

Compliance with this ‘no creditor worse off’ principle is assessed after the completion of the resolution phase. The resolution authority must appoint an independent third party that will assess whether shareholders and creditors are worse off. If that is the case, shareholders and creditors have the right to be compensated for their losses.

Recovery and resolution for non-banks

Regulation (EU) 2021/23 provides a framework for the recovery and resolution of central counterparties. It includes various measures that are aimed at reducing the risk and impact of a central clearing counterparty’s failure by providing national authorities with preventative and resolution tools to manage central clearing counterparties that are in or are approaching financial distress. The majority of the provisions entered into force on 12 August 2022.

Courts and appeals

5. What courts are involved? What are the rights of appeal from court orders? Does an appellant have an automatic right of appeal or must it obtain permission? Is there a requirement to post security to proceed with an appeal?

The rules in this context vary between member states. Under the Recast Regulation, main proceedings are to be opened by the courts of the member states in which the debtor has its COMI. Secondary or territorial proceedings are to be opened by the courts where the debtor has an establishment. Any restrictions are a matter for individual member states.

Under the Restructuring Directive, member states are to ensure that any appeal provided for by national law against a decision to confirm or reject a restructuring plan taken by a court is taken to a higher court. The appeal must not have a suspensive effect on the execution of the plan (although member states could provide that the court can order a suspension if necessary and appropriate to safeguard the interests of a party).

TYPES OF LIQUIDATION AND REORGANIZATION PROCESSES

Voluntary liquidations

6. What are the requirements for a debtor commencing a voluntary liquidation case and what are the effects?

The procedure for, and effects of, a voluntary liquidation vary between member states. For a solvent company, the usual position for member states in the European Union is that the members can put the company into liquidation by resolving to do so through a general meeting. For an insolvent company, the usual position is that the directors must apply to the court to commence the liquidation process and the debtor is required to show that it is unable to pay its debts as they fall due or that its liabilities exceed its assets or both.

While the rules vary between member states according to national law, in certain member states commencing a voluntary liquidation case will cause a moratorium to arise, preventing creditors from starting or continuing any proceedings against the debtor while it is in a process. In other jurisdictions, the debtor will be put under the control of a liquidator or other insolvency office holder. In some jurisdictions, any secured creditors will have an unrestricted right to exercise their security during this process but in others, these rights are restricted or subject to certain conditions, depending on the type of security in question and the type of proceeding.

Under Directive (EU) 2019/1023 (the Restructuring Directive), member states must ensure that debtors accessing preventive restructuring procedures remain totally or at least partially in control of their assets and the day-to-day operation of their business.

Voluntary reorganizations

7. What are the requirements for a debtor commencing a voluntary reorganization and what are the effects?

Voluntary reorganizations can be classified as ‘insolvency proceedings’ under Regulation (EU) 2015/848 (the Recast Regulation), provided that the type of reorganization is specified in Annex A to the Recast Regulation (e.g, the sauvegarde procedure in France is included in Annex A to the Recast Regulation and therefore falls within its ambit).

While the relevant requirements vary between member states, the general requirement for the debtor is to show that it is likely to become insolvent in the near future if steps are not taken to restructure its business. Furthermore, the debtor will also be required to show that there is (in general) a real expectation that the business can be rescued or that the attempt to reorganize the company and its affairs will ultimately result in a better outcome for its creditors.

The Dutch and the German pre-insolvency restructuring tools provide for both:

• a process that is included in Annex A of the Recast Regulation (the public version of the restructuring procedure) and thus benefits from automatic recognition among member states; and
• a version that falls outside the Recast Regulation (the undisclosed version of the restructuring procedure, which is exempt from publication requirements).

The Recast Regulation applies to collective proceedings, including interim proceedings, which are based on laws relating to insolvency and in which, for the purpose of rescue, adjustment of debt, reorganization or liquidation, either the debtor is totally or partially divested of its assets. Each member state determines which procedures fall within the scope of the Recast Regulation.

Voluntary reorganizations do not necessarily have to be implemented through any formal restructuring procedure, and therefore there is significant variation in terms of the prerequisites to implementation. Voluntary reorganization can be implemented as a result of informal negotiations with creditors outside of a formal restructuring procedure; such informal arrangements will be governed by the laws of the relevant jurisdiction, or the laws and terms of agreements being compromised. In some jurisdictions, however, formal requirements may be relatively strict.

The Restructuring Directive prescribes that where there is a likelihood of insolvency a debtor will need to be given access to a preventive restructuring framework. This will be available on the application of the debtor – although member states may decide to make this available at the request of creditors and employee representatives subject to the debtor’s agreement. The Restructuring Directive sets out the content of a restructuring plan in article 8. Only parties that are affected can vote on the adoption of a plan. Member states may exclude shareholders or creditors who are subordinated to unsecured creditors or a related party of the debtor with a conflict of interest from voting on the plan.

The effect of a debtor’s voluntary reorganization on the debtor itself and its creditors varies between member states. Potential scenarios include the management remaining free to run the business or an administrator or other insolvency office holder being appointed.

Successful reorganizations

8. How are creditors classified for purposes of a reorganization plan and how is the plan approved? Can a reorganization plan release non-debtor parties from liability and, if so, in what circumstances?

The Restructuring Directive provides that member states must put in place a preventive restructuring framework. It needs to include the availability of a restructuring plan (article 8 and following of the Restructuring Directive). The Restructuring Directive mandates that member states ensure that affected parties are grouped into separate classes that reflect sufficient commonality of interest based on verifiable criteria to be decided by national law (article 9(4)). As a minimum, creditors of secured and unsecured claims should be grouped into separate classes. Member states can also provide that workers’ claims form a separate class.

A restructuring plan is adopted if a majority in the amount of the claims or interests in each class votes in favor of the plan. Member states may stipulate that a majority in number of affected parties must also approve the plan in each class. Member states may decide on what constitutes the majority threshold in each class, but this must not be higher than 75 per cent (article 9(6)). Member states can also provide that a formal vote on the adoption of the plan can be replaced by an agreement with the requisite majority. Member states must ensure that a restructuring plan is approved by a court if it:

• affects the claims or interests of dissenting affected parties;
• provides for new financing; or
• involves the loss of more than 25 per cent of the workforce.

The court may approve such a plan if:

• the plan has been adopted by the requisite majority of creditors in each class;
• creditors with sufficient commonality of interests in the same class are treated equally;
• the plan satisfies the ‘best interest of creditors test’; and
• where there is new financing, this is necessary to implement the restructuring plan and does not unfairly prejudice the interests of creditors.

The best interests of creditors test is satisfied if no dissenting creditor would be worse off in the restructuring plan than the creditor would be if the normal ranking under national law was applied, either in a liquidation or in the event of the next best alternative scenario if the plan was not confirmed. Courts can refuse to confirm a plan if it does not have a reasonable prospect of preventing the insolvency or ensuring viability.

Importantly, the Restructuring Directive provides for cross-class cramdown. Where a plan is not approved by affected parties in each class as otherwise required, it may still be approved by a court if:

• it satisfies the best interest of creditors test; and
• the plan has been approved by a majority of the voting classes (if at least one of those classes is a secured or senior class) or, failing that, the plan has been approved by at least one of the voting classes who are not out of the money.

Member states may stipulate that more than one affected class of creditors who are not out of money must approve the plan before the court can confirm a cross-class cramdown. If a plan has been confirmed by the court, it is binding on all affected parties.

Involuntary liquidations

9. What are the requirements for creditors placing a debtor into involuntary liquidation and what are the effects? Once the proceeding is opened, are there material differences to proceedings opened voluntarily?

The requirements for, and effects of, the involuntary liquidation process vary between member states. Generally, for a creditor to make a successful application for the involuntary liquidation of a debtor, the creditor is required to demonstrate that the debtor is unable to pay its debts as they fall due or that the debtor’s liabilities exceed its assets.

Involuntary reorganizations

10. What are the requirements for creditors commencing an involuntary reorganization and what are the effects? Once the proceeding is opened, are there any material differences to proceedings opened voluntarily?

While the position varies between member states, the general position is that a creditor cannot instigate an involuntary reorganization (as opposed to an involuntary liquidation) of the debtor. In Germany, however, a creditors’ meeting may instruct the insolvency office holder to produce a reorganization plan.

The effects of the commencement of an involuntary reorganization vary between member states.

Expedited reorganizations

11. Do procedures exist for expedited reorganizations (e.g, ‘prepackaged’ reorganizations)?

The procedural elements will be dictated by the law of the jurisdiction where proceedings are commenced. Practically speaking, a large proportion of reorganizations are implemented as a result of informal negotiations with key creditors outside of a formal restructuring framework and therefore the parties to the discussions and the particular circumstances of the debtor and creditor base dynamic will dictate the timetable. However, in some jurisdictions, a formal procedure for an expedited reorganization exists (e.g, France).

