III Secondary Insolvency Proceedings

Where main insolvency proceedings have been opened by a court of a Member State and recognised in another Member State, a court of that other Member State which has jurisdiction pursuant to Article 3(2) may open secondary insolvency proceedings in accordance with the provisions set out in this Chapter. Where the main insolvency proceedings required that the debtor be insolvent, the debtor’s insolvency shall not be re-examined in the Member State in which secondary insolvency proceedings may be opened. The effects of secondary insolvency proceedings shall be restricted to the assets of the debtor situated within the territory of the Member State in which those proceedings have been opened.

34.01 Article 34 sets out the conditions for the opening of secondary insolvency proceedings pursuant to Article 3(3), which in turn lays down that ‘[w]‌here insolvency proceedings have been opened in accordance with paragraph 1 [i.e. main proceedings], any proceedings opened subsequently … shall be secondary insolvency proceedings.’ The effect of Article 34 is to mitigate or modify the (EU-wide) ‘universality’ of main proceedings by providing for the opening of secondary (local) proceedings in Member States outside the State where main proceedings are opened, provided that the debtor has an ‘establishment’ there (see on this point the commentary on Article 3). By contrast, Article 34 does not apply to those proceedings which—in accordance with the Virgós–Schmit Report terminology¹—are called ‘independent’ territorial proceedings² (i.e. proceedings that are opened before main proceedings have been opened).³

34.02 The system set out in Article 3 allows the opening of only one main proceeding and one or more secondary proceedings. The EIR as it has been recast, unlike the EIR 2000, allows secondary proceedings to be any of the types of proceedings listed in Annex A. This means that not only winding-up proceedings but also reorganisation proceedings or pre-insolvency proceedings may now be opened as secondary proceedings.⁴

34.03 The system is arranged in such a way that the main proceedings play a dominant role relative to secondary proceedings. Moreover, the insolvency practitioner (IP) of the main proceedings is empowered to exercise various rights in the secondary proceedings (see e.g. Article 46) and now, more radically, to discourage the opening of secondary insolvency proceedings altogether (Article 36). The latter point is dealt with more fully in the commentary on Article 36.⁵ In any case, it is commonly accepted that the opening of secondary proceedings should not damage interests that are protected by the main proceedings.⁶

34.04 Chapter III corresponds to Chapter III of the EIR 2000 but it is different from the latter in a number of material respects. The changes partly reflect Court of Justice of the European Union (CJEU) case law on the interpretation of the EIR 2000 and especially the decisions taken in Bank Handlowy⁷ and Burgo Group,⁸but some new changes have also been introduced in the process of recasting the EIR. The recast EIR has modified the rules concerning the opening of secondary proceedings both directly and indirectly. It has modified the rules directly by improving the wording of Article 34 (relative to Article 27 of the EIR 2000) and substantially enlarging its scope by implicitly allowing any form of proceedings listed in Annex A to be opened as secondary proceedings.⁹ The recast EIR has, moreover, modified the EIR 2000 scheme indirectly in that it has not only changed the definition of ‘establishment’ (the jurisdictional requirement for the opening of secondary proceedings: Article 2(10))¹⁰ but has also regulated in Article 38 the decision to open secondary proceedings,¹¹ and has introduced in Article 39 the right to obtain a judicial review of the decision to open secondary proceedings.¹²

34.05 Recital 40, which replicates with some formal changes Recital 19 of the EIR 2000, provides:

Secondary insolvency proceedings can serve different purposes, besides the protection of local interests. Cases may arise in which the insolvency estate of the debtor is too complex to administer as a unit, or the differences in the legal systems concerned are so great that difficulties may arise from the extension of effects deriving from the law of the State of the opening of proceedings to the other Member States where the assets are located. For that reason, the insolvency practitioner in the main insolvency proceedings may request the opening of secondary insolvency proceedings where the efficient administration of the insolvency estate so requires.¹³

This explains why, concerning the architecture of EIR 2000, Virgós and Garcimartín wrote that secondary insolvency proceedings can basically have both a defensive function and an auxiliary function, explaining that the former is related to the idea of protecting local interests, while under the latter the territorial proceedings facilitate the administration of the main insolvency proceedings and the efficient realisation of the debtor’s assets.¹⁴ Case law of both the CJEU and national courts has confirmed the existence of both functions.¹⁵

34.06 The commentary on Chapter I of the EIR (and especially the commentary on recast Articles 3 and 7) explains that the opening of main proceedings produces effects in every Member State; that the courts of the main proceedings have control over all the assets of the debtor, even if they are spread across different States; that these courts, unless otherwise provided (see Articles 7–18), apply their own domestic law; that the IP in main proceedings may exercise all their powers in any other Member State, and that the creditors, even if they have their habitual residence, domicile, or registered office in another Member State, may lodge their claim in the main proceedings. However, this framework might not be regarded as sufficiently protective by creditors resident in another Member State who would favour the application of their own domestic law in relation to assets there located. The opening of secondary proceedings would, however, enable this to occur: this is a crucial way in which secondary proceedings can perform a defensive function. National courts appear cognisant of the defensive functions that can be performed by the opening of secondary proceedings. Consider, for example, Komárom-Esztergom Megyei Bíróság.¹⁶ The German owners of a Hungarian textile company applied to the Local Court (Amtsgericht) of Hechingen in Germany to open main insolvency proceedings against the Hungarian company. They stated that the debtor’s centre of main interests was in Germany. The German court opened main insolvency proceedings on 31 March 2005 and appointed a main insolvency liquidator. The main liquidator terminated employment contracts on the date main proceedings were opened in Germany without taking into account the rules of Hungarian labour law. The employees filed an objection against the liquidator in the Hungarian court which considered this as a petition for opening secondary proceedings and appointed a secondary liquidator to oversee the secondary proceedings. This defensive function of the secondary proceedings could also be said to underpin the disputes in Bank Handlowy and Burgo Group, both of which resulted in requests for preliminary rulings from the CJEU.¹⁷ Both cases will be examined later in this chapter, when attention is focused on the concept of establishment¹⁸ and the requirement of appropriateness (of opening).¹⁹

34.07 As mentioned earlier ([34.05]), secondary proceedings can act as a support for main proceedings and, on this point, some scholars give the example of an IP in main proceedings who, since the lex concursus universalis does not affect the rights in remsituated within the territory of another Member State (see Article 8), requests that secondary proceedings be opened in order to preserve or realise assets subject to in rem rights more efficiently.²⁰ However, this is not the only case where secondary proceedings can support main proceedings. In this connection it has been pointed out that the IP in main proceedings might have an interest in opening secondary proceedings because the law of the State where secondary proceedings are opened could provide for prescriptions—for example, concerning fraudulent transfers²¹ or coercive measures²²—which would prove more advantageous for the general body of creditors.²³ Nevertheless, other writers are sceptical about whether the opening of secondary proceedings could really offer any advantages and observe that if the IP in main proceedings needs assistance in another Member State, the court of the main proceedings is empowered to appoint local advisors without opening secondary proceedings.²⁴ The appointment of such local advisors will not, however, lead to the application of the law of the place of secondary proceedings, and there will be cases in which the application of this local law will (for the reasons already explained) facilitate the efficient preservation or enhancement of the debtor’s estate.

34.08 Local courts encourage a broad interpretation of the auxiliary function of secondary proceedings. Consider, for example, FNV Bondgenoten.²⁵ The court of Athens, in Greece, opened main insolvency proceedings in respect of Olympic Airlines. The Dutch establishment of Olympic Airlines had employees with employment contracts governed by Dutch law. The Greek liquidator was of the opinion that, in order to be able to terminate those employment contracts, it would be necessary to obtain the prior consent of a Dutch supervisory judge (rechter-commissaris), since Dutch insolvency law—which is applicable on the basis of Article 10 of the EIR 2000 (see now Article 13)—requires such prior consent. The opening of secondary proceedings in the Netherlands would have resulted in the appointment of a supervisory judge. For that reason the Dutch court was requested to open secondary insolvency proceedings in relation to Olympic Airlines in the Netherlands and this request was granted.

34.09 Under the EIR 2000 it was debated whether the court requested to open secondary proceedings should evaluate whether the opening of the secondary proceedings could be useful (or even necessary) to either protect local interests or assist the IP in the main proceedings or, to put it another way, if the opening of the secondary proceedings was ‘appropriate’ on the facts. This question, which has been answered by the CJEU in Bank Handlowy and Burgo Group, is dealt with in the commentary on Article 38.²⁶

34.10 To open secondary proceedings some conditions must be observed. Like Article 27 of the EIR 2000, Article 34 permits the opening of secondary proceedings under the twofold condition that ‘main insolvency proceedings have been opened by a court of a Member State and recognised in another Member State’ and the requested court ‘has jurisdiction pursuant to Article 3(2)’.

34.11 Article 34 begins by establishing the following prerequisite: ‘Where main insolvency proceedings have been opened by a court of a Member State and recognised in another Member State.’ This sentence means that Article 34, as well as the whole of Chapter III, applies to secondary proceedings, that is, to territorial proceedings opened after the opening of main proceedings. This sentence also implies that—broadly speaking—neither Article 34 nor Chapter III applies to territorial proceedings that are opened before main proceedings have been opened and which remain independent of them. In the past, this rule was absolute.²⁷ By contrast, this rule is now more relaxed since Articles 43 and 50 also apply to independent territorial proceedings. On the distinction between main and territorial proceedings and, within the latter between secondary territorial proceedings and independent territorial proceedings, see the commentary on Article 3.

34.12 The first sentence of Article 34 means that the court seised with the request to open secondary proceedings has a duty to verify whether main proceedings have been opened. As regards this point, it is commonly accepted that the court must only perform a prima facie examination, merely to verify that the decision to open main proceedings is valid, that is, a decision to open proceedings of a kind listed in Annex A, and effective; it is commonly accepted that the seised court is not obliged to verify the soundness of the decision.²⁸ Moreover, as explained in the Virgós–Schmit Report,²⁹ it is also accepted that the court is not obliged to verify whether the decision to open main proceedings is final (i.e. not subject to further appeal).³⁰ By contrast, it is questionable whether the opening of provisional main insolvency proceedings will suffice. This question was tackled by the CJEU in its decision concerning Eurofood, in which it was held that:

it should be noted that Article 38 of the Regulation [the EIR 2000] must be read in combination with Article 29, according to which the liquidator in the main proceedings is entitled to request the opening of secondary proceedings in another Member State. That Article 38 thus concerns the situation in which the competent court of a Member State has had main insolvency proceedings brought before it and has appointed a person or body to watch over the debtor’s assets on a provisional basis, but has not yet ordered that that debtor be divested or appointed a liquidator referred to in Annex C to the Regulation. In that case, the person or body in question, though not empowered to initiate secondary insolvency proceedings in another Member State, may request that preservation measures be taken over the assets of the debtor situated in that Member State. That is, however, not the case in the main proceedings here, where the High Court has appointed a provisional liquidator referred to in Annex C to the Regulation and ordered that the debtor be divested.³¹

Nevertheless, this idea is not accepted by some scholars who maintain that a court which has opened provisional proceedings is to be regarded as a court which is not totally convinced that insolvency proceedings may be opened.³² The position under the recast EIR is considered further in the commentary on Article 37, Section II.

34.13 The first sentence of Article 34 also means that the court seised with the request to open secondary proceedings has power to verify whether main proceedings do not violate public policy, according to Article 33 which lays down that ‘[a]‌ny Member State may refuse to recognise insolvency proceedings opened in another Member State or to enforce a judgment handed down in the context of such proceedings where the effects of such recognition or enforcement would be manifestly contrary to that State’s public policy, in particular its fundamental principles or the constitutional rights and liberties of the individual.’ However, concerning this point, it is commonly accepted that the public policy grounds for non-recognition should be reduced to the minimum necessary and reserved only for exceptional cases.³³

34.14 Article 34 provides that in order to open secondary insolvency proceedings, the seised court must have international jurisdiction to do so (i.e. the court must have jurisdiction under the EIR). This prescription again refers to Article 3(2), which lays down that ‘[w]‌here the centre of the debtor’s main interests is situated within the territory of a Member State, the courts of another Member State shall have jurisdiction to open insolvency proceedings against that debtor only if it possesses an establishment within the territory of that other Member State.’ In turn, Article 3 refers to Article 2(10) which lays down that ‘establishment’ means ‘any place of operations where a debtor carries out or has carried out in the 3-month period prior to the request to open main insolvency proceedings a non-transitory economic activity with human means and assets’.

34.15 The concept of establishment is commonly understood to be an autonomous concept. This means that it does not necessarily correspond to similar concepts adopted by national laws.³⁴ Virgós and Garcimartín, moreover, point out that it does not even correspond to similar concepts adopted elsewhere in EU law and, especially, to that contained in Article 5(5) of Regulation 44/2001 on civil jurisdiction and enforcement (Article 7(5) of the latter Regulation as it has been recast).³⁵

34.16 It is for this reason that Article 2 provides its own definition of establishment. The definition is very similar to that adopted in the EIR 2000 (except for the new inclusion of a temporal qualification relating to when the establishment must exist) and consists in a combination of one external element (a place of operations), one internal element (a minimum level of organisation or stability), and one chronological element (permanence in time).

34.17 The Virgós–Schmit Report remains useful in understanding the elements of the definition of establishment in the recast EIR. It explains that ‘the mere presence of assets (e.g. the existence of a bank account) does not enable local territorial proceedings to be opened’;³⁶ that ‘place of operations means a place from which economic activities are exercised on the market (i.e. externally)’, so that the concept of establishment adopted by the Regulation could have various correspondences in national laws (establishment, branch, agency, etc); and, finally, that this place shall have ‘a minimum level of organization’, so that ‘a purely occasional place of operation cannot be classified as an “establishment”’.³⁷

34.18 Courts have had many opportunities to clarify the meaning and application of the concept of ‘establishment’ in the EIR 2000. In judicial decisions on the concept, emphasis has been placed on the prevalence of the external element (place of operations) over the internal one (organisation) on the grounds, well expressed by the Virgós–Schmit Report, that ‘the decisive factor is how the activity appears externally, and not the intention of the debtor … Potential creditors concluding a contract with a local establishment will not have to worry about whether the company is a national or foreign one. The information costs and legal risks in the event of insolvency of the debtor will be the same whether they conclude a contract with a national undertaking or a foreign undertaking with a local presence on that market.’³⁸ Accordingly, the CJEU in 2011 ruled that ‘in order to ensure legal certainty and foreseeability concerning the determination of the courts with jurisdiction, the existence of an establishment must be determined, in the same way as the location of the centre of main interests, on the basis of objective factors which are ascertainable by third parties’.³⁹ In the same vein, the Regional Court (Landgericht) of Hannover pointed out that ‘economic activity’ in terms of Article 2 of the EIR 2000 does not have to be profit-making, but that the activity must be based on the cumulative operation of staff and assets and that it must be externally observable.⁴⁰ Similarly, the Court of Appeal of Brussels ruled that the mere existence of an office or a postal box did not constitute an establishment, just as the mere presence of assets was not sufficient to conclude that there was an establishment.⁴¹

34.19 The definition set out by Article 2 does not offer any guidance concerning the legal nature of the debtor’s ‘establishment’ and, therefore, does not specify whether an establishment involved in the opening of secondary proceedings could have legal personality. This question is an important one because the presumption laid down by Article 3 that the centre of main interests (COMI) of a company corresponds to the place of the registered office is rebuttable, so that main insolvency proceedings may be opened in a State where the company has its ‘main interests’ but not its registered office, while its creditors who have their domicile in the country of the company’s registered office could ask for local protection.⁴² The question has been referred to the CJEU which, when requested to give a preliminary ruling, held that Article 2 of the EIR 2000 did not distinguish between an establishment with or without legal personality and that a different interpretation of the definition of establishment would result in a discrimination against creditors established in the Member State where the registered office of the debtor company was situated, compared with, inter alia, creditors in other Member States in which the debtor might have other establishments. Accordingly, the CJEU ruled that ‘Article 3(2) of Council Regulation (EC) No. 1346/2000 of 29 May 2000 on insolvency proceedings must be interpreted to the effect that where winding-up proceedings are opened in respect of a company in a Member State other than that in which it has its registered office, secondary insolvency proceedings may also be opened in respect of that company in the other Member State in which its registered office is situated and in which it possesses legal personality’.⁴³

34.20 Article 2(10) lays down that ‘“establishment” means any place of operations where a debtor carries out or has carried out in the 3-month period prior to the request to open main insolvency proceedings a non-transitory economic activity with human means and assets’ (emphasis added). As the Virgós–Schmit Report explains, the ‘non-transitory’ requirement means that ‘a purely occasional place of operations cannot be classified as an “establishment”. A certain stability is required. The negative formula (‘non-transitory’) aims to avoid minimum time requirements’.⁴⁴

34.21 The recast text of Article 2(10) is slightly different from that in the EIR 2000, because in the new version it is laid down that ‘establishment’ means ‘any place of operations where a debtor carries out or has carried out in the 3- month period prior to the request to open main insolvency proceedings non-transitory economic activity …’ (emphasis added). This could be said to be a constraint on forum shifting by debtors because its effect is that the courts of a Member State may have jurisdiction under the Regulation to open secondary proceedings even after the debtor has moved its establishment, provided the establishment existed within the three-month period prior to the request for the opening of proceedings.⁴⁵ Some similar rules have been adopted at national level with the aim of avoiding the fraudulent manipulation of the territorial competence of courts;⁴⁶ such rules seek to strike a balance between the need for legal certainty and the need to avoid a situation where a debtor could cease his business in order to eschew local insolvency proceedings. Another function of the temporal qualification, as discussed in the commentary on Article 3(1), is to mitigate the problems that have been encountered in previous cases under the EIR 2000 where an establishment has ceased to operate after the commencement of main proceedings, with the apparent result that secondary proceedings could not be opened—even in cases where such proceedings could perform a useful auxiliary function. Of course, in either case the choice of three months for this period of time is somewhat arbitrary.

34.22 Article 34 goes on to provide that ‘where the main insolvency proceedings required that the debtor be insolvent, the debtor’s insolvency shall not be re-examined in the Member State in which secondary insolvency proceedings may be opened’. This sentence, on the one hand, reflects the fact that Article 1 brings within the potential scope of the Regulation proceedings in which ‘there is only a likelihood of insolvency’; on the other hand, it constitutes an improvement on Article 27 of the EIR 2000, which provided that ‘the opening of the proceedings referred to in Article 3(1) by a court of a Member State and which is recognised in another Member State (main proceedings) shall permit the opening in that other Member State, in a court which has jurisdiction pursuant to Article 3(2), of secondary insolvency proceedings without the debtor’s insolvency being examined in that other State’. The drafting of the latter part of Article 27 EIR 2000 was not clear, and its interpretation resulted in an international dispute involving Polish and French insolvency laws in which the CJEU, asked to give a preliminary ruling, held: ‘Article 27 of Regulation No 1346/2000, as amended by Regulation No 788/2008, must be interpreted as meaning that the court before which an application to have secondary insolvency proceedings opened has been made cannot examine the insolvency of a debtor against which main proceedings have been opened in another Member State, even where the latter proceedings have a protective purpose.’⁴⁷ The apparent result was that insolvency could not be examined in the opening of secondary proceedings irrespective of whether insolvency had in fact been verified in the opening of main proceedings; the wording of Article 34 now clarifies that this approach applies only where the opening of main proceedings required that the debtor be insolvent.

34.23 Some scholars have queried the precise effect of Article 34. One author has suggested that Article 27 of the EIR 2000 (the precursor to Article 34) contains an irrebuttable presumption according to which if the court of the main proceedings has ascertained the insolvency of the debtor, it is to be presumed that the debtor is insolvent for the purpose of national law prescriptions on the opening of secondary proceedings.⁴⁸ However, this approach does not seem persuasive, not least because the concept of insolvency varies from State to State.⁴⁹ Most writers therefore agree that this prescription instead constitutes a derogation from national insolvency law in that, independently from what is required by national laws, if a court is requested to open secondary proceedings then this court should not verify that the debtor is insolvent (where insolvency was required to be established to open main proceedings).⁵⁰

34.24 Article 34 provides that the court may open secondary insolvency proceedings ‘in accordance with the provisions set out in this Chapter’, which in turn refers both to procedural law and to substantive law. In short, concerning the other conditions which are to be observed in opening secondary proceedings, Article 34 implies that the court must verify: (a) that the debtor has capacity to (i.e. is eligible to) enter insolvency proceedings according to the law of the State where the court is requested to open secondary proceedings (including, if required by this law, that the local assets are sufficient to cover the costs of the proceedings); (b) whether the IP in the main proceedings has given an undertaking to avoid secondary proceedings; and (c) that the party making the request for the opening of secondary proceedings is empowered to do so. Point (a) will be dealt with in the commentary on Article 35; point (b) will be dealt with in the commentary on Article 36; and point (c) will be dealt with in the commentary on Article 37.

34.25 Article 34 conclusively lays down that the effect of opening secondary proceedings is ‘restricted to the assets of the debtor situated within the territory of the Member State in which those proceedings have been opened’.⁵¹ As the secondary proceedings must be recognised in all Member States (Articles 19 and 20), the effect of the opening of secondary proceedings under Article 34 is to divide the insolvency estate originally belonging only to main proceedings into two estates of which one part, now restricted, still refers to the main proceedings and the other part, territorially limited, refers to the secondary proceedings. This effect has also been labelled ‘ring-fencing’ by secondary proceedings towards main proceedings.⁵²

34.26 As already stated, the assets falling within the scope of secondary proceedings are those assets of the debtor that are situated within the territory of the Member State where those proceedings have been opened. Their situs is regulated by Article 2(9) which provides for specific criteria aimed at ‘localising’ the assets of the debtor, which may be of many different types (shares, financial instruments, cash, property and rights entered in a public register, European patents, copyrights, tangible property, and claims against third parties, etc). Recently, issues relating to the localising of assets were tackled by the CJEU in its preliminary ruling in Comité d’entreprise de Nortel.⁵³ For an examination of these rules see the commentary on Article 2.

34.27 The time at which secondary proceedings are opened is decisive for the attachment of the debtor’s local assets to secondary proceedings. This is clear not only from Article 34 but also from Article 21(2) which lays down that ‘[t]‌he insolvency practitioner appointed by a court which has jurisdiction pursuant to Article 3(2) may in any other Member State claim through the courts or out of court that moveable property was removed from the territory of the State of the opening of proceedings to the territory of that other Member State after the opening of the insolvency proceedings. The insolvency practitioner may also bring any action to set aside which is in the interests of the creditors’.

