The word "recession" is the order of the day. Most seem to be living with the impending fear of this "recession" hitting close to home, with the terms "bankruptcy" and "insolvency" becoming almost unmentionable. The timing has never been quite so right for insolvency legislation to be revisited.

Of particular relevance in today's rather dubious economic climate and in this day and age of globalisation, are the effects of an insolvency which will in all likelihood go beyond the local scenario. What happens in such cases? If a company has assets and interests spread across the EU, where should one open insolvency proceedings?

The EU Insolvency Regulation (Council regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings), which is directly applicable in Malta, was intended to more or less answer these questions.

The Regulation acknowledges the cross-border dimension to insolvency proceedings, and, without introducing uniform cross-border insolvency proceedings across the entire EU, tries to create some certainty and above all to protect creditors. By providing conflict of law rules for, among others, international jurisdiction, applicable law and recognition of insolvency proceedings, the EU Insolvency Regulation attempts to establish a uniform framework and tries to minimise the possibility of, and need for, debtors to move assets, or even judicial proceedings, from one Member State to another, and "shopping around", as it were, for the most "favourable legal position".

The EU Insolvency Regulation applies "to collective insolvency proceedings which entail the partial or total divestment of a debtor and the appointment of a liquidator". The Maltese insolvency proceedings which fall within the ambit of the Regulation and are considered to be the "main" insolvency proceedings for Malta (namely those listed in Annex A to the Regulation) are: (i) "Xoljiment" (ii) "Amminstrazzjoni" (iii) "Stralc Volontarju mill-membri jew mill-kredituri" (iv) "Stralc mill-Qorti" and (v) "Falliment f'kaz ta' negozjant". Insurance undertakings and credit institutions, among others, do not fall within the scope of the Regulation since these are specifically regulated by separate EU enactments.

The EU Insolvency Regulation determines which courts have jurisdiction to open the main insolvency proceedings and makes the "centre of a debtor's main interests" the key test for such a determination. The Regulation does not, however, give much guidance on how to effectively determine where such interests are situated, but sets the presumption that in the case of a company or legal person, it is the place of the registered office which shall be presumed to be the centre of its main interests in the absence of proof to the contrary.

Such a determination has given rise to considerable debate in case law across Europe. The ECJ has expressed itself on the interpretation of this presumption and in the "Eurofood Case" (Case C-341/04 - Eurofood IFSC Ltd., 2 May 2006) it opined that "the centre of main interests must be identified by reference to criteria that are both objective and ascertainable by third parties". It is not immediately clear, however, what these criteria effectively are.

Interestingly the EU Insolvency Regulation does not exclude the possibility of secondary proceedings being opened in a different Member State to where the centre of the debtor's main interests is located, if the debtor has an "establishment" in the territory of this other Member State. The effects of these secondary proceedings shall, however, be restricted to the assets of the debtor situated in the territory of this latter Member State. The Regulation also allows for some cases where these "secondary proceedings" may be opened before the main proceedings.

The determination of which Member State has jurisdiction over the insolvency proceedings is crucial since, once opened, the insolvency proceedings and their effects shall be determined by the laws of that Member State. This law will be determining for such matters as the conditions for the opening of the proceedings, the conduct of proceedings and their closure and creditors' rights after the closure of insolvency proceedings.

In principle, once a judgment opening insolvency proceedings is given by a court which is vested with jurisdiction in terms of the Regulation this judgment should be recognised in all the other Member States, without further formalities, unless it is blatantly against that State's public policy.

The EU Insolvency Regulation, although noble in its aim, certainly leaves perhaps that little too much room for interpretation to be as effective as desired in the creation of order in the international insolvencies scenario. The Regulation is not, therefore, without its flaws, and at the end of the day much is left to the discretion of the courts.

The role of the insolvency professional becomes crucial in ensuring that the developments in the interpretation of the Regulation are at least driven in a uniform direction. It would be very interesting to understand how local practitioners have been going down this route - if at all.

This is the first of a two part article on the cross-border dimension of insolvency.

Dr Pisani Bencini is a lawyer at Fenech & Fenech Advocates specialising in company law and financial services legislation.

www.fenechlaw.com

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