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Transcript of Issues Relating to Corporate Recovery
Society of Young Solicitors Ireland
Autumn Conference 2003
7-9 November 2003
Issues Relating to Corporate Recovery
Contents
Pages Chapter One Day to Day Issues 2 - 11 Chapter Two Restriction of Directors – recent case law 12 - 15 Chapter Three Insolvency generally – recent case law 16 - 25 Chapter Four Cross Border Insolvency Regulations 26 – 42 Chapter Five Transfer of Undertakings – Insolvency Issues 43 – 54
Chapter One
Day to Day Issues
INTRODUCTION
1.1 Despite the good economy, in the last few years there has been
a steady flow of liquidations. With the levelling off of the
improvement in our economy, an increase is likely to occur
during the next few years.
1.2 Statistics relating to liquidations in the last few years give an idea
as to trends.
Year No. of Liquidations
1990 501
1996 560
1997 433
1998 410
1999 337
2000 336
2001 439
2002 412
1.3 When I use the word “liquidations” I am referring to insolvent
liquidations.
There are three types of liquidation: -
(a) Members voluntary liquidation (solvent)
2
(b) Creditors voluntary liquidation (insolvent)
(c) Court Liquidation (insolvent)
1.4 Today, we will be talking about both types of insolvent
liquidation.
LANDLORDS
1.5 By and large the event which brings a solicitor in touch with a
Liquidator is the fact that the solicitor acts for the Landlord of a
property. That property is occupied by a company which goes
into liquidation. The attitude of the Landlord usually determines
the attitude of the Solicitor acting for the Landlord.
1.6 This attitude can be broken down into three groups: -
(a) Practical/Common sense approach.
(b) Legalistic approach.
(c) Aggressive.
1.7 Disclaimer is a word which always crops up in the context of the
relationship between Landlord and Liquidator.
Yes, a Liquidator can disclaim an onerous contract. I will
describe this more fully shortly. But before becoming involved in
the area of disclaimer, it is important to set the scene.
1.8 Inevitably, when the liquidation starts there will be money due to
the Landlord by the Company by way of arrears of rent (or for
some other liability which stems from the lease). Obviously,
different forces are at play: more than likely, the Landlord will
3
want the property back. Sometimes however, the Liquidator
wants the property for a few months to conduct an orderly wind
down of the Company’s affairs.
1.9 The reverse can happen: the Landlord doesn’t want to take the
property back and the Liquidator is very keen to give the
property back.
1.10 It is important to distinguish disclaimer from surrender. The
difference between the two words is:
(a) A “surrender” takes place by agreement. In other words
both the Landlord and the Liquidator agree the terms on
which the leasehold interest in the property will be
surrendered back to the Landlord.
(b) “Disclaimer”. This mechanism will only be triggered where
surrender is unavailable. In other words, where the
Landlord and the Liquidator do not agree on the basis for
the return of the property to the Landlord. Then the
Liquidator is usually placed in a position where something
must be done with the property but the Landlord and the
Liquidator cannot agree terms.
1.11 In essence, a disclaimer is an application to the High Court under
Section 290 of the Companies Act 1963. The application is
brought by the Liquidator on the basis that a part of the property
of the Company consists of land burdened “with onerous
covenants”.
4
1.12 There is a time limit: the Liquidator may disclaim the property
“with the leave of the Court” at any time within 12 months after
the commencement of the winding up or any extended period
which may be allowed by the Court.
1.13 Forfeiture
Forfeiture is another aspect of the relationship between the
Company/Liquidator and its Landlord. Generally, leases contain
a provision for the forfeiture of the lease on the commencement
of an insolvent liquidation.
1.14 However, this provision is watered down considerably by Section
2 of the Conveyancing Act 1892 which gives the Liquidator 12
months relief from forfeiture. In essence, if the Liquidator is
prepared to pay the rent and comply with the other covenants
in the lease, then the Landlord is unable to exercise apparent
rights under a forfeiture clause in the lease for a period of 12
months after the date of the commencement of the liquidation.
You may from time to time hear the phrase “the Liquidators
year”. This is where the phrase comes from.
1.15 The legalistic approach
As I have mentioned, the Liquidator may apply to the Court for
leave to disclaim. That power is available for 12 months after the
commencement of the liquidation. However, Section 290 (5) of
the Companies Act 1963 allows someone like a Landlord, to
force the agenda. That section says that a Liquidator would not
be entitled to disclaim any property in a situation where an
application has been made in writing to him by the Landlord
5
requiring the Liquidator to decide whether or not he will disclaim.
The Liquidator will not be entitled to disclaim where the
Liquidator has not given Notice of Intention to apply to the Court
for leave to disclaim with in 28 days after receiving the written
warning.
1.16 Therefore, a legalistic approach is as follows: -
(a) Company goes into liquidation.
(b) Landlord serves a Notice requiring Liquidator to decide
about disclaimer within 28 days.
(c) 28 days expires.
(d) Liquidator has not given Notice of Intention to apply to the
Court for leave to disclaim.
(e) Liquidator now deemed to have adopted the lease.
1.17 Alternatively, the sequence could be: -
(a) Company goes into liquidation.
(b) Landlord serves notice.
(c) Liquidator gives Notice of Intention to apply to Court for
leave to disclaim.
(d) Application to Court/Leave given.
1.18 By and large, Liquidators and their solicitors do not like receiving
this 28-day notice. It puts them under much greater pressure
than they would like to be under, particularly if the notice comes
at the beginning of the liquidation. They have other things on
their minds at that stage rather than having to make a very
important decision regarding the premises.
6
1.19 The disadvantage (from a Landlord’s point of view) is that it
generates a possible High Court action, the outcome of which
almost inevitably in favour of the liquidator and disclaimer.
1.20 Common Sense Approach
The common sense approach is by far the most attractive.
Everyone wins. The property usually goes back to the Landlord
who is then free to let the property to another tenant.