34.28 Normally, the separation of the insolvency estate and the segregation of the secondary proceedings could be (subject to the costs considerations noted in the next paragraph) expected to be neutral for the general body of creditors in the sense that the sum of the restricted estate of the main proceedings and of the estate of the secondary proceedings corresponds to the amount of the estate originally belonging only to main proceedings, with creditors entitled to cross-filing of their claims in each set of proceedings (Article 45(2)). Sometimes, however, this separation could be advantageous for the general body of creditors. As explained earlier, this could be because, under Articles 35 and 7(2)(b), the assets which form part of the insolvency estate of the secondary proceedings are determined by the law of the State where secondary proceedings have been opened, and that law could permit the attachment of some goods which were totally or partially excluded by the law of the State where the main proceedings have been opened. This might be the case when property has been encumbered with third party rights in rem within the meaning of Article 8, which lays down that ‘[t]‌he opening of insolvency proceedings shall not affect the rights in rem of creditors or third parties in respect of tangible or intangible, moveable or immoveable assets … belonging to the debtor which are situated within the territory of another Member State at the time of the opening of proceedings’—provided, of course, that the law of the State where secondary proceedings have been opened permits this inclusion.⁵⁴ Similarly, having regard to Articles 35 and 7(2)(m), it could be that application of the law of the State where secondary proceedings have been opened would permit the setting aside of some transactions fraudulently performed by the debtor which would have been ‘immune’ under the law of the State where main proceedings had been opened⁵⁵—provided that Article 16 does not exclude this result.

34.29 Theoretically, the application of the law of the State where secondary proceedings have been opened could also result in a diminution of the originally unitary estate, because, in determining the assets within the scope of the proceedings, this law might be more restrictive than the law of the State where the main proceedings had been opened. However, it is generally considered to be unlikely that the opening of secondary proceedings might result in this form of diminution of the originally unitary estate. Some scholars try to put forward a more systematic justification for the idea that the opening of secondary proceedings should not result in a diminution of the originally unitary estate. In particular, some writers maintain that ‘putting away’ (the expression is intentionally non-technical) the effects of any divestment produced by main proceedings would require a specific regulation which is not provided for either by the Regulation or by national laws.⁵⁶ Some others justify this position teleologically, noting the principle of ‘unity of the estate’ and stressing the fact that, even though the opening of secondary proceedings divides the assets into two parties, there is still one debtor and one group of creditors.⁵⁷ Of course, whether or not these arguments are accepted, there is also the more fundamental point that the opening of secondary proceedings may reduce the overall size of the ‘unitary estate’ by the simple duplication of direct costs, because there will be two or more proceedings, rather than one set of proceedings, two or more IPs, rather than one IP, and so on.

34.30 The time at which secondary proceedings are opened is also decisive as regards the determination of the costs of proceedings and the costs incurred by the IPs—respectively in the main and secondary proceedings—in the interests of the general body of creditors.⁵⁸ This means that, after the date of the opening of secondary proceedings, the insolvency estate of the main proceedings will be liable solely for the costs and liabilities incurred in the main proceedings after this time, and likewise the insolvency estate of secondary proceedings becomes liable solely for the costs of secondary proceedings and the liabilities determined by their IP: consequently, post-commencement creditors of the insolvency estate of the main proceedings must assert their claims against the IP of the main insolvency proceedings, while post-commencement creditors of the insolvency estate of the secondary proceedings must assert their claims against the IP in the secondary insolvency proceedings.⁵⁹

 34.31 By contrast, it might be a matter of dispute as to how to treat the costs of proceedings and the liabilities incurred by the IP in main proceedings before the date of the opening of secondary proceedings which are attributable to the insolvency estate of the secondary proceedings. Here the problem arises because these liabilities, on the one hand, were established when there were only main proceedings but, on the other hand, will be paid after secondary proceedings have been opened, when the originally unitary insolvency estate has been spilt into two insolvency estates and, probably, the estate of secondary insolvency proceedings has been increased. The expenses incurred by the IP in the main proceedings in managing a property situated in a country where secondary proceedings have been opened subsequently are a case in point. Scholars suggest various solutions, but the most reasonable is that the interpreter should reason ‘as if’ the debtor’s insolvency estate had been neither split nor increased because of the application of the law of the State where secondary proceedings had been opened, and he should bear in mind that the insolvency estate of the main proceedings is fully liable for the liability attributable to the insolvency estate of the secondary proceedings.⁶⁰

34.32 The Regulation treats the assets of both the main and the secondary proceedings as independent of each other. Nevertheless, the system expressly contemplates the possibility of a transfer of assets from the secondary to the main proceedings, since Article 49 lays down that ‘[i]‌f, by the realisation of assets in the secondary insolvency proceedings, it is possible to meet all claims allowed under those proceedings, the insolvency practitioner appointed in those proceedings shall immediately transfer any assets remaining to the insolvency practitioner in the main proceedings.’ Actually, Article 49 refers to that particular situation which occurs if the realisation of the assets in the secondary proceedings has met all the claims to be settled in the secondary proceedings. Nevertheless, this prescription is commonly interpreted as an expression of the ‘principle of unity of the estate’ and as implying that, if the IP of the secondary proceedings has released some of the debtor’s assets, they do not revert to the debtor but are automatically attached to the main proceedings, so that the IP need do no more than perform their material transfer.⁶¹ This explains why one German author has written that ‘one potential way of transferring the assets from the insolvency estate of the secondary proceedings to that of the main insolvency proceedings may be for the liquidator of the secondary insolvency proceedings to release (Freigabe) the assets’,⁶² provided that, of course, these assets are treated as being within the scope of the debtor’s estate under the law governing the main proceedings. The suggestion seems to be attractive. Nevertheless, before this proposal is regarded as universally adoptable, it should be verified, country by country, that the law of the State where secondary proceedings have been opened (and especially the law concerning the liability of IPs) allows an IP to release assets belonging to the debtor’s insolvency estate outside of the case where all the claims are satisfied or, of course, outside of that where the assets to be released are of no value.

34.33 Transfers of assets, this time in both directions, could also be the outcome of special agreements or protocols concluded between IPs, now recognised under the recast EIR as legal and binding (Article 41). The process of revising the Regulation has considerably enlarged its provisions on cooperation and communication between IPs and between IPs and courts. As recast, the EIR states that the IP in the main proceedings and the IP in the secondary proceedings shall ‘coordinate the administration of the realisation or use of the debtor’s assets and affairs’ (Article 41(2)(c)) and that ‘such cooperation may take any form, including the conclusion of agreements and protocols’ (Article 41(1)) which could facilitate asset transfers. Attention will be focused on this prescription, and the possible contents of the agreements and protocols, in the commentary on Articles 41–44, where possible conflicts between IPs’ duties will also be examined.⁶³

Save as otherwise provided for in this Regulation, the law applicable to secondary insolvency proceedings shall be that of the Member State within the territory of which the secondary insolvency proceedings are opened.

35.01 Article 35 corresponds to Article 28 of the EIR 2000 and reproduces its contents (almost) faithfully. Scholars regarded Article 28 EIR 2000 as superfluous¹ because it merely reproduced the contents of Article 4(1) of the EIR 2000, which was always considered to be applicable in both main proceedings and secondary proceedings (and indeed in independent proceedings). This was conceded from the outset in the Virgós–Schmit Report, which stated: ‘in fact, this [i.e. Article 28] reiterates Article 4, which is interpreted as meaning that the law applicable to the main proceedings is the law of the State where the main proceedings are opened, and the law applicable to the secondary proceedings is the law of the State of the opening of secondary proceedings’.² This statement about redundancy may be extended to the new Article 35, which reiterates Article 7 of the recast EIR, which, in turn, corresponds to Article 4 of the EIR 2000. As such, the following comments on Article 35 will be restricted to only a few specific points, with the remaining aspects of the discussion left to the commentary on Article 7.

35.02 Article 35 is closely connected to Article 34 and to Article 3. The rules on jurisdiction and specifically the connecting factor of ‘establishment’ determine where secondary proceedings can be opened. As explained earlier in the commentary on Article 34,³ the jurisdictional concepts of the Regulation are autonomous and do not depend on national law. Once jurisdiction is established, however, the applicable law will be the law of the place of opening unless the Regulation provides otherwise. This analysis was confirmed by the CJEU in Rastelli, in which the Court stated:

With regard to judicial competence, the Regulation provides, in Article 3, that two criteria correspond to two different types of proceedings. According to paragraph 1 of that article, the centre of the debtor’s main interests, presumed to be the place of the company’s registered office, gives jurisdiction to the courts of the Member State in which it is situated to initiate the ‘main’ proceedings … Under Article 3(2) ‘secondary’ or ‘territorial’ proceedings may be opened by the courts of the Member State where the debtor has an establishment …

With regard to the applicable law, Article 4(1) of the Regulation provides that this is dependent on the determination of the court with international jurisdiction. In relation to both the main insolvency proceedings and to the ‘secondary’ or ‘territorial’ proceedings, the law of the Member State in which the proceedings are opened is applicable to those insolvency proceedings and to their effects … In view of its importance as a criterion, it is appropriate to ascertain which court has jurisdiction in the main proceedings.⁴

35.03 Article 35 contains a rule of private international law. This point has been clearly expressed by scholars⁵ and implicitly admitted by the judiciary.⁶ It is also clear from Recital 66 to the Regulation (following Recital 23 to the EIR 2000), which states:

This Regulation should set out, for the matters covered by it, uniform rules on conflict of laws which replace, within their scope of application, national rules of private international law. Unless otherwise stated, the law of the Member State of the opening of proceedings should be applicable (lex concursus). This rule on conflict of laws should be valid both for the main insolvency proceedings and for local proceedings; the lex concursus determines all the effects of the insolvency proceedings, both procedural and substantive, on the persons and legal relations concerned. It governs all the conditions for the opening, conduct and closure of the insolvency proceedings.⁷

35.04 Article 35 lays down that ‘the law applicable to secondary insolvency proceedings shall be that of the Member State within the territory of which the secondary insolvency proceedings are opened’. This wording is slightly different from that of Article 7(1), which stipulates: ‘the law applicable to insolvency proceedings and their effects shall be that of the Member State within the territory of which such proceedings are opened’. This difference in the wording of the two prescriptions already existed in the EIR 2000, where the text of Article 4(1) was different from the text of Article 28. Nevertheless, it was generally considered irrelevant in the interpretation of the English text. By contrast, this discrepancy was particularly noticeable in German-speaking countries where the German wording of Article 4(1) EIR 2000 referred to ‘das Insolvenzrecht des Mitgliedstaats’ (i.e. the insolvency law of the Member State), while the German version of Article 28 referred to ‘die Rechtsvorschriften des Mitgliedstaats’ (i.e. the provisions in law of the Member State); this created some confusion in the interpretation of Article 28 of the EIR 2000 and allowed some German-speaking writers to maintain that Article 28 referred to the law of the State of the opening of secondary proceedings in its entirety.⁸ But this interpretation was considered erroneous, a point that will be examined in Section IV. It is a pity that those who translated the recast EIR from English into German have made the same mistake.⁹

35.05 The overall effect of this is that, as in Article 28 of the EIR 2000, Article 35 refers only to substantive law provisions (where ‘substantive law provisions’ stands in contradistinction to ‘provisions of private international law’) concerning insolvency law in the State of the opening of insolvency proceedings, and does not encompass national rules of private international law concerning insolvency. A different interpretation of Article 35 would be incompatible with the objective of harmonising the choice of law rules that was at the heart of the EIR 2000 and is also core to the recast EIR, and would also create an evident misalignment between the main and the secondary proceedings.¹⁰

35.06 The referral provided by Article 35 incorporates both national substantive insolvency law and national procedural insolvency law. This point has not been questioned, since it is commonly accepted that this extended scope of referral prevents interpreters from determining whether a prescription of national insolvency law belongs to its substantive law or to its procedural law.¹¹

35.07 As stated earlier, Article 35 reiterates Article 7 and has the same function. This means that, by means of a systematic interpretation, Article 35 can be read as if it laid down that:

The law of the State of the opening of proceedings shall determine the conditions for the opening of those proceedings, their conduct and their closure. In particular it shall determine the following: (a) the debtor against which insolvency proceedings may be brought on account of their capacity; (b) the assets which form part of the insolvency estate and the treatment of assets acquired by or devolving on the debtor after the opening of the insolvency proceedings; (c) the respective powers of the debtor and the insolvency practitioner; (d) the conditions under which set-offs may be invoked; (e) the effects of insolvency proceedings on current contracts to which the debtor is party; (f) the effects of the insolvency proceedings on proceedings brought by individual creditors, with the exception of pending lawsuits; (g) the claims which are to be lodged against the debtor’s insolvency estate and the treatment of claims arising after the opening of insolvency proceedings; (h) the rules governing the lodging, verification and admission of claims; (i) the rules governing the distribution of proceeds from the realisation of assets, the ranking of claims and the rights of creditors who have obtained partial satisfaction after the opening of insolvency proceedings by virtue of a right in rem or through a set-off; (j) the conditions for, and the effects of closure of, insolvency proceedings, in particular by composition; (k) creditors’ rights after the closure of insolvency proceedings; (l) who is to bear the costs and expenses incurred in the insolvency proceedings; (m) the rules relating to the voidness, voidability or unenforceability of legal acts detrimental to the general body of creditors.

This list is understood to be non-exhaustive.¹²

35.08 The effect of the primary rule supplied by Article 7 (i.e. the application of the law of the place of opening) is that main proceedings and secondary proceedings will be generally subject to two different sets of national laws. In many cases this feature of the Regulation may not be an obstacle to the parallel running of main and secondary proceedings. However, in some cases this could command some extra effort on the part of the IP. For example, this could be the case where a creditor who has lodged their claim in both the main and in the secondary proceedings (according to Article 45) is ranked differently in each set of proceedings according to the different national laws regulating the treatment of claims. IPs will clearly be required to address such points of difference between national laws while at the same time attempting to achieve cooperation and coordination between the proceedings in accordance with Articles 41–44 (see the commentary on these articles).

35.09 Just like Article 7, Article 35 is a prescription of private international law. This means that its application raises a problem of qualification or, to use a different expression which is more popular in common law jurisdictions, it raises a problem of characterisation in order to determine whether a rule ad quem is an insolvency law prescription (such that it falls within the scope of the rule supplied by Article 7).¹³ Determining this is the responsibility of the court of the opening of secondary proceedings, the national court system and, in some cases, the CJEU, which might be requested to give a preliminary ruling as to the proper construction of Article 7. A particular characterisation challenge may arise when the court requested has to ascertain whether the rule being invoked in the insolvency proceedings is a prescription of company law or insolvency law. It is commonly accepted that this determination should not depend on how the rule is described or where it has been placed within the law and, consequently, on the fact that a rule is laid down by a statute of company law or, by contrast, by a statute of insolvency law.¹⁴ These areas of law are very often closely intermixed: first, because it is commonly accepted that functionally equivalent regulations vary in form from country to country and could pertain to either company law or insolvency law, depending on the legal tradition of the country and its policy choices.¹⁵ Cases in point include regulations on the duty to request the opening of insolvency proceedings and liability for delayed filing for insolvency; the recovery of equity-replacing loans; directors’ liability in the vicinity of insolvency; piercing the corporate veil, and so on.¹⁶ Secondly, company law and insolvency law are very often intermixed because since Centros the CJEU has officially ‘adopted’ the incorporation theory and, consequently, has permitted and encouraged the existence of so-called ‘pseudo-foreign companies’.¹⁷ These points have been dealt with in depth in the commentary on Article 7.

35.10 The rule that the law applicable to insolvency proceedings, both main and secondary, is the law of the State of the opening of proceedings is not absolute and has many exceptions. Therefore, as in Article 7, Article 35 lays down that the law applicable to secondary proceedings must be that of the Member State within the territory of which the secondary proceedings are opened, ‘save as otherwise provided for in this Regulation’. These exceptions are contained in Articles 8–18, which are titled respectively: ‘Third parties’ rights in rem’ (Article 8); ‘Set-off’ (Article 9); ‘Reservation of title’ (Article 10); ‘Contracts relating to immoveable property’ (Article 11); ‘Payments systems and financial markets’ (Article 12); ‘Contracts of employment’ (Article 13); ‘Effects on rights subject to registration’ (Article 14); ‘European patents with unitary effect and Community trade marks’ (Article 15); ‘Detrimental acts’ (Article 16); ‘Protection of third-party purchasers’ (Article 17); ‘Effects of insolvency proceedings on pending lawsuits or arbitral proceedings’ (Article 18).

35.11 The exceptional rules supplied by Articles 8–18 vary in nature and function.¹⁸ For example, it is sometimes disputed whether Articles 8–10 contain a substantive rule restricting the scope of Articles 7 and 35, or a private international rule operating as an alternative to those contained in Articles 7 and 35. By contrast, Articles 11–14 and 16–18 contain private international law prescriptions, while Article 15 contains a substantive rule that restricts the scope of Article 7 and 35.

35.12 For discussion of these exceptions and their underlying policy, see the relevant commentary.

1. In order to avoid the opening of secondary insolvency proceedings, the insolvency practitioner in the main insolvency proceedings may give a unilateral undertaking (the ‘undertaking’) in respect of the assets located in the Member State in which secondary insolvency proceedings could be opened, that when distributing those assets or the proceeds received as a result of their realisation, it will comply with the distribution and priority rights under national law that creditors would have if secondary insolvency proceedings were opened in that Member State. The undertaking shall specify the factual assumptions on which it is based, in particular in respect of the value of the assets located in the Member State concerned and the options available to realise such assets.

2. Where an undertaking has been given in accordance with this Article, the law applicable to the distribution of proceeds from the realisation of assets referred to in paragraph 1, to the ranking of creditors’ claims, and to the rights of creditors in relation to the assets referred to in paragraph 1 shall be the law of the Member State in which secondary insolvency proceedings could have been opened. The relevant point in time for determining the assets referred to in paragraph 1 shall be the moment at which the undertaking is given.

3. The undertaking shall be made in the official language or one of the official languages of the Member State where secondary insolvency proceedings could have been opened, or, where there are several official languages in that Member State, the official language or one of the official languages of the place in which secondary insolvency proceedings could have been opened.

4. The undertaking shall be made in writing. It shall be subject to any other requirements relating to form and approval requirements as to distributions, if any, of the State of the opening of the main proceedings.

5. The undertaking shall be approved by the known local creditors. The rules on qualified majority and voting that apply to the adoption of restructuring plans under the law of the Member State where secondary insolvency proceedings could have been opened shall also apply to the approval of the undertaking. Creditors shall be able to participate in the vote by distance means of communication, where national law so permits. The insolvency practitioner shall inform the known local creditors of the undertaking, of the rules and procedures for its approval, and of the approval or rejection of the undertaking.

6. An undertaking given and approved in accordance with this Article shall be binding on the estate. If secondary insolvency proceedings are opened in accordance with Articles 37 and 38, the insolvency practitioner in the main insolvency proceedings shall transfer any assets which it removed from the territory of that Member State after the undertaking was given or, where those assets have already been realised, their proceeds, to the insolvency practitioner in the secondary insolvency proceedings.

7. Where the insolvency practitioner has given an undertaking, it shall inform local creditors about the intended distributions prior to distributing the assets and proceeds referred to in paragraph 1. If that information does not comply with the terms of the undertaking or the applicable law, any local creditor may challenge such distribution before the courts of the Member State in which main insolvency proceedings have been opened in order to obtain a distribution in accordance with the terms of the undertaking and the applicable law. In such cases, no distribution shall take place until the court has taken a decision on the challenge.

8. Local creditors may apply to the courts of the Member State in which main insolvency proceedings have been opened, in order to require the insolvency practitioner in the main insolvency proceedings to take any suitable measures necessary to ensure compliance with the terms of the undertaking available under the law of the State of the opening of main insolvency proceedings.

9. Local creditors may also apply to the courts of the Member State in which secondary insolvency proceedings could have been opened in order to require the court to take provisional or protective measures to ensure compliance by the insolvency practitioner with the terms of the undertaking.

10. The insolvency practitioner shall be liable for any damage caused to local creditors as a result of its non-compliance with the obligations and requirements set out in this Article.

11. For the purpose of this Article, an authority which is established in the Member State where secondary insolvency proceedings could have been opened and which is obliged under Directive 2008/94/EC of the European Parliament and of the Council to guarantee the payment of employees’ outstanding claims resulting from contracts of employment or employment relationship shall be considered to be a local creditor, where the national law so provides.

36.01 Article 36 is a new provision with no corollary in the EIR 2000. Its contents are innovative since they allow the insolvency practitioner (IP) in the main proceedings to disaggregate procedural law and substantive law to avoid opening secondary proceedings, and—this is the crucial point—to allow the court of the main proceedings to apply the law of the State where the debtor has an establishment with regard to the distribution of proceeds from the realisation of the assets located in that State, the ranking of creditors’ claims for the purpose of making such a distribution, and the rights of creditors in relation to those assets.

36.02 The success of this innovation will depend on the flexibility of the courts in main proceedings and the ability and the willingness of their IPs to perform the ‘undertaking in order to avoid secondary proceedings’. The EIR—as is well known—is the outcome of a carefully negotiated balance between universalism and territorialism which results in a mixture variously described as ‘limited universalism’, ‘cooperative universalism’, ‘cooperative territoriality’, and so on.¹ If Article 36 succeeds, it could alter the impact of the EIR 2000 by transforming the compromise between universalism and territoriality significantly and introducing a kind of ‘virtual territoriality’. However, it will take some time to evaluate whether Article 36 will remain a regulator’s flatus vocis, an option for the IP but rarely used, or whether it really will establish a new deal in European insolvency law in those jurisdictions where ‘virtual territoriality’ was previously not an option.

36.03 The background to Article 36 lies in two English cases where the IPs involved convinced territorial creditors that avoiding the opening of secondary proceedings was in their best interests. Consider MG Rover Belux SA/NV.² MG Rover Belux SA/NV (‘Belux’) was a Belgian subsidiary of the English motor manufacturer MG Rover Ltd and the national sales company for MG Rover cars in Belgium and Luxembourg. MG Rover entered administration on 8 April 2005. On 18 April 2005 the English court made an administration order against Belux having been satisfied that pursuant to Article 3 of the EIR 2000 the company’s centre of main interests was in England. The English court declared the administration to be main proceedings. The commercial objective was to prevent a fire sale of the group’s stock of vehicles and thereby to achieve a better result for Belux creditors as a whole. On 11 May 2005 the court made an additional order declaring that the administrators (who were ‘liquidators’ within the meaning of the EIR 2000) could make payments to employees of Belux equal to what they would have received in secondary proceedings opened in Belgium if the administrators thought that such a payment would assist in the achievement of the purpose of the administration. The court also declared that the administrators could make payment to someone who was not a secured or preferential creditor without the permission of the court if the liquidators considered that such a payment would be likely to assist in the achievement of the purpose of the administration. In accordance with English procedural law the administrators made proposals to the creditors of Belux, however the proposals were that a creditor payment plan should be developed that would respect all local, and therefore Belgian, statutory priorities with a view to making prompt payment once funds became available. Those proposals were accepted by creditors on 5 June 2005. Those proposals and payments secured the cooperation of the Belgian employees and local creditors, with the result that there was no request for the opening of secondary proceedings, which would necessarily have been in the nature of winding-up proceedings (given the restricted approach of the EIR 2000 to this question) and would have interfered with the strategy of the main proceedings. The administration was successful in that the gradual winding down of the group facilitated both the settlement of a group dispute as to the ownership of the stock and a more advantageous realisation of the stock. Realisations of €11.4 million exceeded the initial estimates of the return to unsecured creditors so that it rose from 19 per cent to 37 per cent.