In the Netherlands, a statutory foundation is being prepared to codify the practice that has been applied by some practitioners and courts (albeit with no statutory basis) to prepackage bankruptcies through the appointment of a silent administrator before the formal insolvency to ensure that any plan to either restructure (parts of) the business or to prepare for a formal filing, or any combination thereof, is acceptable to the silent administrator and the court. Decisions by the Court of Justice of the European Union regarding the position of employees in a transfer of undertaking (FNV v Smallsteps BV (Case C-126/16) and FNV v Heiploeg (Case C-237/20)), however, have caused delay in the treatment of the legislative proposal.

Unsuccessful reorganizations

12. How is a proposed reorganization defeated and what is the effect of a reorganization plan not being approved? What if the debtor fails to perform a plan?

This is more a practical than a legal question. In general, any proposed reorganization will fail if the requisite support of the different creditor or stakeholder classes is not obtained. In some jurisdictions, the court may be willing to grant an interim stay on creditor actions to allow a reorganization to be implemented.

The rules will vary between jurisdictions, but the effects on the debtor if the reorganization plan is not approved can be wide-ranging, including an agreement from key creditors to a temporary relaxation of the debtor’s obligations, or the debtor entering into liquidation or another form of insolvency process.

Corporate procedures

13. Are there corporate procedures for the dissolution of a corporation? How do such processes contrast with bankruptcy proceedings?

In general, there are procedures for the liquidation or dissolution of a corporation outside of the insolvency process, particularly where the company’s constitutional documents or by-laws provide for this. Some possible scenarios include the company expiring at the end of a fixed duration or being wound up after achieving the purpose for which it was established or where it can no longer achieve the purpose for which it was established.

There are some provisions of EU law in specific contexts that would be relevant (e.g, cross-border mergers), but these are not of general application.

Conclusion of case

14. How are liquidation and reorganization cases formally concluded?

In nearly all jurisdictions, liquidation proceedings end with a court hearing or meeting or creditor decision process at which the final accounts of the company are approved.

reorganization procedures usually come to an end either when the plan has been consummated or if the debtor goes into liquidation, having been unable to comply with the terms of the plan.

On request from the liquidator in the main proceedings, a court in another member states must stay secondary proceedings unless the request is of manifestly no interest to creditors in the main proceedings.

The Recast Regulation formally recognizes the concept of ‘synthetic secondary proceedings’ and sets out the right of an office holder in main proceedings to give an undertaking to recognize priority and distribution rights that local creditors would have had if secondary proceedings had been opened (article 36). The undertaking requires the approval of local creditors and must comply with any requirements as to form and approval requirements in the member state presiding over the main proceedings. Once given, the undertaking is binding on the estate, and local creditors are entitled to apply to the courts to ensure compliance with the undertaking.

INSOLVENCY TESTS AND FILING REQUIREMENTS

Conditions for insolvency

15. What is the test to determine if a debtor is insolvent?

There is no single criterion to apply to determine if a debtor is insolvent, as the concept of ‘insolvency’ is a matter for the national law of each member state (article 2(2)(a) of Directive (EU) 2019/1023 (the Restructuring Directive)). In general, some member states have a cash flow-only insolvency test, while others have a balance sheet insolvency test, and some have both.

Under the Restructuring Directive, member states need to ensure that where there is a likelihood of insolvency, debtors have access to a preventive restructuring framework. However, it is – again – up to member states to define what is meant by the concept of ‘likelihood of insolvency’ (article 2(2)(b) of the Restructuring Directive).

Mandatory filing

16. Must companies commence insolvency proceedings in particular circumstances?

The position as to whether an obligation to file for insolvency exists, at which point it arises and the potential liabilities that can be incurred if the obligation is not met varies significantly between member states.

For example, in Germany there are stringent mandatory insolvency filing rules for directors in particular circumstances, which once triggered are subject to clear time limits.

Under the Restructuring Directive, where there is a stay of individual enforcement action (article 6 of the Restructuring Directive, which requires member states to ensure that the debtor can benefit from a stay of individual enforcement action to support the negotiations of a restructuring plan in a preventive restructuring framework), the obligation under national law to file for insolvency is suspended (article 7 of the Restructuring Directive). Member states can derogate from such suspension in situations where a debtor is unable to pay its debts as they fall due.

DIRECTORS AND OFFICERS

Directors’ liability – failure to commence proceedings and trading while insolvent

17. If proceedings are not commenced, what liability can result for directors and officers? What are the consequences for directors and officers if a company carries on business while insolvent?

The position on liabilities for directors and officers varies between member states. Where there is a failure to meet an obligation to file for insolvency, the potential consequences can include personal liability for losses caused by such failure, a fine or imprisonment for directors of the company or both. The consequences of carrying on business while insolvent vary according to each member state.

In some jurisdictions (e.g, the Netherlands) civil liability may attach to the directors if they continue the business past a certain point in time and that decision resulted in a damage to the creditors. In other member states (e.g, Germany) a failure to file for insolvency when the relevant insolvency test is met may also result in criminal liability.

Directors’ liability – other sources of liability

18. Apart from failure to file for proceedings, are corporate officers and directors personally liable for their corporation’s obligations? Are they liable for corporate pre-insolvency or pre-reorganization actions? Can they be subject to sanctions for other reasons?

The laws governing the liability of directors are generally those of the jurisdiction of incorporation in circumstances where insolvency proceedings are commenced in that jurisdiction. In a scenario where the company’s COMI is different to its place of incorporation, the directors will need to be aware of potential liabilities in both jurisdictions.

In the case of Kornhaas v Dithmar [2015] (Case C-594/14), the Court of Justice of the European Union (CJEU) ruled that the provisions of German company law that (broadly) require directors to file for insolvency within 21 days of a company becoming unable to pay its debts fell within the scope of article 4 of Council Regulation (EC) No. 1346/2000 (the EC Regulation). This meant that the directors of an English incorporated company with its COMI in Germany and placed into insolvency proceedings in Germany could be liable under these provisions to make payments under German law.

Generally, it is possible for directors and officers to be liable to contribute to the debtor’s assets but, because of the concept of limited liability, this is normally limited to where the director’s conduct falls below the requisite standard imposed by national law.

Directors can sometimes be made personally liable for pre-insolvency actions. The types of claims for which a director can be liable range from failing to place the company into insolvency at the appropriate time to fraud. The most common claim, however, is of negligence. There is some variation in the rules between member states as to who can bring claims against directors. In most jurisdictions, it is the debtor itself or in some cases its shareholders, but in other jurisdictions creditors can bring claims directly against directors for losses they have suffered. Another common claim is that the directors wrongly allowed the debtor to continue to trade despite the fact that the debtor was in a challenging financial position.

Directors are also exposed to a range of criminal sanctions arising from their conduct before insolvency (including, in extreme cases, terms of imprisonment). In some jurisdictions, directors can also be disqualified from acting as directors for a given period or indefinitely.

Directors’ liability – defenses

19. What defenses are available to directors and officers in the context of an insolvency or reorganization?

Available defenses depend on national law and on the particular offence and its components. For example, a particular offence may have a specific inbuilt defense, or the relevant national law may impose a general defense at the courts’ discretion for directors acting reasonably in the circumstances.

Shift in directors’ duties

20. Do the duties that directors owe to the corporation shift to the creditors when an insolvency or reorganization proceeding is likely? When?

Whether directors’ duties shift to creditors varies between member states. In the Netherlands, for example, where a company is facing financial difficulties, there is a shift in the focus of the director’s duties towards the interest of the company’s creditors, depending on the circumstances at hand. In Germany, however, the directors’ duties remain with the shareholders even when insolvency or reorganization is likely or inevitable, although once it is established that a debtor cannot pay its debts as they fall due or is over-indebted, its managing directors are required by law to apply for the commencement of insolvency proceedings without undue delay.

Directors’ powers after proceedings commence

21. What powers can directors and officers exercise after liquidation or reorganization proceedings are commenced by, or against, their corporation?

The powers that directors and officers can exercise after insolvency proceedings have been commenced vary according to both the type of insolvency process and member state. For example, in Italy, after declaring bankruptcy, the directors lose all powers of administration. On the other hand, in a French sauvegarde proceeding, the directors retain management and control of the company. Under Directive (EU) 2019/1023 (the Restructuring Directive), member states must ensure that debtors accessing preventive restructuring procedures remain totally or at least partially in control of their assets and the day-to-day operation of their business.

MATTERS ARISING IN A LIQUIDATION OR REORGANIZATION

Stays of proceedings and moratoria

22. What prohibitions against the continuation of legal proceedings or the enforcement of claims by creditors apply in liquidations and reorganizations? In what circumstances may creditors obtain relief from such prohibitions?

