The EU Insolvency Regulation
and EU Winding Up Directives
and other Collateral Issues
26 September 2002
Ian Annetts
Allen & Overy
Introduction

EU Insolvency Regulation

EU Winding Up Directives for Credit
Institutions and Insurance Undertakings

EU Settlement Finality Directive

Proposed Hague Convention

Unidroit: Collateral with Intermediaries
BK:969523v1
ALLEN & OVERY
Introduction to Insolvency
Regulation

Council Regulation (EC) No 1346/2000 of 29
May 2000 on insolvency proceedings (the
“Regulation”)

Became effective on 31 May 2002

Directly applicable throughout the EU (with the
exception of Denmark)
BK:969523v1
ALLEN & OVERY
Purpose of Regulation

Recognition provisions for both the office-holder
and the effects of main proceedings

Clear choice of law rules regarding the effects of
insolvency proceedings, co-ordination and other
related issues, subject to exceptions

But NOT an attempt to introduce a single
European insolvency law
BK:969523v1
ALLEN & OVERY
When will the Regulation apply?

The “centre of main interests” of the debtor must
be in the EU

Must be “collective insolvency proceedings” as
listed in Annexes A and B of the Regulation

Debtor may be natural or legal person, a trader
or an individual

Does not apply to insurance undertakings or
credit institutions - Winding Up Directives
BK:969523v1
ALLEN & OVERY
Choice of jurisdiction provisions

BK:969523v1
Jurisdiction to open three types of insolvency
proceedings:

main proceedings where debtor has its
centre of main interests: recognised across
EU

secondary proceedings where debtor has
an establishment: territorial scope

territorial proceedings where debtor has an
establishment and before main proceedings
are opened
ALLEN & OVERY
Definitions (1)
“Centre of main interests”:

not defined but rebuttable presumption that
place of registered office - article 3(1)

should correspond to the place where the
debtor conducts the administration of his
interests on a regular basis and is therefore
ascertainable by third parties (but can therefore
change) - recital (13)
BK:969523v1
ALLEN & OVERY
Definitions (2)
“Establishment”:

defined as “any place of operations where the
debtor carries out a non-transitory economic
activity with human means or goods - article
2(h)

equivalent to a branch office or agency?

mere presence of assets unlikely to be sufficient
BK:969523v1
ALLEN & OVERY
Definitions (3)
“Main proceedings”:

can be opened in the Member State where the
debtor has its centre of main interests - article
3(1)

universal scope and aim to encompass all the
debtor’s assets on an EU-wide basis

any of the proceedings listed in Annex A (winding
up or reorganisation proceedings)
BK:969523v1
ALLEN & OVERY
Definitions (4)
“Secondary proceedings”:

can be opened subsequently in any Member
State where the debtor has an establishment article 3(3)

opened by either the office-holder in the main
proceedings or any other person authorised to
open secondary proceedings under local
insolvency law

limited in scope to assets located in that
Member State

only winding up proceedings listed in Annex B
ALLEN & OVERY
BK:969523v1
Definitions (5)
“Territorial proceedings”:

can be opened before the commencement of
main proceedings in any Member State where
the debtor has an establishment - article 3(2)

can only be opened:
BK:969523v1

where main proceedings cannot be opened;
or

where requested by creditor with domicile,
residence or registered office in Member
State - article 3(4)
ALLEN & OVERY
Definitions (6)
“Territorial proceedings” (cont):

BK:969523v1
not limited to winding up proceedings but can be
converted into winding up proceedings if
requested by office-holder in main proceedings article 37
ALLEN & OVERY
Choice of law provisions
article 4(2)

BK:969523v1
Law of Member State where proceedings
opened generally to determine effect of those
proceedings, for example:
 what assets form part of estate
 powers of office-holder
 conditions for set-off
 effects of proceedings on current contracts
 lodging and ranking of claims
 effects of closure of proceedings
 avoidance of transactions
ALLEN & OVERY
Recognition provisions