36.04 The case raised some obvious legal issues given that as noted earlier, Articles 3 and 4 of EIR 2000 laid down that the COMI was decisive in determining international jurisdiction and in establishing the applicable law (save as otherwise provided by the Regulation), while the effect of the administrator’s arrangement was in effect (albeit indirectly) to apply priority rules from Belgian law. Nevertheless, the court found that although the object of Article 3 EIR 2000 was to determine the supervising jurisdiction and the choice of law, it did not oblige the supervising court to insist upon the adoption of domestic law in every aspect of the insolvency or to insist that local rights should only be taken into account if secondary insolvency proceedings were commenced. The large degree of discretion that exists in English law allowed the court to provide the administrator with the ability to depart from the applicable payment provisions within an administration if just and convenient to do so and if this helped to achieve the objective of the administration. After due consideration and relying heavily on the approval of the payment proposal by creditors, on the unanimous approval of the Belgian Creditors’ committee with regard to the making of the application, and on English precedents as to the exercise of the court’s jurisdiction to approve distributions by administrators to unsecured creditors, the court gave permission for payments to be made that would not strictly accord with ordinary English law procedure. Permission was granted to extend the administration period for a further 12 months so that following the payment of all the preferential claims and a distribution to Belgian creditors, Belux could subsequently be dissolved without entailing any further liquidation procedure.

36.05 Consider next Collins & Aikman.³ Collins & Aikman was a global car manufacturer. The US holding company and the US part of the group filed for reorganisation under Chapter 11 of the US Bankruptcy Code on 17 May 2005. The European part of the group consisted of 24 companies, spread over 10 countries, employing 4,000 people at 27 sites. The European companies applied to the English court on 15 July 2005 for administration orders, asserting in each case that the centre of main interests was in England pursuant to Article 3 of the EIR 2000. The English court made administration orders on that basis and directed that the proceedings should be main proceedings. Many of the group companies’ functions were organised on a European rather than a national basis. The liquidators therefore recognised that a coordinated approach to the continuation of the businesses, the funding of the administration, and the sale of the businesses and assets would lead to a better overall return for creditors. The European creditors remained entitled to seek the opening of secondary proceedings in their respective jurisdictions against the relevant debtor entity. However, the administrators (who again were ‘liquidators’ within the meaning of EIR 2000) believed that this would have made it difficult to trade the businesses and achieve the best outcome of the sales processes on a group-wide basis. They therefore gave assurances to creditors that if no secondary proceedings were commenced, their respective financial positions as creditors under the relevant local law would be respected in the English administration as far as possible. This strategy was supported by creditors with only a few minor exceptions and the administrators believed that this would enable them to achieve very favourable realisations in excess of prior estimates.

36.06 By April 2006, the administrators held over US$125 million for distribution to creditors of the European companies. Here, concerning the interpretation of Articles 3 and 4 EIR 2000, the court ruled that there was nothing in the provisions of Article 3 to prevent the court seised of jurisdiction in main proceedings from exercising any degree of flexibility provided to that court by its own law. That being the case, English statutory provisions provided the English court with the jurisdiction to direct the administrators to depart from the application of the ordinary provisions of English law. In so finding, the court noted and approved the earlier decision of the court in the MG Rover Belux SA/NV case. Where the law of the main jurisdiction is sufficiently flexible, as English law is, to acknowledge that in the particular circumstances of an administration it is the provisions of a local (i.e. non-English) law that may (albeit indirectly) be respected, then the court may exercise that jurisdiction. On the facts of the case there was no doubt that the giving of assurances by the administrators had been thought by them to be likely to assist the objectives of the administration, which is itself a requirement of English administration law. However, the court then considered whether it would be right and reasonable to perform those assurances, for there might arise exceptional circumstances which would mean that when the time came to perform these assurances, it would be more difficult to achieve the purpose of the administration in question. After due consideration of the alternatives to the administrators’ proposals under English law, and in view of the fact that the proposals were approved by the creditors, including those significant creditors most likely to be put at a disadvantage, the court gave permission for the administrators to implement their assurances, thereby departing from the ordinary provisions of English law. In the case of one company of the group the application stood adjourned whilst further opinions were sought from the creditors to whom assurances had been given. Concerning the provision of the appropriate law in the application of Article 4 of the EIR 2000, the court held that the question of derogation from the lex consursus would be a matter to be decided by the court seised with jurisdiction in the main proceedings; thus, the court of each Member State seised of the same question would have to decide whether or not the law of that jurisdiction provided the flexibility afforded by English law. On the facts in Collins & Aikman, the court in this matter heard extensively from the joint administrators’ counsel but there was no argument that the court should not derogate from English law as the lex concursus.

36.07 The ruling of the English courts in MG Rover Belux and Collins & Aikman and the new rule established by Article 36 affect the overall architecture of the EIR. This architecture is dealt with in detail in the commentary on Article 3, and so is only summarised here. The model adopted first by the 1995 Insolvency Convention and later by the EIR 2000 is a compromise between ‘universalism’ and ‘territoriality’.⁴ Universalism consists in legitimating the court of the debtor’s ‘home’ State so that this court has control over the whole case. The court applies its domestic law to decide on outcomes (for example, by choosing between liquidation and reorganisation) and to determine priorities among creditors. The court, moreover, has control over all the assets of the debtor, even if they are spread across different States. If the court needs assistance in enforcement from a court of another State, the relation between the home country court and the local court is similar to the relation between a principal and an agent. The universalist approach seems to be very attractive: first, because it extends worldwide the pattern of domestic insolvency law and its features of ‘universality’, ‘collectivity’, and ‘unity’, and secondly, because it facilitates the unitary administration of assets and their distribution among creditors. Furthermore, this approach improves the chances of rescuing a firm.⁵ However, the universalist approach also has its drawbacks, including the fact that local creditors (i.e. those outside the ‘home’ State) do not necessarily anticipate the application of the law of the home country (or know of its effects), and that the debtor might decide to establish the centre of his affairs in a country that offers treatment that is more favourable for him. Territorialism refers to a system whereby each country administers assets within the country’s territory and recognises that other countries do the same. Accordingly, this system seems to be certain and predictable, because local creditors know that local law is competent in a choice between, say, liquidation and reorganisation and to determine priorities among creditors.⁶ However, the territorial approach lacks any central ‘authority’ which has control over the entire case. This means that the traditional framework of insolvency law and its key features must be adapted to a context which is fragmented (see further Part I of the introductory chapter to this commentary). One consequence of this is that the territorial approach encounters particular difficulties in facilitating firm or business rescue. The EIR adopts a broadly universalist approach but limits the universal reach of main proceedings by providing for the (limited) possibility of the opening of rival secondary proceedings—the latter being required to be coordinated with the former. For these reasons the system adopted by the European Union, is called ‘limited universalism’, ‘mitigated universalism’, ‘controlled universalism’, or, more recently, ‘coordinated universalism’.⁷

36.08 Of course, these terms do not have an entirely fixed or settled meaning: they simply offer a way of conceptualising and understanding the overall architecture of the EIR. What is the impact of the Collins & Aikman model (now incorporated into Article 36) on this architecture? One American scholar has suggested that this development represents a further refinement of the modified universalism model used in the EIR so as to improve the model’s efficiency. In particular, this author suggests disaggregating procedural law and substantive law, opening secondary proceedings only virtually or, to be more precise, allowing the IP in the main proceedings to avoid opening secondary proceedings and empowering the court of the main proceedings to apply the law of the State where the debtor has an establishment with regard to the distribution of proceeds from the realisation of the assets located in that State, the ranking of creditors’ claims, and the rights of creditors in relation to those assets.⁸ This scheme is permitted under the recast EIR so as to improve the prospects of achieving an efficient administration of the debtor’s estate in main proceedings. This is clear from the emphatic wording of Recitals 41 and 42:

Secondary insolvency proceedings may also hamper the efficient administration of the insolvency estate. Therefore, this Regulation sets out two specific situations in which the court seised of a request to open secondary insolvency proceedings should be able, at the request of the insolvency practitioner in the main insolvency proceedings, to postpone or refuse the opening of such proceedings.⁹

First, this Regulation confers on the insolvency practitioner in main insolvency proceedings the possibility of given an undertaking to local creditors that they will be treated as if secondary insolvency proceedings had been opened. That undertaking has to meet a number of conditions set out in this Regulation, in particular that it be approved by a qualified majority of local creditors. Where such an undertaking has been given, the court seised of a request to open secondary insolvency proceedings should be able to refuse that request if it is satisfied that the undertaking adequately protects the general interests of local creditors. When assessing those interests, the court should take into account the fact that the undertaking has been approved by a qualified majority of local creditors.¹⁰

36.09 Article 36 introduces for the first time into the EIR the device invented by English pragmatism, labelling it an ‘undertaking’, and regulating thoroughly its availability and operation by means of eleven paragraphs which can be divided into three areas: proposal, approval, and enforcement. This section deals with the first of these areas.

36.10 Article 36 contemplates the IP in the main proceedings giving a unilateral undertaking. He is the only person who is empowered to initiate this procedure. The court seised in the main proceedings or the creditors resident in a State other than the State where the debtor has an establishment are not empowered under the EIR to take a similar initiative. They may of course suggest that the IP in the main proceedings do so.

 36.11 The undertaking must concern only the ‘assets located in the Member State in which secondary insolvency proceedings could be opened’, because it is aimed at avoiding the opening of secondary proceedings—proceedings which, as explained earlier, are confined to local assets. Article 36(2), moreover, specifies that the relevant point in time for determining the assets is the moment when the undertaking is given. The undertaking consists of a unilateral proposal addressed to the general body of the local creditors, to whom the IP in the main proceedings promises that the realisation and distribution of the assets located in that Member State will be conducted in accordance with the distribution and priority rights that creditors would have had if secondary proceedings were opened in that Member State. In other words, the local law on the ranking of creditors’ claims and the rights of creditors in relation to the assets will be applied.

36.12 Article 36 seeks to coordinate the EIR with EU law on labour and, especially, with Directive 2008/94/EC, which requires Member States to set up an institution to guarantee the payment of employees should the employer become insolvent. This explains why Article 36(11) lays down that ‘[f]‌or the purpose of this Article, an authority which is established in the Member State where secondary insolvency proceedings could have been opened and which is obliged under Directive 2008/94/EC of the European Parliament and the Council to guarantee the payment of employees’ outstanding claims resulting from contracts of employment or employment relationships shall be considered to be a local creditor, where the national law so provides’. The significance of being characterised as a ‘local creditor’ is explained in section V.

36.13 Article 36(1) requires that ‘[t]‌he undertaking shall specify the factual assumptions on which it is based, in particular with respect of the value of the assets located in the Member State concerned and the options available to realise such assets’. This means that the IP cannot formulate their undertaking in generic terms, but must instead propose a detailed plan showing the legal treatment that will be applied, asset by asset or block of assets by block of assets.

36.14 Article 36(4) requires that ‘[t]‌he undertaking shall be made in writing’. Moreover, the same provision specifies that the law of the State of the opening of the main proceedings is decisive in determining ‘any other requirements relating to form and approval requirements as to distributions’.

36.15 Article 36(3) also regulates the language of the undertaking, providing that ‘[t]‌he undertaking shall be made in the official language or one of the official languages of the Member State where secondary insolvency proceedings could have been opened, or, where there are several official languages in that Member State, the official language or one of the official languages of the place in which secondary insolvency proceedings could have been opened.’

36.16 The proposal by the IP must be approved by ‘known local creditors’. ‘Local creditors’ are defined in Article 2(11) to mean those whose claims against the debtor arose from or in connection with the operation of a debtor’s establishment in the Member State in which secondary proceedings might, absent the giving of an undertaking under Article 36, be opened. While the law of the IP’s proposal is the law of the State of the opening of main proceedings, the law of the approval is the law of the State where secondary proceedings could have been opened. The latter is decisive in establishing how the IP in the main proceedings has to inform the local creditors and how creditors have to vote on it. This is the meaning of Article 36(5) which, on the one hand, lays down that ‘[t]‌he insolvency practitioner shall inform the known local creditors of the undertaking, of the rules and procedures for its approval, and of the approval or rejection of the undertaking’ (Article 36(5), fourth sentence) and, on the other hand, states: ‘[t]he undertaking shall be approved by the known local creditors.’ (Article 36(5), first sentence), and ‘[t]he rules on qualified majority and voting that apply to the adoption of restructuring plans under the law of the Member State where secondary insolvency proceedings could have been opened shall also apply to the approval of the undertaking. Creditors shall be able to participate in the vote by distance means of communication, where national law so permits’ (Article 36(5), second and third sentence).

36.17 It seems clear that the first sentence of Article 36(5) (‘The undertaking shall be approved by the known local creditors’) contains a rule of EU-substantive law which, as such, prevails over every national law, while the rest of the Article contains rules of private international law which refer to the law of the State where secondary proceedings could have been opened. This means that every ‘undertaking’ within the meaning of Article 36 must be approved, but it also means that the way in which the undertaking is to be communicated to local creditors and approved by them could vary from State to State.

36.18 Article 36(5), second sentence, provides that ‘[t]‌he rules on qualified majority and voting that apply to the adoption of restructuring plans under the law of the Member State where secondary insolvency proceedings could have been opened shall also apply to the approval of the undertaking’. This drafting could raise some problems of interpretation: it might be, for example, that a Member State does not have any procedure providing for restructuring plans such that it would be questionable how the undertaking should be communicated to local creditors and how it should be approved. This case must surely be a rare one given the culture of restructuring that has spread across the globe, in general, and across Europe in particular.¹¹ If this situation occurs, however, the IP should communicate the undertaking to the known local creditors by those means which in any particular case appear to be most appropriate, while the undertaking should be approved unanimously according to the law of contract of that State.

36.19 A second problem with the second sentence of Article 36(5) concerns the scope of this provision and in particular whether the reference to ‘the rules on qualified majority and voting’ also includes all the mechanisms of national law that aim at facilitating the approval of the restructuring plan.¹² Some national insolvency laws, such as those of Germany and Italy, provide that the plan may designate classes of claims and interests for treatment under the reorganisation plan, for example by classifying claim holders into classes of secured creditors, unsecured creditors entitled to priority, general unsecured creditors, and shareholders. Moreover, these jurisdictions state that the majority required for the approval of the plan is to be calculated for each class, subject to some prescriptions which allow the court to impose a plan approved by the majority of the classes on a class of objecting creditors according to the principle of so-called ‘class cram-down’.¹³ It might seem doubtful whether these types of provisions are also intended to apply to the approval of an undertaking under Article 36. Nevertheless, one should not insist on this position. In fact, the application of such local restructuring rules makes sense because they will enable local creditor holdouts to be resisted.

36.20 Recital 44 clarifies another aspect of local creditor approval that might otherwise remain obscure. In particular, this Recital states that ‘[w]‌here there are different procedures for the adoption of restructuring plans under national law, Member States should designate the specific procedure which should be relevant in this context’. This guidance is sensible because some Member States, such as Italy, provide for more than one procedure aimed at approving restructuring plans. Nevertheless, the statement that ‘Member States should designate the specific procedure which should be relevant in this context’ is not as clear as it might be: does this mean that the body in charge of this designation is the State, as would appear from the quoted wording, or that this body is a national entity to be designated on a case-by-case basis, or that this body is the court which might open secondary proceedings? The first interpretation seems to be the most sensible, however until the Member State legislator designates the relevant specific procedure, it will make sense for the court to take a decision.

36.21 Article 36(6) lays down that ‘[a]‌n undertaking given and approved in accordance with this Article shall be binding on the estate.’ This means that ‘the assets and rights located in the Member State where the debtor has an establishment should form a sub-category of the insolvency estate, and, when distributing them or the proceeds resulting from their realisation, the insolvency practitioner in the main insolvency proceedings should respect the priority rights that creditors would have had if secondary insolvency proceedings had been opened in that Member State’.¹⁴

36.22 Article 36(7) lays down that the IP in the main proceedings ‘shall inform local creditors about the intended distributions prior to distributing the assets and proceeds’ and that ‘[i]‌f that information does not comply with the terms of the undertaking or the applicable law, any local creditor may challenge such distribution’. This provision is crucial: first, because, before the proceeds have been distributed, the creditors can obtain information about how the IP intends to perform the undertaking; secondly, because it seems that the intention of the drafters is to limit creditors’ rights to challenge the distribution to cases where there is mismatch between the ‘information’ provided and ‘the terms of the undertaking or the applicable law’. This is sensible because any challenge would have a negative impact on the proceedings, as will be explained in the next section. Moreover, the restrictive approach to the right to challenge the decision is balanced by Article 36(10), discussed further below.¹⁵

36.23 Any challenge by creditors delays the fulfilment of the undertaking because under Article 37(7) ‘no distribution shall take place until the court has taken a decision on the challenge’. Moreover, to protect the interests of local creditors, Article 36(8) and Article 36(9) provide that ‘[l]‌ocal creditors may apply to the courts of the Member State in which main proceedings have been opened, in order to require the insolvency practitioner in the main insolvency proceedings to take any suitable measures necessary to ensure compliance with the terms of the undertaking available under the law of the State of the opening of main insolvency proceedings’ (Article 36(8)), and that they ‘may also apply … to require the court to take provisional or protective measures to ensure compliance by the insolvency practitioner with the terms of the undertaking’ (Article 36(9)).

36.24 The fact that the right to challenge the distribution is limited to the existence of a mismatch between the ‘information’ provided by the IP and ‘the terms of the undertaking or the applicable law’ does not mean that creditors are not be protected in other ways, since Article 36(10) lays down that ‘[t]‌he insolvency practitioner shall be liable for any damage caused to local creditors as a result of its non-compliance with the obligations and requirements set out in this Article’. This compensatory remedy has the advantage of being more flexible than the right to challenge the distribution for two reasons: first, because the liability of the IP does not affect the making of the distribution, and secondly, because the compensation can be made proportionate to the seriousness of the IP’s non-performance. Moreover, the wording of Article 36(10) does not rule out the possibility that creditors who challenge the distribution may also apply for compensation for the damage suffered.

36.25 Article 36(10) provides for a form of liability that will arise if the IP in the main proceedings fails to comply with the obligations and requirements laid down by Article 36 and this behaviour has caused damage to local creditors. Article 36(10) only requires that there should be a causal link between the IP’s non-compliance and the damage suffered by local creditors; it does not otherwise regulate the scope of this liability nor prescribe the applicable law to determine this. Nevertheless, this law should be understood as the law of the State where secondary proceedings could be opened: first, because Regulation (EC) No. 593/2008 on the law applicable to contractual obligations (Rome I) seems hardly applicable according to Article 1(2)(f) of that Regulation, which lays down that ‘Rome I’ is not applicable to ‘questions governed by the law of companies and other bodies, corporate or unincorporated, such as the creation, by registration or otherwise, legal capacity, internal organisation or winding-up of companies and other bodies, corporate or unincorporated, and the personal liability of officers and members as such for the obligations of the company or body’;¹⁶ secondly, because the IP’s liability is a part of the enforcement of the undertaking which refers to and is subject to the law of the State where secondary proceedings could be opened;¹⁷ thirdly, because this liability is best seen as connected with the law of the State where the damage is produced in accordance with the principle of the locus commissi delicti.

1. The opening of secondary insolvency proceedings may be requested by:

   (a)

   the insolvency practitioner in the main proceedings;

   (b)

   any other person or authority empowered to request the opening of insolvency proceedings under the law of the Member State within the territory of which the opening of secondary insolvency proceedings is requested.

2. Where an undertaking has become binding in accordance with Article 36, the request for opening secondary insolvency proceedings shall be lodged within 30 days of having received notice of the approval of the undertaking.

37.01 Article 37 deals with the right to request the opening of secondary proceedings. The first paragraph reproduces—with some changes—the wording of Article 29 of the EIR 2000. Like Article 29 of the EIR 2000, this paragraph contains two rules distinguished by the letters (a) and (b): the former is a rule of substantive law that allows the insolvency practitioner (IP) in the main proceedings to request the opening of secondary proceedings; the latter is a rule of private international law referring to the law of the State within the territory of which the opening of secondary proceedings is requested in order to determine the persons or authorities, other than the IP in the main proceedings, empowered to request the opening. The second paragraph of Article 37 has no corollary in the EIR 2000 and was added in order to coordinate Article 37 with Article 36 in the event that the IP in the main proceedings gives an undertaking in order to avoid secondary proceedings and that this undertaking becomes binding.

37.02 Article 37(1)(a) is a substantive law rule that allows the IP in the main proceedings to apply for the opening of secondary proceedings. Its rationale is that secondary proceedings can perform an auxiliary function in relation to the main proceedings (as explained in the commentary on Article 34),¹ for example by enabling the more efficient realisation of assets subject to rights in rem that are situated within the territory of that Member State (see Article 8), or by providing some other local rights or powers that are more advantageous for the general body of creditors, or by providing a stay which is not provided by the law of the State of the opening of main proceedings.²

37.03 IPs are listed Member State by Member State in Annex B, and they are defined in Article 2(5).³ This definition is broader than that provided by Article 2 EIR 2000 concerning the ‘liquidator’, for it lays down that ‘“insolvency practitioner” means any person or body whose function, including on an interim basis, is …’ (emphasis added). This means, therefore, that now even a temporary administrator may request the opening of secondary proceedings under Article 37(1)(a), provided they can be said to be an ‘insolvency practitioner in the main proceedings’. This appears to build on the approach taken by the CJEU in the Eurofood case.⁴ When requested to give a preliminary ruling on whether the appointment of a provisional liquidator under English law (whose appointment in effect divested the debtor of assets) amounted to a decision opening proceedings under the EIR 2000, the CJEU ruled:

in that respect, it should be noted that Article 38 of the Regulation [on preservation measures available to a temporary administrator appointed prior to the opening of proceedings] must be read in combination with Article 29, according to which the liquidator in the main proceedings is entitled to request the opening of secondary proceedings in another Member State. That Article 38 thus concerns the situation in which the competent court of a Member State has had main insolvency proceedings brought before it and has appointed a person or body to watch over the debtor’s assets on a provisional basis, but has not yet ordered that that debtor be divested or appointed a liquidator referred to in Annex C to the Regulation. In that case, the person or body in question, though not empowered to initiate secondary insolvency proceedings in another Member State, may request that preservation measures be taken over the assets of the debtor situated in that Member State. That is, however, not the case in the main proceedings here, where the High Court has appointed a provisional liquidator referred to in Annex C to the Regulation and ordered that the debtor be divested. (emphasis added)⁵

The effect of this was that a provisional liquidator might be eligible to invoke Article 29, provided that on a proper characterisation of the facts (including whether the debtor had been divested, one of the features of proceedings eligible to fall within the scope of the EIR 2000) the decision to appoint them could be characterised as a decision opening main proceedings. Article 37(1)(a) read together with Article 2 of the recast EIR appears to take an even more generous approach: if an ‘insolvency practitioner’ of a kind listed in Annex B is appointed in proceedings of a kind listed in Annex A, then—even if their appointment is on an interim basis—this appears capable of amounting to the opening of proceedings within the meaning of Article 37(1) without more (see further Article 2(7) and (8), and the commentary on these provisions). Thus, it seems, the temporarily appointed insolvency practitioner will be able to invoke Article 37 without the detailed inquiry suggested by Eurofood into the effects of their appointment on the facts.