The rules regarding stays of proceedings and moratoria vary between member states. Under Regulation (EU) 2015/848 (the Recast Regulation), the effect of insolvency proceedings on the continuation of proceedings by individual creditors is expressly a matter for the law of the member state where those proceedings are opened. The exception to this is that the effect of insolvency proceedings on a pending action relating to an asset or right where the debtor has been divested of that asset or right is governed by the law of the member state where the relevant action is pending. Arbitration proceedings are specifically included within this exception.

The court’s ability to grant a stay may vary between member states, but typical examples include a stay on transfers by the debtor of its property, a freeze on creditor enforcement action and judicial proceedings against the debtor, or a stay on other creditor rights. The circumstances and process by which creditors may obtain relief from such prohibitions vary between member states.

Under the Directive (EU) 2019/1023 (the Restructuring Directive), member states must ensure that a debtor can benefit from a stay of individual enforcement action to support the negotiation of a restructuring plan in a preventive restructuring framework (article 6).

Member states can provide that a court can refuse to grant a stay where it is not necessary or where it would prevent negotiations regarding the restructuring plan. The stay of individual enforcement actions should cover all types of claims, including secured and preferential claims – but must not cover workers’ claims (unless payment of such is guaranteed in the preventive restructuring framework at a similar level of protection).

Member states can provide that the stay is general (i.e, covering all creditors) or limited (i.e, covering one or more individual creditors or categories of creditors only). Certain claims can be excluded from the stay where such exclusion is justified, enforcement is not likely to jeopardize the restructuring of the business or the stay would unfairly prejudice the creditors of those claims.

The initial duration of the stay must be no more than four months. Member states can authorize the courts to extend the duration of the stay or to grant a new stay if well-defined circumstances show that such an extension or new stay is justified (e.g, where relevant progress has been made in the restructuring plan negotiations). The total duration of the stay (including extensions and renewals) should not exceed 12 months.

The Restructuring Directive provides that courts can lift the stay where:

• it no longer assists in supporting the restructuring plan negotiations;
• the debtor or a restructuring professional requests the stay to be lifted;
• one or more creditors would be unfairly prejudiced by the stay; or
• the stay gives rise to the insolvency of a creditor.

Member states may also provide that there is a minimum period (of no more than four months) in which the stay cannot be lifted. Member states may also provide that the stay may only be lifted in circumstances where creditors did not have the opportunity to be heard before the stay came into force (or before an extension).

A stay does not apply to netting arrangements, including close-out netting arrangements on financial markets, energy markets and commodity markets if such arrangements are enforceable under national insolvency law.

Doing business

23. When can the debtor carry on business during a liquidation or reorganization? Is any special treatment given to creditors who supply goods or services after the filing? What are the roles of the creditors and the court in supervising the debtor’s business activities?

The rules vary among member states. Where a reorganization is implemented under the supervision of the court, a debtor will be able to carry on its business subject to court-imposed conditions. Depending on the jurisdiction and the process, an insolvency office holder could be appointed (either by the court or out of court) to run the debtor’s business and there will be rules specific to the relevant jurisdiction and process governing the way in which the office holder may run the business and their powers and duties.

The Restructuring Directive provides that where there is a stay of individual enforcement action, member states must provide for rules preventing creditors to which the stay applies from withholding performance or terminating, accelerating or in any other way modifying essential executory contracts to the detriment of the debtor. An ‘essential executory contract’ is an executory contract that is necessary for the continuation of the day-to-day operations of the business, including contracts concerning suppliers, the suspension of which would lead to the debtor’s activities coming to a standstill. Member states may afford these creditors appropriate safeguards to prevent the causing of unfair prejudice. Member states may also extend these provisions to non-essential executory contracts.

Separately, member states must ensure that creditors are not allowed to withhold performance or terminate, accelerate or in any other way modify executory contracts by virtue of a contractual right, solely because a request for the opening of a preventive restructuring proceeding or a stay has been made, a preventive restructuring proceeding has been opened or a stay has been granted.

In various jurisdictions (e.g, France) creditors who supply goods or services after the commencement of a formal reorganization procedure will have priority over other creditors, but this will often depend on the specific arrangements made with those particular creditors and the relevant local law.

The roles of the creditors and the court in supervising the debtor’s business vary between member states and depend on the particular insolvency process that the debtor is in. The creditors do not generally have a formal supervisory role in the proceedings but will often have voting power depending on the relevant insolvency process and the relative size of a creditor’s stake. In many jurisdictions, an insolvency office holder appointed by the court will supervise the debtor’s business activities on the court’s behalf.

Post-filing credit

24. May a debtor in a liquidation or reorganization obtain secured or unsecured loans or credit? What priority is or can be given to such loans or credit?

Post-filing credit procedures vary significantly between jurisdictions and the Recast Regulation does not specifically address this issue. The Restructuring Directive stipulates that new and interim financing should be adequately protected. As a minimum, where the debtor subsequently enters into insolvency proceedings, any new and interim financing should not be declared void, voidable or unenforceable. Member states can provide that this only applies to financing approved by a court.

Member states may also exclude financing granted after a debtor has become unable to pay its debts as they fall due. Member states can stipulate that providers of new or interim financing are entitled to receive payment with priority in a subsequent insolvency in relation to other creditors that would otherwise have superior or equal claims.

Sale of assets

25. In reorganizations and liquidations, what provisions apply to the sale of specific assets out of the ordinary course of business and to the sale of the entire business of the debtor? Does the purchaser acquire the assets ‘free and clear’ of claims or do some liabilities pass with the assets?

The procedure for the sale of assets during reorganizations or liquidations varies between member states. However, the Recast Regulation provides that a disposal of an immovable asset, a ship or an aircraft subject to registration in a public register, or any registered securities, in each case after the opening of insolvency proceedings, will be governed by the law of the member state where the particular asset or register is located.

The relevant documentation effecting the reorganization will provide for the terms under which the assets are, or the whole of the business is, disposed of.

The question of whether assets are purchased ‘free and clear’ or subject to encumbrances depends on the relevant local legislative framework. Council Directive 2001/23/EC (the Acquired Rights Directive) aims to safeguard and protect the rights of employees on a ‘change of employer’ and provides that in certain situations where there is a transfer of a business, the rights and obligations under a contract of employment will also transfer automatically.

Negotiating sale of assets

26. Does your system allow for ‘stalking horse’ bids in sale procedures and does your system permit credit bidding in sales?

The permissibility of credit bidding in insolvency sale processes varies between member states.

Rejection and disclaimer of contracts

27. Can a debtor undergoing a liquidation or reorganization reject or disclaim an unfavorable contract? Are there contracts that may not be rejected? What procedure is followed to reject a contract and what is the effect of rejection on the other party? What happens if a debtor breaches the contract after the insolvency case is opened?

The rules governing the disclaimer and rejection of unfavorable contracts vary between member states. In certain jurisdictions, an insolvency office holder is permitted to disclaim onerous contracts without the need for a court order, while in other jurisdictions (e.g, Spain) it may be possible to apply to the insolvency court to terminate any contract where the debtor has outstanding obligations if the court is of the opinion that this constitutes a convenient outcome for the insolvency proceedings. Special arrangements are usually in place for employment contracts, and these will vary between jurisdictions.

The rules regarding contracts that may not be rejected and the procedure to reject a contract vary between member states.

The effects of breach of contract post-insolvency vary between each member state and often there is a distinction to be drawn between contracts entered into by the insolvency office holder (where a breach may result in damages with high priority ranking) or contracts entered into by the company before insolvency (where a breach may only result in an unsecured claim against the company).

Intellectual property assets

28. May an IP licensor or owner terminate the debtor’s right to use the IP when a liquidation or reorganization is opened? To what extent may IP rights granted under an agreement with the debtor continue to be used?

Where the intellectual property (IP) right is a right that has been registered (or is pending registration) at EU level, rather than on a national level, the Recast Regulation provides that such a right may only be included in the debtor’s main proceedings (not in secondary or territorial proceedings, even where no main proceedings have been commenced). This applies to an EU patent with unitary effect, a community trademark or any other similar right established by EU law. The law of the member state where main proceedings are opened will therefore determine the insolvency office holder’s rights in relation to the IP right. Other IP rights can be included in secondary or territorial proceedings.

Under the Recast Regulation, EU patents are treated as being situated in the member state for which they are granted, and copyright and related rights are treated as being situated in the member state where the owner has its habitual residence or registered office.

The rules in some jurisdictions (eg, Italy and Germany) prohibit the automatic termination of contracts upon an insolvency (which would include agreements containing IP rights) and render void any clauses purporting to achieve this effect. In other jurisdictions, insolvency may constitute a contractual event of default that may cause an automatic termination of the contract.

The rules regarding whether an insolvency office holder can continue to use IP rights granted under an agreement with the debtor vary between member states.