Main proceedings to be recognised, and have
same effects, in other Member States so long as
no secondary proceedings - articles 16 and 17

Foreign officeholder to be recognised in other
Member States - article 18
BK:969523v1
ALLEN & OVERY
Co-ordination provisions

Creditors may lodge claims in either or both of
main and secondary proceedings - sharing rules
if lodge claims in both

Office-holders in main and secondary
proceedings duty bound to communicate and cooperate

Each office-holder to lodge claims in his
proceedings in any other proceedings
BK:969523v1
ALLEN & OVERY
Impact of the Regulation on
Security
BK:969523v1

The “rights in rem”exception in Article 5 to
the primary choice of law rule in Article 4

Opening of insolvency proceedings shall not
affect rights in rem of creditors in respect of
debtor’s assets situated within another
Member State
ALLEN & OVERY
Impact of the Regulation
on Security (continued)
BK:969523v1

A “right in rem” includes:
 right to dispose and to be repaid from the
proceeds of the assets
 right to the beneficial use of assets

This does not preclude actions for voidness,
voidability or unenforceability - Article 5(4)
ALLEN & OVERY
Impact of the Regulation
on Security (continued)

BK:969523v1
Determining location of right in rem under Article
2(g):
 tangible property, the Member State where
the asset is situated
 registered property, the Member State where
the asset register is kept
 claims, where the obligor of the claim has its
centre of main interests
ALLEN & OVERY
Impact of the Regulation
on Security (continued)

Thus, a deposit at the London branch of a
German bank would be situated in Germany for
the purposes of Article 5 (and otherwise?)

Practical impact on financial markets
documentation (structure and drafting)
BK:969523v1
ALLEN & OVERY
Impact of the Regulation on Set-off

The “set-off”exception in Article 6 to the primary
choice of law rule in Article 4

Opening of insolvency proceedings shall not
affect the right of creditors to demand set-off of
claims where set-off is permitted by the law
applicable to the insolvent debtor’s claims
BK:969523v1
ALLEN & OVERY
Impact of the Regulation
on Set-off (continued)

Thus, an insolvent French company’s deposit
made with an English bank’s London branch
under English law may be set off as a matter of
English law, even if set-off is prohibited under
French insolvency law

This does not preclude actions for voidness,
voidability or unenforceability - Article 6(2)

Likely impact on financial markets practice and
documentation (structure and drafting)
ALLEN & OVERY
BK:969523v1
Impact of the Regulation
on Reservation of Title

The “reservation of title”exception in Article 7 to
the primary choice of law rule in Article 4

Opening of insolvency proceedings shall not
affect the right of a seller to an asset based on
reservation of title, and shall not rescind the
sale, where the asset is situated in another
Member State

This does not preclude actions for voidness,
voidability or unenforceability - Article 7(3)
ALLEN & OVERY
BK:969523v1
Avoidance Rules

BK:969523v1
Consider avoidance rules and effects of Article
13:

general rule is that law of Member State
where insolvency proceedings opened will
determine the insolvency avoidance rules Article 4(2)(m)

BUT may be defence under Article 13 if the
governing law of the transaction does not
allow any means of challenging the
detrimental act in the relevant case
ALLEN & OVERY
Avoidance rules (continued)

Consider an Italian company which may be
subject to main insolvency proceedings in Italy

Under Italian insolvency law, it may be possible
to challenge a transaction document under the
Italian avoidance laws

If the transaction document is governed by
English law, and there is no means of
challenging the transaction as a matter of
English law, the counterparty will have a defence
under Article 13

Care needed over choice of governing law
ALLEN & OVERY
BK:969523v1
Winding Up Directives

Directive 2001/24/EC of 4 April 2001 on
the reorganisation and winding up of credit
institutions. Implementation by 5 May
2004

Directive 2001/17/EC of 19 March 2001 on
the reorganisation and winding up of
insurance undertakings. Implementation
by 20 April 2003
BK:969523v1
ALLEN & OVERY
Credit Institutions WUD