37.04 By contrast, it is commonly accepted that the IP in a secondary proceeding has no right to request the opening of another secondary proceeding because this possibility would violate the legal framework of the Regulation, which broadly positions main proceedings as dominant and the secondary proceedings as dependent.⁶

37.05 Article 37(1)(b) contains a rule of private international law that refers to national insolvency laws. This means that every person or body that is empowered under national law to request the opening of national insolvency proceedings must also be regarded as empowered to request the opening of secondary proceedings. These persons or bodies vary from jurisdiction to jurisdiction such that it is impossible to list them all here. For example, Italian law lays down that if an insolvency case has criminal relevance, the right to request the opening of insolvency proceedings also belongs to the public prosecutor,⁷ while if the debtor company has public significance this right also belongs to the public authority which is in charge of supervising the business of the firm.⁸ By contrast, every jurisdiction allows the debtor and his creditors to file for insolvency proceedings. Both cases will be dealt with specifically.

37.06 Apparently, every jurisdiction allows the debtor to request the opening of insolvency proceedings. Nevertheless, this statement does not imply automatically that the debtor, who by definition is already subjected to the main proceedings, is empowered to request the opening of secondary insolvency proceedings, because Article 37(1)(b) is a rule of private international law which refers to national law. This means that the debtor may request the opening of secondary proceedings in the following two cases: first, if national law expressly does not deprive the debtor of this power, as happens, for example, in the Netherlands;⁹ secondly, if the debtor is not totally divested of his power, as may be the case for example if the main proceedings are so-called ‘debtor in possession’ proceedings.¹⁰ It has, however, often been suggested that if the debtor had requested the opening of main proceedings he would not be allowed to request the opening of secondary proceedings because this latter request would be inconsistent with the previous one.¹¹ This position is consistent with the fact that secondary proceedings are usually opened to protect local (creditor) interests, and with the idea that Article 36 and Recital 41 are aimed at favouring the universality of main proceedings and avoiding the opening of secondary proceedings. Despite this, this view does not seem to be totally convincing: first, because secondary insolvency proceedings could have an auxiliary function,¹² and secondly, because the scope of the recast EIR expressly extends to proceedings which leave the debtor fully or partially in control of his assets and affairs.¹³ This suggests that a debtor who had requested the opening of main proceedings might need to request the opening of secondary proceedings and that this need would not necessarily be considered inappropriate or inconsistent with the choices of policy endorsed by the Regulation.

37.07 Every jurisdiction also appears to allow creditors to request the opening of insolvency proceedings. Since Article 37(1)(b) is a rule of private international law which refers to national law, this statement implies that those creditors or classes of creditor empowered to open national insolvency proceedings under national law may request the opening of secondary insolvency proceedings. Recently it has been queried whether Article 37(1)(b) and its reference to national law imply that the person or authority empowered to request the opening of secondary proceedings must reside or have their registered office in the territory of the Member State of the court before which the action seeking to open secondary proceedings is brought. The question was referred to the CJEU which, when requested to give a preliminary ruling, answered in the negative, ruling that ‘Article 29(b) of Regulation No 1346/2000 must be interpreted as meaning that the question as to which person or authority is empowered to seek the opening of secondary proceedings must be determined on the basis of the national law of the Member State within the territory of which the opening of such proceedings is sought. The right to seek the opening of secondary proceedings cannot, however, be restricted to creditors who have their domicile or registered office within the Member State in whose territory the relevant establishment is situated, or to creditors whose claims arise from the operation of that establishment’.¹⁴

37.08 It has sometimes been debated whether, as a matter of EU law, the IP or any other person or authority empowered to request the opening of secondary proceedings should have to justify their request. The prevailing opinion under the EIR 2000 favoured a negative answer. In relation to the IP in main proceedings this answer was based on the fact that the main proceedings under the EIR 2000 produced the divestment of the debtor and the transfer of his power to dispose of his assets from the debtor to the IP in the main proceedings, such that the IP ought to be able to use this power to open secondary proceedings without offering further justification for their decision to do so.¹⁵ The notion that the other persons and authorities empowered by national law to request the opening of the insolvency proceedings did not have to justify their request complies with the Virgós–Schmit Report which on this point states: ‘the right of the persons [i.e. the persons and authorities empowered by national law to request the opening of the insolvency proceedings] and therefore the right of the creditors to bring about proceedings is not limited by the requirement of a specific interest’.¹⁶

37.09 This conclusion does not seem to be contradicted by the CJEU’s decisions in Bank Handlowy¹⁷ and Burgo Group.¹⁸ It is true that—within the legal context of the EIR 2000—the Court in Bank Handlowy ruled that ‘Article 27 of Regulation No 1346/2000, as amended by Regulation No 788/2008, must be interpreted as meaning that it permits the opening of secondary insolvency proceedings in the Member State in which the debtor has an establishment, where the main proceedings have a protective purpose. It is for the court with jurisdiction to open secondary proceedings to have regard to the objectives of the main proceedings and to take account of the scheme of the Regulation, in keeping with the principle of sincere cooperation.’¹⁹ The same Court in Burgo Group stated: ‘Regulation No 1346/2000 must be interpreted to the effect that, where the main insolvency proceedings are winding-up proceedings, whether the court before which the action seeking the opening of secondary insolvency proceedings has been brought may take account of criteria as to appropriateness is governed by the national law of the Member State within the territory of which the opening of secondary proceedings is sought. However, when establishing the conditions for the opening of secondary proceedings, Member States must comply with EU law and, in particular, its general principles, as well as the provisions of that regulation.’²⁰ Both decisions suggest that the seised court has a degree of discretion in opening secondary proceedings, but they also suggest that the scope and exercise of this discretion is to be governed by national law. It is therefore left to Member States to develop rules of ‘appropriateness’ when establishing the conditions for the opening of proceedings. In developing these rules, Member States are required to act consistently with the framework established by the EIR. This could well lead to the imposition of criteria requiring a court to consider whether the opening of secondary proceedings would be consistent with the objectives of main proceedings, but the source of this condition would be national law rather than Article 37 or any other provision of the recast EIR.

37.10 These decisions, and especially the decision taken in Burgo Group, imply that, since Article 37(1)(a) contains a rule of EU-substantive law and since EU law does not require any further justification, the IP of the main proceedings does not have to justify his request to open secondary proceedings.²¹ By contrast, since Article 37(1)(b) contains a rule of private international law referring to national law, the decisions taken in these cases do not rule out the possibility that a national law could require the submission of the reason for opening insolvency proceedings. This is the position, for example, in Germany.²² In such a case, the requirement of ‘appropriateness’ is not a requirement of the EIR but of national law.

37.11 The recast EIR suggests that an undertaking to avoid opening secondary proceedings is much more desirable than the opening of secondary proceedings.²³ Nevertheless, the Regulation aims at balancing the interests of the main proceedings with those of local creditors. This explains why Article 37(2) provides that ‘[w]‌here an undertaking has become binding in accordance with Article 36, the request for opening secondary insolvency proceedings shall be lodged within 30 days of having received notice of the approval of the undertaking.’ This allows for the possibility that a request for opening may be made notwithstanding the giving of an undertaking, but places a limit on the time within which such a request must be made.

37.12 This provision contains a time limit of 30 days. Time runs from the date when creditors have received notice of the approval of the undertaking. This right to request the opening of secondary proceedings will be taken into account by the court which has to decide whether to open secondary proceedings, but the decision to do so will be influenced by the presence of the undertaking, as required by Article 38(2).

1. A court seised of a request to open secondary insolvency proceedings shall immediately give notice to the insolvency practitioner or the debtor in possession in the main insolvency proceedings and give it an opportunity to be heard on the request.

2. Where the insolvency practitioner in the main insolvency proceedings has given an undertaking in accordance with Article 36, the court referred to in paragraph 1 of this Article shall, at the request of the insolvency practitioner, not open secondary insolvency proceedings if it is satisfied that the undertaking adequately protects the general interests of local creditors.

3. Where a temporary stay of individual enforcement proceedings has been granted in order to allow for negotiations between the debtor and its creditors, the court, at the request of the insolvency practitioner or the debtor in possession, may stay the opening of secondary insolvency proceedings for a period not exceeding 3 months, provided that suitable measures are in place to protect the interests of local creditors.

   The court referred to in paragraph 1 may order protective measures to protect the interests of local creditors by requiring the insolvency practitioner or the debtor in possession not to remove or dispose of any assets which are located in the Member State where its establishment is located unless this is done in the ordinary course of business. The court may also order other measures to protect the interest of local creditors during a stay, unless this is incompatible with the national rules on civil procedure.

   The stay of the opening of secondary insolvency proceedings shall be lifted by the court of its own motion or at the request of any creditor if, during the stay, an agreement in the negotiations referred to in the first subparagraph has been concluded.

   The stay may be lifted by the court of its own motion or at the request of any creditor if the continuation of the stay is detrimental to the creditor’s rights, in particular if the negotiations have been disrupted or it has become evident that they are unlikely to be concluded, or if the insolvency practitioner or the debtor in possession has infringed the prohibition on disposal of its assets or on removal of them from the territory of the Member State where the establishment is located.

4. At the request of the insolvency practitioner in the main insolvency proceedings, the court referred to in paragraph 1 may open a type of insolvency proceedings as listed in Annex A other than the type initially requested, provided that the conditions for opening that type of proceedings under national law are fulfilled and that that type of proceedings is the most appropriate as regards the interests of the local creditors and coherence between the main and secondary insolvency proceedings. The second sentence of Article 34 shall apply.

38.01 Article 38 contains several substantive law provisions that can be divided into three groups. The first, comprising paragraphs 1 and 2, deals with the duty of the court seised with a request to open secondary proceedings to inform the IP or the debtor in possession in the main proceedings, to give them the opportunity to be heard on the request, and, if the IP in the main proceedings has given an undertaking, to give them the opportunity to request a stay of the opening of secondary proceedings on that basis. The second group, contained in paragraph 3, refers to cases in which a moratorium has been imposed in main proceedings, and the IP in those proceedings (or debtor in possession) seeks a stay of the opening of secondary proceedings on that basis. The third group of provisions deals with the assessment of the appropriateness of the type of requested secondary proceedings and with the court’s ability, at the request of the IP in main proceedings, to open another more appropriate form of proceeding than that requested.

38.02 Article 38(1) provides that ‘[a]‌ court seised of a request to open secondary insolvency proceedings shall immediately give notice to the insolvency practitioner or the debtor in possession in the main insolvency proceedings and give it an opportunity to be heard on the request.’ This establishes two duties: first, the duty to give immediate notice to the IP, or the debtor in possession in the main proceedings, of the request for opening secondary proceedings; secondly, the duty to give them an opportunity to be heard.

38.03 The first duty is based on the principle of mutual trust and, especially, on the policy of the EIR to afford main proceedings a position of dominance. Moreover, in the context of the recast EIR, the duty ‘to give notice’ allows an IP in main proceedings who has given an undertaking under Article 36 to seek a stay of the opening of secondary proceedings. The notice is to be addressed to the IP in the main proceedings or, if the debtor has been divested of his assets and powers only partially, to the debtor ‘in possession’. To fulfil this duty, Article 38 does not contain any time limit but only lays down that the seised court has to take action ‘immediately’.

38.04 The second duty refers to the right to be heard. This provision is quite innovative. In the past, courts and academics stated that a similar duty would be desirable so as to ensure coordination between main and secondary proceedings. In the absence of any prescription of EU law, they referred to Articles 28 and 4 of the EIR 2000, which, concerning the conditions for the opening of proceedings, referred to the law of the State of the opening of secondary proceedings. This meant, therefore, that under the EIR 2000 a court seised of a request to open secondary proceedings had a duty to hear only to the extent this was provided for by the national law.¹

38.05 Article 38 lays down that ‘[a]‌ court … shall … give it an opportunity to be heard on the request’. This wording, despite the use of the pronoun ‘it’, certainly refers both to the IP and the debtor in possession. Moreover, it allows the seised court to adopt the form of hearing which seems to be most appropriate in each particular case. This freedom as regards the form that a hearing may take complies again with EU case law which, on this point, specifies that ‘though the specific detailed rules concerning the right to be heard may vary according to the urgency for a ruling to be given, any restriction on the exercise of that right 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’.²

38.06 The right for the IP in main proceedings to be heard is also related to the possibility that they may have given an undertaking under Article 36 for the purpose of avoiding the opening of secondary proceedings.³ Additionally, the duty to give the IP, or the debtor in possession in the main proceedings, an opportunity to be heard is related to their right to apply for a temporary stay of the opening of secondary proceedings ‘in order to allow for negotiations between the debtor and its creditors’ in circumstances where a moratorium has been granted in main proceedings to facilitate such negotiations (Article 38(3)).⁴

 38.07 Clearly the hearing right provided by Article 38 appears intended to facilitate better coordination between main and secondary proceedings, but this may not be the only explanation for its introduction: it might also be said to be related to the right of the debtor or his representative to a fair trial. The CJEU stated the principles of a fair trial in the context of insolvency proceedings when it ruled in Eurofood that:

In the procedural area, the Court of Justice has expressly recognised the general principle of Community law that everyone is entitled to a fair legal process (Case C-185/95 P Baustahlgewebe v Commission [1998] ECR I-8417, paragraphs 20 and 21; Joined Cases C-174/98 P and C-189/98 P Netherlands and Van der Wal v Commission [2000] ECR I-1, paragraph 17; and Krombach, paragraph 26). That principle is inspired by the fundamental rights which form an integral part of the general principles of Community law and which are enforced by the Court of Justice, drawing inspiration from the constitutional traditions common to the Member States and from the guidelines supplied, in particular, by the European Convention for the Protection of Human Rights and Fundamental Freedoms, signed in Rome on 4 November 1950. In particular with regard to the right to be notified of procedural documents and in general with regard to the right to be heard, referred to in the referring court’s fifth question, these rights occupy an important position in the organisation and conduct of a fair legal process.⁵

38.08 Thus while Article 38 is clearly aimed at facilitating coordination between main and secondary proceedings, it also introduces into European insolvency law the principle of a fair trial established by Article 47 of the Charter of Fundamental Rights of the European Union, by Article 6 of the ‘Convention for the Protection of Human Rights and Fundamental Freedoms and by EU-settled case law.⁶

38.09 Article 38(2) coordinates the role of the court seised of the request to open secondary proceedings with Article 36, which allows for the possibility that a binding undertaking has already been given by the IP in main proceedings and approved with a view to avoiding the opening of such proceedings. Accordingly, Article 38(2) lays down that ‘[w]‌here the insolvency practitioner in the main insolvency proceedings has given an undertaking in accordance with Article 36, the court referred to in paragraph 1 of this Article shall, at the request of the insolvency practitioner, not open secondary insolvency proceedings if it is satisfied that the undertaking adequately protects the general interests of local creditors’.

 38.10 Article 38(2) specifies that the court shall not open secondary proceedings ‘if it is satisfied that the undertaking adequately protects the general interests of local creditors’. This means that the court must evaluate the undertaking but it is not entirely clear just how the court is to do so: by definition the evaluation will be somewhat speculative in that it requires an inquiry into how creditors would be positioned if secondary proceedings were opened. This problem was at the core of the English decisions that laid the groundwork for the formulation of Article 36. For example, this kind of evaluation was made in MG Rover Belux SA/NV where the IP in the main proceeding intended to prevent a fire sale of the group’s stock of vehicles and thereby to achieve a better result for the Belux creditors as a whole and where the realisations of proceeds exceeded the initial estimates of the return to unsecured creditors, so that they rose from 19 per cent to 37 per cent.⁷ A similar analysis was carried out in Collins and Aikman, where the liquidators in the main proceedings estimated that the decision not to open secondary proceedings and to instead treat creditors under the relevant local law would enable them to achieve very favourable realisations in excess of prior estimates.⁸

38.11 Neither the EIR nor most national insolvency laws provide criteria specifically aimed at performing this kind of evaluation because—as has been said—the undertaking to avoid opening secondary insolvency proceedings is something absolutely new for most jurisdictions. Nevertheless, since the US Bankruptcy Code 1978 entered into force, US insolvency law, and now many European statutes, provide for rules aimed at comparing the expectations of a group of creditors who could participate in two putative proceedings in order to establish which procedure would be more desirable from the point of view of that group of creditors. Consider, as an example of this, section 1129 of the US Bankruptcy Code, which requires a bankruptcy court asked to confirm a Chapter 11 plan to ensure that the plan meets numerous requirements, including: feasibility, the best interests of creditors, fairness and equity, and good faith. Since section 1129 of the US Code applies when a court is considering confirmation of a reorganisation plan, the court must verify that the proposed plan is feasible, that is that it is likely to succeed, a requirement which is not apt in the context of Article 36 undertakings. Nevertheless, other aspects of section 1129 seem to offer some criteria which—mutatis mutandis—could help to interpret the provision ‘if it is satisfied that the undertaking adequately protects the general interests of local creditors’.

38.12 One way of examining whether local creditors are adequately protected for the purposes of Article 38 would be for the court requested not to open secondary proceedings to verify whether the undertaking meets the ‘best interests’ of those creditors. In Chapter 11 of the US Bankruptcy Code, the ‘best interests’ test requires that unsecured creditors receive at least as much under a proposed plan as they would if the debtor’s case were converted into a liquidation regulated by Chapter 7 of the US Code. In the context of Article 38(2), the ‘best interests’ test would require that local creditors receive at least as much under a proposed undertaking as they would if secondary proceedings were opened.

38.13 Of course, the formula ‘if it [the court] is satisfied that the undertaking adequately protects the general interests of local creditors’ has to be interpreted not only with reference to the body of these creditors as a whole but also with reference to their reciprocal positions, that is with respect to distribution and priority rights (see Article 36(1)).

38.14 The parallel with US law suggests that one should ask whether the court must also verify whether the giving of the undertaking is the outcome of any abuse of right by the IP in the main proceedings. The question may seem strange but actually it is not: the IP could abuse his powers and manipulate the facts on which the undertaking is based in order to persuade creditors and obtain their approval. This means that the formula ‘if it is satisfied that the undertaking adequately protects the general interests of local creditors’ should be interpreted as also implying control over the soundness of the ‘factual assumptions on which the undertaking is based’ and ‘in particular in respect of the value of the assets located in the Member State concerned and the options available to realise such assets’ (Article 36(1 and 2)). On this point, see the commentary on Article 36.

38.15 Article 38(3), first sub-paragraph, lays down that ‘[w]‌here a temporary stay of individual enforcement proceedings has been granted in order to allow for negotiations between the debtor and its creditors, the court, at the request of the insolvency practitioner or the debtor in possession, may stay the opening of secondary insolvency proceedings for a period not exceeding 3 months, provided that suitable measures are in place to protect the interests of local creditors’. This provision deals with the relationship between the request to open secondary insolvency proceedings and a moratorium that has been ordered to restrain debt enforcement action in main insolvency proceedings. Some national insolvency laws have recently been reformed by the introduction of special procedures to give the debtor protection from individual enforcement measures in order to allow him to negotiate with his creditors and prepare with them a restructuring plan. The names given to these protective procedures and the regulations governing them vary from Member State to Member State. They usually grant protection for a very short period of time.

38.16 Article 38(3) provides that if such a moratorium is operating in the main proceedings, the IP or the debtor in possession in the main proceedings may request a stay of the opening of secondary proceedings in order to allow negotiations to continue between the debtor and his creditors. However, to obtain this result, Article 38(3), first sub-paragraph, requires that the IP or the debtor in possession in the main proceedings should apply for this stay, and that this application should be granted only if ‘suitable measures are in place to protect the interests of local creditors’.

38.17 The court seised of the request for the stay is not obliged to accept the request, even where evidence is provided of ‘suitable measures’ being put in place ‘to protect the interests of local creditors’. This is clear from the wording of Article 38(3) sub-paragraph 1, which clearly lays down that ‘the court … may stay’ (emphasis added) (see also the language used in Article 38(2) in relation to an application for a stay based on an undertaking).

38.18 This means that the court requested to grant a stay has discretionary power, which must be exercised by striking a balance between the interests involved and, especially, between the interests of the IP or the debtor in possession in the main proceedings to facilitate negotiations between the debtor and his creditors and the protection of the interests of local creditors. Article 38(3), sub-paragraph 2, demonstrates that the court may go beyond the contents of the motion of the IP or the debtor in possession in the main proceedings, as this provision lays down that ‘[t]‌he court referred to in paragraph 1 may order protective measures to protect the interests of local creditors by requiring the insolvency practitioner or the debtor in possession not to remove or dispose of any assets which are located in the Member State where its establishment is located unless this is done in the ordinary course of business. The court may also order other measures to protect the interest of local creditors during a stay, unless this is incompatible with the national rules on civil procedure’. This means, for example, that the court requested to grant a stay of the opening of secondary proceedings may limit or exclude the IP’s ability to use the powers belonging to him in accordance with Article 21.

