The Recast Insolvency Regulation (RIR)[1] came into effect on 26 June 2017.  It replaces the Insolvency Regulation 2000[2] (the Regulation) in relation to insolvency proceedings opened in respect of a company or individual debtor whose centre of main interests (COMI) is in a Member State (other than Denmark) on or after that date. As with the Regulation, the RIR does not apply to receiverships, members voluntary liquidations or schemes of arrangement.

The RIR allows for automatic recognition of insolvency proceedings in all EU member states (other than Denmark) and allows insolvency practitioners to quickly and cost effectively pursue assets situated in other member states without the need to bring separate proceedings, maximising value for creditors.

In recent years a number of individuals and corporates in financial difficulty have moved their COMI to the UK in order to take advantage of the combination of the Regulation and the UK’s flexible restructuring laws.  This process is called forum shopping and it is an issue which the EU is hoping to tackle in the RIR.

One of the stated objectives of the RIR is to “avoid incentives for parties to transfer assets or judicial proceedings from one Member State to another, seeking to obtain a more favourable legal position to the detriment of the general body of creditors (forum shopping)”.[3]

The RIR states that before opening any insolvency proceedings in a Member State, the Court in that Member State should carefully examine whether the debtor’s COMI is actually located within that Member State.

In order to discourage forum shopping, the RIR provides that the usual presumptions as regards COMI (i.e. that a debtors COMI is located where its registered office, principal place of business or habitual residence is) should be rebuttable.  It goes on to give some examples of the circumstances in which the presumptions may be rebutted successfully.  These include circumstances where it is established that a company’s central administration, supervision and management of its interests are carried out in a different Member State to that in which its registered office is located.  Or, in the case of an individual debtor, where the majority of the debtors assets are located in a different Member State to that of the debtors habitual residence.

The RIR then goes further, confirming that the presumptions as regards COMI will not apply at all if the registered office (if the debtor is a company) or principal place of business (if the debtor is an individual) has been moved within the previous 3 months or the debtor’s habitual place of residence has moved within the last 6 months.

This does not mean that if a debtor has moved its registered office, principal place of business or habitual residence within the relevant period that it will not be able to establish that its COMI falls within the new Member State.  However, debtors will have to go to greater lengths and provide more evidence to satisfy the Court that it has truly relocated its COMI and that it has not merely done so for the sake of gaining the advantages offered by the insolvency regime in that Member State before insolvency proceedings will be opened.

If the Court decides that insolvency proceedings may be opened in a particular Member State then the RIR allows for that decision to be challenged by the debtor or any creditor on the grounds of international jurisdiction.  The RIR also provides that anyone else may challenge that decision if the national law of the Member State in which the proceedings have been opened allow for it.

Of course, this could all cease to be relevant in the short/medium term if/when the UK exits the European Union.  It is not clear at this stage whether the RIR will continue to apply, or whether a new structure will be put in place to replace it.  It could be that the RIR simply ceases to apply altogether (with or without transitional arrangements being put in place). However, for now the RIR is in force and insolvency practitioners and their advisors must ensure they are familiar with its terms.

This blog post was written by Lisa Smith.

[1] Regulation (EU) 2015/848 (20 May 2015)

[2] Council Regulation (EC) 1346/2000

[3] RIR (5)

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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.