1.21 Obligation to pay Rent
If the Liquidator uses the property for the beneficial winding up of
the Company, the rent is an expense of the liquidation. The
Liquidator is not personally liable for the amount due. However,
the expense is one of the first payments to be made by the
Liquidator out of the funds in the liquidation and, in most cases,
the rent will be paid for the period of occupation.
1.22 A miscellaneous point regarding disclaimer: a Liquidator cannot
disclaim a contract which is less profitable than another
contract. For instance, if the Company had contracted (prior to
liquidation) to sell its factory for £1,000,000 but the Liquidator
knows that a better price can be obtained in the liquidation, it is
not open to the Liquidator to set aside the contract as an
“onerous” contract and re-sell the property. This is not an
onerous contract. It is simply a less profitable contract. The
Liquidator would be obliged to specifically perform the contract
already entered into by the Company.
7
INJURED PARTIES
1.23 Quite often in liquidations, the Liquidator will encounter existing
Court proceedings against the Company in relation to a
personal injury action.
The Liquidator’s standard response in these circumstances is to
transfer the running of the case to the Company’s former
insurers.
Normally there is no problem but sometimes the insurers wish to
repudiate liability for a number of different reasons.
What does the plaintiff do in those circumstances?
The decision of relevance was made by the Supreme Court in
the case of PJ White Construction Limited [1989] ILRM 803. In
essence, the plaintiff can sue the Insurance Company. The
plaintiff should not be put off or stopped from proceeding with
the case on the grounds of lack of privity etc.
1.24 Proceeds of Insurance Claim – Trust Money
Section 61 of the Civil Liability Act, 1961 provides that the award
to an injured party is trust money in favour of the injured party.
The fund does not become part of the assets of the Company.
8
RESERVATION OF TITLE
1.25 The rules relating to Reservation of Title have now settled down.
Liquidators are very willing to deal quickly with Reservation of Title
claims.
1.26 Inevitably, the debates centre around the documentation, the
wording of the clauses and the notification of the clause to the
purchaser i.e. the Company which is now in liquidation.
1.27 The golden rule in relation to a Reservation of Title claim is that
the creditor must act quickly.
1.28 If the goods can be identified and if the documentation is in
order, the goods are likely to be handed back straight way by
the Liquidator. The amount of litigation relating to Reservation of
Title has diminished considerably.
RESTRICTION
1.29 Practitioners are becoming more and more involved in
Restriction applications.
1.30 Restriction was introduced by Section 150 of the Companies Act
1990. Thirteen years down the line there is a large number of
directors who have been restricted by the Court.
1.31 The Court appointed Official Liquidator must apply to the Court
for a Restriction Order against the relevant directors.
9
1.32 Since the enactment of the CLEA 2001 liquidators in creditors’
voluntary liquidations will be obliged to apply to the High Court
for these restriction orders, unless they are relieved of the
obligation by the Director of Corporate Enforcement.
1.33 As a result, the number of restriction applications increased
dramatically.
1.34 In the vast majority of cases, the directors seek legal advice
regarding the defence of their position as directors.
1.35 There have been a number of recent key note decisions in
which: -
(a) A number of individuals have been declared to be
shadow directors by the Court (and therefore liable to
restriction). (Vehicle Imports Ltd.; Gasco Ltd)
(b) The restriction provisions apply to anyone who is a director
of the Company at the time of liquidation (and anyone
who has been a director of the Company within the
previous 12 months). The Court cannot restrict someone
who is no longer a director of the Company for 12 months
prior to liquidation. Therefore, the Court looks particularly
at the behaviour of directors and the conduct of the
Company in the 12 months prior to liquidation. (Gasco
Ltd).
(c) Nevertheless, the Court is also obliged to look at the entire
tenure of the directorship (Re Squash Ireland).
10
(d) Being a non-executive director does not mean that there
is sympathy from the Court (Re Hunting Lodges), as non-
executive directors have a residual duty to supervise the
affairs of the Company (Vehicle Imports Ltd).
1.36 It is essential to note that the onus is on the director to prove that
he or she has acted honestly or responsibly in relation to the
conduct of the affairs of the Company.
1.37 The Court has continuously emphasised the importance of
keeping proper books and records in relation to the Company’s
affairs. The Court will also look to see whether the Company has
kept its statutory returns up to date and whether it has fulfilled its
obligations to the Revenue Commissioners.
11
Chapter Two
Restriction of Directors – Recent Case Law GMT ENGINEERING SERVICES LIMITED (IN VOLUNTARY LIQUIDATION)
High Court 30th July 2003: Ms Justice Finlay Geoghegan
2.1 This was an action for a declaration of restriction of directors
under s.150 Companies Act 1990.
2.2 In relation to the substantive issue, it was held that the directors
had acted honestly and responsibly in relation to the conduct of
the affairs of the company and accordingly the directors were
not restricted.
2.3 Counsel for the liquidator then applied for an order against the
respondents for the applicant’s costs in the proceedings. This
was based on the premise that if the respondents did not bear
the costs, it would have to be borne by the creditors of the
company.
2.4 Counsel for the respondents argued that the court had no
discretion to make an order for costs against the respondents
where an application for restriction had been refused.
2.5 The general jurisdiction of the High Court in relation to costs is the
Rules of the Superior Courts. The Rules provide that the costs of
every proceeding in the Superior Courts shall be at the discretion
of the court subject to any other Act or Statute.
12
2.6 Section 150 (4B) Companies Act, 1990 provides that the court
“may order that the directors against whom the application is
made shall bear the costs of the application……..”
2.7 Finlay Geoghegan J concluded that s. 150(4B) of 1990 Act be
construed as limiting the discretion of the Court in orders relating
to the applicant’s costs in s.150 cases.
2.8 She explained that the Company Law Enforcement Act, 2001
introduced a filtering system which allows the Director of
Corporate Enforcement to relieve a liquidator of the obligation
to make an application under s.150 in appropriate
circumstances.
2.9 Finlay Geoghegan J held that it is consistent with this filtering
system and the constitutionally guaranteed right to one’s good
name and property that a respondent director in a s.150
application should only become obliged to bear the applicant’s
costs where the application for a declaration of restriction is
successful.