38.19 The power of the court encounters some limits in that the IP or the debtor in possession in the main proceedings may continue removing or disposing of any assets which are located in the Member State where his establishment is located if this activity is done ‘in the ordinary course of business’. The wording ‘in the ordinary course of business’ is very common, especially in US law, where it is adopted in section 1-201 of the Uniform Commercial Code, which defines a ‘buyer in the ordinary course of business’, and in section 547(c)(2) of the US Bankruptcy Code, which offers a defence from preference actions for transactions performed in the ordinary course of business. The formula ‘in the ordinary course of business’ is intentionally flexible and, within the context of Article 38, implies that—despite the protective measures ordered by the court seised of a request to open secondary proceedings—the IP or the debtor in possession in the main proceedings may continue to remove or dispose of the assets located where the establishment is situated if these acts of removing or disposing prove to be a condicio sine qua non to protect the value of the firm and its assets. Of course, the extension of this clause may vary from case to case depending on the size of the debtor, its business and the type of the main proceedings.⁹

38.20 Article 38(3), sub-paragraph 2, provides that ‘[t]‌he court may also order other measures to protect the interest of local creditors during a stay unless this is incompatible with the national rules on civil procedure.’ This provision again confirms the fact that the court requested to grant a stay has discretionary power and that the court must use this in the way that the court considers most effective. However, the same provision, by referring to national laws, prevents the court from ordering measures which are ‘incompatible with the national rules on civil procedure’. For example, reference might be made to national prescriptions limiting a creditor’s power to seize the debtor’s assets.

38.21 Article 38(3), sub-paragraph 1, provides that ‘[w]‌here a temporary stay of individual enforcement proceedings has been granted in order to allow for negotiations between the debtor and its creditors, the court, at the request of the insolvency practitioner or the debtor in possession, may stay the opening of secondary insolvency proceedings for a period not exceeding 3 months, provided that suitable measures are in place to protect the interests of local creditors’ (emphasis added). This provision limits the time for which the opening of secondary proceedings can be stayed to no more than three months. This period of time should be sufficient to allow the court seised of the request for the opening of secondary proceedings to observe the moratorium imposed in main proceedings, which usually will not last longer than three months (though this of course varies from Member State to Member State). What is certain is that Article 38(3), sub-paragraph 1, is an EU-law provision which, as such, prevails over every provision of national law: consequently the requested court may stay the opening of secondary proceedings under Article 38(3) for a period which is not longer than three months, regardless of the fact that a national law may have granted a moratorium for a longer period of time.

38.22 Article 38(3), sub-paragraphs 3 and 4, deals with the revocation of the stay of the opening of secondary proceedings. These passages distinguish between two types of revocation which could be called ‘ordinary revocation’ and ‘extraordinary revocation’.

 38.23 Article 38(3), sub-paragraph 3, deals with ‘ordinary revocation’ and refers to those cases where a moratorium succeeded—an agreement in the negotiation between the debtor and his creditors was concluded—and it no longer makes sense to maintain the stay of the opening of secondary proceedings. This therefore explains why Article 38(3), sub-paragraph 3, lays down that if these conditions are met then the court must revoke the stay. This provision moreover lays down that the court shall, not may, revoke the stay, and that the court has to take this measure either on the request of any creditor or on its own motion.

38.24 Article 38(3), sub-paragraph 4, deals with ‘extraordinary revocation’ and refers to those cases where the continuation of the stay is ‘detrimental to the creditor’s rights’. The provision gives some illustrations of such circumstances: ‘in particular if the negotiations have been disrupted or it has become evident that they are unlikely to be concluded or if the insolvency practitioner or the debtor in possession has infringed the prohibition on disposal of its assets or on removal of them from the territory of the Member State where the establishment is located’. The use of the phrase ‘in particular’ suggests that this list is not exhaustive.

38.25 Article 38(3), sub-paragraph 4, lays down that ‘the stay may be lifted’ (emphasis added). This means that unlike what is laid down for the case of ‘ordinary revocation’, ‘extraordinary revocation’ is not compulsory. This may cause some surprise given that the conditions required for ‘extraordinary revocation’ are certainly more serious than those required for ‘ordinary revocation’, such that the interpreter might be tempted to believe that the regulator has made a mistake and that the verb ‘may’ is to be interpreted as ‘shall’. However, this approach would not take into account the fact that maintaining the stay of the opening of secondary proceedings could afford an opportunity for a better evaluation of the case and, in particular, for a request to open a type of insolvency proceedings different from the one initially requested or even an opportunity to challenge the decision to open secondary proceedings and to prevent them from being opened. This point will be discussed in Section VII immediately below¹⁰ and in the commentary on Article 39. ‘Extraordinary revocation’ as well as ‘ordinary revocation’ may be made at the request of any creditor and on the court’s motion.

38.26 The recast EIR has improved the flexibility of the system regulating secondary proceedings. On the one hand, the recast EIR relaxes the restriction previously found in Article 27 EIR 2000 under which secondary proceedings were restricted to liquidation proceedings only. This means that today, according to Articles 3 and 34, any proceedings listed in Annex A may be opened as main or secondary proceedings, regardless of whether they are liquidation proceedings, reorganisation proceedings, or hybrid proceedings. On the other hand, the recast EIR also stipulates that the IP in the main proceedings can apply to the court where the debtor has his establishment in order to change the type of secondary proceedings so as to improve coherence between main and secondary proceedings.

38.27 The recast EIR regulates the conversion of secondary proceedings twice, depending on the point in time when the request is made. In particular, Article 38(4) regulates the case where the IP in the main proceedings makes a request for the conversion of secondary proceedings before secondary proceedings have been opened (i.e. a change in the proceedings that have been requested to be opened), while Article 51 refers to the case where the IP in the main proceedings makes a request for the conversion of secondary proceedings after secondary proceedings have been opened. The present comments refer to the former case; the latter is dealt with in the commentary on Article 51.

38.28 Article 38(4) is once again an expression of the dominance of the main proceedings over the secondary proceedings. This explains why this provision lays down that ‘[a]‌t the request of the insolvency practitioner in the main insolvency proceedings, the court referred to in paragraph 1 may open a type of insolvency proceedings as listed in Annex A other than the type initially requested, provided that the conditions for opening that type of proceedings under national law are fulfilled and that that type of proceedings is the most appropriate as regards the interests of the local creditors and coherence between the main and secondary insolvency proceedings’. This means that the IP in the main proceedings has to apply for the change and must demonstrate: first, that ‘the conditions for opening that type of proceedings national law are fulfilled’, and secondly, that ‘that type of proceedings is the most appropriate’ taking account of the interests of the local creditors and coherence between the main and secondary insolvency proceedings.

38.29 The first element to be proved—that is, the fact that ‘the conditions for opening that type of proceedings national law are fulfilled’—implies an assessment which has to be performed entirely under the law of the State of the opening of secondary proceedings. Essentially, the IP’s statement is aimed at demonstrating that the case meets every condition that is required to open the preferred proceedings. For example, if the debtor is a consumer, the IP in the main proceedings must demonstrate that he is applying for a conversion into a proceeding which does not require the debtor to be a merchant.

38.30 The second element to be proved—that is, the fact that ‘that type of proceedings is the most appropriate as regards the interests of the local creditors and coherence between the main and secondary insolvency proceedings’—implies, by contrast, a comparative assessment. This means that the IP making the application must compare the proceedings sought with the proceedings requested and must demonstrate that the latter are more ‘appropriate’ than the former.

 38.31 The theme of appropriateness is not something new in the field of the European insolvency law because it was tackled by the CJEU twice, in particular in Bank Handlowy¹¹ and in Burgo Group.¹² Both decisions were, however, given in a context which was slightly different from that in which Article 38(4) appears: first, because at that time secondary proceedings could only be liquidation proceedings (see the text of Article 27 of the EIR 2000); secondly, because in both cases the CJEU was requested to clarify whether the court seised with a request to open secondary proceedings had to apply of its own motion some form of assessment as to whether the opening of secondary proceedings was in general appropriate, rather than the narrower question of what kind of proceedings were most appropriate. Despite this, the decisions do provide some insight into the concept of coherence between main and secondary proceedings, which may assist in the interpretation of Article 38(4).

38.32 In particular, in Bank Handlowy the Court was asked whether Article 27 EIR 2000 must be interpreted as meaning that it allowed the opening of secondary insolvency proceedings in the Member State in which all of the debtor’s assets were situated, where the main proceedings had a protective purpose. To this request for a preliminary ruling the Court answered:

Those provisions must therefore be construed as authorising the opening of secondary proceedings also where the main proceedings, like the French sauvegarde proceedings, have a protective purpose.

The interpretation advocated by Christianapol and the French Government, to the effect that the opening of main proceedings having a protective purpose precludes the opening of secondary proceedings, in addition to being incompatible with the wording of the provisions in question, runs counter to the recognised role of secondary proceedings in the system established by the Regulation. Although secondary proceedings are intended, inter alia, to protect local interests, they may also, as stated in Recital 19 in the preamble to the Regulation, serve other purposes, which is why they may be opened at the request of the liquidator in the main proceedings, when the efficient administration of the estate so requires.

As observed by the referring court, the fact remains that the opening of secondary proceedings, which, under Article 3(3) of the Regulation, must be winding-up proceedings, risks running counter to the purpose served by main proceedings, which are of a protective nature.

It should be noted that the Regulation provides for a certain number of mandatory rules of coordination intended to ensure, as expressed in Recital 12 in the preamble thereto, the need for unity in the Community. In that system, the main proceedings have a dominant role in relation to the secondary proceedings, as stated in Recital 20 in the preamble to the Regulation.

The liquidator in the main proceedings thus has certain prerogatives at his disposal which allow him to influence the secondary proceedings in such a way that the protective purpose of the main proceedings is not jeopardised. Under Article 33(1) of the Regulation, he may request an order for stay of the process of liquidation for up to three months, which may be continued or renewed for similar periods. Under Article 34(1) of the same regulation, the liquidator in the main proceedings may propose closing the secondary proceedings with a rescue plan, a composition or a comparable measure. Article 34(3) provides that, during the stay of the process of liquidation under Article 33(1) of the Regulation, only the liquidator in the main proceedings or the debtor, with the liquidator’s consent, may propose such measures.

The principle of sincere cooperation laid down in Article 4(3) EU requires the court having jurisdiction to open secondary proceedings, in applying those provisions, to have regard to the objectives of the main proceedings and to take account of the scheme of the Regulation, which, as observed in paragraphs 45 and 60 of this judgment, aims to ensure efficient and effective cross-border insolvency proceedings through mandatory coordination of the main and secondary proceedings guaranteeing the priority of the main proceedings.

The answer to the third question is therefore that Article 27 of the Regulation must be interpreted as meaning that it permits the opening of secondary insolvency proceedings in the Member State in which the debtor has an establishment, where the main proceedings have a protective purpose. It is for the court having jurisdiction to open secondary proceedings to have regard to the objectives of the main proceedings and to take account of the scheme of the Regulation, in keeping with the principle of sincere cooperation.¹³

38.33 Article 38(4) applies the principle set out in Bank Handlowy in relation to the interaction between main and secondary proceedings, requiring the court to consider this interaction in determining whether to grant the IP’s request for a change in the type of proceeding requested. Thus, the IP must demonstrate that the kind of proceedings that they seek are more appropriate than the proceedings originally requested, taking into account the ‘coherence between the main and secondary insolvency proceedings’. In another sense, though, Article 38(4) goes beyond this CJEU decision in requiring an assessment of the ‘appropriateness’ of the particular kind of proceedings sought in the IP’s request. While the decisions in Bank Handlowy and Burgo appeared to leave it to national law to determine the scope of any condition that the opening of secondary proceedings be ‘appropriate’ (although noting that the formulation of such conditions would be informed by Member States’ obligations under the EIR), Article 38(4) expressly lays down a requirement that the court be satisfied of the appropriateness of the particular kind of proceeding sought—but only in the context of a request by the IP in main proceedings.

38.34 Finally, Article 38(4) lays down that ‘[t]‌he second sentence of Article 34 shall apply’. This prescription is redundant because—even without it—it would have been established that ‘[t]he effects of secondary insolvency proceedings shall be restricted to the assets of the debtor situated within the territory of the Member State in which those proceedings have been opened’. On this point, see the comment on Article 34.

The insolvency practitioner in the main insolvency proceedings may challenge the decision to open secondary insolvency proceedings before the courts of the Member State in which secondary insolvency proceedings have been opened on the ground that the court did not comply with the conditions and requirements of Article 38.

39.01 Article 39 is entirely new and it is closely connected with another article introduced by the recast EIR: Article 38. Article 39 provides that the IP in the main proceedings may challenge the decision to open secondary proceedings on the ground of non-compliance with Article 38. Article 39 appears exceptional within the overall system of the Regulation, which does not lay down expressly any other possibility for the IP in the main proceedings to challenge the decision to open secondary proceedings.

39.02 Article 39 provides that the IP in the main proceedings may challenge the decision to open secondary proceedings on the grounds that the court did not comply with the conditions and requirements of Article 38. The wording is apparently clear; nevertheless, its reference to ‘the conditions and requirements of Art 38’ could give rise to some interpretative problems.

39.03 The IP in the main proceedings may certainly challenge the decision to open secondary proceedings if the court seised of a request to open secondary proceedings did not give him notice of the requested proceedings or did not give him an opportunity to be heard (as required by Article 38(1)). These are plain omissions by the court and, accordingly, they are covered by the formula adopted by Article 39. Article 38 requires that the court give such notice to the IP ‘immediately’. Theoretically, this would mean that any undue delay in giving notice would also result in a ground for challenging. More pragmatically, however, it would seem to be much more sensible to distinguish on a case-by-case and a delay-by-delay basis in order to ensure that the remedy—that is, not opening secondary proceedings—does not turn out to be worse than the omission.

39.04 It is questionable whether the IP may challenge the decision to open secondary proceedings when the IP has given an undertaking in accordance with Article 36 and requested the court not to open secondary proceedings, but the court, nonetheless, has not accepted the request. Certainly, the question is a sensible one; moreover, its relevance for the efficient administration of the insolvency estate would seem to suggest that the answer should be affirmative. Nevertheless, the recast EIR does not seem to allow for this interpretation: first, because the Regulation does not require the court to justify its decision of rejecting the undertaking, with the result that the challenging IP might seem to be objecting that the court had exercised its powers arbitrarily—which seems clearly inappropriate; secondly, because Article 36(4) contains a referral to the law of the State of the opening of the main insolvency proceedings which should also regulate the possibility—if any—of challenging the decision to reject the request based on the undertaking.

39.05 It seems to be equally doubtful whether the IP may challenge the decision to open secondary proceedings if a moratorium is operating and the IP has requested the court to stay the opening of secondary proceedings but the court has not granted this request. Here, the reasons mentioned earlier seem to suggest again a negative answer. In any case, the challenge and the consequent remedy to open secondary proceedings could not produce an outcome that went much beyond the request of the IP who, according to Article 38(3), is empowered to request a stay ‘for a period not exceeding 3 months’.

39.06 Article 38(1) lays down that ‘[a]‌ court seised of a request to open secondary insolvency proceedings shall immediately give notice to the insolvency practitioner or the debtor in possession in the main proceedings and give it an opportunity to be heard on the request’ (emphasis added). Nevertheless, it is only the insolvency practitioner in the main proceedings that Article 39 empowers to challenge the decision to open secondary proceedings. This prescription is absolutely comprehensible if the main proceedings have divested the debtor of his assets and powers totally; by contrast, this is less comprehensible if the main proceedings have divested the debtor only partially and he is ‘in possession’, because—in these cases—the debtor is still empowered by national law to exercise his rights (even with some restrictions). Although Article 38(1) is a prescription of substantive EU law which, as such, prevails over national law, this imbalance could be solved by interpreting the wording by analogy as if it included the debtor in possession who is empowered by national law to go to the court individually.

39.07 Article 39 does not expressly contain any prescription concerning the time for challenging the decision to open secondary proceedings, nor does such a restriction result from any other provision of the Regulation or from any specific referral to national law. Nevertheless, it seems sensible and consistent with the most commonly accepted interpretation of other provisions of the EIR that the IP should still enjoy the right of challenge when the decision to open secondary proceedings comes into force, regardless of the fact that it has otherwise become irrevocable. This approach would be consistent with the principle underpinning the EIR according to which main proceedings play a dominant role in relation to secondary proceedings.¹

Where the law of the Member State in which the opening of secondary insolvency proceedings is requested requires that the debtor’s assets be sufficient to cover in whole or in part the costs and expenses of the proceedings, the court may, when it receives such a request, require the applicant to make an advance payment of costs or to provide appropriate security.

40.01 Article 40 reproduces, without any substantial changes, the wording of Article 30 of the EIR 2000. It provides that if the law of the State of the opening of secondary proceedings requires the assets to be sufficient to cover the costs of those proceedings, the seised court may equally (where national law so provides) open secondary proceedings on condition that the applicant makes an advance payment of costs or provides appropriate security for these costs.

40.02 Article 40 deals with the costs and expenses of secondary proceedings and, in particular, regulates the case where the law of the State where main proceedings have been opened does not require the debtor’s assets to be sufficient to cover the costs of proceedings, while the law of the State where secondary proceedings have been opened lays down such a requirement. As the Virgós–Schmit Report explains: ‘various legislations rule out the possibility of insolvency proceedings where the debtor’s assets are insufficient to cover in whole or in part the costs and expenses of the proceedings. The Convention takes these legislations into account … Should national law rule out insolvency proceedings where assets are insufficient, the Convention upholds this law and allows the court to require from the applicant, including the liquidator, an advance payment of costs, or an appropriate security. The terms “may require” do not confer a power on the court but mean that national legislation continues to apply’.¹

 40.03 It is commonly accepted that the court has to calculate the sufficiency of the debtor’s assets by reference to the assets located in the State of the opening of secondary proceedings. This is because these are the only assets available in the proceedings: under Article 34, ‘[t]‌he effects of secondary insolvency proceedings shall be restricted to the assets of the debtor situated within the territory of the Member State in which those proceedings have been opened’.²

40.04 The Virgós–Schmit Report specifies that ‘the terms “may require” do not confer a power on the court but mean that national legislation continues to apply’. This means that Article 40 does not contain an EU-substantive law provision compelling or empowering courts to accept advance payment or security for costs; rather, national laws continue to govern the question of whether courts are competent to do so.³

1. The insolvency practitioner in the main insolvency proceedings and the insolvency practitioner or practitioners in secondary insolvency proceedings concerning the same debtor shall cooperate with each other to the extent such cooperation is not incompatible with the rules applicable to the respective proceedings. Such cooperation may take any form, including the conclusion of agreements or protocols.

2. In implementing the cooperation set out in paragraph 1, the insolvency practitioners shall:

   (a)

   as soon as possible communicate to each other any information which may be relevant to the other proceedings, in particular any progress made in lodging and verifying claims and all measures aimed at rescuing or restructuring the debtor, or at terminating the proceedings, provided appropriate arrangements are made to protect confidential information;

   (b)

   explore the possibility of restructuring the debtor and, where such a possibility exists, coordinate the elaboration and implementation of a restructuring plan;

   (c)

   coordinate the administration of the realisation or use of the debtor’s assets and affairs; the insolvency practitioner in the secondary insolvency proceedings shall give the insolvency practitioner in the main insolvency proceedings an early opportunity to submit proposals on the realisation or use of the assets in the secondary insolvency proceedings.

3. Paragraphs 1 and 2 shall apply mutatis mutandis to situations where, in the main or in the secondary insolvency proceedings or in any territorial insolvency proceedings concerning the same debtor and open at the same time, the debtor remains in possession of its assets.

41.01 Articles 41–44 provide for cooperation and communication where there are multiple insolvency proceedings relating to a single debtor. In the Regulation as recast the duty for ‘liquidators’ in main and secondary proceedings to cooperate and to communicate, as laid down in Article 31 EIR 2000, has been extended in several ways. Whereas in Article 31 EIR 2000 these duties were limited to insolvency practitioners (defined in the EIR 2000 as ‘liquidators’), Articles 41–44 now impose duties of cooperation and communication as between courts (Article 42), and between insolvency practitioners and courts (Article 43), as well as between insolvency practitioners (Article 41, the successor to Article 31 EIR 2000).¹ These provisions not only extend the number of parties subject to the Regulation’s duties of cooperation and communication but also provide more detail as to the content of these duties, and (in the case of Article 43) provide a rule to regulate the costs of such cooperation and communication (Article 44).² Parallel provisions to Articles 41–44 can be found in Chapter V of the Regulation, which governs cooperation, communication, and coordination in corporate group insolvencies.

41.02 The Statement of the Council’s reasons for the adoption of the recast EIR³ is remarkably short on the theme of cooperation and communication. It is touched upon under two headings, that is, ‘secondary proceedings’ and ‘group of companies’. In the section on secondary proceedings it is stated that in order not to hamper the efficient administration of the insolvency estate, the Regulation should empower a court seised with a request to open secondary proceedings to (at the request of the insolvency practitioner in main proceedings) refuse or to postpone the opening of such proceedings: (i) by allowing the insolvency practitioner in the main proceedings to give an undertaking to local creditors according to which they will be treated, in the main proceedings, as if secondary proceedings had been opened (see Article 36), and (ii) by providing for the court to temporarily stay the opening of secondary proceedings when a temporary stay of individual enforcement has been granted in the Member State where main proceedings have been opened (see Article 46).⁴ The Statement continues: ‘[i]‌n addition, a number of rules of cooperation and communication between the actors involved in the main and in the secondary proceedings have been added’.⁵ No further reasons are provided in the Statement for these additions. The section on groups of companies is similarly sparse, with the Statement simply providing:

The proposed Insolvency Regulation includes specific provisions on cooperation and communication between the courts and the insolvency practitioners involved in the insolvency of members of groups of companies.

The provisions on cooperation and communication referred to above are completed with a system for the coordination of the insolvency proceedings of members of a group of companies.⁶

Again, this offers little explanation for the new provisions on cooperation, communication, and coordination in group insolvencies (as to which see further the commentary on Chapter V).

41.03 The recitals to the Regulation give a clearer indication of the legislative intention underpinning the expanded cooperation and communication provisions. The recitals relating to cooperation and communication are Recitals 48–62. Of these, Recital 48 is concerned with multiple proceedings relating to the same debtor, whereas Recitals 49 and 50 both concern proceedings relating to ‘the same debtor or members of the same group of companies’. These three Recitals are considered in more detail later. Recitals 51–62 focus exclusively on the latter scenario, that is, the cooperation and communication necessary to ensure the efficient administration of insolvency proceedings relating to different companies that are members of a corporate group.

41.04 Although there are some strong similarities between the cooperation and communication provisions in Articles 41–44 and those in Chapter V (relating to corporate groups), Recital 52 suggests that some additional principles should be borne in mind when interpreting the latter. This recital notes that insolvency practitioners and courts involved in insolvency proceedings relating to several companies in a corporate group ‘should be under a similar obligation to cooperate and communicate with each other as those involved in main and secondary insolvency proceedings relating to the same debtor’ (such obligations being set out in full in Chapter V). It continues, however, by introducing two additional provisos that do not apply to cooperation and communication in cases involving the estate of a single debtor. These provisos relate to the interests of the creditors and the goals of cooperation: ‘Cooperation between the insolvency practitioners should not run counter to the interests of the creditors in each of the proceedings, and such cooperation should be aimed at finding a solution that would leverage synergies across the group.’ Cooperation and communication with regard to main insolvency and secondary insolvency proceedings regarding the estate of a single debtor have a different aim: these proceedings are not aimed at creating ‘synergies across the group’ but should contribute to the efficient administration of the debtor’s insolvency estate or to the effective realisation of the total assets (see Recital 48 sentence 1).

