More cooperation needed on insolvency
in the EU

Differing national insolvency laws create conflict and confusion when international companies become insolvent. Harmonisation of EU regulations is therefore needed. Ackordscentralen's CEO Mikael Kubu and Marc Udink, Head of the international insolvency organisation INSOL Europe, were in agreement on this point when they met in the Hague.

"EU legislation does not, per se, offer any cooperation at all between interested parties in different countries when a company becomes insolvent. The law does not say how we should cooperate and communicate with our counterparts in other countries," says Mr Marc Udink from his office in the Hague.

He is a lawyer and a specialist in insolvency and business reorganisation, as well as being Secretary-General of INSOL Europe, the world's oldest international insolvency organisation.

As things stand, the EU Insolvency Regulation (EIR) says that the place of insolvency proceedings for a company operating in several countries should be determined by the member state in which the company has its centre of main interest (COMI). This will result in one main proceeding and several secondary proceedings. The aim is then that participants such as liquidators, judges and lawyers in these proceedings should cooperate with each other. This seldom works in practice, however.

The problem is that EIR does not say how cooperation should take place, nor does EIR require that it should actually do so.

Complicated reorganisations

"EU legislation says that judges can cooperate, not that they must do so. And it must be realised that judges do not usually even leave their offices, much less cooperate," says Mr Udink, adding that differences between national laws mean that reorganisation can be very complicated if the company has connections with several countries. He mentions an example of a current bankruptcy involving a company with operations in France and Belgium. The lawyers have now been arguing for one and a half years over a possible sale of the company.

Mr Udink thinks that the EU should make cooperation a real requirement, and also explain how this should be achieved, in line with the practical guidelines developed by INSOL Europe. Mr Udink was one of the driving forces behind the "CoCo" guidelines introduced in 2006. They provide a framework for cooperation between people working in the insolvency field in different countries in the absence of guidance in EIR on cross-border insolvency cooperation. Mr Udink also considers that the EU should introduce a "comply or explain" system, imposing a duty either to comply with the guidelines or explain failure to comply.

Ackordscentralen CEO Mikael Kubu agrees that differences in national laws, combined with the absence of uniform substantive law provisions cause problems.

"All developed nations have their traditions in the field of insolvency law, and everyone thinks their own system is the right one," he explains.

Forum shopping

Another problem with EIR is the division between main proceedings and secondary proceedings. It may be difficult to determine the country in which a business has its centre of main interests. The CEO and management team may be in one country, the main owners/shareholders in another, and manufacturing may take place in a third country. This may result in long-drawn-out conflicts that must be settled by a court. The absence of uniform law provisions has also favoured forum shopping (read Professor Dotevall's article on page 8). This involves attempting to open main proceedings in a jurisdiction where the outcome of a reorganisation or of debt relief will be most advantageous, even though the centre of main interests is in an entirely different country.

"Credit institutions and insurance companies, which are not currently covered by EU insolvency legislation, should also be included," adds Mr Udink.

These are all problems that are commonplace, since most companies with more than 50 employees nowadays have some kind of international connection. That is why it is important to address this issue and introduce more uniform regulations.

New regulations on the way

The EU Parliament has also noted the need for clearer regulations in the EU. The Legal Affairs Committee recently pointed out that differences in insolvency laws in member states inhibit competition and may be an obstacle to successful business reorganisation or debt relief. The Parliament has also urged the Commission to evaluate the original insolvency regulation of 2000. The Commission has recently responded by inviting tenders to produce a report on the subject, probably for publication next year.

Harmonise proceedings, not the law

However, neither Mr Udink nor Mr Kubu think it realistic to expect complete harmonisation of EU insolvency legislation, even though steps are now being taken to review the law. The differences between member states are too great.

"It might work in Scandinavia, or together with Germany and the Netherlands, but not with the UK and France, or with Italy," opines Mr Udink.

"I don't think we will see uniform insolvency law throughout the EU in my lifetime," adds Mr Kubu.
But even if differing national insolvency laws remain, both men believe it will be possible to harmonise insolvency proceedings. This will involve harmonising the practical ways of resolving conflicts and cooperating over national boundaries in the EU when an international company goes bankrupt or needs to be reorganised. This will take time, however, since not only are there wide differences between national laws; there are also differences in the traditional approach to resolving insolvency problems. Mr Udink mentions the former eastern bloc countries, which have often "imported" insolvency legislation from the west.

"We must remember that Eastern Europe does not even have a tradition of ownership. They may have ultra-modern insolvency laws, but they do not use them; they resolve these issues in their own way. It takes time to bring about harmonisation. The best system does not guarantee success; it is the people who use the system who get it to work," he explains.

Mr Udink sees the benefits of harmonising not the laws as such, but the approach to resolving cross-border insolvency issues. It is a question of focusing on procedural legislation rather than substantive laws. He thinks that scope for interpretation is needed, and that guidelines allow a certain degree of flexibility. However, he does hope that the guidelines will ultimately be reflected in the law.

"This can be done by incorporating language in the law to the effect that organisations may issue guidelines, or that compliance with guidelines of the kind developed by INSOL Europe is recommended," he says.
However, this presupposes that company representatives, lawyers, judges and other participants in primary and secondary insolvency proceedings, cooperate with their counterparts in other countries. And the EU must demand cooperation. In practice, there is then really only one word in the law that needs to be replaced," Mr Udink and Mr Kubu explain; a "may" needs to be replaced by a "must".