Home Member State (which authorises a
bank) has sole right to implement
reorganisation measures or winding up
proceedings under the laws of that
Member State, subject to exceptions

Those laws will be automatically and
immediately effective throughout the
Community
BK:969523v1
ALLEN & OVERY
Credit Institutions WUD (continued)

Obligations to inform host Member States
with branches and to publicise to third
parties

Rules corresponding to Articles 5, 6, 7 and
13 of the Insolvency Regulation

Enforcement of proprietary rights re
registered instruments governed by the
law where the register is located
BK:969523v1
ALLEN & OVERY
Credit Institutions WUD (continued)

Netting and repurchase agreements are
governed by the chosen law of the
relevant agreement

Transactions on a regulated market are
governed by the law of that market
BK:969523v1
ALLEN & OVERY
Insurance Undertakings WUD

Home Member State (which authorises an
insurance undertaking) has sole right to
implement reorganisation measures or
winding up proceedings under the laws of
that Member State, subject to exceptions

Those laws will be automatically and
immediately effective throughout the
Community
BK:969523v1
ALLEN & OVERY
Insurance Undertakings WUD
(continued)

Insurance claims must take precedence
in any distribution on winding up

Obligations to inform host Member
States with branches and publicise to
third parties

Rules corresponding to Articles 5, 6, 7
and 13 of the Insolvency Regulation
BK:969523v1
ALLEN & OVERY
Insurance Undertakings WUD
(continued)

BK:969523v1
Transactions on a regulated market are
governed by the law of that market
ALLEN & OVERY
Settlement Finality Directive

Directive 98/26/EC of 19 May 1998 on
settlement finality in payment and
securities settlement systems

Implemented by 11 December 1999

Purpose: to achieve finality of
settlement within designated systems,
even on insolvency of a participant
BK:969523v1
ALLEN & OVERY
Settlement Finality Directive
(continued)

Applies to participants (eg credit
institutions, investment firms, public
authorities) in systems designated by a
Member State’s designating authority

Rules of the system must be governed
by the laws of a Member State
BK:969523v1
ALLEN & OVERY
Settlement Finality Directive
(continued)

Disapplies insolvency laws which would
avoid, revoke or disrupt netting and
settlement of a “transfer order” made
through a system or collateral provided
in connection with transfer orders

Rules of system will be recognised
throughout the Community
BK:969523v1
ALLEN & OVERY
Settlement Finality Directive
(continued)

Article 9(2): rights in respect of
securities recorded in a register,
account or centralised deposit system
located in a Member State shall be
governed by law of that Member State

Place of the Relevant Intermediary
Approach (PRIMA)
BK:969523v1
ALLEN & OVERY
Hague Convention

Convention on the Law Applicable to
Certain Rights in respect of Securities
held with an Intermediary

Concerned only with conflicts of laws

Currently draft of June 2002, to be
signed, after diplomatic session, on 14
December 2002
BK:969523v1
ALLEN & OVERY
Hague Convention (continued)

Requires adoption by at least three
States and implementation as
necessary

Convention will conform private
international law treatment of indirectly
held securities in line with PRIMA
BK:969523v1
ALLEN & OVERY
Hague Convention (continued)

Article 4 determines where PRIMA is
located; likely to be law agreed between
parties, either generally or for the
purposes of Article 2(1)

If no law is agreed, fallback is law where
the intermediary is organised
BK:969523v1
ALLEN & OVERY
Unidroit

International Institute for the Unification
of Private Law (Unidroit)

Project on “Harmonised Substantive
Rules for the Use of Securities Held
with Intermediaries as Collateral”

Scope of project still being determined end 2004?
BK:969523v1
ALLEN & OVERY
Unidroit (continued)

BK:969523v1
Likely to attempt to conform substantive
law on creation, perfection and
disposition of interests in securities held
by intermediaries, including right of
intermediary and collateral taker to use
securities
ALLEN & OVERY
The EU Insolvency
Regulation and EU Winding
Up Directives and other
Collateral Issues
26 September 2002
Ian Annetts
Allen & Overy