2.10 It follows that the Liquidator or the creditors of an insolvent
company are obliged to bear the costs of an unsuccessful
application by the liquidator to the High Court under s.150.
2.11 The High Court decision in Re GMT Engineering Services Ltd. may
make liquidators reluctant to wind up small companies. In cases
where the company’s assets are not sufficient to pay for legal
costs, the costs of the High Court application will have to be
shouldered by the liquidator and/ or his lawyers.
13
EUROKING MIRACLE (IRELAND) LIMITED (IN VOLUNTARY LIQUIDATION)
High Court 5 June 2003: Ms Justice Finlay Geoghegan
2.12 The facts of this case revolved around a jurisdictional issue. The 4
respondents in this case resided in England. There is no express
provision in Irish Law for the service out of the jurisdiction of an
originating notice of motion seeking a declaration of restriction
pursuant to s.150 of the Companies Act 1990. The first issue to be
determined in this case was whether section 150 confers
jurisdiction on the High Court to make declarations thereunder in
respect of directors resident outside this jurisdiction.
2.13 Finlay Geoghegan J. concluded that the High Court had this
jurisdiction. Having regard to the frequency with which persons
resident outside the State are appointed directors of Irish
companies, it would clearly be absurd to suggest that the
Oireachtas, in enacting these provisions in the public interest,
only intended to restrict resident directors. The use of the phrase
“any person” in s.149 (2) underlines this intent.
2.14 In relation to the service of a Notice of Motion on a director
outside this jurisdiction, Finlay Geoghegan J. concluded that
service by registered post was sufficient.
14
E HOST EUROPE LIMITED (IN VOLUNTARY LIQUIDATION)
High Court 14 July 2003 Ms Finlay Geoghegan J
2.15 Section 52(1) of the Company Law Enforcement Act 2001
imposes a time limit of 6 months on a liquidator to produce a
report to the Director of Corporate Enforcement (“the Director”).
Section 56(2) provides that not earlier than 3 months and not
later than 5 months after this report has been produced to the
Director, the liquidator is obliged to make a restriction
application to the High Court, unless relieved by the Director
from that obligation. Failure to comply with this section is an
offence.
2.16 Finlay Geoghegan J concluded that although a liquidator will be
guilty of an offence for contravening these sections, this in itself
does not bar the liquidator’s entitlement to bring a section 150
application. There is no express prohibition in s.56 (2) against a
liquidator bringing an application at a later date. Furthermore,
s150 (4A) gives a liquidator power, without any time limitation, to
bring an application under s.150.
2.17 It’s important to point out that Finlay Geoghegan J, pointed out
that this application was among the first batch of applications,
and therefore the liquidator could be excused from fully
appreciating the time constraints. Therefore, in granting a time
extensions to the liquidator in this case, the judge was not
signalling to liquidators and their solicitors that other such time
extension can easily be obtained. There is a very clear legislative
intent that the application should be made within the specified
time.
15
Chapter Three
Insolvency Generally – Recent Case Law
Re Ruby Property Company Ltd (in receivership)
3.1 Sale of Assets by a Receiver and the Obligations Imposed by
Section 316(A)(1) of the Companies Act 1963.
3.2 There was a recent judgment which is very relevant to this issue.
The Judgment of Mr Justice McKechnie was delivered on 31
January 2003 in the case of in Re Ruby Property Company
Limited (In Receivership).
3.3 Section 316 Companies Act, 1963 allows a Receiver to apply to
the High Court for directions on any aspect of the receivership.
Section 316(A) places an obligation on a Receiver, in selling the
property of a company, to exercise all reasonable care to obtain
the best price reasonably obtainable for the property at the time
of sale. It is generally accepted that this was putting into
statutory form an obligation on the Receiver which had long
since been recognised at common law.
3.4 The Ruby Property Company Limited case involved the sale by
the Receiver of a property in Sutton, County Dublin, under the
powers contained in a collateral mortgage. The challenge to
the disposal was mounted by the company itself and its
controlling shareholders. The ultimate issue before Mr Justice
McKechnie was an alleged breach by the Receiver of his duties
under Section 316(A) of the 1963 Act and included among the
allegations were the following:-
16
(i) That the property should have been sold by public
tender.
(ii) That the property should have been publicly advertised
in the press.
(iii) That the market was not tested.
3.5 McKechnie J made a number of observations in his judgment:-
(i) He cited with the approval the Judgment of
O’Dalaigh C.J. (Holohan -v- Friends Provident and
Century Life Office 1966 1 I.R.) that the duty on a
mortgagee when exercising its power of sale is to
act in good faith and, in addition, to act “in all the
circumstances as a reasonable man would”.
(ii) “The duty on a Receiver is to exercise reasonable
care to obtain, at the time of sale, the best price
reasonably obtainable for the property in question”.
(iii) “Each case must depend and must be determined
on its own individual circumstances.”
(iv) “There are no pre-determined, fixed or rigid rules by
which such disposal of property must take place.
Public auction, exposure by media or bill board,
market strategy, expenditure of money, generous
time limits and the hiring of experts were all matters
for consideration, as are many others but not for
mandatory engagement.”
17
3.6 The Judgment also addressed the onus of proof in such cases.
The Court rejected the Plaintiff’s contention that the Receiver
had the responsibility of satisfying the Court that he had not
been in breach of Section 316(A).
18
Re W & R Morrogh Stockbrokers
3.7 The issue of the application of pari passu distribution or the Rule in
Clayton’s case to cash funds in an insolvency
3.8 This issue was addressed in the reserved Judgment of Mr Justice
Murphy delivered in the High Court on 6 May 2003. The firm of
W&R Morrogh Stockbrokers ceased to trade in April 2001 and a
Receiver and Manager was appointed to the firm by the High
Court. In July 2002, the Receiver sought directions on a number
of issues.
