Chapter 13 Insolvency Proceedings of Members of a Group of Companies

• Jurisdiction: United States

13. Insolvency Proceedings of Members of a Group of Companies

The EIR 2000 did not contain rules dealing specifically with the insolvency of multinational enterprise groups. This was seen as a considerable drawback, as a large number of cross-border insolvencies in the EU involves groups of related companies. The basic premise of the EIR 2000 was that separate proceedings must be opened for each individual member of the corporate group and that these proceedings ought to be entirely independent of each other. The lack of provisions for group insolvencies often diminished the prospects of a successful restructuring of the group as a whole and led to its break-up into constituent parts.

The need to ensure fair and efficient administration of cross-border insolvencies concerning enterprise group members, and to guarantee protection and maximization of the overall combined value of the operations and assets of the enterprise group, drew the attention of UNCITRAL. In 2010, it issued Part III of the Legislative Guide on Insolvency Law ("Treatment of enterprise groups in insolvency"). UNCITRAL Working Group V is now discussing the draft legislative provisions addressing the shortcomings of the Model Law when it comes to failures of groups of companies.

As opposed to the EIR 2000 and the Model Law, which do not touch upon the issues pertinent to the insolvency of different group members, the EIR Recast contains a whole chapter (Chapter V) dedicated to group insolvencies, with more than 20 articles. The EIR Recast aims at achieving efficient administration of insolvency proceedings relating to different companies forming part of a group of companies (Recital 51). For that end, it provides two sets of tools. Articles 56-60 prescribe cooperation and communication duties for courts and insolvency practitioners involved in insolvency proceedings opened against members of an enterprise group. Articles 61-77 introduce a distinct mechanism of the so-called group coordination proceeding, including the figure of a group coordinator.

The starting point is that the EIR Recast recognizes and adheres to the notion of separate legal personalities of the companies comprising a corporate group. In Eurofood IFSC Ltd., considered above, the CJEU concluded that the Irish subsidiary of the Italian company was a separate legal entity with its own COMI, and therefore fell under separate insolvency proceedings. The idea that a subsidiary can constitute an establishment of its parent company was outright rejected. The EIR Recast does not change this entity-by-entity approach. It does not introduce the concept of "group COMI." Neither does it sanction substantive (pooling of assets and liabilities) or procedural (single insolvency proceeding) consolidation of insolvency proceedings opened against members of a group of companies.

It shall be noted that some European jurisdictions allow pooling of assets and liabilities of some or all members of a corporate group, so that a creditor of one member becomes, in essence, a creditor of all members. For instance, article L. 621-2 of the French Commercial Code provides for a consolidation of insolvency proceedings against companies whose property is intermixed or where the corporate body is a sham. In Case C-191/10, Rastelli Davide e C. Snc v. JeanCharles Hidoux, ECLI:EU:C:2011:838 (Dec. 15, 2011), the CJEU had to decide whether the court, having opened the main insolvency proceedings in one Member State (France), could join to those proceedings a second company whose registered office was in another Member State (Italy) solely on the basis that the property of the two companies had been intermixed. The court answered in the negative, concluding that such a "joinder" had effects similar to the opening of insolvency proceedings against the second "joining" company. Therefore, it requires the COMI or establishment of that company to be located in the Member State where initial insolvency proceedings have been opened. The intermingling of assets alone does not suffice to link two COMIs, as this factor is in general difficult to ascertain by third parties. Furthermore, intermixing of properties does not necessarily imply a single center of interests. Indeed, it cannot be excluded that such intermixing may be organized from two management and supervision centers situated in two different Member States (para. 38 of the Judgment).

At the same time, the EIR Recast tries to tackle the economic, financial, strategic and organizational reality of complex business structures. It offers a definition for a "group of companies." According to Article 2(13), "group of companies" means a parent undertaking and all its subsidiary undertakings. The parent undertaking should control, either directly or indirectly, one or more subsidiary undertakings. An undertaking that prepares consolidated financial statements pursuant to Directive 2013/34/EU on the annual and consolidated financial statement shall be deemed a parent undertaking (Article 2(14) EIR Recast).

Article 22 of this Directive requires any undertaking to draw up consolidated financial statements and a consolidated management report if that undertaking (a parent undertaking):

1. has a majority of the shareholders' or members' voting rights in another undertaking (a subsidiary undertaking);
2. has the right to appoint or remove a majority of the members of the administrative, management or supervisory body of a subsidiary undertaking and is at the same time a shareholder in or member of that undertaking;
3. has the right to exercise a dominant influence over a subsidiary undertaking of which it is a shareholder or member, pursuant to a contract entered into with that undertaking or to a provision in its memorandum or articles of association; and
4. is a shareholder in or member of an undertaking and either (1) has appointed a majority of the members of the administrative, management or supervisory bodies of that undertaking or (2) controls alone, pursuant to an agreement with other shareholders or members of that undertaking, a majority of shareholders' or members' voting rights in that undertaking.

Thus, the definition of a group of companies given in the EIR Recast is based on accountancy rules and is sufficiently broad to cover various types of company groups involving varying degrees of control and unity (vertical and horizontal integration). It is predicated on the broad definition of "control," which includes both equity and nonequity-based control (agreement or operational (management) related).

Despite the fact that the EIR Recast is quite conservative in its approach to insolvency of corporate groups (no substantive or procedural consolidation), it seems to advocate for a commercially sensible and flexible solution. For instance, it accepts the possibility for a court to open insolvency proceedings for several companies belonging to the same group in a single jurisdiction if the court finds that the COMIs of those companies are located in a single Member State (Recital 53 EIR Recast). In such a case, the court should also be able to appoint, if appropriate, the same insolvency practitioner in all proceedings concerned, provided that this is not incompatible with the rules applicable to them.

Bringing members of a corporate group into a single jurisdiction, even with the applicable restrictions (entity-by-entity COMI determination), can significantly reduce transaction costs arising from multiple insolvency proceedings and enhance the chances of a successful restructuring (rescue) of a group as a whole. A similar position was previously advocated for and exercised by the U.K. courts in the case of the insolvency of Nortel Network Group, a multinational telecommunications and data-networking equipment manufacturer headquartered in Ontario, Canada. On 14 January 2009, the High Court of Justice of England and Wales, Chancery Division opened main insolvency proceedings under English law in respect of all the companies in the Nortel Group established in separate Member States of the EU. Thus, the COMIs of 18 Nortel Group member companies in Europe were found to be in the U.K.

13.1. Cooperation and Communication in Group Insolvencies

The legal framework for cooperation and communication in the context of group insolvencies greatly resembles rules for cooperation and communication between main and secondary proceedings (Articles 41-43). Recital 52 EIR Recast explicitly states that the various insolvency practitioners and the courts involved in group insolvencies should be under similar obligations to cooperate and communicate with each other as those involved in main and secondary insolvency proceedings relating to the same debtor. In our opinion, such duties shall not be limited to intra-EU group insolvencies, but extend to cooperation and...