Supreme Court takes restrictive approach to the opening of secondary proceedings in England under EC Insolvency Regulation

The Supreme Court has held that, in order to open secondary proceedings in England under EC Regulation 1346/2000 on Insolvency Proceedings, the company's "establishment" within the jurisdiction must be a fixed place of business that is involved in a business activity that consists of dealings with third parties: The Trustees of the Olympic Airlines SA Pension and Life Assurance Scheme v Olympic Airlines SA [2015] UKSC 27. The Court refused permission to make a reference to the Court of Justice of the European Union under Article 267 of the Treaty on the Functioning of the European Union.

There have been very few reported cases in relation to the definition of "establishment" for the purposes of the Regulation and this is the first time the question has come before the Supreme Court. By stressing that an establishment requires more than just assets – it requires "economic activities" that are "exercised on the market" – the Supreme Court has made it clear that a creditor's ability (under the Regulation) to have an EU company wound up in England is more restricted than its ability (under the Insolvency Act 1986) to have a non-EU company wound up in England.

Accordingly, protections such as the Pension Protection Fund or the National Insurance Fund that are dependent on there being English insolvency proceedings might be less readily available where the debtor is an EU company compared to a non-EU company.

The decision could also lead to an increase in creditors applying for secondary proceedings to be opened soon after main proceedings are initiated and before the economic activities necessary for an English "establishment" have ceased, a development which could undermine one of the main purposes of the Regulation. Oliver Elgie, a senior associate in our dispute resolution team, considers the decision further below.

Background 

Regulation 1346/2000 on Insolvency Proceedings

Before the Regulation was adopted, the insolvency of a pan-European company could lead to a whole range of potentially conflicting insolvency proceedings being opened in jurisdictions all across Europe as competing creditors scrambled for assets. These uncoordinated actions often led to uncertainty, conflict, delay and greatly increased costs, all of which were damaging to the interests of creditors.

In order to support the proper functioning of the EU internal market (and to decrease forum-shopping), the Regulation sought to coordinate EU cross-border insolvencies by granting jurisdiction to open insolvency proceedings to the Member State in which the debtor has its centre of main interests (or "COMI") (see Article 3(1) of the Regulation). Those insolvency proceedings are the "main proceedings".

However, the Regulation also envisaged that it may be appropriate for other Member States to open "secondary proceedings" in certain circumstances. This is possible where the debtor has an "establishment" in that Member State. The effects of the secondary proceedings are restricted to assets within that jurisdiction (see Articles 3(2) and 3(3) of the Regulation). Article 2(h) defines "establishment" as: "any place of operations where the debtor carries out a non-transitory economic activity with human means and goods".

The main rationale behind allowing secondary proceedings is that: (i) foreign businesses that conduct economic activities through a local establishment should be subject to the same rules as national businesses in that jurisdiction; and (ii) potential creditors who contract with the local establishment should not have to worry about whether their counterparty is a national or foreign company.

Secondary proceedings are currently rare (as was the purpose of the Regulation), but if opened, they run parallel to the main proceedings.

Facts of the present case

Olympic Airlines S.A. ("Olympic") was the flag carrier airline for Greece, with its head office in Athens. In September 2009, Olympic ceased all operations and most flights were undertaken by another, unrelated, company. Olympic was wound up on the direction of the Athens Court of Appeal in October 2009. Since then, the main liquidation proceedings have been in progress in Greece.

The Olympic ticket office at Heathrow was closed in November 2009. In March 2010 the Greek liquidator gave instructions for the disposal of Olympic's assets at its branches outside of Greece. The premises in Manchester were vacated in May 2010 and their contents moved to the London head office. In June 2010 Olympic's bank in England was instructed to cancel all direct debits and standing orders with immediate effect, and  the employment contracts of all 27 of Olympic's employees in England were terminated with effect from 14 July 2010. Thereafter, three people were retained by Olympic on short term ad hoc contracts to liaise with the Greek liquidator from the London head office.

Olympic was the principal employer in its pension scheme. On 20 July 2010, the trustees of the pension scheme presented a winding up petition against Olympic in England on the grounds that Olympic was unable to make good the £16m deficit in the scheme.  The hope of the trustees was that, by initiating secondary proceedings in England, the pension scheme should qualify for entry into the Pension Protection Fund under sections 121(3)(g) and 127 of the UK Pensions Act 2004.

The question was whether Olympic possessed an "establishment" in England at the relevant date. At first instance, the court held that Olympic had an establishment in England and the court therefore opened secondary proceedings and granted the winding up order sought.  This was overturned by the Court of Appeal which held that it did not and therefore secondary proceedings should not be opened.

Decision

The Supreme Court (with Lord Sumption delivering the judgment) unanimously held that Olympic did not possess an establishment in the jurisdiction as at 20 July 2010 and so dismissed the appeal.

First, the Supreme Court held, applying In re Office Metro Ltd [2012] BCC 829, that the relevant date for deciding whether a company has an establishment is the date of the application to court to open secondary proceedings.

The Supreme Court then explained that article 2(h) must be read as a whole, not broken down into discrete elements, meaning that in order to constitute an "establishment" the relevant activities undertaken by Olympic must be (i) “economic”, (ii) “non-transitory”, (iii) carried on from a “place of operations”, and (iv) using the debtor’s assets and human agents.