3.9 The only aspect of the Judgment considered here is the
treatment of the money in the firm’s bank accounts in the
context where overall, the liabilities of the firm were
approximately double the realisable assets. This meant that the
manner of distribution was crucial in that the application of the
rule in Clayton’s case, namely ‘first in first out’ would result in
some claims being discharged in full and other claimants
receiving little or nothing whereas if a rateable distribution was
made all creditors would suffer a proportionate case.
3.10 The money in the firm’s bank accounts comprised:-
(a) Amounts due to clients following the sale of
investments or cash provided by clients for
acquisitions.
(b) Amounts due to clients following the sale of
investments undertaken without the knowledge or
consent of the client.
19
(c) Parties who sought to trace their funds to funds held
in the bank accounts of the firm.
3.11 The Receiver expressed the view that there were two categories
of claimants in relation to these monies, namely:-
(a) Those parties who could trace their monies into the
accounts by the application of the rule in Clayton’s
case.
(b) Those parties who would suffer a substantial loss by
the application of that rule.
3.12 Murphy J recognised that the application of the ‘first in first out’
rule would greatly benefit those whose money was lodged to the
firm’s bank accounts in the period immediately before the
collapse. It was calculated that this period was so short that any
money lodged more than one week before the collapse would
have been lost. Other parties contended that the application of
the ‘first in first out’ rule was not appropriate. The Court agreed
and found that the monies in the client bank accounts of the firm
shared at least some of the characteristics of a “pool” and had
not been appropriated as between one client and another. The
Court concluded that the principle that “equity is equality”
should be applied. Therefore, although declining to make a
declaration in favour of a general pooling of the assets of the
firm, it did hold in favour of a pari passu distribution of the funds
to credit of the firm’s bank account.
20
3.13 The Order made following this Judgment is under appeal.
21
Re C.B. Readymix Limited (in liquidation)
3.14 The application of disqualification and restriction provisions of the
Companies Act 1990 to Liquidators.
3.15 The restriction and disqualification provisions of the Companies
Act 1990 had been virtually exclusively applied to directors until
the Judgment of Smyth J in the High Court on 20 July 2001 in the
case of in Re C.B. Readymix Limited (In Liquidation). Smyth J
disqualified Dr Michael Grimes from being concerned in the
management of the company as a liquidator, receiver or
examiner for a period of seven years from 20 July 2001, and
imposed conditions limiting the right of the Respondent to act as
auditor, director or secretary of any company during the same
period. Dr Grimes appealed this decision and the Judgment of
the Supreme Court was delivered by Mr Justice Murphy on 1
March 2002.
3.16 The relevant facts were that Dr Grimes had purportedly been
appointed liquidator of C.B. Readymix Limited (“the company”)
on 15 January 1996 in circumstances where the appointment
was clearly invalid. Shortly thereafter, on 25 April 1996 a
provisional liquidator was appointed but Dr Grimes continued to
hold himself out as being liquidator and disputed the entitlement
of the provisional liquidator to act in that capacity. Some time
after the appointment of the provisional liquidator Dr Grimes
decided to destroy the books and records and sought to justify
so doing on grounds that were clearly unsustainable. Murphy J
expressed the view that the fact that Dr Grimes had deprived
the Official Liquidator of the books and records of the company
was extremely serious and “in his decision to destroy or permit
22
the destruction of the books and records of Readymix was a very
serious wrong indeed”. He therefore held that the High Court
was entitled to make the Order in the form given by Smyth J and
in particular was entitled to limit the terms upon which Dr Grimes
could act as an auditor, director or secretary of a company as
an alternative to making an absolute disqualification order
against him. To meet the circumstances in which Dr Grimes was
never properly appointed liquidator to the company, Murphy J
held that the relevant legislation is as applicable to a de facto
liquidator as it is to a de facto director.
23
Re Macks Bakeries Limited (in voluntary liquidation)
3.17 The “Solicitors Lien” in the context of Section 244(A) of the
Companies Act 1963.
3.18 For many years, it had been a considerable comfort to the
solicitor’s profession to know that, in the event of the insolvency
of a corporate client, the solicitor would have a lien over files
and title deeds of the client, other than statutory books and
records, for the discharge of unpaid costs and outlay. This
comfort appeared to have been removed by the addition,
under the provisions of the Companies Act, 1990, of Section
244(A) of the Companies Act 1963 which provided that in the
winding up by the Court or by means of a creditors’ voluntary
winding up “no person shall be entitled as against the Liquidator
or provisional liquidator to withhold possession of any deed,
instrument or other document belonging to the company, or
books of account, receipts, bills, invoices or other papers of a like
nature relating to the account or trade dealings or business of
the company, or to claim any lien thereon”.
3.19 It was contended in the case of in Re Macks Bakers Limited (In
Voluntary Liquidation) firstly that a solicitor’s lien in common law
had been expressly recognised by the Irish Courts and secondly
that by virtue of Section 284(1) Companies Act, 1963 the law of
bankruptcy is to be applied in an insolvent liquidation in order to
establish the rights of creditors of the insolvent company.
3.20 Section 3(1) of the Bankruptcy Act 1988 includes in the definition
of a secured creditor “ any creditor……holding
any……lien…….as security for a debt due to him”. The ingenious
24
argument was then made that if the new Section 244(A) was to
be interpreted as removing the solicitors’ lien, it would bring it
into conflict with Section 284(1) of the Companies Act, 1963 and
bring about a change in the law of insolvency which was not
intended. The Respondents contended that the law of lien is
well established and to interpret Section 244(a) in the manner
sought by the liquidator would give effect to radical and far
reaching changes.
3.21 Mr Justice Kelly concluded that the language used in Section
244(A) “ is clear and unambiguous” and “allows of no other
interpretation but that the legislature intended that the holder of
a lien would not be entitled to claim such as against the
liquidator”. Kelly J recognised that Section 244(A) had brought
about a change in the law of insolvency relating to holders of
liens. However, these changes could not be regarded as
unintended or ambiguous. Consequently the claim to a lien
failed.