41.05 Section II offers an introduction to the general principles of cooperation and communication underpinning Articles 41–44, especially a further analysis of Recital 48 and its reference to ‘best practices’ ([41.06]–[41.45]). Section III introduces the specific measures referred to in Recitals 49 and 50 viz. agreements and ‘protocols’, and coordination between courts in relation to the appointment of one insolvency practitioner ([41.51]–[41.54]).

41.06 Recital 48 provides:

Main insolvency proceedings and secondary insolvency proceedings can contribute to the efficient administration of the debtor’s insolvency estate or to the effective realisation of the total assets if there is proper cooperation between the actors involved in all the concurrent proceedings. Proper cooperation implies the various insolvency practitioners and the courts involved cooperating closely, in particular by exchanging a sufficient amount of information. In order to ensure the dominant role of the main insolvency proceedings, the insolvency practitioner in such proceedings should be given several possibilities for intervening in secondary insolvency proceedings which are pending at the same time. In particular, the insolvency practitioner should be able to propose a restructuring plan or composition or apply for a suspension of the realisation of the assets in the secondary insolvency proceedings. When cooperating, insolvency practitioners and courts should take into account best practices for cooperation in cross-border insolvency cases, as set out in principles and guidelines on communication and cooperation adopted by European and international organisations active in the area of insolvency law, and in particular the relevant guidelines prepared by the United Nations Commission on International Trade Law (Uncitral).

41.07 Except for its last sentence (beginning ‘When cooperating’) the wording of Recital 48 generally reflects the wording of Recital 20 of the EIR 2000. It is noteworthy, however, that because the EIR 2000 focused on cooperation and communication between ‘liquidators’, Recital 20 EIR 2000 referred only to this form of cooperation. As recast, the EIR now makes provision for court-to-court cooperation (Article 42) and court-to-IP cooperation (Article 43), and this is reflected in Recital 48’s broad reference to ‘proper cooperation between the actors involved in all the concurrent proceedings’ (emphasis added). Although the text of the recast itself only expresses cooperation and communication duties for insolvency practitioners and courts (Articles 41–43), other actors might also be regarded as within the scope of Recital 48, for instance an ‘independent person or body’ appointed to facilitate coordination as referred to in Article 42(1) (last sentence). Given the fundamental place of cooperation in the recast EIR it is submitted that the spirit of cooperation and communication should also be reflected in the position of other actors in concurrent insolvency proceedings.

41.08 Within the framework of the EIR, main insolvency proceedings and secondary proceedings are interdependent proceedings which concern one debtor having ‘several centers of activity and assets’ spread over several territories.⁷ The mutual duty to cooperate and to communicate across these interdependent proceedings is a fundamental element of the recast Regulation. Cooperation and coordination is necessary to realise two goals of the Regulation, the first of which is to enable the efficient and effective deployment of the debtor’s assets. As Recital 3 and 4 of the EIR explain, the proper functioning of the internal market requires that cross-border insolvency proceedings should operate efficiently and effectively and, given that the insolvency of businesses also affects the proper functioning of the internal market, there is a need for coordination of the measures to be taken regarding an insolvent debtor’s assets. Coordination and cooperation between insolvency practitioners and courts in interdependent proceedings will clearly be essential if the debtor’s estate is to be preserved and efficiently deployed. A second goal, less clear from the Virgós–Schmit Report but nevertheless a systematic principle of the Regulation, is that creditors be able to participate effectively in all proceedings (Article 32(1) EIR 2000/Article 45(1) of the recast EIR). In order to ensure the smooth course of operations in the various proceedings, the sharing of information and the alignment of distributions, cooperation between the insolvency practitioners is clearly vital.⁸ On this analysis, insolvency practitioners in both main and secondary proceedings, working together in the spirit of cooperation and communication, must be seen as principal agents for the realisation of the goals of the recast EIR.

41.09 The EIR uses a ‘modified universalism’ model in relation to an insolvent debtor’s assets. This model results in a potential split of insolvency proceedings against an insolvent debtor who has operations in two or more jurisdictions of the EU (Denmark excluded). Main insolvency proceedings can be opened in Member State X, when the centre of the debtor’s main interests (COMI) is in Member State X (Article 3(1)); these extend to assets situated in other Member States, except those in which secondary proceedings have been opened. Secondary insolvency proceedings can be opened in other Member States where the debtor has an establishment within the meaning of Article 2(10), but are confined to local assets. The proceedings, as they are both concerned with the same insolvent debtor (and its estate), should be coordinated, but on a practical level they do not operate on an equal footing. Recital 48 provides: ‘Main insolvency proceedings and secondary proceedings can … contribute to the efficient administration of the insolvent debtor’s insolvency estate or to the effective realisation of the total assets only if all the concurrent proceedings pending are coordinated … In order to ensure the dominant role of the main insolvency proceedings, the insolvency practitioner in such proceedings should be given several possibilities for intervening in secondary insolvency proceedings which are pending at the same time’ (emphasis added).

41.10 The ‘dominance’ of the main proceedings creates a leading role for the insolvency practitioner, appointed in these main proceedings, to coordinate all insolvency proceedings pending against the same debtor in order to pursue the overarching goals of the Regulation (as to which, see [41.07]–[41.08]). Insolvency practitioners in all pending proceedings are duty bound to communicate and to cooperate (Article 41). The insolvency practitioner appointed in main proceedings also enjoys other rights and powers in relation to the secondary proceedings that are designed to facilitate the coordinated treatment of the debtor’s estate. These include the following:

All these powers have their basis in the recast EIR and therefore may be regarded as the ‘Union’ powers of the main insolvency practitioner.⁹

41.11 It is quite remarkable that the EU legislator, although providing a general framework for ways and forms of (cross-border) cooperation, also relies on ‘best practices’ that have been developed in (international) insolvency practice. Recital 48 (last sentence) provides: ‘[w]‌hen cooperating, insolvency practitioners and courts should take into account best practices for cooperation in cross-border insolvency cases, as set out in principles and guidelines on communication and cooperation adopted by European and international organisations active in the area of insolvency law, and in particular the relevant guidelines prepared by the United Nations Commission on International Trade Law (Uncitral).’ In this statement the European legislator acknowledges the value of these best practices and relies on the professionality and integrity of the organisations that have drafted or have adopted them.

41.12 Since Recital 48 refers only to principles and guidelines adopted by European or international organisations, a strict reading of the text would exclude, for instance, principles and guidelines developed in academic literature or those developed by a national association of insolvency practitioners in consultation with a similar association in another Member State.¹⁰ Where there is no ‘hard law’ duty, but instead the serious suggestion ‘to take into account’ best practices, such a limited reading does not seem necessary. Also, formal ‘adoption’ by organisations is not necessarily a prerequisite for use of the guidelines or principles they develop; in practice, such ‘best practices’ evolve over time, some of them being discussed within certain organisations, and then endorsed but not made mandatory for an organisation’s membership.

41.13 Given their importance for insolvency practice (both for insolvency practitioners, and for courts that have jurisdiction in insolvency matters) I will discuss the following ‘best practices’: Communication and Cooperation Guidelines for Cross-Border Insolvency (CoCo Guidelines) ([41.16]–[41.26]), particularly relevant in the context of cooperation and communication between insolvency practitioners (Article 41), and the EU Cross-Border Insolvency Court-to-Court Cooperation Principles (abbreviated called EU JudgeCo Principles), which include EU Cross-Border Insolvency Court-to-Court Communications Guidelines (EU JudgeCo Guidelines). These mainly focus–as their titles indicate—on cooperation and communication between courts (Article 42) ([41.27]–[41.34]). The CoCo Guidelines date from 2007. The EU JudgeCo Principles and Guidelines were finalised in 2014 and published in spring 2015. The reference in Recital 48 to guidelines of UNCITRAL leads to a short introduction to this organisation, as well as to its most appealing ‘best practice’ document that may provide assistance, both to practitioners and to courts: the UNCITRAL Practice Guide on Cross-Border Insolvency Cooperation, 2009 ([41.35]–[41.44]). All of the documents addressed in the following are important sources of ‘best practice’ that should inform the approach of insolvency practitioners and courts to cooperation and communication under the EIR.

41.14 In 2007, to facilitate cooperation between ‘liquidators’ as required by Article 31 EIR 2000, the Communication and Cooperation Guidelines for Cross-Border Insolvency (CoCo Guidelines) were developed by Professors Bob Wessels (Leiden Law School) and Miguel Virgós (Universidad Autónoma, Madrid) with the assistance of some 15 experts, including several judges. These CoCo Guidelines are briefly introduced later in this chapter. The complete text of the Guidelines is set out in Appendix 4 of this book.¹¹

41.15 The CoCo Guidelines concern the cooperation and communication of courts and ‘liquidators’ (the choice of term for insolvency practitioner used in the EIR 2000) in European cross-border insolvencies, and particularly between main and secondary proceedings under the Insolvency Regulation. Their overarching aim is to facilitate effective and efficient proceedings and the equal treatment of creditors (CoCo Guidelines 1.1 and 1.2). CoCo Guideline 2 states that:

In particular, these Guidelines aim to promote:

(i)

The orderly, effective, efficient and timely administration of proceedings;

(ii) The identification, preservation and maximisation of the value of the debtor’s assets (which includes the debtor’s undertaking or business) on a world-wide basis;

(iii)

The sharing of information in order to reduce the costs involved; and

(iv)

The avoidance or minimisation of litigation, costs and inconvenience to all parties affected by proceedings.

As CoCo Guideline 3 states, the Guidelines are not intended to interfere in any way with the jurisdiction of courts, or with national rules or ethical principles for liquidators, and they neither confer substantive rights nor interfere with any function or duty derived from the EIR or from national law. Nor should the CoCo Guidelines be seen as a static instrument; the Guidelines are not a ‘recipe book’ supplying a formula certain to succeed in all cases, but instead are designed to be a source of inspiration for all actors as they seek to tailor solutions in specific cases.

41.16 The CoCo Guidelines comprise 18 guidelines, relating to the following topics:

41.17 Under CoCo Guideline 6, each liquidator has to communicate with other liquidators following their appointment. The prime responsibility for starting and continuing this communication lies with the liquidator in the main proceeding. CoCo Guideline 7 specifies what information should be disclosed to whom, when, and how. This includes all relevant information about the existence and status of the insolvency proceedings in which they are acting, which should be disclosed promptly and in full (CoCo Guideline 7.1). Subsequently, liquidators are obliged to share information regularly (CoCo Guideline 7.2). Depending on local obligations, liquidators may be required to inform the court of any relevant developments in the other proceedings (CoCo Guideline 7.3). Additionally, the Guidelines state that foreign liquidators should be able to use all legal methods to obtain access to information that would be able to be used by creditors and liquidators in local proceedings (CoCo Guideline 7.4). When necessary, non-public information should be shared among liquidators under appropriate confidentiality agreements (CoCo Guideline 7.5). In order to fulfil the information obligation, copies of documents may need to be provided; however, this needs to be done at a reasonable cost (CoCo Guideline 7.6). CoCo Guideline 8 provides further guidance on communication and cooperation between liquidators regarding the formulation of proposals for liquidation or use of assets in the secondary proceedings, or the adoption of a reorganisation or restructuring plan in those proceedings. Liquidators should determine the most convenient language for communication, and it is also suggested that, where permissible, courts should accept documents in that language (CoCo Guideline 10). CoCo Guideline 11 provides a way of allocating the costs made by liquidators in main and secondary proceedings, given the possibility of tension arising due to differences in the honorarium among liquidators. CoCo Guideline 12 relates to cooperation between liquidators. Cooperation should take place in all aspects of the case; protocols could be used to achieve this. Guideline 13 provides for cooperation relating to a cross-border sale, and CoCo Guideline 14 for providing assistance in a reorganisation. CoCo Guideline 15 requires all liquidators in secondary proceedings to comply with the CoCo Guidelines.

41.18 Although Article 31 EIR 2000 does not cover courts, CoCo Guideline 16 offers several non-binding suggestions (‘advice’) for courts, including that ‘[c]‌ourts are advised to operate in a cooperative manner to resolve any dispute relating to the intent or application of these Guidelines or the terms of any cooperation agreement or protocol’ (CoCo Guideline 16.2), and that ‘[t]o the maximum extent permissible under national law, courts conducting insolvency proceedings or dealing with requests for assistance or deciding on any matters relating to communications from other courts should cooperate with each other directly, through liquidators or through any person or body appointed to act at the direction of the courts’ (CoCo Guideline 16.4). Finally CoCo Guideline 17 provides for notices of any court hearing, or the making of any order by a court, to be given to each of the liquidators at the earliest possible point in time where the hearing or order is relevant to that liquidator. As CoCo Guideline 18 makes clear, whilst the CoCo Guidelines aimed primarily at facilitating the coordination of the administration of insolvency proceedings falling within the scope of the EIR and involving the same debtor, it was always intended that they would also encourage insolvency practitioners and courts to cooperate in relation to proceedings falling outside the scope of the EIR.

41.19 The CoCo Guidelines are accompanied by an explanatory text and a checklist for a protocol. A protocol is one of the cooperation mechanisms referred to in the CoCo Guidelines (see CoCo Guidelines 2 and 12.4). The Guidelines encourage liquidators—where cost-effective to do so—to adopt a protocol to confirm agreements on coordinating cross-border proceedings. CoCo Guideline 2.1, for example, states: ‘[t]‌he aim of these Guidelines is to facilitate the coordination of the administration of insolvency proceedings involving the same debtor, including through the use of a governance protocol’ (emphasis added).

41.20 Appendix I to the CoCo Guidelines provides a checklist of the basic requirements and specific issues to be incorporated in a protocol. The checklist is as follows:

Basic requirements for a Protocol

1. A clause should be inserted, stating that nothing contained in the protocol shall be construed to increase, decrease or otherwise affect in any way the independence, sovereignty or jurisdiction of the relevant national courts.

2. An additional clause should be inserted, stating that the courts involved shall be entitled at all times to exercise its independent jurisdiction and authority with respect to matters presented to the courts and the conduct of the parties appearing in such matters, including the court’s ability to provide appropriate relief on an ex parte basis or a limited notice basis.

3. A clause could be inserted, stating that where there is any discrepancy between the Protocol and the Guidelines either one of them (the Protocol or the Guidelines) will prevail.

Basic requirements with regard to liquidators

1. Statement of the status of the liquidators.

2. Statement that each of the liquidators is subject only to the jurisdiction of its own court.

3. Statement of the right of each of the liquidators to be heard as a foreign representative in the other insolvency proceedings.

4. Statement of each of the liquidators that they will communicate and cooperate with each other as best as possible under the application of the European Communication and Cooperation Guidelines For Cross-border Insolvency.

Basic requirements with regard to the debtor

1. Statement of identity of the debtor and its management.

2. Statement of the involvement of the debtor prior to certain steps taken.

Basic requirement with regard to the proceedings

1. Statement of type (main, secondary) and nature (domestic name) of the insolvency proceedings.

2. Statement of specific topics, like mandatory involvement of certain third parties or bodies and to certain mandatory forms to use.

3. Statement of the use of language.

4. Statement of division of costs.

5. Statement relating to methods of exchanging and sharing information.

Specific issues for cooperation

1. The goal of co-operation.

2. The performance of certain acts and timescales to realise this goal.

3. The coordination of issuing information to be communicated to creditors.

4. The coordination of lodging of claims.

5. The sharing of information on claims lodged, the verification and disputes concerning claims.

6. The ranking of creditors.

7. The description and disposal of relevant assets.

8. The actions planned or underway in order to recover assets, including action to obtain payment from debtors.

9. The location of assets.

10. The actions to obtain payment from debtors.

11. The initiation of actions to set aside detrimental acts.

12. The filing of actions against third parties in relation to the insolvent company.

13. The right to demand performance or to terminate an executory contract.

14. The exercise of any voting rights.

15. The decisions relating to (post-commencement) financing, including the provision of security.

16. The filing of additional insolvency petitions concerning establishments in other Member States.

17. The process of drawing up or the submission of a liquidation or reorganisation plan.

18. The distribution of any kind of dividends.

19. The application of the hotch-potch rule.

20. The applicable law on certain issues.

21. The closure of any insolvency proceedings and its effect on the continuation of other insolvency proceedings.

41.21 A protocol can be described¹² as a means of agreeing the alignment between different insolvency proceedings, or of establishing how pre-reorganisation measures will be taken across a number of jurisdictions. Such an agreement is designed to overcome certain legal or factual obstacles that could otherwise be an impediment to achieving a reorganisation or efficient and equitable liquidation. The references to the use of protocols in the CoCo Guidelines (and also in the EU JudgeCo Guidelines) reflect an established and successful practice of using protocols in a number of countries, especially outside Europe. Protocols have been used mainly in the United States and Canada, but have also been used in the United Kingdom, and it has been reported that courts in other jurisdictions have been involved in such protocols as well, including Australia, Bahamas, Bermuda, British Virgin Islands, France, Hong Kong, Israel, and Switzerland.¹³

 41.22 A protocol is relevant for courts as well. Co-Co Guideline 16.2¹⁴ and CoCo Guideline 16.5¹⁵ stress that it is important for courts not only to allow the use of a protocol but also to use protocols as a mechanism to gain experience from every case. Of course, there will be limits on the ways that such information can be used, and these limits will be at least partly determined by the national laws of the parties or the place of the relevant proceedings. In 2010, for example, German authors provided a sample protocol which is aligned to German procedural law (Mustervereinbarung).¹⁶ Despite these limits it is clear that protocols can have a significant impact on the conduct of proceedings in affected courts. In this regard it is interesting to note a recent decision in which Canadian courts gave effect to a protocol by denying leave to parties who were objecting to the holding of a joint trial (in the sense of both judges hearing the evidence at the same time on their own in parallel cases and being able to confer with each other before rendering their decisions) between the Canadian and US insolvency courts: ‘Cooperation and communication between the two courts in accordance with the relevant protocols is not inconsistent with judicial independence, but rather is a sensible and effective response to a significant interjurisdictional commercial case’.¹⁷

 41.23 Protocols are explicitly referred to in the recast EIR, and it seems from the text of Recital 46 that the drafters have in mind a broad conception of a protocol, with the flexibility to tailor its form and content to the particular circumstances. Recital 46 reads:

In view of such cooperation, insolvency practitioners and courts may enter into agreements and protocols for the purpose of facilitating cross-border cooperation of multiple insolvency proceedings in different Member States concerning the same debtor or members of the same group of companies, where this is compatible with the rules applicable to each of the proceedings. Such agreements and protocols may vary in form (written or oral) and scope (ranging from generic to specific) and may be entered into by different parties. Simple generic agreements may emphasise the need for close cooperation between the parties, without addressing specific issues, while more detailed, specific agreements establish a framework of principles to govern multiple insolvency proceedings and may be approved by the courts involved, where the national law so requires. They may reflect agreement between the parties to take, or refrain from taking, certain steps or actions.

41.24 Eight years after their publication, it is clear that the CoCo Guidelines have been welcomed in literature and have been used in several cases.¹⁸ They are likely to continue to influence and inspire cooperation and coordination under the recast EIR, including in relation to the formulation of protocols under Articles 41–44. A recent case provides some support for this prediction. On 29 January 2015 Attorney-General Mengozzi at the European Court issued his opinion in the (then) pending Nortel Networks S.A. (NNSA) case. The Opinion made clear that the coordination protocol agreed for the case expressly referred to the CoCo Guidelines, with the result that they would be relevant to the interpretation of parties’ obligations under the protocol (see Opinion, at 26).¹⁹ As Recital 48 of the recast EIR explicitly refers to ‘best practices’, there appears to now be an even stronger argument to study these CoCo Guidelines.

41.25 There are many examples of cross-border cases in which courts from different Member States have acted in a cooperative mode towards insolvency proceedings pending in other states. Examples are the BenQ case (involving the Netherlands and Germany), the PIN AG case (Luxembourg and Germany), the matter of Lehman Brothers (involving 17 jurisdictions worldwide) and of Bernard Madoff (involving eight jurisdictions worldwide). Within the European Commission’s Civil Justice Programme, in order to contribute to the strengthening of the area of Freedom, Security and Justice in Europe, and with co-funding from the International Insolvency Institute (III),²⁰ in 2013 and 2014 Professors Bob Wessels (Leiden Law School) and Paul Omar (Nottingham Law School) created the EU Cross-Border Insolvency Court-to-Court Cooperation Principles to facilitate efficient cross-border cooperation between courts in future cases²¹ (see Appendix 5).

41.26 These are referred to as the EU JudgeCo Principles. They were released with a set of guidelines, called the EU Cross-Border Insolvency Court-to-Court Communications Guidelines (the EU JudgeCo Guidelines, see Appendix 6). Both documents are non-binding; they offer a set of recommendations on cross-border communications and cooperation between courts in insolvency cases within the EU. The need for this guiding framework within the context of the EU is clear: to date there have been several instances of cross-border judicial cooperation being negotiated without (at least for the continental EU Member States) any clear guidance on how to set up and conduct cross-border cooperation and communications, and how to take into account parties’ legitimate interests when doing so.²²

41.27 The EU JudgeCo Principles and EU JudgeCo Guidelines draw on principles and/or guidelines set out in a number of other cross-border insolvency documents. The first is the CoCo Guidelines of 2007, drafted by Wessels and Virgós and considered at [41.16]–[41.26]. Further steps to promoting court-to-court communication were taken in June 2012, when the American Law Institute (ALI) and International Insolvency Institute (III) Global Principles for Cooperation in International Insolvency Cases (Global Principles) were published. These include the Global Guidelines for Court-to-Court Communications in International Insolvency Cases, drafted by Professors Ian Fletcher (University College London) and Bob Wessels (Leiden Law School).²³ These Principles built on the foundations of the CoCo Guidelines of 2007. The methodology for the development of the EU Cross-Border Insolvency Court-to-Court Cooperation Principles was essentially to evaluate systematically and adapt the June 2012 Global Principles²⁴ for the EU context. In adapting the Global Principles the specific EU insolvency (procedural) context is generally reflected in six areas: (i) consistency with international norms, (ii) the goals of the EU, (iii) the existence of national procedural law, (iv) the existing European Insolvency Regulation, (v) ongoing case law, and (vi) developments within the EU legislature and the European judicial community.²⁵ The adaptation process resulted in the development of a standard (legally non-binding) statement of principles and guidelines suitable for application within the framework of the recast EIR (and the EIR 2000), and which can, by analogy, be applied in other cases.²⁶

41.28 As will be clear from the earlier discussion, the EU JudgeCo Principles and the EU JudgeCo Guidelines have been drafted as a set of non-binding best practices that should inform cooperation and communication under the recast EIR in accordance with Recital 48. In particular, the EU JudgeCo Principles and EU JudgeCo Guidelines can be used to ‘put flesh on the bones’ of Articles 41–44 of the Regulation. The EU JudgeCo Principles and EU JudgeCo Guidelines address cooperation and communication between courts, including communication between courts in different jurisdictions (addressed by Article 42 of the recast EIR), but also between courts and insolvency practitioners from different jurisdictions (the subject of Article 43 of the recast EIR).

