CHAPTER ONE INTRODUCTION

Insolvency is a fact of ( e c o n o m i c ) lite. People and businesses accept risks in order to

make a profit. If t o o many of these risks materialise, however, people may become

unable to pay all of their debts as they fall due. In such instances legal systems usually

make available insolvency proceedings. One thing these procedures have in c o m m on

is that they are collective proceedings: so as to prevent the chaos and inequity that

would result from individual creditors seeking to collect on their debt; and, where

possible, to enable rehabilitation of the debtor.

In international (economic) life, the chances are that people and businesses have assets

and/or liabilities in more than one state. If insolvency occurs in this case, the same

collectivity cannot be attained by a single state alone. States are generally unable to

control assets and restrain creditor and debtor behaviour in the territory of another

state. The necessary degree of" collectivity then depends on the willingness of those

other states to enforce the collectivity in their own territory. Historically, such

willingness has been lacking. The result: exactly the ineffective procedures with

inequitable and unpredictable outcomes which insolvency law is designed to prevent.

Without too much difficulty, cross-border insolvency and the problems it raises can

be traced back to medieval times. The downfall of the Ammanati Bank of Pistoia in

the year 1302 is a well known example. With offices, debtors and creditors all over

Western Europe, it was thanks to the efforts of pope Bonafacius V I I I , as a sovereign

not bound by worldly frontiers, that many of the assets could be transferred to Rome

allowing for an even distribution: a sub-divine intervention with a reasonable result.

Throughout history there have been other favourable exceptions but it is only fair to

say that as a rule cross-border insolvency has proven a particularly difficult problem

that states have been unable or unwilling to address in a satisfactory fashion. Thus,

nearly seven centuries after the collapse of the Ammanati Bank, Westbrook could still

rightly claim that the existing lack of effective regulation ot cross-border insolvency stands in the way of'regional economic integration' and 'transnational enterprise

generally'.-

The states that embarked on the project of European economic integration did,

however, acknowledge the intimate relationship between (cross-border) trade and

(cross-border) insolvency. Work on a European Convention on Bankruptcy, Windingup,

Arrangements, Compositions and similar Proceedings began soon after the

establishment of the European Economic Community in 1958.'Nevertheless, i t t o ok

the Member States another thirty-five years to agree on a common framework to deal

with cross-border insolvencies and it was not until 31 May 2002 that Council

Regulation 1346/2000 on insolvency proceedings entered into force.1 The adoption

and entry into force o f Council Regulation 1346/2000 i s of considerable significance,

both in terms of (the history of) cross-border insolvency regulation as well as the

process of European integration.

The regulation of cross-border insolvencies in the European Union forms the central

focus of this book. To be more specific, this book presents an analysis of the crossborder

insolvency regime introduced by Council Regulation 1 3 4 6 / 2 0 0 0 on insolvency

proceedings from two wider perspectives: that of international cross-border insolvency

regulation and that of the internal market and Community law.

For thirty out of thirty five years, the attempts of the Member States to come to a

common cross-border insolvency regime were guided by the so-called ideal of 'unity

and universality' of insolvency. Proceedings opened in one Member State should

operate in all other Member States. The end result of Regulation 1 3 4 6 / 2 0 0 0 , however,

is a system in which cross-border insolvency proceedings are to be regulated through

a combination and co-ordination of (universal) main and (territorial) secondary

proceedings that simultaneously take place in several Member States.

This choice for a more pragmatic approach is certainly not unique to European efforts

in the field of cross-border insolvency regulation. It forms part of a much wider

tendency at the global level which has been gaining momentum for more than twenty

years and continues to do so. Instead of a commitment to one of the traditional

principles of universality or territoriality, academic debate as well as court practice

and legislative reforms have moved towards reliance on and accommodation of cooperation

between the various jurisdictions involved in cross-border insolvency proceedings. Internationally, co-operation has become the new paradigm of crossborder

insolvency regulation.