25
Chapter Four
European Union
Cross-Border Insolvency Regulation
INTRODUCTION
4.1 On 31 May 2002, Council Regulation (EC) No. 1346/2000 (“the
Regulation”) came into force. The Regulation does not apply to
Denmark.
4.2 The introduction of the Regulation brings to an end a long period
of effort on the part of the various members of the European
Community to co-operate in relation to cross-border insolvency
cases.
4.3 The Regulation does not attempt to harmonise substantive law.
Instead, the EU has identified that the proper functioning of an
internal market requires that cross-border insolvency cases
should operate efficiently and effectively.
4.4 The Treaty of Rome included “judicial co-operation” as one of
the methods by which an internal market could operate
successfully. The introduction of the Regulation comes within the
scope of the concept of judicial co-operation.
4.5 The Regulation is to be welcomed because more and more
insolvency cases involve cross-border issues. The EU had
identified the fact that the proper functioning of an internal
market would be hindered if there were incentives for parties to
transfer assets or judicial proceedings from one Member State to
26
obtain a more favourable legal position (forum shopping).
Accordingly, action at a Community level was required.
4.6 The Regulation tries to achieve its objectives with three
mechanisms:-
(a) Jurisdiction.
(b) Recognition.
(c) Applicable law.
4.7 The implementation of the Regulation involves two key
strategies:-
(a) Main Proceedings.
(b) Secondary (territorial) Proceedings.
4.8 The Regulation sets out how the Main Proceedings and
Secondary Proceedings will interact against the backdrop of
jurisdiction, recognition and applicable law.
LANGUAGE
4.9 Compiling a Regulation inevitably leads to problems regarding
language. The words used in the Regulation must be
approached with care. Some of the words, on first reading, will
give a misleading impression given our normal use of those
words. However, once that mindset has been altered, then the
position becomes clear.
27
4.10 For instance:-
“Proceedings”:- This word is used throughout the Regulation.
For us, we should think: “procedure”.
“Liquidator”:- This word is used extensively throughout the
Regulation. For us, it would be preferable to
keep in mind the image of “insolvency
practitioner”.
“Open”:- This word effectively means “begin”.
SCOPE
4.11 The Regulation applies to a company with a branch or assets in
more than one Member State. The Regulation does not apply to
companies with subsidiaries in other Member States.
4.12 The Regulation also applies in personal bankruptcy, but this
paper addresses the issues of corporate insolvency only.
4.13 Because it relates only to a single entity, the Regulation will have
limited effect - most businesses operating on an international
scale will have subsidiaries in other countries.
4.14 From an Irish perspective, “insolvency proceedings” (i.e.
procedures) covered by the Main Proceedings are:
(a) Creditors’ voluntary liquidation (with confirmation of
Court).
28
(b) Compulsory winding up by the Court.
(c) Company examinership.
For the sake of completeness, the following are also covered:-
(e) Bankruptcy.
(f) The administration in bankruptcy of the estate of persons
dying insolvent.
(g) Winding up in bankruptcy of partnerships.
(h) Arrangements under the control of the Court which involve
the vesting of all or part of the property of the debtor in
the Official Assignee for realisation and distribution.
4.15 The areas which we will concentrate on are:-
(a) Creditors’ voluntary liquidation (with confirmation of
Court).
(b) Compulsory winding up by the Court (i.e. Court
liquidation).
(c) Company examinership (i.e. Examinership).
NOTE: Receiverships are not covered by the Regulation.
4.16 An issue immediately arises in relation to a creditors’ voluntary
liquidation. Before the implementation of the Regulation, there
was no process involving a creditors’ voluntary winding up being
“confirmed by a Court”. This been remedied by Statutory
29
Instrument 333/2002. This S.I. allows the Master of the High Court
to “confirm” a creditors’ voluntary liquidation.
MAIN PROCEEDINGS : SCOPE
4.17 The “Main Proceedings” can cover all of the following:-
(a) Creditors’ voluntary liquidation.
(b) Court liquidation.
(c) Examinerships.
SECONDARY (TERRITORIAL) PROCEEDINGS : SCOPE
4.18 Secondary (territorial) Proceedings do not include Examinerships.
Therefore, the Secondary (territorial) Proceedings only cover:-
(a) Creditors’ voluntary liquidation.
(b) Court liquidation.
EXCLUSION
4.19 Insolvency proceedings involving the following are not covered
by the Regulation:-
(a) Insurance undertakings.
(b) Credit institutions.
30
(c) Investment undertakings
4.20 The reason for this is that these undertakings are subject to
special arrangements and, to some extent, the national
supervisory authorities have extremely wide ranging powers of
intervention.
JURISDICTION: MAIN PROCEEDINGS
4.21 Article 3.1 of the Regulation provides that the Courts of the
Member State in which the “centre of a debtor’s main interests is
situated” has the jurisdiction to open (i.e. begin) insolvency
proceedings (i.e. procedures). The place of the registered office
of a company is presumed to be the centre of its main interests,
unless there is evidence which suggests otherwise.
4.22 Some guidance to be found in paragraph 13 of the Preamble
which states that “the centre of main interests” should
correspond to the place where the debtor conducts the
administration of its interests on a regular basis and is therefore
ascertainable by third parties.
4.23 The State before which the proceedings are opened is called
“the State of the opening of proceedings”.
JURISDICTION : SECONDARY PROCEEDINGS
4.24 Article 3.2 says that where the centre of a debtor’s main interests
is located within the territory of any Member State, the courts of
another Member State have jurisdiction to open insolvency
proceedings against that debtor if there is “an establishment”
31
within the territory of that other Member State. However, the
effect of the Secondary (territorial) Proceedings is restricted to
assets of the debtor located in the relevant territories.
4.25 There are two circumstances where the Secondary Proceedings
may be opened before the opening of the Main Proceedings:-
(a) where the Main Proceedings cannot be opened because
the conditions for doing so in the “Main” State cannot be
satisfied.
(b) where Secondary Proceedings are requested by a creditor
in the second Member State within which the debtor has
an establishment or where the creditor’s claim arises from
the operation of that establishment.