Personal data

29. Where personal information or customer data collected by a company in liquidation or reorganization is valuable, are there any restrictions in your country on the use of that information or its transfer to a purchaser?

The General Data Protection Regulation (the GDPR) became applicable on 25 May 2018 under Regulation (EU) 2016/679. The GDPR leaves some matters to the discretion of member states, and each member state has introduced its own national legislation that supplements the GDPR rules.

A controller is required to comply with the data protection principles set out in the GDPR when processing any personal data. The first principle is that personal data must be processed lawfully, fairly and in a transparent manner. Where valuable customer data is collected or held by the insolvent company, it is one of the assets that an insolvency office holder can realize for the benefit of creditors.

The GDPR (as supplemented by relevant member state national law) will apply, and an office holder may require a buyer of the data to comply with its obligations under those laws and to provide an indemnity to the seller and the office holder against any liability for failure to have complied. This may be supported by an agreed form ‘fair processing’ notice, which the buyer will be required to send to each customer to inform them that the buyer is now the controller and of any new purposes for which the customer’s personal data will be processed by the buyer. The GDPR expands the amount of information that must be provided in a fair processing notice.

Among other things, the GDPR introduces stricter rules on obtaining consent to use a person’s data; this means that a business that buys an insolvent company’s personal data may be unable to use it for new purposes without obtaining new consents.

National sector-specific data protection laws may also apply.

Arbitration processes

30. How frequently is arbitration used in liquidation or reorganization proceedings? Are there certain types of disputes that may not be arbitrated? Can disputes that arise after the liquidation or reorganization case is opened be arbitrated with the consent of the parties?

The Recast Regulation specifically states that the effects of insolvency proceedings on pending arbitral proceedings concerning an asset or a right that forms part of a debtor’s insolvency estate are to be governed solely by the law of the member state in which the arbitral tribunal has its seat.

The rules governing the effect of insolvency proceedings on individual creditor proceedings vary between member states. Generally, the use of arbitration proceedings in member state insolvency proceedings is relatively limited. Once insolvency proceedings are commenced, the moratorium that normally arises will generally restrict other actions and the use of other legal processes, including arbitration, therefore arbitration may not be available.

The rules governing whether arbitration proceedings can be continued differ between member states. In Italy, for example, during insolvency proceedings, the court will allow arbitration to continue, but if the agreement containing an arbitration clause is terminated, the pending arbitration proceeding cannot be continued. By contrast, in Germany, the commencement of insolvency proceedings does not lead to automatic cessation of arbitration proceedings (although the insolvency administrator will be a party to the arbitration proceedings, rather than the insolvent company). However, if the arbitral tribunal does not interrupt the arbitration proceedings until the insolvency administrator has had sufficient time to become familiar with them, there is a risk of (successful) setting-aside proceedings based on a violation of the German ordre public.

CREDITOR REMEDIES

Creditors’ enforcement

31. Are there processes by which some or all of the assets of a business may be seized outside of court proceedings? How are these processes carried out?

The rules in this context vary between member states. In some jurisdictions, it is possible for assets to be seized outside of court proceedings.

Creditors may also be able to avail themselves of certain ‘self-help’ remedies against the assets of the debtor, for example, by way of the exercise of a lien, a retention of title clause or the appropriation of assets (potentially by way of a pledge).

Unsecured credit

32. What remedies are available to unsecured creditors? Are the processes difficult or time-consuming? Are pre-judgment attachments available?

The treatment of unsecured creditors in an insolvency process varies between member states. In general, unsecured creditors in the European Union have limited remedies against debtors because of their unsecured status. To have any recourse to a debtor’s assets, before the commencement of formal insolvency proceedings, a creditor would have to bring its own proceedings in a local court and obtain a judgment against the debtor, which, if not complied with, may give scope for recourse against the debtor’s assets themselves. The treatment of unsecured creditors in the context of pre-judgment attachments varies between member states.

In many jurisdictions, it is open to creditors to obtain a pre-judgment attachment or freezing order over some or all of a debtor’s assets to prevent the relevant assets from being dissipated pending a trial or resolution of a claim or claims. As a precaution, however, such an order is usually made subject to the provision of some kind of security or bond to protect the debtor if it is later established that the attachment or freezing order was granted incorrectly.

In many jurisdictions, however, it is open to certain creditors in possession of relevant rights to assert a possessory lien or other similar claim, which would circumvent the requirement to bring legal proceedings. It is also possible in some jurisdictions for creditors to avail themselves of the benefit of retention of title provisions.

On 15 May 2014, Regulation (EU) No. 655/2014 established the European Account Preservation Order (EAPO). The EAPO can be used by a creditor in civil and commercial matters to freeze some or all of the funds within any bank account held by a debtor located in another member state within the European Union than that of the creditor.

An EAPO operates to stop the withdrawal or transfer of the funds from a bank account beyond the amount specified in the order. EAPOs are to be used in cross-border claims as an alternative to other methods of preservation available in the individual member states. Regulation (EU) No. 655/2014 became effective on 18 January 2017 in those member states that had not opted out (all member states except Denmark).

CREDITOR INVOLVEMENT AND PROVING CLAIMS

Creditor participation

33. During the liquidation or reorganization, what notices are given to creditors? What meetings are held and how are they called? What information regarding the administration of the estate, its assets and the claims against it is available to creditors or creditors’ committees? What are the liquidator’s reporting obligations?

The procedural requirements of the various types of insolvency proceedings that exist in different member states (eg, in respect of notices to be provided to creditors, what meetings should be held, the ambit of information provided to creditors or any creditors’ committee) vary between member states.

Regulation (EU) 2015/848 (the Recast Regulation) contains specific provisions relating to providing information to creditors and the lodgement of creditors’ claims in relation to insolvency proceedings covered under the Recast Regulation. The Recast Regulation also provides for a standard notice form to be used across the European Union. The notice form is contained in Commission Implementing Regulation (EU) 2017/1105 of 12 June 2017 establishing the forms referred to in Regulation (EU) 2015/848 on insolvency proceedings (the Recast Forms Regulation).

Once insolvency proceedings have commenced, the insolvency office holder must request that notice of the judgment opening insolvency proceedings and, where appropriate, the decision appointing the insolvency office holder be published in any other member state where an establishment of the debtor is located in accordance with the publication procedures provided for in that member state. Creditors are notified by either personal notice or advertisement, and a creditors’ meeting is normally held early on in the process.

In the majority of member states, a further meeting with creditors will be held to consider and approve the claims of creditors as well as a final meeting or creditor decision procedure in which the final accounts of the debtor are approved and the liquidation ends. In some cases, a reorganization plan will be presented during the liquidation and a separate creditors’ meeting or creditor decision procedure may be convened to discuss the plan and vote on it.

Further protection will be afforded to creditors with the introduction of national insolvency registers. By 26 June 2018, each member state was obliged to create a national insolvency register that contained ‘mandatory information’ for main, secondary and territorial proceedings. The European Commission established a system of interconnecting insolvency registers, allowing searches for insolvent entities within the European Union (except Denmark).

Creditor representation

34. What committees can be formed (or representative counsel appointed) and what powers or responsibilities do they have? How are they selected and appointed? May they retain advisers and how are their expenses funded?

The rules governing creditor representation vary between member states. In a number of member states (eg, Germany and Austria) there will often be a creditors’ committee appointed to assist and supervise the insolvency office holder in the exercise of their duties. The creditors’ committee will be appointed by the competent court or by nomination by the creditors as a group directly, where permitted. If a creditors’ committee is formed, the committee is free to retain its own advisers, but there is no EU-wide rule as to how the costs of such advisers are funded.

Enforcement of estate’s rights

35. If the liquidator has no assets to pursue a claim, may the creditors pursue the estate’s remedies? If so, to whom do the fruits of the remedies belong? Can they be assigned to a third party?

The rules on whether creditors may pursue the remedies of a debtor’s estate vary between member states. In Spain, for example, where an insolvency office holder decides not to exercise a particular remedy open to them that is in the interests of the estate, the creditors may file an application to seek a remedy. While the rules relating to third-party funding of litigation are different in each member state, often an alternative route is for the creditors to group together to provide funding for the costs of the insolvency office holder or the estate (as applicable) incurred in exercising the remedy, making the relevant claim or taking the relevant action.

Creditors do not normally have standing to pursue any remedy of the debtor against third parties. However, in some jurisdictions, it is open to creditors (normally through the creditors’ representative and depending on the type of insolvency process the debtor is in) to bring direct proceedings against former directors or shadow directors of the debtor in their personal capacity for losses they have incurred as a result of the director’s or shadow director’s conduct, as opposed to the insolvency office holder making a claim on behalf of the debtor.

Claims

36. How is a creditor’s claim submitted and what are the time limits? How are claims disallowed and how does a creditor appeal? Can claims for contingent or unliquidated amounts be recognized? Are there provisions on the transfer of claims and must transfers be disclosed? How are the amounts of such claims determined?