The regime introduced by Regulation 1346/2000 must be understood in the light of

this new paradigm of modern cross-border insolvency regulation that has emerged

at the international level, o u t s i d e o f the Community context. The nature of this paradigm

illustrates that within the Regulation's overall approach, co-operation between

the various proceedings is the key mechanism. The extent to which co-operation has

been accommodated within the Regulation's framework determines whether and to

what extent the Regulation may indeed achieve its stated objective of ensuring that

within the internal market, cross-border insolvency proceedings operate 'efficiently

and effectively'.'

There are however differences between the international context, in which the cooperative

paradigm of modern cross-border insolvency regulation has developed, and

that ot the European Community/Union, in which the Regulation has been introduced.

It the absence ot effective cross-border insolvency regulation hinders 'regional

economic integration'and'transnational enterprise generally'at the international level,

then this must be even more true at the Community level. This is not just a matter

of degree - it also has constitutional dimensions. Under public international law

individual states are free to balance their local and multi-state interests as they see fit.

States are under no obligation to exercise their 'conflicts freedom' in order to promote

economic integration or international commerce. Whereas this in general terms is true

in the case of public international law, it certainly is not true in the case of European

Community law. Viewed from a Community law perspective Westbrook's observation

acquires a crucial connotation. Essentially, it brings the regulation of cross-border

insolvencies within the scope of Community law and the principle of supremacy.

Integration and economic growth in the broad sense have been, and still are, the core

objectives of the Community.1 , It is exactly for these purposes that Member States have

transferred part of their sovereignty, creating an autonomous legal order.

Remarkably enough, however, Community law has played no more than a marginal

role in the process leading up to Regulation 1346/2000. In fact, until the Treaty of

Amsterdam, negotiations took place within the intergovernmental framework of

Article 293 EC and not the supranational framework of the Community. And although

the preamble dutifully proclaims that' [ t ] he proper functioning of the internal market requires that cross-border insolvency proceedings should operate efficiently and

effectively', this appears to be little more than an all too familiar dictum, intended to

bring the legislative powers of the Community into position.

Nevertheless, it is unlikely that Community law is (or has ever been) neutral regarding

the regulation of cross-border insolvency between the Member States. In its judgment

in Dankmarks Aktive Handekrejsende the Court of Justice observed that Community

law 'guarantees freedom of movement ( . . . ) within the Community and thus encourages

situations involving ( . . . ) foreign e l e m e n t s ' / Conversely, where national law discourages

parties to create such international situations this may hinder the exercise of the

freedoms. As early as 1977 Fletcher observed that

the disparities between the laws of the nine Member States, including their rules

on private international law, in relation to bankruptcy pose ominous difficulties,

and there is the ever-present threat o f ' d i s t o r t i on in economic relationships'- that

arch-villain of Community law demonology."

These 'difficulties' do not only make themselves felt after the opening of insolvency

proceedings. The expectation and prospect of unpredictable, wasteful and unfair

proceedings in the event of insolvency may also affect the willingness of private parties

to enter into a cross-border transaction in the first place. I n other words, rules of crossborder

insolvency may result in obstacles to interstate trade, and these are in principle

only allowed under strict conditions of Community law.

It is this Community law dimension that will be further explored in this work, as it

seeks to show that, if taken seriously, primary Community law would have been and

i s quite capable of generating the essential building-blocks of an effective cross-border

insolvency regime. It may be noted at the outset that this is not merely an investigation

into what 'could have been'. Not only are there serious doubts as to the validity of

Regulation 1346/2000, but even if i t is assumed to be valid, the EC Treaty would be

an important source of principles to guide national courts (as well as the European

Court of Justice) in applying and interpreting the provisions of Council Regulation

1346/2000 on insolvency proceedings. After all, i t is a general principle of Community

law that all secondary legislation should be interpreted in conformity with the provisions of the Treaty, including those on free movement, and the general principles

of Community law.;"

S T R U C T U R E

The book i s divided into three sections. Section one analyses cross-border insolvency

regulation at the international level and the emergence of a paradigm of co-operation.