In seeking to explain these elements, the Supreme Court (as had the Court of Appeal before it) drew upon paragraph 71 of the Virgos-Schmit Report on the Convention on Insolvency Proceedings (that eventually led to the Regulation). In short, "establishment" requires a fixed, rather than occasional, place of business that is engaged in business dealings with third parties, rather than being a place that is focussed on issues of internal administration. It must certainly be more than the debtor being "locatable or identifiable by a brass plate on a door".

The Supreme Court considered that Olympic was not carrying on any business activity in England as at 20 July 2010.  Its remaining personnel were merely handling matters of internal administration associated with the final stages of the company's liquidation.  Accordingly, the Olympic pension scheme could not be entered into the Pension Protection Fund.

Comment

A higher threshold for winding up an EU company than a non-EU company

English courts have long had the jurisdiction to wind up foreign companies under what are now sections 220 and 221 of the Insolvency Act 1986.  The sections themselves give no guidance as to the criteria that will justify an English court winding up a foreign company, but the case law has held that there has been sufficient nexus to grant an order where a company has assets in the jurisdiction (Banque des Marchands de Moscou v Kindersley [1951] Ch 112), a winding up order will allow former employees to claim statutory redundancy payments (Re Eloc Electro-Optieck and Communicatie BV [1982] Ch 43) or the debt upon which the petition was based was incurred in England (Re a Company (No.00359 of 1987) [1988] Ch 210).

The definitions of "economic activity" and "establishment" set out by the Supreme Court in Olympic mean that article 3(2) of the Regulation has effectively added a new and higher threshold in relation to EU companies.  In particular, whereas the Supreme Court in Olympic endorsed the statement that "the possibility of secondary proceedings only makes sense if the debtor has sufficient assets within the jurisdiction", a foreign company has previously been wound up by the English court under section 221 where it had no assets in the jurisdiction (see ex parte Nyckeln Finance Co Ltd [1991] B.C.L.C. 539).

There are a number of UK creditor/employee protection statutes that depend on there being English insolvency proceedings (for example claims by employees on the National Insurance Fund and, as in the Olympic case, the entry of a pension scheme into the Pension Protection Fund). Although the Supreme Court in Olympic warned that "decisions on what constitutes an 'establishment' can rarely be more than illustrative given the fact-sensitive nature of the inquiry", it is clear that the threshold for a creditor to apply in England to wind up a foreign company (and so take advantage of these protections) that has its COMI in another EU Member State is significantly higher than a foreign company that is domiciled outside of the EU altogether.

A question of timing?

In Olympic, the Supreme Court confirmed that the relevant date for deciding whether a company has an establishment in the jurisdiction is the date of the application to court to open secondary proceedings.  The court also stated:

"Manifestly, some activities which a company in liquidation might carry on, may satisfy the definition. This may happen not only where the liquidator carries on the business with a view to its disposal but also, for example, where he disposes of stock in trade on the market. On the other hand, where a company has no subsisting business it is clearly not the case that the mere internal administration of its winding up will qualify."

An establishment can potentially cease to exist rather rapidly as the business is wound down and/or sold.  It could be that (consistently with how quickly COMI can be established) an establishment can be set up equally quickly, subject to it not being a transitory presence. In the present case, it is not clear whether Olympic would have been held to have had an "establishment" in England at any earlier point after the opening of the main proceedings in Greece in October 2009.

This issue could encourage parties to apply to open (potentially a whole range of) secondary proceedings as soon as possible after the main proceedings are opened, before an "establishment" in any relevant Member State disappears.  Such practice would undermine the purpose of the Regulation insofar as it was intended to stop the proliferation of proceedings across the EU and to concentrate matters into one main proceeding.

Potential amendments to the Regulation?

The scope and utility of secondary proceedings may be affected by proposed amendments to the Regulation. On 5 February 2014, the European Parliament in plenary session voted on proposed amendments. Proposed amendments that survived that vote and that could increase the scope/utility of secondary proceedings include:

• Broadening the definition of "establishment" to include a 3-month look-back from the date of filing. This could have made a material difference in the Olympic case and could reduce the potentially severe impact of the timing of filing for the opening of secondary proceedings.
• Extending the scope of the Regulation to proceedings which promote "the rescue of an economically viable debtor" (in the EU Commission's words) or "the rescue of a debtor in severe financial distress" (the EU Parliament's words). This means that both main and secondary proceedings could result in the appointment of an administrator, receiver or other insolvency practitioner. This should be compared to the current position under both the Regulation (see article 27 and Annex B) and section 221 where the only remedy available against a foreign company is for it to be wound up.

On the other hand, the proposed amendments seek to increase the potential for coordination, allowing a court to postpone or refuse the opening of secondary proceedings if they are not necessary to protect the interests of local creditors. These amendments could limit the scope/utility of the secondary proceedings regime.

Finalised text of the amended Regulation was approved by the Council at a first reading on 12 March 2105. It is expected that the European Parliament will formally adopt the amended Regulation at a second reading at one of its forthcoming plenary sessions in May or June 2015.