In certain jurisdictions, the creditor’s claim is submitted to the court (e.g, Austria, where creditors file their claims with the court and these are then accepted or rejected by the insolvency office holder), whereas in others (e.g, the Netherlands) claims are submitted directly to the insolvency office holder for review and processing.

The Recast Regulation introduced a single EU-wide standardized claim form. Any foreign creditor (being a creditor having its habitual residence, domicile or registered office in a member state other than the member state of the opening of proceedings) may lodge its claim using this standard claim form. The claim form indicates, among other things:

• the creditor’s name and address;
• the nature and amount of the claim;
• details of any interest being claimed;
• whether any preferential status is claimed;
• whether security in rem or a reservation of title is alleged in respect of a claim; and
• whether any set-off is claimed and the amount net of the set-off.

If a creditor lodges its claim by means other than the standardized claim form, the claim must contain the information that would be contained in the standard claim form. Claims may be lodged in any of the official languages of the European Union, although the creditor may be required to provide a translation into any official language of the member state of the opening of the proceedings or into another language that the member state has accepted. Each member state must indicate whether it accepts an official EU language other than its own for the purposes of accepting claims.

Claims are to be lodged in the period stipulated by the law of the member state of the opening of the proceedings but, in the case of a foreign creditor, that period must be at least 30 days from the publication of the opening of proceedings in the insolvency register of the member state of opening of the proceedings. The standard claims form is contained in the Recast Forms Regulation.

The rules in most jurisdictions provide for reasonably stringent time limits applicable to the submission of claims. Failure to submit a claim within the prescribed time limits may, in some jurisdictions, result in the debt owed to the relevant creditor or creditors being extinguished and any security rights being lost.

In those jurisdictions where claims are submitted to the court, the court will generally hold a hearing to review the claims and rule on them. In those jurisdictions where claims are submitted to the insolvency office holder directly, the office holder will review, assess and process the claims and notify the creditors of the result. Under the Recast Regulation, where the court, insolvency office holder or debtor in possession has doubts in relation to a claim, they are to give the creditor the opportunity to provide additional evidence on the existence and the amount of the claim.

The majority of jurisdictions allow for an appeal against the rejection of a claim; however, the requirements differ from jurisdiction to jurisdiction.

Under the Recast Regulation, creditors domiciled in the European Union have the right to assert claims against the debtor’s assets in the relevant insolvency proceeding.

Typically, EU jurisdictions allow for a transfer of insolvency claims. The requirements vary between member states as to the necessity to disclose the transfer of the claim.

The rules regarding whether claims for contingent or unliquidated amounts can be recognized and how the amounts of such claims are determined vary between member states. Similarly, whether a claim acquired at a discount can be enforced for its full value will depend on the rules in relevant member states. The question of interest accrued post-insolvency also varies between member states and the Recast Regulation does not address this point.

Under Directive (EU) 2019/1023 (the Restructuring Directive), member states must ensure that in procedures concerning restructuring, insolvency and discharge of debt, at least the following can be performed by the parties by use of electronic communication, including in cross-border situations:

• filing of claims;
• submission of restructuring or repayment plans;
• notifications to creditors; and
• lodging of challenges and appeals.

Set-off and netting

37. To what extent may creditors exercise rights of set-off or netting in a liquidation or in a reorganization? Can creditors be deprived of the right of set-off either temporarily or permanently?

The rules on set-off and netting in a liquidation or a reorganization context vary between member states, and the Recast Regulation states that the conditions under which set-off may be invoked must be determined by the laws of the member state in which proceedings are opened.

Notwithstanding the variation in the rules on set-off across the European Union, the Recast Regulation does contain a specific provision relating to set-off, which seeks to preserve each member state’s laws on set-off, primarily by stating that:

“the opening of insolvency proceedings shall not affect the right of creditors to demand the set-off of the claims against the claims of the debtor, where such a set-off is permitted by the law applicable to the insolvent debtor’s claim.”

Recital 70 to the Recast Regulation states that ‘in this way, set-off would acquire a kind of guarantee function based on legal provisions on which the creditor concerned can rely at the time when the claim arises’.

Contractual netting is not specifically addressed under the Recast Regulation. Under the Restructuring Directive, any stay does not apply to netting arrangements, including close-out netting arrangements on financial markets, energy markets and commodity markets if such arrangements are enforceable under national insolvency law.

Modifying creditors’ rights

38. May the court change the rank (priority) of a creditor’s claim? If so, what are the grounds for doing so and how frequently does this occur?

Claims that are to be lodged against a debtor’s estate and the ranking of these claims vary between member states, and are matters for the law of the state where the insolvency proceedings are commenced.

The ability of the courts to change the priority of creditor claims also varies between member states. Not in all countries the court can change the priority of creditor claims. In the Netherlands, for example, it is only possible for parties to contractually agree on the change.

Alternatively, there may be challenges to the security of a purported secured creditor that, if successful, could result in a secured creditor’s claim being deemed to be unsecured. However, this is not strictly a reordering of a predefined rank or priority of distribution, but a reclassification of where a particular creditor sits in that ranking, based on an assessment of the relevant facts.

Priority claims

39. Apart from employee-related claims, what are the major privileged and priority claims in liquidations and reorganizations? Which have priority over secured creditors?

Under the Recast Regulation, each creditor, wherever domiciled in the European Union, has the right to assert claims regarding the debtor’s assets in each pending insolvency proceeding (i.e, in main and secondary proceedings). This right extends to each member state’s taxation and social security authorities but does not give these claims automatic priority status. A taxation authority enjoying priority status as a preferential creditor under its domestic laws is likely to be able to prove only as an ordinary unsecured creditor in proceedings in other member states.

Employment-related liabilities

40. What employee claims arise where employees’ contracts are terminated during a restructuring or liquidation? What are the procedures for termination? (Are employee claims as a whole increased where large numbers of employees’ contracts are terminated or where the business ceases operations?)

Guarantee institutions

The provisions for dealing with employees’ salaries during a restructuring or liquidation vary between member states. Most countries have some form of protection in place for ensuring that there are funds available to pay (part of) outstanding salaries. Directive 2008/94/EC (the Employment Insolvency Directive) protects employees who have a claim for unpaid remuneration against an employer who is in a state of insolvency. The directive requires member states to establish guarantee institutions that guarantee payment of employees’ claims and, where appropriate, severance pay on termination of employment relationships. Member states are permitted to set ceilings on (and time limits for) the payments made by the relevant guarantee institution.

Some jurisdictions protect employees’ rights arising after insolvency proceedings have commenced, whereas others require provision only to be made for claims arising before proceedings were opened.

In some jurisdictions there is a requirement for a certain amount of money to be ring-fenced for employees or for employee claims to be given a preferential claim on the insolvent estate. Whether the employees’ preferential claims rank ahead, or behind, secured creditors varies between member states.

Sale of the business

Council Directive 2001/23/EC (the Acquired Rights Directive) provides that in certain situations where there is a transfer of a business, the rights and obligations under a contract of employment will also transfer automatically. This can mean that the employee claims (even for back pay) transfer to the (presumably solvent) transferee or purchaser and so are (presumably) reflected in a lower price paid for the relevant business.

However, where the transfer takes place during insolvency proceedings that have been opened in relation to a transferor, but not ‘with a view to the liquidation of the assets of the transferor’, and provided that such proceedings are under the supervision of a competent public authority (which may be an insolvency office holder determined by national law), member states may provide that the transferor’s debts arising from any contracts of employment or employment relationships and payable before the transfer or before the opening of the insolvency proceedings must not be transferred to the transferee, provided that such proceedings give rise to protection for employees equivalent to that set out in the Employment Insolvency Directive.

If the insolvency proceedings have been opened ‘with a view to the liquidation of the assets of the transferor’, the Acquired Rights Directive allows member states to exclude employee liabilities from transferring altogether. The Court of Justice of the European Union (CJEU) in Federatie Nederlandse Vakvereniging v Smallsteps BV (Case C-126/16) held that the transfer of undertaking through a pre-pack in the Netherlands in that case is not a proceeding within this provision. The CJEU’s decision has led to uncertainty as to whether employee protection rules in pre-pack cases apply.

In April 2022, the CJEU in the Dutch case FNV v Heiploeg (Case C-237/20) decided that employee protection in the event of a transfer of an undertaking did not apply to the pre-pack in that case. The pre-pack procedure in that case was instituted with a view to the liquidation of the assets of the transferor (contrary to the pre-pack procedure in the Smallsteps case, which was not aimed at the liquidation of the business).

