Chapter 11 Secondary Insolvency Proceedings

• Jurisdiction: United States

11. Secondary Insolvency Proceedings

The EIR Recast adheres to the complex (multi-layered) system allowing for the opening of several insolvency proceedings against the same debtor in different Member States. The starting point is the universality of a single location for main insolvency proceedings covering all of a debtor's assets in all Member States. As discussed above, the main insolvency proceedings can only be opened in the Member State where the debtor has its centre of main interests (COMI) (Article 3(1) EIR Recast). COMI is an autonomous concept and must therefore be interpreted in a uniform way, independently of national legislation (para. 44 in Interedil).

The second step comprises the opening of secondary insolvency proceedings. To protect the diversity of interests, the EIR Recast permits secondary insolvency proceedings to be opened to run parallel with the main insolvency proceedings, which plays the dominant role. The effects of a secondary insolvency proceeding are limited to the assets located in the state of the opening of such proceeding (Recital 23 EIR Recast). The concrete location of such assets must be determined in accordance with Article 2(9) EIR Recast. Thus, as opposed to the universal character of main insolvency proceedings, secondary proceedings are territorial by nature. The opening of secondary proceedings disturbs the otherwise-coherent insolvency estate by creating a separate insolvency estate carved out from the main insolvency proceedings.

In addition, secondary insolvency proceedings fall under separate rules: The lex concursus secundarii is distinct from the lex concursus of the main insolvency proceedings. According to Article 35 EIR Recast (similar to Article 28 EIR 2000), unless otherwise provided, the law applicable to secondary insolvency proceedings shall be that of the Member State within the territory of which the secondary insolvency proceedings are opened. This law is comprised of both substantive and procedural insolvency rules of the state of the secondary insolvency proceedings, and extends to the issues nonexhaustively outlined in Article 7 EIR Recast.

Chart 3. Relations Between Main and Secondary Insolvency Proceedings

Regarding the reasoning behind the introduction of secondary insolvency proceedings, the EIR Recast cites protection of local interests and the need to ensure effective handling of complex insolvency estates, which are too difficult to administer as a unit (Recital 40 EIR Recast). Differences in substantive insolvency rules of the Member States may cause complications and frictions whenever the lex concursus extends beyond the territory of the opening Member State. Some assets belonging to the debtor that cannot form part of the insolvency estate under the lex concursus might fall into the "secondary" insolvency estate pursuant to the lex concursus secundarii, thus enriching the total insolvency estate. This could happen as a result of application of Article 8 EIR Recast, which exempts rights in rem from the effects of the lex concursus, but not the lex concursus secundarii. For these reasons, the insolvency practitioner in the main insolvency proceedings or creditors under the applicable lex concursus secundarii may request the opening of secondary insolvency proceedings where the efficient administration of the insolvency estate so requires. Thus, secondary proceedings perform a dual function, protecting local interests (defensive function) and improving the administration of the insolvency estate (auxiliary function).

Simultaneous running of the main insolvency proceedings and one or several secondary proceedings can arguably lead to the increased costs (e.g., court fees, salary of insolvency practitioners, legal fees paid to local legal counsel) and protraction of insolvency proceedings. Moreover, problems may arise when the nature of main and secondary proceedings differs — e.g., the main proceeding is rehabilitative, while the secondary proceeding aims at the company's liquidation. In this respect, the EIR Recast sets out two specific situations in which the court requested to open secondary insolvency proceedings should be able, at the request of the insolvency practitioner in the main insolvency proceedings, to postpone or refuse the opening of such proceedings. The first one includes an undertaking to local creditors that they will be treated as if secondary insolvency proceedings had been opened (Article 36 EIR Recast). The second concerns a temporary stay of the opening of secondary insolvency proceedings (Article 38(3) EIR Recast).

The EIR Recast recognizes that main insolvency proceedings and secondary insolvency proceedings can contribute to the efficient administration of the debtor's insolvency estate or to the effective realization of the total assets if there is proper cooperation between the actors involved in all the concurrent proceedings (Recital 48 EIR Recast). The EIR Recast cements the principle of communication and cooperation between different actors in insolvency proceedings, and to that end lays down rules to improve such cooperation and communication (Articles 41-44 EIR Recast).

11.1. Opening of Secondary Insolvency Proceedings

Article 3(2) EIR Recast dealing with international jurisdiction for the opening of secondary insolvency proceedings is identical to Article 3(2) EIR 2000. It states that where the debtor's COMI is situated in a Member State, the courts of another Member State shall have jurisdiction to open insolvency proceedings against that debtor only if it possesses an establishment on the territory of the latter Member State. Importantly, as opposed to the EIR 2000, the EIR Recast does not prescribe that secondary proceedings must be winding-up proceedings (Article 3(3) EIR 2000). The elimination of such a limitation should ensure efficient restructuring of the debtor's business in case the main proceedings aim at its rescue.

For the opening of secondary proceedings, two conditions must be met (Article 34 EIR Recast). First, main insolvency proceedings need to be opened and recognized in the Member State of the prospective secondary proceedings. Second, as indicated above, the debtor must possess an establishment in that Member State.

11.1.1. Timing: Secondary and Territorial Proceedings

Article 34 EIR Recast links the opening of secondary proceedings to the opening of main insolvency proceedings; the latter precedes the former. This is determined by the fact that secondary proceedings have a supporting function to main insolvency proceedings. The possibility of opening separate territorial proceedings prior to the opening of the main universal one inhibits the efficient management or realization of the debtor's insolvency estate. Therefore, the EIR Recast permits the opening of secondary proceedings only after the main insolvency proceedings have been opened. To find out what constitutes the judgment opening insolvency proceedings and the time of the opening of insolvency proceedings, see Articles 2(7) and 2(8) EIR Recast.

The description of the European insolvency framework would be incomplete without mentioning the independent "territorial" proceedings. In contrast to secondary proceedings, independent territorial proceedings can be opened prior to the opening of main insolvency proceedings and only under certain narrowly defined conditions. It is clear that both the EIR Recast and previously EIR 2000 try to avoid the opening of any insolvency proceedings before the main proceedings. Just like secondary proceedings, territorial proceedings require the debtor to have an establishment in the Member State where the opening of the territorial proceeding is requested (Article 3(2) EIR Recast). Territorial proceedings may be opened if main insolvency proceedings cannot be opened due to the conditions laid down in the lex concursus of the debtor's COMI (Article 3(4)(a) EIR Recast). Additionally, the opening of independent territorial insolvency proceedings may be possible at the request of a creditor whose claim arises from or in connection with the operation of the establishment in a Member State where the opening of territorial proceedings is requested (Article 3(4)(b)(i) EIR Recast). The right to initiate territorial insolvency proceedings may also be granted to a public authority by the applicable lex concursus particularis: ...