 41.29 There are in total 26 EU JudgeCo Principles, relating to the following topics:

41.30 To emphasise the soft-law character of these EU JudgeCo Principles, the first two principles highlight that they are not intended to interfere with the independent jurisdiction of national courts, or with applicable national rules, ethical principles, or professional rules, nor are they intended to prevent a court from refusing to take actions that are manifestly contrary to public policy. Principles 3 and 4 explain the overriding objective and aim. These make clear that the EU JudgeCo Principles are designed to enable courts to operate more effectively and efficiently in cross-border insolvency cases, with due regard to the interests of creditors. Their overarching goal is to maximise the value of the debtor’s global assets. More concretely, Principle 4(1) identifies the aim of ‘facilitat[ing] the coordination of the administration of international insolvency cases involving the same debtor, including where appropriate through the use of a protocol’. The EU JudgeCo Principles also aim to promote (Principle 4(2)–(3)):

The EU JudgeCo Principles are also designed to promote the exploration of possibilities for reorganisation of the business, including by encouraging secondary proceedings to be conducted in a way that supports main reorganisation proceedings, calling for cooperation between courts and IPs to enable the reorganising debtor to obtain new finance, and encouraging mechanisms that allow binding reorganisation plans to be adopted in cross-border insolvency cases (see among others EU JudgeCo Principles 22, 23, 24, and 25).

41.31 The Principles contemplate coordination through all types of modern international modes of professional communication (telephone, e-mail, fax, or video link, including conferencing arrangements enabling discussions to take place simultaneously with creditors and/or other stakeholders in several jurisdictions) and through the use of a protocol—an agreement designed to help align the different insolvency proceedings, as explained in [41.21 ff] (Principle 4.1).

41.32 An example of the kind of coordination and cooperation contemplated by the EU JudgeCo Principles may be given of a situation in which a Luxembourg supervising judge (juge commissaire) encouraged cooperation with the representatives of foreign insolvency practitioners. In the BCCI case (a pooling agreement between the Luxembourg liquidation of BCCI International S.A. (main liquidation), BCCI Holdings S.A., the BCCI UK branch (ancillary liquidation) and BCCI Overseas Ltd) judicial assistance of this kind resulted in the determination and distribution of a common dividend, and encouraged good levels of cooperation between the various insolvency practitioners.²⁷

41.33 As indicated earlier, the text also contains EU JudgeCo Guidelines. There are 18 in total:

41.34 These EU JudgeCo Guidelines are intended to supplement the EU JudgeCo Principles and therefore are similarly not intended to interfere with any national rules of procedure (Guideline 1(2). Their overriding objective is to ‘enhance coordination and harmonisation of insolvency proceedings that involve more than one state through communications among the jurisdictions involved’.²⁸ They offer a set of guidelines that can be adopted and applied by courts in such cross-border cases. Guideline 3 provides for a court to communicate with another court for the purpose of coordinating and harmonising proceedings. Since communication with foreign courts is difficult for judges in some countries, Guideline 3(2) also provides that the court should obtain the consent of all parties involved before disclosing information to the other court(s). Guideline 4 makes similar provision for communication by courts with foreign insolvency practitioners. Guideline 5 states how an insolvency practitioner can communicate with a foreign court. As to the mode of communication, Guideline 8 should prove particularly valuable as it allows courts to employ electronic methods of court-to-court communication instead of requiring the physical appearance of parties. Similar provision is made for communication between courts and foreign court representatives/foreign insolvency practitioners (Guideline 9). The Guidelines also allow courts to organise joint hearings, with the courts being able to simultaneously hear the proceedings in the other court (provided, of course, that evidentiary and other written materials filed in one court are provided in advance to the others) (Guideline 10). They also provide that orders given by one court should be accepted by the other court as orders duly and properly made, without further proof, except upon proper objections being made on valid grounds (Guideline 12). An important overarching provision is Guideline 16, which provides: ‘[a]‌ court may communicate with a court in another jurisdiction or with an authorised representative of such court in the manner prescribed by these EU JudgeCo Guidelines for the purposes of coordinating and harmonising proceedings before it with proceedings in the other jurisdiction regardless of the form of the proceedings before it or before the other court wherever there is commonality among the issues and/or the parties in the proceedings’.

41.35 In its endorsement of best practices for cooperation between insolvency practitioners and courts, Recital 48 refers explicitly to ‘relevant guidelines prepared by the United Nations Commission on International Trade Law (Uncitral).’ The United Nations Commission on International Trade Law (UNCITRAL) was established in 1966 with the aim of enabling the United Nations to take a more active role in resolving differences in national legal systems in the domain of international trade. UNCITRAL is composed of 36 Member States, chosen for a period of six years by the General Meeting of the United Nations (UN). In several legal fields UNCITRAL has made significant contributions to the alignment, harmonisation, or uniformity of international commercial law, for example through the Vienna Convention on International Sales of Goods (CISG) of 1980, the UNCITRAL Arbitration Rules of 1976 (and revised in 2010), the Model Law on International Commercial Arbitration of 1985 (amended in 2006), and the UNCITRAL Model Law on Electronic Commerce of 1996. UNCITRAL is popularly known as the private (or commercial) arm of the United Nations.

41.36 Over 20 years ago it was suggested that UNCITRAL should involve itself in the problems of cross-border insolvency.²⁹ UNCITRAL decided to develop a legal instrument relating to cross-border insolvency in 1995. It entrusted the work to one of its six Working Groups (Working Group V on Insolvency Law, sometimes referred to as Working Group V). The Working Group devoted several two-week sessions (in Vienna and in New York alternately) to discussion and work on the draft text. During Joint Colloquia judges separately or jointly discussed and debated all kinds of issues.³⁰ In 1997 UNCITRAL adopted the outcome of these discussions in its UNCITRAL Model Law on Cross-Border Insolvency (Model Law).

41.37 The Model Law is undoubtedly UNCITRAL’s most well-known insolvency product. Legislation based on or inspired by the Model Law on Cross-Border Insolvency has been enacted in Eritrea (2000), Japan (2000), Mexico (2000), South Africa (2000), Montenegro (2002), Romania (2002), Poland (2003), Serbia (2004), British Virgin Islands, overseas territory of the United Kingdom of Great Britain and Northern Ireland (2003), Canada (2005), United States of America (2005), Colombia (2006), Great-Britain (England, Wales, and Scotland; 2006), New Zealand (2006), Republic of Korea (2006), Slovenia (2007), Australia (2008), Mauritius (2009), Greece (2010), Uganda (2011), Chile (2013), and 17 African countries, members of OHADA.³¹

41.38 What then could be, in the context of the Insolvency Regulation ‘the relevant guidelines prepared by the United Nations Commission on International Trade Law (Uncitral)’ (Recital 48)? UNCITRAL has published the following insolvency-related material:

1. UNCITRAL Model Law on Cross-Border Insolvency with Guide to Enactment and Interpretation, 1997 (revised Guide to Enactment and Interpretation, 2013)

2. UNCITRAL Legislative Guide on Insolvency Law, 2004;

3. UNCITRAL Legislative Guide on Secured Transactions, 2007;

4. UNCITRAL Practice Guide on Cross-Border Insolvency Cooperation, 2009;

5. UNCITRAL Legislative Guide on Insolvency Law, Part Three: Treatment of Enterprise Groups in Insolvency, 2010;

6. UNCITRAL Legislative Guide on Insolvency Law, Part Four: Directors’ Obligations in the Period Approaching Insolvency, 2013;

7. UNCITRAL Model Law on Cross-Border Insolvency: The Judicial Perspective, 2013.³²

41.39 It is clear from this list that UNCITRAL, especially its Working Group V, has been very productive in the area of (international) insolvency law. Moreover, its work in this field is ongoing: Working Group V is presently considering or working on a number of projects, including:

In each of these matters, no final texts have yet been produced.

41.40 Of the seven existing UNCITRAL texts listed in [41.38], none are labelled ‘guidelines’, the term used in the last sentence of Recital 48. Some of the seven texts appear less likely to have been in mind when the drafter referred to ‘relevant guidelines prepared by the United Nations Commission on International Trade Law (Uncitral)’ (Recital 48), and these are the texts that have been designed by UNCITRAL to assist national states with the introduction or improvement of their national insolvency laws. This leaves in particular one document that is of potentially more relevance in the context of the EIR: the UNCITRAL Practice Guide on Cross-Border Insolvency Cooperation, 2009.

41.41 The Practice Guide on Cross-Border Insolvency Cooperation (referred to here as the Practice Guide) focuses on the role that cooperation can play in resolving issues in cross-border insolvency cases.³⁵ It arose out of the recognition that there was not a sufficient framework in all jurisdictions to effectively address the challenges posed by a rising amount of cross-border insolvency cases. Existing domestic laws seem to be inadequate and/or unpredictable (including in relation to the costs of their use, and the scope of their application), and on an international level, there has been a lack of multilateral treaties. For this reason UNCITRAL adopted the Practice Guide on 1 July 2009, followed by adoption by the UN General Assembly on 16 December 2009.³⁶ The General Assembly recommended ‘that the Practice Guide be given due consideration, as appropriate, by judges, insolvency practitioners and other stakeholders involved in cross-border insolvency proceedings’.

41.42 The Practice Guide closely relates to the UNCITRAL Model Law on Cross-Border Insolvency ([41.37]). One of the aims of the Model Law is to provide effective mechanisms for dealing with cross-border insolvency, including by promoting cooperation between courts and other competent authorities (such as insolvency practitioners) in cross-border cases (see Preamble to the Model Law). Article 27 of the Model Law sets out some of the forms this cooperation can take, including the negotiation and implementation of cross-border insolvency agreements (or protocols: see Article 27(d) and [41.46] above). The Practice Guide has been designed to provide insolvency practitioners and judges with practical insights that should help to achieve these forms of cooperation in cross-border insolvency cases. As such, the Practice Guide uses terminology that is consistent with the Model Law (and the UNCITRAL Legislative Guide on Insolvency Law) wherever possible.

41.43 The Practice Guide consists of three chapters:

1. Chapter I (Background) discusses the increasing importance of coordination and cooperation in cross-border insolvency cases. Several frameworks that have been developed over the years to address issues related to cross-border insolvency are discussed, including the International Bar Association’s Cross-Border Insolvency Concordat, the UNCITRAL Model Law on Cross-Border Insolvency, and some regional initiatives. These documents provide some general guidance for dealing with cross-border cooperation between insolvency proceedings.

2. Chapter II (Possible forms of cooperation under Article 27 of the Model Law) elaborates on various ways in which cooperation can be improved, based on Article 27 of the UNCITRAL Model Law. Each paragraph of this Article is extensively discussed and some suggestions are made how cooperation can be achieved.

3. Chapter III (Cross-border insolvency agreements) examines in detail Article 27(d) Model Law. It does so by analysing several of these cross-border insolvency agreements that have been used over the past two decades in international insolvency practice. To support the future use of insolvency agreements several sample clauses are provided, drawing on an analysis of some 30 agreements used in past cases since 1990.

41.44 Under the UNCITRAL Practice Guide a ‘protocol’ is referred to as ‘insolvency agreement’. This language complements the Model Law, which in Article 27(d) also uses the language of ‘insolvency agreement’ rather than ‘protocol’ (see [41.21]–[41.24]).³⁷ There is no difference in these terms. As explained earlier, such agreements can be used to address (potential) disputes in cross-border cases by securing cooperation (and the terms of this cooperation) between courts, the debtor, and other stakeholders ex ante.³⁸ They are typically focused more on aligning procedural aspects than substantive matters, but can be used flexibly in varying ways. They can be agreed in writing or orally, in general or very detailed terms, and in proceedings aiming either at reorganisation or liquidation.³⁹ As already noted (and considered further at [41.45ff], [42.09], and [43.06]) the use of such agreements is explicitly contemplated in the recast EIR, hence the relevance of international best practice that has been adopted (including by UNCITRAL) in relation to them.

41.45 Recitals 49 and 50 provide:

(49) In light of such cooperation, insolvency practitioners and courts should be able to enter into agreements and protocols for the purpose of facilitating cross-border cooperation of multiple insolvency proceedings in different Member States concerning the same debtor or members of the same group of companies, where this is compatible with the rules applicable to each of the proceedings. Such agreements and protocols may vary in form, in that they may be written or oral, and in scope, in that they may range from generic to specific, and may be entered into by different parties. Simple generic agreements may emphasise the need for close cooperation between the parties, without addressing specific issues, while more detailed, specific agreements may establish a framework of principles to govern multiple insolvency proceedings and may be approved by the courts involved, where the national law so requires. They may reflect an agreement between the parties to take, or to refrain from taking, certain steps or actions.

(50) Similarly, the courts of different Member States may cooperate by coordinating the appointment of insolvency practitioners. In that context, they may appoint a single insolvency practitioner for several insolvency proceedings concerning the same debtor or for different members of a group of companies, provided that this is compatible with the rules applicable to each of the proceedings, in particular with any requirements concerning the qualification and licensing of the insolvency practitioner.

41.46 In Recitals 49 and 50 two examples of cross-border cooperation are given: agreements and protocols (Recital 49) and the coordination between courts to secure the appointment of a single insolvency practitioner (Recital 50). Both examples are presented as tools for use in related insolvency proceedings falling within the scope of the EIR, whether concerning the same debtor or different members of a group of companies.

41.47 Recital 49 encourages both insolvency practitioners and courts to enter into agreements and protocols to facilitate cross-border cooperation in cases involving multiple insolvency proceedings in different Member States. It seems rather unlikely that a court itself will enter into such a protocol (see the commentary on Article 42); the most probable scenario is that it will be agreed between insolvency practitioners. It is clear from the text of Recital 49 that the European legislator has a broad and flexible conception of what a protocol is, which may be negotiated in any number of forms. Recital 49 leaves room for the insolvency actors involved to determine the appropriate scope and content of a protocol. It also leaves open which (national) law will apply to determine, for example, the power to conclude such a protocol, the nature of such a protocol, the consequences of a party’s non-performance, etc: this is left to the parties to determine.

41.48 The best practices described earlier provide further information on protocols (see the discussion on the CoCo Guidelines at [41.14]–[41.24] and the UNCITRAL Practice Guide at [41.41]–[41.44]). The EU JudgeCo Principles discussed earlier ([41.25]–[41.34]) also refer to the use of protocols (JudgeCo Principles 4.1, 16.5, 17.1, 19.1, and 19.4), as do the related EU JudgeCo Guidelines ([41.35]–[41.36] and Guideline 10).

41.49 The second tool—the power to coordinate the appointment of an insolvency practitioner—relates only to courts. The only expressed limitation seems to be that ‘this’ (i.e. the appointment) must be ‘compatible with the rules applicable to each of the proceedings, in particular with any requirements concerning the qualification and licensing of the insolvency practitioner’.

41.50 The cross-border coordination of the appointment of an insolvency practitioner has for instance been identified as best practice in the CoCo Guidelines ([41.14]–[41.24]). CoCo Guideline 16 (‘Courts’) provides: ‘16.3. Courts are advised to consider whether an appointment of the liquidator in main proceedings or a nominated agent of such liquidator as a liquidator or a co-liquidator in secondary proceedings would better ensure coordination between different proceedings under the courts’ supervision.’ Similarly, Principle 19 (‘Coordination’) in the EU JudgeCo Principles ([41.25–41.34]) states: ‘19.3. A court should consider whether the insolvency practitioners in a main proceeding, or his or her agent, should serve as the insolvency practitioner or co-practitioner in secondary proceedings to promote the coordination of the proceedings.’ In the full version of both documents there is further reasoning offered about the merits of coordinated appointments.

41.51 This section discusses the central elements of Article 41. Article 41 is headed ‘cooperation and communication between insolvency practitioners’, and it is worth beginning with the terms ‘cooperation’ and ‘communication’. Article 41 also uses other terms including ‘exploration’ (Article 41(2)(b)) and ‘coordination’ (Article 41(2)(b) and Article 41(2)(c)), although these activities may be regarded as forms of ‘implementing’ or achieving the desired levels of cooperation (see Article 41(2) first sentence). ‘Communication’ is also presented as a sub-form of implementation (Article 41(2)(a)), so it is not clear why it also in the heading of Article 41: perhaps simply to underscore the necessity of good communication to achieving cooperation.

41.52 In 2010, the Austrian author Geroldinger used the term ‘coordination’ to describe the result of ‘collaboration’, which would cover all topics of information exchange (‘communication’), all other matters in which different proceedings pending in different states can influence each other (‘intervention’ possibilities), ‘cooperation’ (actually aligning approaches to pending proceedings), and ‘harmonisation’ or ‘unification’ (as found in certain provisions of the recast EIR, such as Articles 10(2) (reservation of title), 23 (return and imputation), 37 (right to request the opening of secondary proceedings), 38 (insolvency practitioner making an undertaking), 40 (advance payments of costs and expenses), 41 (duty to cooperate and to communicate), 45 (exercising creditors’ rights), 46 (stay of the process of liquidation in secondary proceedings), 47 (measures ending secondary proceedings), 49 (assets remaining in the secondary proceedings), 53 (right to lodge claims), and 54 (duty to inform creditors).⁴⁰ It is submitted that the terms used in Article 41 are employed in a less precise way, such that they may each cover a number of overlapping concepts (such that ‘cooperation’ includes ‘coordination’, etc). This is consistent with international best practice in which such terms are used broadly and as a result sometimes overlap.

41.53 The purpose and nature of the cooperation required of insolvency practitioners under Article 41 is clear from Recital 48:

41.54 It should be emphasised that the duties of communication and cooperation under Article 41 are mutual. Thus the main insolvency practitioner will also be obliged to inform the insolvency practitioner in secondary proceedings and to cooperate with him (‘to each other’, see Article 41(2)(a)). The mutual duty of cooperation and communication means that the insolvency practitioners have a duty ‘to act in concert with a view to the development of proceedings and their coordination, and to facilitate their respective work’.⁴¹

41.55 Cooperation should take place ‘to the extent such cooperation is not incompatible with the rules applicable to the respective proceedings’: Article 41(1). As an example, the duty to communicate information will be limited by national legislation on data exchange, for example, legislation relating to the protection of computerised personal data.⁴²

41.56 As explained earlier ([41.01]), Article 41 corresponds with (and expands upon) Article 31 EIR 2000. The cooperation duty for ‘liquidators’ in secondary and main proceedings under Article 31 EIR 2000 was similarly expressed to be ‘subject to the rules applicable to each of the proceedings’. In a 2011 English case this proviso was the subject of interpretation.⁴³ The question was whether assets located in England were to be applied in discharge of liabilities which were not preferential as a matter of English domestic law but which would be accorded priority under Italian law. The debtor was Alitalia, the Italian airline, which was heavily insolvent (liabilities of over €2.8 billion and at the end of 2010 some 13,000 claims against the whole group) and therefore placed under an extraordinary administration procedure for large companies (which also featured in the Parmalat case). Alitalia’s COMI is in Italy. In October 2008 its administrator received an offer for assets and contracts of the Alitalia group, of which Alitalia was part, from a company called Compagnia Aerea Italia S.p.A. (CAI). The price was in excess of €1 billion. Structuring the deal became complex, as it was ruled in November 2008 by the European Commission that Alitalia had received unlawful State aid from the Italian Government. The Commission ruled furthermore that if the proposed sale to CAI would contain elements which would gave rise to a state of ‘economic continuity’ between Alitalia and CAI, the Italian government would be obliged to recover the unlawful state aid from CAI. If, however, CAI assumed only those staff of Alitalia indispensable to its operational activity, without any automatic transfer of employment contracts, the Commission decided that there would be no such ‘economic continuity’. To avoid ‘economic continuity’, and so to facilitate the sale to CAI, Alitalia’s administrator, Professor Fantozzi, had to terminate the contracts of all Alitalia’s existing employees. A consultation process was embarked upon with representatives of employees across more than 40 countries, which in England led to compromise agreements being entered into in January 2009 with 46 employees based in England and Wales. The agreements provided for the employees to be paid sums by Alitalia in two tranches, a ‘termination payment’ to be paid within 28 days and a ‘protective award payment’ to be paid within 14 days of 13 April 2009, provided that no proceedings had been brought in the Employment Tribunal. The assets included in the sale to CAI were transferred on 12 January 2009. The employment contracts of all employees (including those in England and Wales) were terminated on the same date. Then, in England, winding-up proceedings were instituted at the request of the trustees of the Alitalia Italian Airlines Pension and Assurance Scheme, founded on indebtedness owing to the pension scheme of some £20,631,000. On 22 January 2009 the winding-up order was made.

41.57 Alitalia had two bank accounts in England, both held with Barclays Bank, which were used for trading purposes before it was put into administration in Italy, and they continued to be so used after it had gone into administration. The first tranche of the payments made by the English liquidators to the employees under the English compromise agreements (£576,175.23) had been made in early February 2009. The second tranche (£363,522) had not been made and was long overdue. The administrator of the main insolvency proceedings in Italy argued that the second payment should be paid in full by the English liquidators out of the assets represented by the Barclays accounts, relying (in part) on their duty of cooperation under Article 31 EIR 2000. He noted that the liabilities would be treated as having a priority status under Italian law, and stated: ‘It is confirmed that under Italian law, if the sums due to the Former Employees under the Compromise Agreements are not paid from assets in the UK, then I will be obliged to use the funds otherwise available to me to pay the Former Employees in full.’ The joint English liquidators then made an application to the court on 12 January 2011 seeking a declaration that the second tranche of payments, insofar as they were a provable debt owing by Alitalia, were unsecured and liable to be ranked ‘pari passu with all other debts of Alitalia for the purposes of the English Proceedings’. The English liquidators referred to Articles 4 and 28 EIR 2000 (under which the law applicable to the secondary proceedings was in general English law) and submitted that applying English law, the assets of Alitalia in England and Wales (comprising, essentially, money in the Barclays accounts) fell to be distributed to unsecured creditors proving in the English proceedings in accordance with the Insolvency Act 1986. The Italian administrator, in contrast, argued that the sums in the Barclays accounts should be used to discharge the outstanding indebtedness to the English employees under the compromise agreements, either by the court directing the Liquidators to remit all the money in the Barclays accounts (less whatever was needed to discharge debts with preferential status under English law) to the Italian liquidator, or directing them to pay the English employees directly.

