EC insolvency regulation – referral to the European Court of Justice

Eurofoods IFSC Limited

Judgment was handed down on 27 July 2004 by the Irish Supreme Court in the case of Eurofood IFSC Limited ("Eurofood"). The case raises fundamental issues arising under the EC Regulation. However, although the Irish Supreme Court agreed with the ruling given by the Irish High Court, it found that the issues surrounding the interpretation of the EC Regulation on Insolvency Proceedings (the "Regulation") could only be resolved by the European Court of Justice ("ECJ"). It therefore referred a number of questions to the ECJ for it to consider.

The full background to the case is set out in our previous Law-Now article that was issued on 21.04.2004. To view the previous article please click here.

Facts

Eurofood was incorporated in Ireland as a wholly-owned subsidiary of Parmalat SpA ("Parmalat"), a company incorporated in Italy. Eurofood's principal business activity was providing financing facilities for companies in the Parmalat Group.

Following the collapse of Parmalat at the end of 2003, Eurofood became insolvent as virtually all of its assets were debts due from Parmalat companies or guaranteed its ultimate Parmalat parent. The Italian Parliament passed a law to permit the ''extraordinary administration of companies" on 24 December 2003, and later that month the Parmalat parent company was admitted to extraordinary administration proceedings in Italy.

On the basis of concerns that the Italian administrator (Signor Enrico Bondi) was taking steps to move the centre of main interests ("COMI") of Eurofood to Italy, Bank of America presented a winding-up petition against Eurofood in the Irish High Court on 27 January 2004. A provisional liquidator was then appointed in Ireland but the Italian court refused to recognise those proceedings as main insolvency proceedings under the Regulations. On 20 February 2004 it admitted Eurofood into extraordinary administration, declaring that its COMI was in Italy rather than in Ireland. Eurofood's creditors subsequently appealed to the Irish High Court.

Decision of High Court

The issue for the Irish Court hearing the winding-up petition was whether it had jurisdiction to wind up Eurofood under Article 3 of the Regulation (which provides that the courts of the Member State within the territory in which the debtor's COMI is situated have jurisdiction to open insolvency proceedings).

To open main insolvency proceedings in Ireland Bank of America (as petitioning creditor) had to show (a) COMI was in Ireland and (b) that the presentation of the winding-up petition and the appointment of the provisional liquidator constituted a judgment opening "main insolvency proceedings" within the meaning of the Regulation.

The High Court was satisfied that Eurofood's COMI was in Ireland, emphasis being placed on the reasoning in the English case of Daisytek[1] that the perceptions of third parties (namely creditors) who had dealings with the company was one of the most important factors.

The court also decided that the proceedings were main insolvency proceedings. For the purposes of the Regulation a decision of the Irish High Court appointing a provisional liquidator was a "judgment" opening insolvency proceedings under the Regulation. It also decided that a "liquidator" specifically included a provisional liquidator (this is not the case in the UK).

The Irish High Court held that even if that finding was wrong, the making of the winding up order (on 23 March 2004) related the commencement of the liquidation, and therefore the opening of main proceedings, back to the date of the presentation of the winding-up petition. The court considered that the opening of proceedings occurred automatically and the court did not have to make an express declaration to that effect.

Appeal to Supreme Court

Signor Bondi appealed to the Irish Supreme Court. The Supreme Court handed down 2 judgments.

Public Policy

The first judgment deals with issues of public policy concerning recognition of the Italian judgment by the Irish courts. The court held that the policy of the extraordinary administrator in not providing full information to creditors and the provisional liquidator of Eurofoods of the arguments to be raised at the Italian court hearing amounted to a breach of those parties right to a fair hearing. Accordingly, the court considered that the judgment of the Italian court allegedly opening "main insolvency proceedings" under the Regulation should not be recognised by the Irish Court.

Issues for the Supreme Court

The judgment agreed with the decisions of the High Court. The Court formulated a number of questions to be referred to the ECJ. The second judgment considered the following key issues:

(i) Whether main insolvency proceedings had first been opened in Ireland or Italy

Under the doctrine of relation back, as far as Irish law was concerned, the winding up proceedings were deemed to have been opened when the winding up petition was presented. These proceedings were main proceedings for the purpose of the Regulation.

(ii) Whether Eurofoods COMI was in Ireland or Italy

The court considered the rebuttable presumption that COMI should be the place of the debtor's registered office, and decided that in evaluating that presumption the court should be guided by preamble 13 to the Regulation (which defines COMI). This states that COMI is designed to help third parties (i.e. creditors) ascertain where the company's main interests lie.

(iii) How should subsidiaries be assessed?

Subsidiaries of larger Group structures should be assessed independently. The COMI of a subsidiary would not necessarily correspond to the location of its parent: this was so even where the parent company controlled the policy of the subsidiary, and the subsidiary was dependent upon the parent for financial backing.

Questions formulated for the ECJ

The Supreme Court held that, ultimately, the issues raised in Eurofood could only be decided with any certainty by the ECJ. It therefore formulated questions to be put to the ECJ. These are as follows:

1) Where a petition for winding-up is filed and a provisional liquidator appointed, is this sufficient to open proceedings under the Regulation?

2) It the answer to (1) is 'no', does the presentation of a winding-up petition (in Ireland) constitute the opening of insolvency proceedings by virtue of the Irish doctrine of relation back (which is the same as the position under English law)?

3) If a company's registered office and COMI are in one Member State, can the court of another Member State open main insolvency proceedings?

4) Where a parent and subsidiary are both situated within the EU, in deciding COMI, (a) should the subsidiary be viewed as a separate corporate entity; or (b) should the parent company's ability to control the subsidiary be the main factor influencing the court's decision?

5) If a decision purportedly opening main proceedings in one Member State is against the public policy of another Member State, is that second Member State nevertheless required to give effect to those main proceedings (under the doctrine of mutual recognition created by Article 17 of the Regulation)?

Comment

The issues surrounding the insolvency of Parmalat and the Parmalat Group highlight that the Regulation does not specifically provide for the insolvency of a Group which has subsidiaries in a number of different countries. Both the Irish High Court and Supreme Court were of the view that a subsidiary should be assessed independently from the control functions exercised by its parent company when evaluating COMI.

Eurofood also points to a significant difference between Ireland and the UK in that a provisional liquidator is included in Annex C to the Regulation as constituting a "liquidator" in respect of Ireland but not the UK.

The series of cases in the Irish and Italian courts highlight the problems of 'forum shopping' and jurisdictional conflicts, which the Regulations were supposed to avoid. The scope for differing interpretations of COMI and the lack of guidance concerning the effect of preamble 13 has contributed to this uncertainty. The decision of the Supreme Court is not conclusive and the decision of the ECJ on the Regulation will be important in providing greater certainty in how to apply the Regulation.

Once a decision on the question of interpretation has been given by the ECJ (which is not bound by its previous decisions), such interpretation is likely to be followed in subsequent cases. Over time, we can expect the ECJ to develop an independent interpretation of important concepts used in the Regulation.

[1] Re Daisytek – ISH Ltd (2003) BCC 562