The insolvency of the transferor was inevitable, and the primary objective of the bankruptcy procedure and the preceding pre-pack procedure was to obtain the highest possible return for all creditors. Therefore, the pre-pack procedure can be considered a procedure instituted with the aim to liquidate the assets of the transferor, meaning that the exception to the employee protection rules applies and that employees do not automatically need to be transferred under the same employment conditions.

This indicates that the circumstances of the matter at hand need to be taken into account when considering the primary objective of the sale of business, which will determine whether employee protection rules apply. The CJEU stressed that, to be lawful under EU law, the pre-pack procedure must be governed by statutory provisions. The CJEU’s decision was a result of preliminary questions by the Dutch Supreme Court in the FNV v Heiploeg case. A final ruling from the Dutch Supreme Court in this matter is expected at the end of 2023.

A similar Belgian case (Case C-509/17) made it to the CJEU in which the CJEU ruled that Belgian insolvency law deviates from the principle included in paragraph 1, article 3 of the Acquired Rights Directive and that the proceedings for judicial restructuring by transfer under judicial supervision (a GROG) does not satisfy any of the criteria as set out in paragraph 1, article 3 of the Acquired Rights Directive. As a result, in the context of a judicial reorganization, the transferee of the company by means of a transfer under judicial authority will most likely need to accept the transfer of all employees.

Collective redundancies

If a large number of workers are to be dismissed, a consultation obligation may apply. Under Council Directive 98/59/EC (the Collective Redundancies Directive), national laws of member states need to provide for consultation ‘in good time’ with workers’ representatives where it is contemplated that a relevant number of workers may be dismissed (for reasons not related to the individual workers concerned) within a relevant period. Member states can choose which qualifying period can apply as either:

• the dismissal, over a period of 30 days, of at least:
• 10 workers in establishments with 21 to 99 workers;
• 10 per cent of the number of workers in establishments with 100 to 299 workers; and
• 30 workers in establishments of 300 or more; or
• the dismissal, over a period of 90 days, of at least 20 workers, whatever the number of workers normally employed in the establishments in question.

Spain, for example, has adopted the first of these two definitions.

The Collective Redundancies Directive also requires that national law provides for employers to notify the competent public authority in writing of any projected collective redundancies, and that the relevant redundancies do not normally take effect earlier than 30 days after this notification.

Member states need to specify appropriate judicial and administrative procedures for the enforcement of the obligations under the Collective Redundancies Directive.

Pension claims

41. What remedies exist for pension-related claims against employers in insolvency or reorganization proceedings and what priorities attach to such claims?

The provisions for dealing with pension-related claims against employers in insolvency proceedings vary among member states. Member states have very different approaches to pensions, regardless of whether they are internal to the company or guaranteed by a third-party insurer (e.g, in Germany). In the latter case, the insolvency of the employer company should not affect the protection of the pension fund.

Some jurisdictions include pension liabilities as preferential claims, while in other jurisdictions pension-related claims rank as an unsecured debt in the absence of any special circumstances. Other jurisdictions deal with pensions by way of a statutory guaranteed fund (e.g, Germany). There is no EU-wide regulation on how a pension deficit (whether it is an actuarial deficit or unpaid pension contributions) is to be treated in the ranking of insolvency claims.

Article 8 of the Employment Insolvency Directive requires member states to ensure that necessary measures are taken to protect the interests of employees and previous employees in respect of rights conferring on them immediate or prospective entitlement to benefits under supplementary occupational or inter-occupational pension schemes outside the national statutory social security schemes.

Environmental problems and liabilities

42. Where there are environmental problems, who is responsible for controlling the environmental problem and for remediating the damage caused? Are any of these liabilities imposed on the insolvency administrator personally, secured or unsecured creditors, the debtor’s officers and directors, or on third parties?

A large amount of individual member state law in respect of environmental liabilities is derived from EU legislation. The European Union has a designated environmental policy set out in articles 191 to 193 of the Treaty on the Functioning of the European Union. EU policy is based on the precautionary principle and on the principles that preventive action should be taken, that environmental damage should as a priority be rectified at source and that the polluter should pay.

The Recast Regulation does not deal with the impact of environmental liabilities on insolvency and therefore each member state must enact appropriate legislation in this regard (drawing on the above directives and their national implementation). The rules among member states differ and often also vary depending on the type of insolvency process or the identity of the person whose actions caused the environmental liability for example, whether it was caused by the company pre-insolvency or by the company while in an insolvency process, or both, and whether, for example, an office holder can disclaim a contract where environmental liability attaches.

Liabilities that survive insolvency or reorganization proceedings

43. Do any liabilities of a debtor survive an insolvency or a reorganization?

The rules in respect of the survival of liabilities in an insolvency or reorganization vary between member states. Where the debtor is reorganized pursuant to some form of formal plan (e.g, an insolvency plan under German law), the debts of the debtor will usually survive only to the extent specified in any such formal plan. Some insolvency procedures do not, however, bind certain types of creditors (typically secured or preferential) unless they vote in favor of the procedure.

The treatment of employment liabilities upon the transfer of the debtor’s business and assets is the subject of the Acquired Rights Directive.

Distributions

44. How and when are distributions made to creditors in liquidations and reorganizations?

The rules governing the distribution of proceeds from the realization of assets will be dictated by the insolvency laws in the relevant member states. Under the rules of most member states, once claims have been admitted or rejected and all preferential and secured claims have been dealt with in liquidations, any remaining assets will be realized and the remaining funds will be distributed pari passu to all unsecured creditors.

In most jurisdictions, reorganizations are treated differently, and distributions are made in accordance with the terms of the plan agreed with creditors.

Under the Recast Regulation and to ensure equal treatment of creditors, the distribution of assets is coordinated by the office holder of the main proceedings under the ‘hotchpot’ rule. This rule requires that where a creditor, after the opening of the main insolvency proceedings by any means (including enforcement) obtains total or partial satisfaction of its claim out of the assets of the debtor situated in another member state, it must return what it has obtained to the liquidator.

This is strengthened by the rule that a creditor who has obtained a dividend on its claim will share in distributions made in other proceedings only where creditors of the same ranking have in those proceedings received a dividend in the same proportion of their claims. This procedure ensures dividends are paid evenly to creditors regardless of the number of jurisdictions in which they have lodged claims.

The Recast Regulation also attempts to protect the interests of all creditors by empowering the liquidator in the main proceedings to lodge the claims of all creditors in any secondary proceedings where it serves the creditors’ interests. Any surplus of assets in the secondary proceedings, after payment of all claims provable under local law, must be remitted to the insolvency office holder in the main proceedings (article 49).

SECURITY

Secured lending and credit (immovables)

45. What principal types of security are taken on immovable (real) property?

There is no harmonized system for the creation of security within the European Union. Each member state has its own provisions for the creation of security, both in type and procedure required (including any steps to perfect such security). Generally, in each member state, it is possible to take a mortgage or fixed charge over immovable (real) property, and this security will usually cover fixtures and fittings relating to the secured immovable (real) property. There is usually a registration requirement for the security to be effective and enforceable against third parties.

Secured lending and credit (movables)

46. What principal types of security are taken on movable (personal) property?

Each member state has its own provisions for the creation of security and there is no harmonized system for the taking of security within the European Union. However, common types of security include:

• liens;
• possessory pledges;
• non-possessory pledges (in some jurisdictions, the concept of the pledge has been refined so that the security can exist but physical delivery, a characteristic normally associated with a pledge, is not required for the security to be effective);
• chattel mortgages – similar in nature to the possessory pledge;
• security assignments – an assignment of personal property to the secured party;
• fixed charges – providing security over a particular asset or class of assets;
• floating charges (or equivalent) – security over all of the assets and undertakings of the chargor; and
• reservation of title.

Other types of security include:

• rights of privilege granted by law;
• special liens only given to secure medium or long-term bank facilities;
• assignments of receivables; and
• cash collateral charges.

Effect of insolvency proceedings on security rights

Regulation (EU) 2015/848 (the Recast Regulation) specifically addresses third parties’ rights in rem and states that the opening of insolvency proceedings in one EU member state will not affect the rights in rem of creditors or third parties in respect of tangible or intangible, movable or immovable assets belonging to the debtor that are located in a member state other than the one in which the proceedings are commenced.

The Financial Collateral Arrangements Directive

Directive 2002/47/EC (the Financial Collateral Arrangements Directive) came into force on 27 June 2002 and had to be implemented by member states by 27 December 2003. The purpose of the Financial Collateral Arrangements Directive was to simplify the process of taking financial collateral across the European Union by introducing a minimum uniform legal framework. Financial collateral under the directive is made up of cash, financial instruments and credit claims.

