Malta: Cross-Border Insolvency: Making A Case Of Harmonised Insolvency Laws Across The EU

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Cross-border insolvency law has been gaining importance in the EU's legal system over the past few decades. Harmonising insolvency laws is a difficult process as the legal framework interacts with a myriad of domestic laws. In order to increase the effectiveness of cross-border insolvency proceedings, the original Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings was replaced by new Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 the Insolvency Proceedings (Recast) Regulation (the "Recast"). Insolvency proceedings opened after 26 June 2017 are regulated by the Recast which applies to all Member States except Denmark. Like the old regulation, the Recast still deals primarily with private international law issues and does not harmonise national insolvency rules. However, the Recast fine-tunes the private international law rules in relation to insolvency proceedings, establishes national insolvency registers to facilitate smooth cooperation between Member States, broadens the scope of the application to include additional insolvency processes, places restrictions on secondary proceedings and allows for group insolvency proceedings. Generally, the Recast aims to remove inefficiencies from the systems that cause delays and make cross-border insolvency proceedings more effective while also modernising them in accordance with the commercial expectations of today's rapidly changing global business environments. 

The rules concerning jurisdiction are crucial. When a debtor or creditor have the option to choose various jurisdictions, they will want to go to the jurisdiction that offers the best options regarding procedures and substantive law. Under the Recast, main insolvency proceedings are brought before the courts of the Member State where the debtor has its centre of main interests ("COMI"). The term had been criticised for being unpredictable and open-ended and for leaving room for forum-shopping.  However, the Recast defined it as "the place where the debtor conducts the administration of its interests on a regular basis and which is ascertainable by third parties". For a company, which is the main focus of this article, the place of its registered office is presumed to be the centre of main interests, unless proven otherwise. Recital 30 also clarifies that if the company's central administration is located in a Member State other than that of its registered office, and where a comprehensive assessment of all the relevant factors establishes, in a manner that is ascertainable by third parties, that the company's actual centre of management and supervision and of the management of its interests is located in that other Member State, then the company's COMI for the purposes of the Recast is considered to be in than other Member State. In this respect, the Recast has not provided for a radical shift from the approach taken by the old regulation with regard to forum shopping by companies since it merely codifies the interpretation given by the CJEU1 in its case-law2.

The Recast also added an anti-abuse provision by inserting a three-month period for which a legal entity could not open insolvency proceedings after shifting its COMI to another Member State. It is quite common to shift a company's COMI to a more favourable jurisdiction for insolvency procedures, thus the introduction of an anti-abuse provision was a welcome addition. However, it is argued that it still left room for different interpretations of COMI. Additionally, Recital 5 of the Recast prohibits forum shopping when it is to the detriment of the general body of creditors. It is therefore interpreted that if the parties agree to shift the COMI to another Member State, seeking to obtain a more favourable legal position, this is allowed.

To shift the company's COMI, you can either relocate the registered address of the company or change the jurisdiction where the everyday management and control is exercised. The anti-abuse provision of the three-month period refers only to relocating the company's registered address. Hence, it is viewed that the transfer of the company's place of effective management falls outside the scope of the anti-abuse provision. It is clear that the Recast aims to protect the creditors and to that end, various safeguards have been added, yet the anti-abuse provision could be read as a breach of the right of establishment under article 49 of the Treaty on the Functioning of the European Union ("TFEU"). Restrictions of the right to move, set up and manage companies in another EU Member State are prohibited under TFEU.

Shifting of the COMI could also trigger tax implications. There are Member States which for tax purposes consider the relocation of the company to be liquidation and should the various conditions set by CJEU's case-law3 be met, then they are allowed to impose exit taxes. The EU Anti-Tax Avoidance Directive (EU 2016/1164) also caters for exit taxes when a taxpayer transfers its assets/tax residence to a new Member State and falls under the circumstances mentioned therein. These are factors which should be taken into consideration prior to shifting the debtor company's COMI and could potentially eliminate the forum shopping as the costs which the company would face might outweigh the benefits of relocating to a new Member State in order to benefit from a favourable legal regime. It is evident that the costs involved would make it less likely for SMEs to exploit forum shopping and this would in turn create inequalities among corporate entities within the harmonised environment of EU.               

The Recast extends its scope to include interim proceedings, which have the purpose of rescue, adjustment of debt, or reorganisation. In this respect, the Recast applies to all types of Maltese insolvency proceedings, namely, dissolution ("xoljiment"), provisional administration ("amministrazzjoni"), members' or creditors' winding-up ("stralċ volontarju mill-membri jew mill-kredituri"), court winding-up ("stralċ mill-Qorti"), bankruptcy ("falliment f'każ ta' kummerċjant"), and the company recovery procedure ("proċedura biex kumpanija tirkupra"). Proceedings not covered by Annex A of the Recast do not fall within the scope of the Recast. Thus, Member States are free to determine the legal framework for such proceedings and gain a competitive advantage by introducing effective recovery proceedings. An example of such a proceeding has been the "scheme of arrangement", a restructuring mechanism under English law. Such scheme is not included in the list of UK insolvency proceedings contained in the Annex A of the Recast and therefore not subject to the jurisdiction requirements of article 3 of the Recast.

Forum shopping is without a doubt a clear indication that harmonisation of the insolvency proceedings within EU Member States has not yet been achieved. However, we have noticed in the last years that there is a tendency for the convergence of Member States' laws including insolvency laws. Harmonisation of the various legal frameworks aims to enable economies to promptly respond to default conditions and insolvency in a way that promotes economic growth and competition. On 22 November 2016, the European Commission published its proposal for a Directive4 on insolvency, restructuring and second chance. The main objective of this proposal is to provide a uniform European legal framework ensuring that companies in financial distress have access to preventive restructuring proceedings as soon as possible. Harmonising the principles of restructuring proceedings is a tool for a growing economy.


1 Court of Justice of the European Union

2 See Case C-341/04 Eurofood IFSC Ltd; Case C-369/09  Interedil Srl and Case C-191/10 Rastelli Davide e C. Snc.

3 Inter alia, Case C-371/10 National Grid Indus BV v Inspecteur van de Belastingdienst Rijnmond.  

4 Proposal for a Directive of the European Parliament and of the Council on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures and amending Directive 2012/30/EU.

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