As the readers of this blog already know, the EU Inc Proposal devotes a separate chapter to insolvency matters (Chapter X), establishing a regime of simplified winding-up proceedings specifically designed for EU Inc companies that satisfy the criteria of innovative startups.
The overarching objective is to ensure an orderly, expeditious, and cost-effective liquidation process in which the debtor, as a general rule, retains possession of the business's assets throughout the proceedings. The provisions are confined to establishing the insolvency trigger and the procedural architecture: proceedings may be commenced at the instance of either the debtor or a creditor by means of a standardised form; electronic means of communication are prescribed at every stage; and the debtor is afforded a stay of individual enforcement actions. Claims enumerated in a written statement submitted by the debtor are deemed admitted unless a creditor expressly objects. The competent authority determines whether to proceed with the realisation of assets—through electronic public auctions on platforms each Member State must establish—or to close the proceedings where realisation is manifestly unreasonable. The simplicity of the procedure entails that it is apt for piecemeal liquidations and ill-suited to the sale of the business as a going concern.
The applicable law governing the national ingredients
Chapter X furnishes the EU ingredient of the insolvency framework. The question that immediately presents itself is which national law governs the ‘national ingredients’—that is, the remainder of the insolvency framework applicable to such companies. This encompasses a remarkably broad domain, extending not merely to other central aspects of the liquidation proceedings, such as the ranking of claims, but equally to alternative insolvency solutions, in particular prepack sales and restructuring proceedings.
Two conceivable approaches may be envisaged.
Option 1: The application of Article 4
Article 4 of the Proposal provides that matters not governed by the Regulation—or by the articles of association—shall be subject to the law of the Member State in which the EU Inc has its registered office. At first glance, one might conclude that this reference extends to insolvency law. Such a conclusion would be consistent with the general philosophy underlying the Proposal: founders may select the national ingredients from amongst 27 options, irrespective of the location of the company's centre of administration—which must nevertheless be situated within the European Union (Article 9(1)). As recital 11 explains, founders should be able to choose in which Member State to incorporate an EU Inc and therefore in which Member State it would have its registered office, ‘without being required to have its central administration or principal place of business in the same Member State’.
Admittedly, the circumstance that the Proposal does not establish a comprehensive regime engenders ‘27 different versions of the EU Inc’. Yet this plurality may foster regulatory competition and harmonisation through the market—the ‘Delaware Effect’. Following the same logic, the insolvency framework could be made subject to party autonomy, functioning as a European variant of the ‘commitment rule’, albeit confined to 27 regimes and stapled to the lex societatis. This approach presents several advantages: (i) it affords founders a broad menu from which to select the insolvency framework that ex ante minimises the costs of finance; (ii) all substantive aspects of the insolvency proceedings would be governed by a single law, precluding exceptions to the lex concursus; and (iii) it may facilitate restructuring proceedings, where the coincidence between the lex societatis and the lex restructurationis is of considerable practical significance.
The sole lacuna in this construction is that Article 4 determines only the applicable law, not jurisdiction. Whereas in company law disputes the coincidence between forum and ius is guaranteed by Article 24(2) of the Brussels I Regulation, in insolvency jurisdiction is determined by the debtor’s centre of main interests (COMI). This disjunction materially diminishes the advantages of the European variant of the commitment rule outlined above.
Option 2: The application of the European Insolvency Regulation
The alternative approach consists in the application of the European Insolvency Regulation (EIR), pursuant to which the national ingredients governing the insolvency of the EU Inc would be determined by reference to the EU Inc’s COMI. All insolvency aspects not harmonised by the Proposal—including prepack sales and restructuring plans—would be governed by the law of the Member State where the debtor’s COMI is located, with the registered office operating merely as a rebuttable presumption (Article 3(1) para 2 EIR). This appears to be the understanding of the authors of the Proposal. In the Explanatory Memorandum, they state in unequivocal terms that the EU Inc Proposal ‘does not affect the rules on determination of international jurisdiction, applicable law and recognition of judgements in insolvency matters, laid down in Regulation (EU) 2015/848’. Accordingly, notwithstanding the breadth of its formulation, Article 4 does not extend to insolvency matters.
In practical terms, this entails that the EU Inc could potentially be subject to 27 national complementary company laws combined with 27 national insolvency frameworks (27 x 27 = 729). Moreover, the possibility of opening territorial proceedings (Article 3(2) EIR) may further fragment the insolvency framework, such that the same EU Inc could find itself subject to two or more parallel liquidation proceedings—a result that sits uneasily with the avowed objective of offering an ‘expeditious, cost-effective liquidation process’.
Assessment
Option 1 furnishes a clear and predictable legal framework, obviates the difficulties of determining the debtor’s COMI and the risk of opportunistic migration, permits the realisation of certain benefits deriving from the ‘commitment rule’, ensures coherence between the lex societatis and the lex restructurationis, and avoids the costs engendered by the fragmentation of insolvency proceedings (noting the problem of vulnerable or non-adjusting creditors). I am thus persuaded that extending the application of Article 4 to insolvency matters is amply justified, provided the intention is to harmonise, as far as possible, the entirety of the company lifecycle for the EU Inc, and I discern no insuperable obstacle to the partial exclusion of the EIR. However, to maximise the advantages of this approach, it ought to be accompanied by a jurisdictional rule predicated upon the registered office and by the exclusion of territorial proceedings. A ‘single point of entry’ is indispensable to ensuring an expeditious and cost-effective insolvency framework for the EU Inc.
Francisco Garcimartín is a Professor of Private International Law, University Autónoma of Madrid, and Consultant at Linklaters SLP.
This post is part of the OBLB's series of posts on the EU Inc proposal.
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