Jurisdiction to open main insolvency proceedings29/11/06 / cata_european-union-news

In the case of Eurofood, the ECJ laid down an explanation of the right of a court of a Member State to open main insolvency proceedings within the meaning of EC Regulation No 1346/2000 on insolvency proceedings (“Regulation No. 1346”). In essence, the ECJ held that the jurisdiction to open the main insolvency proceedings, which applies to assets of debtors situated in all Member States, is vested in the court of the Member State where the registered office of the debtor is located, unless there are objective and ascertainable circumstances to justify locating the debtor’s centre of main interests in another country. The ECJ’s judgment thus provides a guide for interpreting the “centre of main interests” concept envisaged by Regulation No. 1346.

Pursuant to the Regulation No. 1346, the court of the state where the debtor’s centre of main interests is located has jurisdiction to open main insolvency proceedings against the debtor. In case of a legal entity, Regulation No. 1346 presumes the debtor’s centre of main interests as being in the state of its registered office, unless there is a proof to the contrary.

Eurofood, an Irish subsidiary of Parmalat SpA (the Italian entity under extraordinary administration since 2003), provided certain financial facilities to the Parmalat Group. Following the extraordinary administrative takeover of Eurofood’s mother company, Parmalat SpA, in 2003, the Bank of America applied for liquidation of Eurofood on account of its debts. The Irish High Court accepted the application and appointed an Irish provisional liquidator in January 2004. In February 2004 on order of the Italian administrator of Parmalat, Eurofood was placed under extraordinary administration by the Italian administrator in Italy on the grounds that Eurofood’s centre of main interests was in Italy. This assumption was based on the fact that Eurofood was a wholly-owned subsidiary of Parmalat SpA and entrusted with financing the whole Parmalat Group. The Irish High Court however refused to recognize the administration in Italy and the decision was subsequently challenged by the Italian administrator.

The ECJ held that in determining the centre of the main interests of a debtor company, the simple presumption laid down by Community legislature in favor of the registered office of that company can be rebutted only if factors which are both objective and ascertainable by third parties establish that an actual situation exists different from the location of the registered office. The ECJ further held that this could be so in the case of a ‘letterbox’ company that does not carry out any business in the territory of the Member State in which its registered office is situated. By contrast, if a company carries out its business in the territory of the Member State where its registered office is situated, the mere fact that its economic choices are or can be controlled by a parent company in another Member State is not enough to rebut the presumption laid down by Regulation No. 1346.

The ECJ further held the principle of mutual trust requires the courts of other Member States to recognize a court decision to open main insolvency proceedings without being able to review the jurisdiction of the court of the Member State where the proceedings were opened.

The ECJ laid down the criteria for “opening insolvency proceedings” under Regulation No. 1346. A decision to open insolvency proceedings involves (i) divestment of the debtor and (ii) appointment of a liquidator referred to in Annex C of the Regulation No. 1346. Such divestment implies the debtor loses the powers of management over his assets.

In connection with this case, the ECJ further clarified that a Member State may refuse to recognize insolvency proceedings opened in another Member State where the decision to open the proceedings was taken in flagrant breach of the fundamental right to be heard, which a person concerned by such proceedings enjoys.

The Eurofood judgment may be regarded as upholding certain main principles on which the Regulation No. 1346 and Community cross-border insolvencies stand – namely, the principle of one main insolvency proceedings, recognition, mutual trust and equality of arms.