4.26 The word “establishment” is defined as “any place of operations
where the debtor carries out a non-transitory economic activity
with human means and goods” (Article 2).
4.27 The purpose of the requirement for “an establishment” is to limit
forum shopping. The mere presence of assets in a Member State
will not be sufficient to enable the courts of that State to exercise
insolvency jurisdiction on a territorial basis.
RECOGNITION
4.28 Chapter II of the Regulation sets out the rules for recognition of
insolvency judgments. A judgement opening insolvency
proceedings delivered by a Court of a Member State which has
the appropriate jurisdiction will be recognised in all other
32
Member States from the time the Judgment becomes effective
“in the State of the opening of proceedings”.
4.29 Consequently, the appointment of a liquidator (i.e. insolvency
practitioner) will be recognised in other Member States without
any further formalities. This extends not only to the Order
appointing the liquidator but also the powers conferred on
him/her by the laws of the “main” State.
4.30 A certificate issued by the Court will be evidence of a liquidator’s
appointment. The liquidator may exercise all powers which
derive from his/her appointment including the power to remove
the debtor’s assets from the territory of any Member State in
which they are located, subject to special rules concerning
“rights in rem”.
4.31 The liquidator must give notice of his/her appointment in the
Member State in which he/she has been appointed and in any
other relevant Member State. The notice must state whether
he/she is the liquidator in the Main Proceedings or in the
Secondary Proceedings.
4.32 Publication is important in relation third parties honouring
obligations to the debtors. Article 24 provides that where an
obligation has been honoured in a Member State for the benefit
of a debtor who is the subject of insolvency proceedings
(opened in another Member State) when it should in fact have
been honoured for benefit of the liquidator in those proceedings,
the person honouring the obligation is deemed to have
discharged the obligation only if he/she was unaware of the
opening of the proceedings.
33
4.33 If the obligation is honoured before the appointment has been
advertised in the relevant Member State it is presumed that the
third party was unaware of the opening of the insolvency
proceedings. If the appointment has first been advertised in that
Member State, the third party is presumed to have been aware
of the opening of the proceedings and the onus will fall on
him/her to prove otherwise.
4.34 Recognition extends not only to judgments concerning the
opening of insolvency proceedings and the appointments of
liquidators but also to judgments concerning the course and
closure of insolvency proceedings. Those judgments can then
be enforced in accordance with Regulation 44/2001 (i.e. Brussels
2).
4.35 Article 25 deals with judgments handed down by a Court whose
judgment concerning the opening of proceedings is recognised
in accordance with the Regulation and which concern:-
(a) The course (of insolvency proceedings) and,
(b) The closure (of insolvency proceedings) and,
(c) Compositions (approved by the Court).
4.36 Judgments will also be recognised where those judgments derive
directly from the insolvency proceedings and which are closely
linked with them, even if they were handed down by another
Court. (Article 25).
34
4.37 This is a significant substantive provision because it extends the
concept of recognition and enforcement beyond basic issues
such as the liquidator’s appointment.
4.38 It is likely that judgments concerning the following issues will be
recognised:-
1. Fraudulent preference (S. 286, Companies Act 1963).
2. Invalidity of floating charges (S. 288, Companies Act 1963).
3. Return of assets improperly transferred (S. 139 Companies
Act 1990).
4. Contribution to debts (S. 140, Companies Act 1990).
5. Pooling of assets (S. 141, Companies Act 1990).
6. Personal liability – fraudulent/reckless trading (S. 297,
Companies Act 1963).
7. Personal liability – failure to keep proper books and records
(S. 204, Companies Act 1990).
8. Personal liability – misfeasance (S. 298, Companies Act
1963).
9. Examination by Court (S. 245, Companies Act 1963).
4.39 Until now, the ability of the insolvent company (through its
insolvency practitioner) to recover assets situated abroad to
35
discharge Court judgments has been very limited. These
recognition issues open up numerous possibilities for insolvency
practitioners.
APPLICABLE LAW
4.40 Article 4 of the Regulation states that the law applicable to
insolvency proceedings and “their effects” shall be that of the
Member State within the territory of which such proceedings are
opened. That Member State is referred to in the Regulation as
“the State of the opening of proceedings”. This is the concept of
lex concursus.
4.41 The law of the State of the opening of proceedings determines
all the effects of the insolvency proceedings, both procedural
and substantive. It governs all the conditions for the opening,
conduct and closure of the insolvency proceedings.
4.42 Therefore, the following issues will be dealt with under the law of
the State of the opening of the proceedings:-
(a) The ascertainment of assets/liabilities.
(b) Powers of debtor.
(c) Powers of the liquidator i.e. the insolvency practitioner.
(d) Conditions under which set offs may apply.
(e) The effect of the insolvency proceedings on contracts.
36
(f) Lodging/verification/admission of claims.
(g) Distribution of proceeds from realisation of assets.
(h) Ranking of claims.
(i) Rights of creditors.
(j) Costs/Expenses.
(k) Voidness /voidability /enforceability of acts detrimental to
all creditors.
EXCEPTIONS
4.43 There are a number of exceptions to the principle of
determination according to the law of the State of the opening
of proceedings. These matters concern:-
(a) Rights in rem.
(b) Set off.
(c ) Reservation of title.
(d) Immovable property.
(e) Payment/settlement systems.
(f) Employment contracts.
37
(g) Rights subject to registration (ships/aircraft).
SECONDARY PROCEEDINGS
4.44 The Regulation allows the opening of Secondary Proceedings in
another Member State after the commencement of the Main
Proceedings. However, to open Secondary Proceedings, the
debtor must have “an establishment” in that other Member
State.
4.45 As mentioned, an establishment means “any place of operations
where the debtor carries out non-transitory economic activity
with human means and goods”. This would encompass not only
a branch of the debtor but could include a commercial agent.
4.46 Secondary Proceedings do not apply to examinership – they are
purely winding up proceedings.
4.47 In addition, the Secondary Proceedings are restricted to the
assets of the debtor located in the territory of the relevant
Member State.