Section two deals with the interplay between Community law and the private international

law of the Member States and its relevance for cross-border insolvency law

as between the Member States. Section three presents an analysis of the background

to, and substance of, the Regulation on insolvency proceedings itself.

Section one describes and examines the regulation of cross-border insolvencies at the

international - as opposed to the Community - level and the emergence of the

paradigm of co-operation. It outlines the basic structure of the cross-border insolvency

dilemma and analyses modern responses to this dilemma. Traditionally the crossborder

insolvency discourse has been dominated by an 'all or nothing' attitude under

the principles of territoriality and universality. The reality of this bipolar world was

that each state sought to apply its own insolvency law and policy to the fullest extent

possible; a state of affairs which is aptly characterised as a 'struggle over jurisdiction'

(chapter o n e ) . Modern responses to cross-border insolvency are no longer formulated

by reference to either principle. Instead, modern cross-border insolvency regulation

seeks to arrive at fair and efficient proceedings through co-operation between

jurisdictions. 'Co-operation between jurisdictions' has become the new paradigm of

modern cross-border insolvency regulation (chapter two).

After discussing the wider international context of Regulation 1346/2000 on insolvency

proceedings, section two examines cross-border insolvency in the light of Community

law. In order to assess the lawfulness of t he principles of universality and territoriality

of insolvency under Community law, the general interplay between Community law

and national private international law of the Member States will be elaborated (chapter

three). Community law has, in the process of integrating national markets into a

common market, generated a comitas Europaea, limiting Member States' autonomy

in respect of private international law generally. Under this comitas Member Sates are

no longer tree to apply their rules of (private international) law to relationships arising

in the exercise of one ot the freedoms. Moreover, this comitas also instructs Member

States when confronted with the foreign (mandatory) rules ot law of sister Member

States. The comiuis F.uropoco therefore presents a convenient framework to examine

the application of insolvency law under the principle of universality (chapter four)

as well as the non-application of foreign insolvency law under the principle of

territoriality (chapter five).

Council Regulation 1346/2000 on insolvency proceedings itself is discussed in detail

in section three. In addition to an examination of the legal basis and substance of the

Regulation (chapter 7 ) , due attention will also be paid to the Regulation's background

(chapter 6 ) . This includes, on the one hand, the drafting history, reflecting the fact

that the Regulation builds on the paradigm of co-operation developed outside the

Community context; and, on the other hand, the choice of the Member States to

harmonise their cross-border insolvency laws but to leave their substantive insolvency

laws largely untouched. The experience of federal states - as illustrated by the United

States - strongly suggests that Regulation 1 3 4 6 / 2 0 0 0 remains an accomplishment of

modest proportions, likely to be of a transitory nature.

L I M I T S A N n T E R M I N O L O GY

The following analysis will in principle be limited to business insolvency (whether the

business is run by a natural person or by a legal person) with the exclusion of consumer

insolvency. This is not to say that consumer insolvency lacks a Community law

dimension, as the recent cases ot'Coursicr v Fortis and l)e Vleeschnwesters illustrate."

However, the developments at the international level predominantly address business

failure. Moreover, at the substantive level, the policies underlying the laws concerning

insolvency and debt-restructuring of businesses and consumers are sufficiently

different tor a choice for the former to be both appropriate and convenient.

Lastly, a few words on terminology are appropriate. From the above it may already

be clear that the use of'cross-border' is preferred over'international', and 'insolvency'

is preferred over 'bankruptcy'. As to the first, it is not only borders between sovereign

states that maybe problematic in the context of insolvency. Moreover, not all borders

between sovereign states are the same. Cross-border insolvencies may equally occur

at the national level. Historically, the United States is a good example; today, the