The directive provides for rapid and non-formalistic enforcement procedures designed in part to limit contagion effects in the event of default by one of the parties to the arrangement. Member states may not make the creation, perfection, validity, enforceability or admissibility of a financial collateral arrangement dependent on the performance of any formal act. Also, member states must ensure that the collateral taker is able to realize financial collateral in one of the following manners:

• if it concerns financial instruments, by sale or appropriation and by setting off their value against, or applying their value in the discharge of, the relevant financial obligations;
• if it concerns cash, by setting off the amount against or applying it in discharge of the relevant financial obligations; and
• if it concerns a credit claim, by sale or appropriation and by setting off their value against, or applying their value in the discharge of, the relevant financial obligations.

Appropriation is possible only if this has been agreed on in the arrangement. The directive also stipulates that certain insolvency provisions do not apply. Financial collateral arrangements may not be declared invalid or void or be reversed on the sole basis that they have been concluded or that the financial collateral has been provided on the day of the commencement of winding-up proceedings or reorganization measures, but before the order or decree making that commencement; or in a prescribed period before, and defined by reference to, the commencement of such proceedings or measures or by reference to the making of any order or decree.

CLAWBACK AND RELATED-PARTY TRANSACTIONS

Transactions that may be annulled

47. What transactions can be annulled or set aside in liquidations and reorganizations and what are the grounds? Who can attack such transactions?

The rules relating to the validity or unenforceability of legal acts detrimental to creditors, including who can bring them and the timing for challenging a transaction, vary between member states and are a matter for the law of the state where the insolvency proceedings are opened.

Typically, transactions at an undervalue (i.e, the gifting or undervalue transfer of property) can be set aside, although the relevant pre-insolvency ‘look-back’ period during which a transaction will be vulnerable to such a challenge varies widely between member states and may also depend on whether the transfer is to a related or connected party. It is also very common that transactions preferring one creditor over another are vulnerable to challenge, particularly when debts have been paid that are not yet due and payable. Most jurisdictions also make specific provisions for the avoidance of transactions motivated by fraud or transactions where there was an intention to move assets beyond the reach of all or certain creditors.

The usual result of a transaction being successfully challenged is that the property in question is required to be returned to the company or its insolvency office holder. In some jurisdictions, however, the court has very wide discretion as to the orders that can be made, which may go beyond simply requiring the return of the property and may, depending on the circumstances and conduct of parties involved (including directors), include pecuniary penalties.

Under Directive (EU) 2019/1023 (the Restructuring Directive), member states must ensure that new and interim financing is adequately protected and not declared void, voidable or unenforceable. Member states can decide that such protection only applies to new financing if the restructuring plan has been confirmed by a court.

Equitable subordination

48. Are there any restrictions on claims by related parties or non-arm’s length creditors (including shareholders) against corporations in insolvency or reorganization proceedings?

The principle of equitable subordination exists in a number of member states (e.g, Austria, whereby certain debts, such as repayment of loans made when the company is in ‘crisis’, owed to a shareholder are subordinated in a company’s insolvency). Different member states, however, have different rules governing the extent of subordination. In Germany, for example, shareholder loans made by lenders holding more than 10 per cent of the company’s shares, and shareholder claims resulting from comparable transactions, are subordinated in a company’s insolvency irrespective of whether they qualify as equity substitution. Also, repayments made and collateral granted in relation to these shareholder loans within the relevant look-back period are subject to clawback rights.

Lender liability

49. Are there any circumstances where lenders could be held liable for the insolvency of a debtor?

There is no general European concept of lender liability for the insolvency of a debtor. The position on liability for lenders depends on the national law in each member state. Most jurisdictions do not have a specific (statutory) regime regarding the liability of lenders for the insolvency of a debtor, but lenders may under certain circumstances be held liable by the court for damages; for example, concerning the insolvent debtor if lenders invalidly terminate a credit agreement, or concerning creditors for (indirect) damages if lenders unlawfully continue to provide (emergency) financing to a borrower in financial distress – which could also lead to clawback risks if it causes an unlawful reduction in means of recourse for creditors.

Liability for lenders may, under certain circumstances, also arise based on provisions regarding directors’ liability if the lenders act as shadow directors (de facto directors) of an insolvent company.

GROUPS OF COMPANIES

Groups of companies

50. In which circumstances can a parent or affiliated corporation be responsible for the liabilities of subsidiaries or affiliates?

Each member state has its own legislation regulating if and how a parent or affiliated corporation can be responsible for the liabilities of subsidiaries or affiliates. In general, the starting point is that each corporate entity is self-standing and, because of the principle of limited liability, not responsible for the actions or insolvency of any other group company. This can, however, change in certain circumstances.

Whether a court can order a distribution of group company assets pro rata without regard to the assets of the individual corporate entities involved varies between member states. In some member states, in highly exceptional circumstances a court may order this. In other member states (e.g, Austria) regardless of whether group companies are considered to be one economic entity, the principle of legal separation is to be respected in all circumstances and the transfer of assets between several insolvent debtors (even within the same group) is prohibited.

Combining parent and subsidiary proceedings

51. In proceedings involving a corporate group, are the proceedings by the parent and its subsidiaries combined for administrative purposes? May the assets and liabilities of the companies be pooled for distribution purposes?

Under Regulation (EU) 2015/848 (the Recast Regulation), it is possible to open the main proceeding in relation to each individual company. Generally, the assessment of where a debtor’s center of main interests (COMI) is located is applied on an entity-by-entity basis, and therefore different rules apply to different entities in respect of their insolvency proceedings, but the rules in some member states (e.g, Spain) allow group companies to make joint filings for insolvency in certain circumstances.

The priority of the ranking in any distribution of a creditor of a number of group entities differ depending on the jurisdiction of the relevant proceedings. There are some instances where the courts of one jurisdiction will consider applying the order of priority of another jurisdiction, but this is generally exceptional and does not happen unless there is a significant benefit to the administration and realization of value. To avoid the difficulty of claims having different priorities in different jurisdictions, office holders have (in certain instances) given creditors in another jurisdiction the benefit of an undertaking to treat their claims with the same priority as if such a claim had opened in their local jurisdiction.

These arrangements are sometimes referred to as ‘synthetic secondary proceedings’, the benefits of which have now been formally recognized under article 36 of the Recast Regulation. In Comité d’entreprise de Nortel Networks and others (2011), the Court of Justice of the European Union ruled that where a company is in both main and secondary proceedings, the courts of member states in which main and secondary proceedings have been opened both have concurrent jurisdiction to determine which of the company’s assets fall within the secondary proceedings. Where both courts purport to exercise this jurisdiction, the first decision in time will be binding.

The Recast Regulation includes a separate chapter dealing with the insolvency of members of a corporate group. The chapter deals with two aspects. First, it increases the cooperation that is to take place between members of a company that are in insolvency procedures. Second, it establishes the concept of a group coordination plan for members of a group of companies.

As regards cooperation, the Recast Regulation encourages cooperation between insolvency office holders as well as courts supervising respective insolvencies. An insolvency office holder appointed over one member of a corporate group is to cooperate with an insolvency office holder appointed to another member of the same group to the extent that cooperation is appropriate to facilitate the effective administration of the proceedings, is not incompatible with the rules applicable to such proceedings and does not entail any conflict of interest.

The use of agreements or protocols between insolvency office holders is officially envisaged and accepted. The intended aim of the cooperation is that information that may be relevant to the other proceeding is immediately communicated and that possibilities of restructuring the group are explored and, where such possibilities exist, these are coordinated with respect to the proposal and negotiation of a coordinated restructuring plan. Also, an office holder appointed in insolvency proceedings for one member of a corporate group is given rights aimed at encouraging a group-wide rescue.

As regards the group coordination plan, any insolvency office holder appointed over a group member of companies can request the court having jurisdiction of the insolvency of that group member to open group coordination proceedings. Where multiple courts are asked to open group coordination proceedings, the court first seized is to have jurisdiction. The request is to be accompanied by:

• a proposal on who is to be nominated the group coordinator;
• an outline of the proposed group coordination plan;
• a list of the insolvency practitioners appointed in relation to group members and, where relevant, the courts involved in the insolvency proceedings of the group members; and
• an outline of the estimated costs of the proposed group coordination and an estimation of the share to be paid by each group member.

A court seized with a request to open group coordination proceedings must open these if it is satisfied that:

• the opening of proceedings is appropriate to facilitate the effective administration of the insolvency proceedings relating to the different group members;
• no creditor of the group member anticipated to participate is likely to be financially disadvantaged by such participation; and
• the proposed coordinator is eligible under the law of a member state to act as an insolvency practitioner.

The proposed group coordinator may not be one of the insolvency office holders appointed in respect of other group members and must not have a conflict of interest in respect of the group members, their creditors and the insolvency office holders appointed over group members. When opening group coordination proceedings, the court must appoint a coordinator, decide on the outline of the coordination and on the estimation of costs and the share to be paid by each group member.

The group coordinator so appointed is to:

• identify and outline recommendations for the coordinated conduct of the insolvency proceedings; and
• propose a group coordination plan that recommends a comprehensive set of measures appropriate to an integrated approach to the resolution of the group members’ insolvencies.