4.48 The law applicable to the Secondary Proceedings is the law of
the Member State within which those Secondary Proceedings
are opened. This is particularly important when it comes to the
priority/ranking of claims, the effects on contracts and the
potential for challenges to transactions such as fraudulent
preference. The laws of the State of the Secondary Proceedings
only apply in relation to realisation and distribution of the assets
within that State.
38
4.49 Secondary Proceedings may be requested by the liquidator (i.e.
insolvency practitioner in the Main Proceedings or any other
person empowered to request the opening of insolvency
proceedings under the law of the Member State within which the
Secondary Proceedings are requested. Therefore, if the
liquidator in the Main Proceedings does not request Secondary
Proceedings, it is foreseeable that a creditor in the second
Member State will do so.
4.50 The existence of parallel insolvency procedures will result in the
need for considerable co-operation between the relevant
insolvency practitioners.
4.51 The liquidator in the Main Proceedings, can request the Court in
the Secondary Proceedings to suspend those (secondary)
proceedings. This presumably may be required in a situation
where the liquidator is trying to benefit all the creditors of the
debtor.
4.52 A creditor may lodge a claim in both the Main Proceedings and
in any Secondary Proceedings. Each liquidator must lodge (in
the other proceedings) claims which have already been lodged
in his individual liquidation provided that doing so advances the
interest of the creditors concerned. Each liquidator is
empowered to participate in the other proceedings, as if he/she
were a creditor, in particular by attending creditor’s meetings
(Article 32).
4.53 Where the Secondary Proceedings result in a surplus after
payment of all claims allowed under the proceedings, the
second liquidator must transfer that surplus to the main liquidator.
39
CREDITORS – INFORMATION/CLAIMS
4.54 The Regulation promotes the basic principle of equality of
treatment of creditors.
4.55 Article 39 allows a creditor in a Member State (other than the
State of opening of proceedings) to lodge claims in the main
insolvency proceedings.
4.56 This will include tax authorities. The ability of a tax authority to
claim in the liquidation in another State overturns the widely
practiced rule of private international law by which Courts of
one State refused to enforce the Revenue laws of another. The
Regulation does not alter issues such as the priorities of claims
under Irish law. In Ireland, only debts to which Section 285,
Companies Act 1963 (as extended) will enjoy preferential status
in a liquidation. This means that the claim of a foreign revenue
authority must be admitted in the liquidation but not within a
category to which preferential status attaches.
4.57 There are two other important provisions preserving the
fundamental right of the equal treatment of creditors. These are
contained in Article 20:-
(a) After insolvency proceedings have been opened if a
creditor obtains total/partial satisfaction of his/her claim
from assets of the debtor situated in another Member
State, those assets must be returned to the liquidator.
(b) Where a creditor receives a dividend in the course of
insolvency proceedings in any State (main or secondary)
40
that creditor can only share in dividends in another set of
insolvency proceedings where creditors of the same rank
have already obtained an equivalent dividend.
4.58 Once the insolvency proceedings have commenced, the
liquidator/Court must inform known creditors in other Member
States. The notification will include time limits and other details
concerning lodging claims. It must be given in one of the official
languages of the State of the opening of proceedings. The form
must bear a heading “Invitation to Lodge a Claim: Time Limits to
be Observed”. That notation must be in all the official languages
of the institutions of the EU.
4.59 The creditor may then lodge a claim in the official language of
his/her own State. However, the lodgement of the claim must
bear the heading “Lodgement of Claim” in one of the official
languages of the State of the opening of proceedings.
4.60 Creditors can be required to provide a full translation of the
claim into the language of the State of the opening of
proceedings.
INSOLVENCY PRACTITIONERS : CO-OPERATION
4.61 It will be the duty of both the main liquidator and any other
liquidator appointed under Secondary Proceedings to keep
each other informed and to co-operate for the benefit of
creditors. There will be a duty on the liquidator to ensure
exchange of information and co-operation.
4.62 A creditor may lodge a claim in the Main Proceedings and also
41
in one, two or even more Secondary Proceedings if these have
been opened. Ultimately, creditors of the same standing are
entitled to the same proportion of distribution of the total assets.
Therefore, there will be high degree of co-ordination, co-
operation and exchange of information required between the
various insolvency practitioners.
4.63 It would appear that the reconciliation of all the claims will
eventually fall on the liquidator in the Main Proceedings. That
liquidator will be entitled to any surplus in Secondary
Proceedings.
CONCLUSION
4.64 The Regulation will transform the conduct of cross-border
insolvency proceedings involving member countries of the EU.
From an Irish perspective, there will be an immediate need for
reform of procedures/formalities (particularly in relation to the
treatment of claims and information for creditors).
4.65 That said, the Regulation will achieve its objective of improving
the efficiency and effectiveness of cross border insolvency
proceedings. It will also give greater powers to insolvency
practitioners in relation to remedies available to them. Given the
complexity of modern business, this regulation will have an
immediate impact and is to be welcomed.
42
Chapter Five
Transfer of Undertakings – Insolvency Issues
INTRODUCTION
5.1 The European Communities (Protection of Employees on Transfer
of Undertakings) Regulations 2003 (“the 2003 Regulations”) set
out specific provisions relating to bankruptcy and insolvency.
Under Council Directive 2001/23/EC of 12th March 2001 (“the
Directive”) relating to the transfer of undertakings, Member
States were given the right to tailor the requirements of the
Directive to local bankruptcy and insolvency situations with the
overriding statement that Member States were to take
appropriate measures with a view to preventing misuse of
insolvency proceedings in such a way as to deprive employees
of the rights provided for in the Directive.
5.2 The general principle is that the provisions of the Directive and
the 2003 Regulations transferring employment rights and
obligations from the transferor of a business or undertaking to its
acquirer shall not apply where the transferor is the subject of
insolvency proceedings. It is important to note that even before it
was defined by the 2003 Regulations the scope of this
“insolvency exclusion” has been considered by the European
and Irish Courts and given a narrow interpretation.
