Ireland 4, Italy 0

The European Court has delivered its long-awaited guidance on jurisdiction in insolvency proceedings

The Journal, July 2006, page 44

The decision of the European Court of Justice in Euro Food IFSC Ltd was handed down on 2 May. The case originates from the collapse of Parmalat, the Italian food company. Its subsidiary Euro Food was incorporated in Ireland; its principal purpose was to provide finance to other subsidiaries.

Briefly, after winding up proceedings against Euro Food were begun in the Irish High Court and a provisional liquidator appointed, an Italian court appointed the extraordinary administrator of Parmalat as extraordinary administrator of Euro Food. That court decided that Euro Food’s centre of main interest (COMI) was in Italy and that it had jurisdiction to determine that it was in a state of insolvency. The Irish court then held that the COMI was in Ireland, that the Irish proceedings were main proceedings and that the court was justified in refusing to recognise the Italian decision. On appeal by the Italian administrator the Irish Supreme Court referred five questions concerning the interpretation of the EC Regulation on Insolvency Proceedings (1346/2000) to the ECJ for a preliminary ruling.

Questions and answers

Question 1 asked whether, where a winding-up petition is presented to a competent court in Ireland and that court makes an order, pending the making of a winding-up order, appointing a provisional liquidator with powers to take possession of the company’s assets, that order combined with the presentation of the petition constitutes a judgment opening insolvency proceedings for the purposes of the Regulation.

The ECJ said yes. In order to ensure the effectiveness of the Regulation the “recognition principle” should be capable of being applied as soon as possible. A decision to open proceedings should not be limited to decisions formally described by a local court as a decision in the proceedings. This, however, may encourage “forum shopping” and we can also anticipate a further raft of amendments to the Regulation to include temporary administrators/liquidators.

The second question was superseded by the answer to question 1.

The third question was whether a court in a member state other than that in which the registered office of the company is situated and other than where the company conducts its interests on a regular basis, has jurisdiction to open main insolvency proceedings. The ECJ held that on a proper interpretation of article 16 of the Regulation, the main insolvency proceedings must be recognised by the courts of other member states without reviewing the jurisdiction. It was incumbent on the court hearing an application for the opening of main insolvency proceedings to check that it had jurisdiction in terms of article 3(1).

The fourth question was what factors were to be taken into account in determining the centre of main interests (COMI), in particular where the registered offices of a parent company and a subsidiary company are in different member states. The ECJ held that the COMI must be identified by reference to criteria that are both objective and ascertainable by third parties, ensuring legal certainty and foreseeability concerning jurisdiction to open insolvency proceedings. The presumption in favour of the registered office can be rebutted only if factors which are both objective and ascertainable by third parties exist which locate the COMI elsewhere. The mere fact that a company’s economic choices can be controlled by a parent in another member state is not enough. It is not clear whether the ECJ intends to imply that where a company carries on any business in the place of registration the presumption cannot be rebutted. Somewhat unhelpfully, the ECJ does not address the “head office function” test, approved in the Advocate General’s opinion and followed recently in the French courts.

The last question reflected concerns that the (Irish) provisional liquidator had not been given sufficient opportunity to be heard in Parma. The ECJ considered that the right to be heard and to be notified of procedural documents occupied an eminent position in the conduct of a fair legal process, and that “equality of arms” principle was of particular importance in insolvency proceedings. Any restriction on the exercise of the right to be heard must be duly justified and surrounded by procedural guarantees ensuring that persons concerned by such proceedings actually have the opportunity to challenge the measures adopted in urgency. The ECJ therefore decided that a member state may refuse to recognise insolvency proceedings opened in another member state where the decision to open the proceedings was taken in flagrant breach of the fundamental right to be heard which such persons enjoy. It also observed that a national court cannot simply impose its own concept of what is required on the court of another member state, but should assess whether the parties were given sufficient opportunity to be heard. In this respect the ECJ’s judgment may be considered uncontroversial.

We await with interest the resolution of the remaining issues relating to jurisdiction and the determination of the centre of main interests.

Alistair Burrow, Partner and Head of Recovery, Tods Murray LLP