41.58 The case is relevant to Article 41 because, as noted earlier, the Italian liquidator submitted that the English court could direct the English liquidators to discharge the debts to the English employees using the asset represented by the Barclays accounts on the basis of the duty of cooperation imposed on liquidators under Article 31 EIR 2000. This argument was rejected. Newey J considered that the essential difficulty with this argument lay in Article 31(2) EIR 2000’s opening words, ‘Subject to the rules applicable to each of the proceedings’, read together with other articles of the Regulation that envisaged that assets within the scope of secondary proceedings would be distributed in accordance with the local law. He noted that under Article 28 EIR 2000 the law applicable to secondary proceedings is to be ‘that of the Member State within the territory of which the secondary proceedings are opened’, and that Article 4 EIR 2000 likewise provided for insolvency proceedings opened in a Member State to be governed by that State’s law (including in relation to ‘the distribution of proceeds from the realisation of assets’). Further, a judgment opening main proceedings is to produce the same effects in another Member State only ‘as long as no proceedings referred to in Article 3(2) [i.e. secondary proceedings] are opened in that other Member State’ (Article 17 EIR 2000), and a liquidator in main proceedings is to be able to exercise his powers in another Member State only ‘as long as no other insolvency proceedings have been opened there’ (Article 18 EIR 2000). Therefore, whilst proceedings opened in the Member State of a debtor’s COMI were to be regarded as the ‘main’ proceedings (as their name indicates), the Insolvency Regulation had provided for assets falling within the scope of secondary proceedings to be disposed of in accordance with that Member State’s law. The argument that the duty of cooperation extended to require the liquidators to apply assets in a manner different from that for which the Regulation itself provides, could therefore not be accepted: ‘I do not think that that can be right, especially when the duty of co-operation is expressly subject “to the rules applicable to each of the proceedings”.’

It is submitted that this is a very wide interpretation of the latter phrase, as the proviso limits only the core duty to cooperate. Thus, these ‘rules applicable’ should be seen only as to prevent conflicting functions and duties imposed by national law applicable to each of the insolvency proceedings, for example, requirements for certain approvals of creditors or a supervisory judge that relate to cross-border cooperation.⁴⁴

41.59 Cooperation under the recast EIR may take any form, including the conclusion of agreements or protocols (see Article 41(1) last sentence, and as to protocols see also [41.20]–[41.25]).⁴⁵ Article 41(2) explicitly mentions three forms in which insolvency practitioners should ‘implement’ cooperation, each of which will now be considered in turn. Of course, the fundamental principle of cooperation in cross-border cases may require other forms of cooperation not specifically addressed in Article 41(2).⁴⁶

41.60 As soon as possible the respective insolvency practitioners should communicate to each other any information that may be relevant to the other proceedings involving the same debtor (subject to the limitation noted earlier: [41.55]–[41.58]). Under Article 31(1), second sentence, EIR 2000 both ‘liquidators’ were required to communicate any information which could be relevant to the other proceedings ‘immediately’. In German literature a maximum period of 14 days has been suggested in relation to this.⁴⁷ The time period will obviously be entirely dependent on the circumstances, including the time it takes to translate certain information (the costs of these to be borne by the insolvency practitioner providing the information). As such it seems sensible that the recast EIR more realistically requires communication ‘as soon as possible’.

41.61 Article 41(2)(a) provides that the information to be shared includes ‘in particular any progress made in lodging and verifying claims and all measures aimed at rescuing or restructuring the debtor, or at terminating the proceedings, provided appropriate arrangements are made to protect confidential information’. The Virgós–Schmit Report ⁴⁸ offers the following list of topics on which information should be provided to comply with mutual duties to communicate: (i) the assets, (ii) the actions planned or underway in order to recover assets: actions to obtain payment or actions to set aside, (iii) possibilities for liquidating assets, (iv) claims lodged, (v) verification of claims and disputes concerning them, (vi) the ranking of creditors, (vii) planned reorganisation measures, (viii) proposed compositions, (ix) plans for the allocation of dividends, and (x) the progress of operations in the proceedings. This list demonstrates that the duty to communicate includes several topics of a non-procedural nature.

41.62 The next implementation measure of cooperation is to explore the possibility of restructuring the debtor and, where such a possibility exists, to coordinate the elaboration and implementation of a restructuring plan. This subject is treated in more detail in the commentary on Article 47.

41.63 Article 41 requires the insolvency practitioners in main and secondary proceedings to coordinate the administration of the realisation or the use of the debtor’s assets and affairs. ‘Realisation’ includes the activity of liquidating these assets, whilst ‘use’ relates to the allocation of assets and conduct of the debtor’s affairs during the pendency of proceedings, such as where assets are deployed in a chosen form of business continuity.

41.64 Article 41(2)(c) furthermore provides that the insolvency practitioner in the secondary insolvency proceedings shall give the insolvency practitioner in the main insolvency proceedings an early opportunity to submit proposals as to the realisation or use of the debtor’s assets in the secondary insolvency proceedings. This provision reflects a similar one formulated in Article 31(3) EIR 2000.⁴⁹ This system essentially requires the secondary insolvency practitioner to inform, in a timely manner and at his own initiative, the main insolvency practitioner on realisation and asset use in the secondary proceedings, in order that the main insolvency practitioner will not be confronted with a fait accompli. The result may be that the main insolvency practitioner will be able, for example, to prevent the sale of particular assets involved in the secondary proceedings, the preservation of which may be deemed desirable in respect of the reorganisation of the business at the debtor’s centre of main interests. Alternatively the main insolvency practitioner may respond by making a more general request for a stay of the process of realising assets in the secondary proceedings (Article 46).⁵⁰

 41.65 The obligation to allow the insolvency practitioner in main proceedings to submit proposals concerns important assets or decisions involving their use, such as the continuation or cessation of the activities of the debtor’s establishment in the secondary proceedings. It should not be interpreted so widely that, in practice, it paralyses the work of the insolvency practitioner in the secondary proceedings.⁵¹ It may be noted that Article 41(2)(c) itself does not contain a rule requiring the secondary insolvency practitioner to take notice of the proposals of the main insolvency practitioner. Furthermore, the provision does not offer a rule concerning how conflicts between the main and the secondary insolvency practitioners over the realisation of assets or the debtor’s affairs are to be decided. Moss and Smith submit (in relation to the equivalent cooperation provision in Article 31(3) EIR 2000) that the provision does not contain any suggestion that the secondary liquidator is bound to follow the proposals of the main liquidator. They are of the view that the main liquidator may, however, appeal against any action taken by the secondary liquidator under the applicable national law.⁵² However, it seems likely that the main insolvency practitioner will typically submit proposals of a nature that are sufficiently favourable to the secondary liquidator for such liquidator to follow.⁵³

41.66 In situations where, in the main or in the secondary insolvency proceedings or in any territorial insolvency proceedings concerning the same debtor and open at the same time, the debtor remains in possession of its assets, Articles 41(1) and 41(2) apply mutatis mutandis, exposing the debtor to the obligation to cooperate with insolvency practitioners in other proceedings under Article 41(1), including by the modes contemplated in Article 41(2).

1. In order to facilitate the coordination of main, territorial and secondary insolvency proceedings concerning the same debtor, a court before which a request to open insolvency proceedings is pending, or which has opened such proceedings, shall cooperate with any other court before which a request to open insolvency proceedings is pending, or which has opened such proceedings, to the extent that such cooperation is not incompatible with the rules applicable to each of the proceedings. For that purpose, the courts may, where appropriate, appoint an independent person or body acting on its instructions, provided that it is not incompatible with the rules applicable to them.

2. In implementing the cooperation set out in paragraph 1, the courts, or any appointed person or body acting on their behalf, as referred to in paragraph 1, may communicate directly with, or request information or assistance directly from, each other provided that such communication respects the procedural rights of the parties to the proceedings and the confidentiality of information.

3. The cooperation referred to in paragraph 1 may be implemented by any means that the court considers appropriate. It may, in particular, concern:

   (a)

   coordination in the appointment of the insolvency practitioners;

   (b)

   communication of information by any means considered appropriate by the court;

   (c)

   coordination of the administration and supervision of the debtor’s assets and affairs;

   (d)

   coordination of the conduct of hearings;

   (e)

   coordination in the approval of protocols, where necessary.

42.01 Article 42 introduces a duty for courts to communicate and cooperate in cross-border insolvency cases concerning the same debtor that fall within the scope of the EIR.¹ The foundations of the Insolvency Regulation lie in Articles 67 and 81 of the Treaty on the Functioning of the European Union (TFEU) and the Regulation is a measure to secure judicial cooperation within the meaning of Article 81. Consistent with this, the process of recasting the Regulation led to the introduction of specific provisions relating to the duties of courts and judges in Member States in relation to insolvency proceedings pending in different Member States. The principle of mutual trust supports the principal of automatic recognition of judgments opening main insolvency proceedings under the EIR. This principle of mutual trust (which appears to be based on Article 4(3) of the Treaty on European Union (TEU) (Article 10 of the EC Treaty)) must also lead the court to be guided by the purpose and rationale of any particular EU measure. In the literature, a direct duty to cooperate by courts has been based on Article 4(3) TEU, in the context of analyses suggesting that the Regulation should be read in the wider context of Union law (the duty of cooperation arising under primary Union law). This comitas Europaea provides sufficient grounds for courts to seek the assistance of sister courts in other Member States concerning matters of insolvency and to require the latter to respond to such requests in good faith.²

42.02 In 2012, the CJEU appeared to accept this view.³ In a case that followed the approval of a rescue plan (procédure de sauvegarde) by the French court in Meaux, the Polish court asked the Tribunal de commerce de Meaux whether the insolvency proceedings in France, which were main proceedings for the purposes of the Regulation, were still pending. The answer given by the French court did not provide the necessary clarification. The referring court then consulted an expert. The Polish court (Sąd Rejonowy Poznań-Stare Miasto w Poznaniu) then decided to stay the proceedings pending before it and to refer questions to the CJEU for a preliminary ruling, which led to the judgment that Article 27 of the EIR 2000 must be interpreted as meaning that it permits the opening of secondary insolvency proceedings in the Member State in which the debtor has an establishment, even where the main proceedings have a protective purpose: ‘It is for the court having jurisdiction to open secondary proceedings to have regard to the objectives of the main proceedings and to take account of the scheme of the Regulation, in keeping with the principle of sincere cooperation.’ This case demonstrates that the principle of mutual trust (between EU Member States) in the context of cross-border insolvency culminates in a duty for the court to look for ways of cooperation that reflect the overall ‘scheme’ of the Regulation. In practice this means that the court, considering the opening of secondary proceedings, should invite the insolvency practitioner in the main proceedings to inform the court about the goals of the main proceedings and the role a secondary proceeding could play to achieve that goal, including information regarding any measures to be taken to protect rights of creditors.

42.03 It is submitted that the principle of sincere cooperation laid down in Article 4(3) TEU (and now reflected directly in Article 42 of the recast EIR) requires the court having jurisdiction to open secondary proceedings to (i) have regard to the objectives of the main insolvency proceedings, and (ii) take account of the scheme of the Regulation, which aims to ensure efficient and effective cross-border insolvency proceedings through mandatory coordination of the main and secondary proceedings (and consistent with the ‘dominance’ of the main proceedings: Recital 48). The ‘scheme’ of the Regulation is built in part through the powers conferred on main insolvency practitioners in relation to secondary proceedings, as listed in [41.10]. In the case discussed in the paragraph immediately above the CJEU refers to these powers as ‘prerogatives’ (‘61 The liquidator in the main proceedings thus has certain prerogatives at his disposal which allow him to influence the secondary proceedings in such a way that the protective purpose of the main proceedings is not jeopardised’). These powers are one way to help to ensure that main and secondary proceedings are coordinated; direct court-to-court cooperation and communication under Article 42 is another.

42.04 Cross-border communication between judges will be a new phenomenon for some Member States. Some evidence of best practice (as referred to in recital 48 of the recast EIR) is offered by EU JudgeCo Principle 16 (‘Communications between Courts’), which provides:

16.1. Courts before which insolvency cases are pending should, if necessary, communicate with each other directly or through the insolvency practitioners to promote the orderly, effective, efficient and timely administration of the cases.

16.2. Such communications should utilise modern methods of communication, including electronic communications as well as written documents delivered in traditional ways.

16.3. For such communications the EU JudgeCo Cross-Border Insolvency Court-to-Court Communications Guidelines should be employed.

16.4. Electronic communications should utilise technology which is commonly used and be reliable and secure.

16.5. If courts are to manage an international insolvency case, they should consider the use of one or more protocols to manage the proceedings with the agreement of the parties, and approval by the courts concerned.

On opening the lines of cross-border communication in practice, see the EU JudgeCo Guidelines ([41.25]–[41.34]), especially EU JudgeCo Guideline 6 (‘Receiving and Handling Communication’).

42.05 In a Union where over 20 languages are used, the question of which language to use in (direct) communications between courts and judges is a significant issue. Again, the JudgeCo Principles ([41.25]–[41.34]) may serve as evidence of best practice here. EU JudgeCo Principle 14 (‘Language’) provides:

14.1. Where there is more than one insolvency case pending with respect to a debtor, the insolvency practitioners and the courts involved should determine the language in which communications should take place with due regard to convenience and the reduction of costs. Notices should indicate their nature and significance in the languages that are likely to be understood by the recipients.

14.2. With due regard to local law and available resources, courts:

(i)

Should permit the use of languages other than those regularly used in local proceedings in all or part of the proceedings, if no undue prejudice to a party will result;

(ii)

Should accept documents in the language designated by the insolvency practitioners without translation into the local language provided that (a) any such document is accompanied by a short description, written in the local language and signed by or on behalf of the insolvency practitioners, confirming in generic terms the nature of the document being filed and provided also that (b) if having considered such description the court concludes that a translation of part or all of such document is required in order to ensure that the local proceedings are conducted effectively and without undue prejudice to interested parties, it may require the insolvency practitioners to provide the same on such terms as the court may think fit;.

(iii)

Should promote the availability of orders, decisions and judgments in languages other than those regularly used in local proceedings, if no undue prejudice to a party will result.

(On the authentication of documents, see EU JudgeCo Principle 15 (‘Authentication’)).

42.06 Cross-border court-to-court cooperation is only a duty ‘to the extent that such cooperation is not incompatible with the rules applicable to each of the proceedings’. A similar limitation is contained in Article 41(1), as analysed at [41.55]–[41.57]. There are very slight differences in the language used in each but this should not lead to a different interpretation.

42.07 Article 42(1) introduces a new actor in the field of cross-border insolvency, an ‘independent person or body’ appointed to assist in securing court-court cooperation in proceedings under the EIR concerning the same debtor. Under Article 41 courts may, ‘where appropriate’, appoint such a person to act on the courts’ instructions, provided that this is not incompatible with the rules applicable to them (Article 42(1)1, last sentence). In implementing the cooperation required by Article 42(1), this person may communicate directly with courts involved in the same proceedings in the same way that courts can, and request information or assistance in the same way (provided that the communication ‘respects the procedural rights of the parties to the proceedings and the confidentiality of information’ (Article 42(2)).

42.08 The concept of such an independent person had previously been suggested in the literature.⁴ It was also introduced in the EU JudgeCo Principles ([41.25 ff]), Principle 17 of which provides:

Principle 17 Independent Intermediary

17.1. Courts should consider the appointment of one or more independent intermediaries within the meaning of Principle 17.2, to ensure that an international insolvency case proceeds in accordance with these EU JudgeCo Principles. The court should give due regard to the views of the insolvency practitioners in the pending insolvency cases before appointing an intermediary. The role of the intermediary may be set out in a protocol or an order of the court.

17.2. An intermediary:

(i)

Should have the appropriate skills, qualifications, experience and professional knowledge, and should be fit and proper to act in an international insolvency proceeding;

(ii)

Should be able to perform his or her duties in an impartial manner, without any actual or apparent conflict of interest;

(iii)

Should be accountable to the court which appoints him or her;

(iv)

Should be compensated from the estate of the insolvency case in which the court has jurisdiction.

The commentary accompanying the principles explains the rationale for using such an intermediary as follows:

In certain circumstances, the court may wish to refrain from conducting direct communications with another foreign court, or even from doing so through the insolvency practitioners who are conducting the respective proceedings in the Member States concerned. Reasons for considering such a course of action could include the need to attend to other immediate priorities or the general pressure of business upon the court, which require it to limit the time and resources devoted to the demands of the international case. A more obvious consideration may be the anticipated complexity of multi-lingual communications in different time-zones, with more than two insolvency cases pending simultaneously (e.g. in such cases as Madoff or Lehman Brothers, involving some eight and fifteen jurisdictions respectively), the unavailability or insufficiency of e-technological means, and possibly the court’s genuine desire to maintain full impartiality, particularly if there are perceived to be conflicts between the insolvency practitioners. In any such case, the court could consider appointing an independent intermediary. The court could be encouraged to do so too in cases where one or more creditors so request.

(For the remainder of the commentary, see the source of the EU JudgeCo Principles, [41.25]–[41.34]).

42.09 Court-to-court cooperation can be implemented by any means that the court considers appropriate (Article 42(3), first sentence). It is submitted that judges should ideally agree explicitly on the chosen means. In the absence of agreement, individual courts should cooperate in what appears to be the most appropriate form in the light of the circumstances and the time available.

42.10 Article 42(3) provides, by way of example (‘in particular’), five ways through which the court-to-court cooperation required by Article 42(1) can be ‘implemented’ or secured. These are:

Reference can again be made to the EU JudgeCo Principles, as well as the EU JudgeCo Guidelines (see [41.25–41.34]), which contain several (non-binding) provisions designed to facilitate these forms of cooperation, including rules for the provision of notice (to creditors or to insolvency practitioners), and details for direct (electronic) communications or the convening of a joint hearing.

1. In order to facilitate the coordination of main, territorial and secondary insolvency proceedings opened in respect of the same debtor:

   (a)

   an insolvency practitioner in main insolvency proceedings shall cooperate and communicate with any court before which a request to open secondary insolvency proceedings is pending or which has opened such proceedings;

   (b)

   an insolvency practitioner in territorial or secondary insolvency proceedings shall cooperate and communicate with the court before which a request to open main insolvency proceedings is pending or which has opened such proceedings; and

   (c)

   an insolvency practitioner in territorial or secondary insolvency proceedings shall cooperate and communicate with the court before which a request to open other territorial or secondary insolvency proceedings is pending or which has opened such proceedings;

   to the extent that such cooperation and communication are not incompatible with the rules applicable to each of the proceedings and do not entail any conflict of interest.

   The cooperation referred to in paragraph 1 may be implemented by any appropriate means, such as those set out in Article 42(3).

43.01 In addition to providing specific rules on cross-border cooperation and communication between insolvency practitioners (Article 41) and between courts (Article 42), the recast EIR also introduces a new provision on cooperation and communication provisions between these actors: that is, between insolvency practitioners, on the one hand, and courts on the other (Article 43).¹ As noted earlier (see [41.04]) both Article 42 and Article 43 explicitly state that they are designed to facilitate the coordination of main, territorial and secondary insolvency proceedings opened in respect of the same debtor. As explained earlier (and summarised in Recital 48), Article 41 has the same aim.

43.02 Article 43(1) formulates three cooperation and communication duties, in sub-paragraphs 1(a), 1(b), and 1(c). The first is imposed on the insolvency practitioner in the main proceedings (requiring cooperation and communication with courts of secondary proceedings), and the second and third on insolvency practitioners in territorial or secondary proceedings (requiring cooperation and communication with the court of the main proceedings, and with courts in other territorial or secondary proceedings). All three are substantial or ‘strong form’ rules, but they have been formulated by building on what is accepted to be best practice in this area (see e.g. EU JudgeCo Guideline 4 (‘Court to Insolvency Practitioner Communication’), discussed at paragraph [41.34]).

43.03 See the analysis of the similar limitation in Articles 41 ([41.55]–[41.57]) and 42 ([42.06]).

43.04 Article 43(1) (last sentence) provides another novel element in cross-border insolvency practitioner–court cooperation and communication. This provides that the cooperation and communication duties of Article 43 apply only to the extent that they ‘do not entail any conflict of interest’. The same phrase (‘conflict of interest’) is used in Chapter V of the recast EIR (see Articles 56(1), 57(1), 58, and 71(2)) as a limitation on the communication and cooperation duties there imposed in relation to proceedings involving members of a corporate group.

43.05 The only reference made in the recitals to the EIR Recast to conflicts of interest appears in Recital 21, which provides: ‘Insolvency practitioners are defined in this Regulation and listed in Annex B. Insolvency practitioners who are appointed without the involvement of a judicial body should, under national law, be appropriately regulated and authorised to act in insolvency proceedings. The national regulatory framework should provide for proper arrangements to deal with potential conflicts of interest.’ This recital indicates that a conflict of interest may arise in relation to the appointment of insolvency practitioners (including where appointed without the involvement of a judicial body, for instance by creditors), and that such a conflict is a domestic issue to be regulated by Member States. The Recast itself does not provide a description of ‘conflict of interest’.² It is not clear if the conflicts of interest alluded to in Recital 21 are necessarily those the Regulator has in mind in Article 44; nor is it entirely clear what might amount to a situation in which such a conflict arises in the context of cooperation and communication. It could be argued that such a conflict may occur where disclosing information to a foreign court or a foreign insolvency practitioner would be beneficial to creditors in one proceeding, but prejudicial to creditors in any other proceeding. Clearly the sanction for acting in breach of the duties regulating conflicts will be a national one, but does it fall under the scope of Article 7 (‘lex concursus’), and what would be the consequence in the other Member State(s) in a case in which the insolvency practitioner whose conduct is impugned is active in a secondary proceeding?

43.06 The cooperation referred to in Article 43(1) may be implemented by any appropriate means, such as those set out in Article 42(3). See the comment at [42.09]–[42.10].

The requirements laid down in Articles 42 and 43 shall not result in courts charging costs to each other for cooperation and communication.

44.01 Article 44 is clear: courts should not charge each other for the costs of cooperation and communication (e.g. costs of cross-border telephone conferences; assistance by translators; translation of documents, etc.).¹

44.02 Article 44 does not make provision for the treatment of the costs of insolvency practitioners. The general rule will continue to be that costs and fees will be covered by the respective estates (for a suggested exception, see CoCo Guideline 11). In recognition of this, several instruments of best practice are formulated in such a way as to accept that cost avoidance or reduction is an independent interest to take into account, see for instance CoCo Guidelines 2.2, 10, and 14, at [41.14ff].