Insolvency forum shopping

Capital market and companies economic operations seem constantly to be a step ahead of the latest legal regulations as well as political storms. What is happening now in politics impacts to a large extent the various world economies, but there is also no doubt that, in particular, multinational, global companies themselves are perfectly prepared to withstand those trends and pursue their set up goals. Their business assumptions may include a wide array of issues such as specific percentage of global revenue increase or strengthening of the brand. However it may also encompass a transfer of the central place of administration in order to find the best forum either for doing business or for insolvency.

From the comparative analysis of the results from 2007 and 2016 we can see that the financial crisis has created new obstacles for business all over the world.[1] It highlighted existing weaknesses and changed the priorities of companies in regions at all stages of development. One of the most serious problems for business, as a consequence of the global financial crisis, is the access to insolvency and restructuring.

The European Union market proves to be predictable and desirable place for doing business. Functioning as a single market with – still - 28 Member States, the European Union remains an important world trading power. In order to maintain that position and to overcome the recent severe recession, the European Commission has identified insolvency and restructuring proceedings as an important factor and one of its top priorities for creating a strong capital market.[2]

As the European Commission noticed with respect to Action Plan on building a Capital Market Union, “despite progress in recent decades to develop a single market for capital, there are still many obstacles that stand in the way of cross-border investment”.[3] These range from obstacles that have origins in national law, such as substantive insolvency law. Therefore, the European Commission consulted on the key insolvency barriers and took forward a legislative initiative on business insolvency, addressing the most important barriers to the free flow of capital and building on national regimes that work well.[4]

More integrated EU capital markets and removal of some of the deep-rooted barriers which discourage investors from diversifying their worldwide investments would produce significant benefits to the EU economy as a whole and increase the attractiveness of the EU Member States as investment destinations for third country investors. Convergence of insolvency and restructuring proceedings would promote legal certainty for cross-border investors and urge the appropriate restructuring of companies in temporary financial distress.

The Recast of the European Regulation on Insolvency that is just about to enter into force on 26 July 2017 is a great tool of a procedural nature and one of the major advantages of the EU internal market. It does not harmonize substantive national insolvency laws, but it co-ordinates different procedures of insolvency.[5]The centre stage is given to the State where the debtors’ COMI (hereinafter: “COMI”) is located that gives the State exclusive authority to open main insolvency proceedings. This automatically requires its full recognition throughout the EU. [6]

In a more general terms, based on the freedom of establishment companies properly established in one Member State can freely choose to incorporate in any other Member State to conduct business activities there. Therefore, freedom of establishment covers also situations where a company transfers its COMI abroad and consequently changes its applicable law with respect to insolvency procedures.[7] The ECJ appears to emphasize this in the preliminary questions referred to it on the right of establishment and insolvency law to clarify its position on the Member States’ choice-of-law policies.[8] From ‘Centros’, ‘Cartesio’, ‘Vale’, ‘Cadbury’, ‘Bank Handlowy’, or “Interdil” a line of cases has been developed upon which a correlation between forum shopping in international company law and forum shopping in insolvency law within the EU can be built.[9]

Similarly, the US Supreme Court has already issued several significant decisions: CTP Corp. v. Dynamics Corp. of America[10], Edgar v. MITE Corp.,[11] International Shoe Co. v. State of Washington,[12]Yukos Oil[13], Avianca[14] based on which the limits of acceptable change of applicable insolvency law are better marked.

The important question that should be examined is whether this case law differentiate between international company law forum shopping and insolvency forum shopping and consequently, whether the applicable choice of law rules indeed discourage opportunistic cross-border reorganizations and protect creditors.

More information will be provided soon in the Journal of Private International Law.

 

[1] The Global Competitiveness Index 2016 – 2017 (The World Economic Forum) https://www.weforum.org/reports/the-global-competitiveness-report-2016-2017-1/, Doing Business Index (The World Bank) http://www.doingbusiness.org/rankings.

[2] Action Plan on Building a Capital Markets Union, COM (2015) 468 Final, 30.9.2015.

[3] Communication from the Commission to the European Parliament , the Council, the European Economic and Social Committee and the Committee of the Regions Action Plan on Building a Capital Market Union; COM/2015/0468 final.

[4] Communication from the Commission to the European Parliament, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions. Capital Markets Union – Accelerating Reform, COM (2016) 601 Final, Brussels 14.9.2016.

[5] For instance: based on the Regulation all creditors have to concur to the same procedure that concerns the common debtor. Since this principle is concerned with substantive insolvency law, it requires additional application of relevant national rules.

[6] G. McCormack “Reforming the European Insolvency Regulation: A Legal and Policy Perspective” Journal of Private International Law 10 (1) 2014, p. 41.

[7] Dario Latella „The „COMI” Concept in the Revision of the European Insolvency Regulation” European Company and Financial Law Review 11 (4) 2014, p. 484.

[8] Johan Meeusen, Mirosława Myszke-Nowakowska “International company law in the European internal market: three decades of judicial activity” XI Brazilian Yearbook of International Law (Anuário brasileiro de direito internacional) 17th edition, August 2016

[9] ECJ C-212/97, Centros [1999] ECR I-1459; ECJ C-210/06 [2008]ECR I - 9614, Cartesio Oktató és Szolgáltatóbt; ECJ C-378/10 VALE Épitési kft [2012] ECR 00000, ECJ C-196/04 Cadbury Schweppes [2006] ECR I – 07995, ECJ C – 116/11, Bank Handlowy [2012] ECR 000, ECJ C – 396/09 Interedil [2011] ECR I-09915.

[10] CTP Corp. v. Dynamics Corp. of America, 481 U.S. 69 (1987)

[11] Edgar v. MITE Corp., 457 U.S. 624 (1982),

[12] International Shoe Co. v. State of Washington, 326 U. S. 310 (1945))

[13] Yukos Oil Co (2005) 321 BR 396.

[14] Aerovias Nacionales de Colombia SA Avianca (2004) 303 BR 1.

[15] Gerard McCormack “Bankruptcy Forum Shopping: The UK and US as Venues of Choice for Foreign Companies” ICLQ 63, 2014, p. 817.

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