In particular, the plan may contain proposals for:

• measures to be taken to re-establish the economic performance and financial soundness of the group;
• the settlement of intra-group disputes as regards intra-group transactions and avoidance actions; and
• agreements between the different insolvency office holders.

However, the coordination plan must not include recommendations as to any substantive consolidation of proceedings or estates. The remuneration of the coordinator is to be ‘adequate, proportional to the tasks fulfilled and reflect reasonable expenses’. The coordinator must also establish the final statement of costs and the share to be paid by each group member.

An insolvency office holder of any group member may object to its inclusion in the group coordination plan of the proceedings in respect of which it has been appointed, or to the person to be appointed as the group coordinator. National law dictates the approval requirements (if any) that an insolvency office holder will need to obtain to decide whether to participate in the group coordination plan. Where an office holder decides not to participate, the group coordination proceedings will not have any effect on that group member.

Where an office holder has agreed to be part of the group coordination proceedings, it will need to consider the coordinator’s recommendations but is not obliged to follow them or the group coordination plan (but would need to give reasons why it is not following the plan). At the time of writing, no group coordinator has yet been appointed in any EU-wide insolvency proceedings.

INTERNATIONAL CASES

Recognition of foreign judgments

52. Are foreign judgments or orders recognized, and in what circumstances? Is your country a signatory to a treaty on international insolvency or on the recognition of foreign judgments?

Under Regulation (EU) 2015/848 (the Recast Regulation), judgments that concern the course and closure of insolvency proceedings and compositions approved by that court must be recognized without further formalities across the EU community (article 32). Automatic recognition is also available for judgments that derive directly from the insolvency proceedings and that are closely linked to them (even if they are handed down by another court) (article 32). The Recast Regulation, however, only deals with insolvency matters. Recognition of a foreign non-insolvency related judgment may be available under Regulation (EU) No. 1215/2012 (the Brussels Regulation), which provides rules for the recognition and enforcement of foreign judgments of contracting states.

The Brussels Regulation does not apply to bankruptcy proceedings relating to the winding up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous proceedings.

Additionally, member states may have special rules for the recognition of foreign judgments and in particular whether registration of these may be required.

As a result of the exit of the United Kingdom from the European Union, the European Union no longer automatically recognizes English insolvency proceedings and schemes of arrangements or restructuring plans that commenced after the end of the implementation period on 31 December 2020. EU insolvency proceedings similarly are no longer automatically recognized under English law. Recognition of proceedings that were opened after the implementation period depends on bilateral treaties that countries might have concluded as well as local recognition processes.

UNCITRAL Model Laws

53. Have any of the UNCITRAL Model Laws on Cross-Border Insolvency been adopted or is adoption under consideration in your country?

Although various EU member states are considering the adoption of the UNCITRAL Model Law on Cross-Border Insolvency, it has only been implemented across the European Union by Greece, Poland, Romania and Slovenia. Montenegro and Serbia have also adopted the Model Law but, at the time of writing, they are still candidate countries as they have not completed their accession into the European Union.

Foreign creditors

54. How are foreign creditors dealt with in liquidations and reorganizations?

The Recast Regulation specifies that any creditor who has their habitual residence, domicile or registered office in a member state other than the state where proceedings are opened (including the tax authorities and social security authorities of a member state) has the right to lodge claims in the insolvency proceedings (article 2(12)). The treatment of foreign creditors outside the scope of the Recast Regulation depends on the laws in each member state.

Cross-border transfers of assets under administration

55. May assets be transferred from an administration in your country to an administration of the same company or another group company in another country?

The rules on whether assets can be transferred from an insolvency administration in one country to an administration in another vary between member states.

COMI

56. What test is used in your jurisdiction to determine the COMI (center of main interests) of a debtor company or group of companies? Is there a test for, or any experience with, determining the COMI of a corporate group of companies in your jurisdiction?

The Recast Regulation defines center of main interests (COMI) as the place where the debtor conducts the administration of its interests on a regular basis and is ascertainable by third parties (article 3(1)). The Recast Regulation applies the concept of COMI to each individual debtor and not to a group of companies, which can all have individual COMIs; although within the boundaries of member states it is open to member states to make legislation permitting a group of companies to file for insolvency with the same court.

The Recast Regulation contains a rebuttable presumption that a company’s COMI will be the place of its registered office, in the absence of proof to the contrary. Where a company’s central administration is in a different member state to that of its registered office, and where a comprehensive assessment of all relevant factors establishes in a manner that is ascertainable by third parties that the company’s actual center of management and supervision and of the management of its interests are located in that other member state, it should be possible to rebut the registered office presumption. T

o address concerns over ‘bankruptcy tourism’, the Recast Regulation contains provisions whereby if a debtor’s registered office has shifted in the three months preceding the filing for insolvency proceedings, the existing rebuttable presumption will no longer apply. In such cases, the debtor will need to produce evidence about COMI to show where it is located. Factors that have been held to be relevant to determine a debtor’s COMI (in addition to the registered office presumption) are:

• location of internal accounting functions and treasury management;
• governing law of main contracts and location of business relations with clients;
• location of lenders and location of restructuring negotiations with creditors;
• location of human resources functions and employees;
• domicile of directors;
• location of board meetings; and
• general supervision.

Cross-border cooperation

57. Does your country’s system provide for recognition of foreign insolvency proceedings and for cooperation between domestic and foreign courts and domestic and foreign insolvency administrators in cross-border insolvencies and restructurings? Have courts in your country refused to recognize foreign proceedings or to cooperate with foreign courts and, if so, on what grounds?

The Recast Regulation requires that the office holders in main proceedings and secondary proceedings have a duty to communicate certain information to each other and to cooperate in general; for example, the secondary proceedings office holder must give the main proceedings office holder an opportunity to submit to it a proposal on how the assets in the secondary proceedings should be used. The Recast Regulation provides for a national and an interlinked EU-wide database of insolvency proceedings to assist such cooperation.

Outside the court system, office holders in different jurisdictions can also agree to bilateral or multiparty protocols.

The Recast Regulation addresses these points and provides for enhanced cooperation and formalizes the use of protocols.

Cross-border insolvency protocols and joint court hearings

58. In cross-border cases, have the courts in your country entered into cross-border insolvency protocols or other arrangements to coordinate proceedings with courts in other countries? Have courts in your country communicated or held joint hearings with courts in other countries in cross-border cases? If so, with which other countries?

The Recast Regulation is designed to assist with cross-border cooperation between the member states of the European Union.

It addresses an obligation to cooperate and communicate between courts as well as between insolvency practitioners and courts for the purpose of facilitating cross-border cooperation of multiple insolvency proceedings in different member states. That cooperation, according to the Recast Regulation, may take any form, including agreements and protocols.

Winding-up of foreign companies

59. What is the extent of your courts’ powers to order the winding-up of foreign companies doing business in your jurisdiction?

In relation to companies in the European Union, the Recast Regulation applies. In this respect, courts of the EU member state have jurisdiction to open main proceedings where the debtor has its COMI.

The extent to which a court of an EU member state has the power to wind up a foreign company outside the context of the Recast Regulation depends on the national law of each EU member state.

UPDATE AND TRENDS IN RESTRUCTURING AND INSOLVENCY IN EUROPEAN UNION (EU)

Trends and reforms

60. Are there any emerging trends or hot topics in the law of insolvency and restructuring? Is there any new or pending legislation affecting domestic bankruptcy procedures, international bankruptcy cooperation or recognition of foreign judgments and orders?

Directive (EU) 2019/1023 (the Restructuring Directive) came into force on 20 June 2019. Member states were required to implement the Restructuring Directive by 17 July 2021 (subject to an extension of up to one year).

There have been relatively few cases on Regulation (EU) 2015/848 (the Recast Regulation) including a reference by the Spanish courts in relation to how to determine an individual’s center of main interests. Policy-wise, in June 2020, the Presidency of the Council and the European Parliament reached a political agreement on a common set of rules for central clearing counterparties. The proposal includes various measures that are aimed at reducing the risk and impact of a central clearing counterparty’s failure by providing national authorities with preventative and resolution tools to manage central clearing counterparties that are in or approaching financial distress.

The European Commission also published its proposal to harmonize substantive insolvency law across EU member states on 7 December 2022. The proposal aims to harmonize three areas of insolvency law in the European Union:

• recovery of assets;
• efficiency of proceedings; and
• fair distribution of recovered assets among creditors.

To achieve this, the proposal introduces new minimum standards, which member states may exceed. Key provisions include rules and standards on avoidance actions, asset tracing, pre-pack proceedings, obligations to file for insolvency and creditors’ committees. However, given that the proposal must still advance through the legislative process, substantial changes may still be made to it.

* The information in this chapter was accurate as at October 2023.

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