5.3 The case law of the European Court of Justice (“ECJ”) in
interpreting the Acquired Rights Directive 1 and of the Irish Courts
in considering the application of the precursor to the 2003
43
1 Council Directive 77/187/EEC
Regulations, the European Communities (Safeguarding of
Employees’ Rights on Transfer of Undertakings) Regulations, 1980
and 2000 (the “1980 Regulations”) will continue to be highly
relevant to situations arising under the 2003 Regulations.
5.4 The concern of the courts, reflected in one of the first cases to
consider the application of the Acquired Rights Directive to
insolvency situations, Abel’s Case2 is to ensure that undertakings
will not “engineer insolvencies so that employees can be
dismissed before businesses are transferred”. It is for this reason
that Courts have tended to suggest that any extra-judicial
process, such as the appointment of a receiver by a debenture
holder, is within the Directive whereas any insolvency process
under Court supervision may fall outside the Directive.
5.5 While the 2003 Regulations define for the first time in domestic
legislation the circumstances which are regarded as constituting
insolvency proceedings, the definition is based on the Directive
and reflects the case law of the ECJ.
DEFINITION OF “INSOLVENCY” UNDER THE DIRECTIVE
5.6 Article 5(1) provides:
“ Unless Member States provide otherwise, Articles 3 and 4 shall
not apply to any transfer of an undertaking, business or part of
an undertaking or business where the transferor is the subject of
bankruptcy proceedings or any analogous insolvency
proceedings which have been instituted with a view to the
liquidation of the assets of the transferor and are under the
44
2 Abels v Bedrijfsuereriging voor de Metaalindustrie en de Electrotechnische Industrie [1985] 2 ECR 469 (“Abel’s Case”)
supervision of a competent public authority (which may be an
insolvency practitioner authorised by a competent public
authority)”.
5.7 The Directive clearly contemplates that any insolvency
proceedings which will have the effect of excluding the general
provisions of the Directive as to transfer of employment rights and
obligations will be under the supervision of a competent public
authority. In Ireland the “competent public authority” for this
purpose would be the Courts which have jurisdiction under the
Companies Acts and the Bankruptcy Act 1988 (“the Bankruptcy
Act”).
5.8 The Directive also provides in Article 5 (2) for Member States to
provide, where Articles 3 and 4 apply to a transfer during
insolvency proceedings which are under the supervision of a
competent public authority that:
(a) the transferor’s debts relating to contracts of employment
which pre-date the transfer shall not transfer to the
transferee and/or alternatively that
(b) the parties may agree alterations with the representatives of
the employees to the employees’ terms and conditions of
employment with a view to ensuring the survival of the
business.
5.9 The Directive further provides that Member States may apply
Article 5(2) (b) to any transfer where the transferor is in a situation
of “serious economic crisis, as defined by national law” as
declared by a competent public authority and open to judicial
45
supervision.
DEFINITION OF “INSOLVENCY” UNDER 2003 REGULATIONS
5.10 Regulation 6 of the 2003 Regulations provides as follows:
“(1) Regulations 3 and 4 of these Regulations [transfer of
employee rights and obligations] shall not apply to any
transfer of an undertaking, business or part of an
undertaking or business where the transferor is the subject
of bankruptcy proceedings or insolvency proceedings.
(2) For the purposes of paragraph (1) bankruptcy
proceedings or insolvency proceedings shall mean the
following:
(a) Proceedings whereby the transferor may be adjudicated
bankrupt under section 14 or 15 of the [Bankruptcy] Act of
1988;
(b) Proceedings whereby the estate of a deceased transferor
may be administered in bankruptcy under section 115 of
the [Bankruptcy] Act of 1988;
(c) Where the transferor is a partnership, proceedings whereby
all the members of the partnership may be adjudicated
bankrupt under section 106 of the [Bankruptcy] Act of 1988;
(d) Proceedings whereby the transferor may become the
subject of a protection order under section 87 of the
[Bankruptcy] Act of 1988 where all or part of the property of
46
the transferor vests (under section 93 of that Act) in the
Official Assignee for realisation and distribution;
(e) Proceedings where the transferor may be wound up under
section 213 (e) of the [Companies] Act of 1963;
(3) Notwithstanding paragraph (1), if the sole or main reason
for the institution of a bankruptcy or insolvency
proceedings in respect of a transferor is the evasion of an
employer’s legal obligations under these Regulations, the
Regulations shall apply to a transfer effected by that
transferor”.
5.11 The 2003 Regulations do not take advantage of the opportunity
afforded by Article 5 (2) of the Directive to introduce provisions
allowing for the non-transfer of pre-transfer employment
obligations or the variation of post-transfer employment terms.
5.12 Irish law does not recognise the term “serious economic crisis”
Section 5(3) of the Directive will not apply in Ireland and the
specific definition of insolvency set out in Regulation 6 of the 2003
Regulations will apply.
BANKRUPTCY
5.13 Although Regulation 6 defines in some detail the circumstances
constituting “bankruptcy” for the purpose of the insolvency
exclusion, in practice most of the situations in which the Courts
have considered “insolvency” in the context of the Acquired
Rights Directive and the 1980 Regulations have to date related
to corporate insolvency.
47
5.14 The various categories of “bankruptcy” situations set out in
Regulation 6 are as follows:
(a) Section 14, Bankruptcy Act, 1988
S.14 relates to presentation of a petition for adjudication
by a creditor. Before such petition is presented certain
requirements set out in S.11 of the Bankruptcy Act must be
complied with and proven to the Court.
(b) Section 15, Bankruptcy Act, 1988
Under S.15 where a debtor presents the petition, the Court
will also require proof that he/she is unable to meet his/her
commitments to his/her creditors and as to the state of
his/her assets.
(c) Section 115
Either a creditor or the personal representative of the
deceased may present petitions to the Court in the case
of a deceased person where there are circumstances
which would have been sufficient to support a bankruptcy
petition against the deceased if he had been alive.
(d) Section 106
Under this section where two or more members of a
partnership obtain the protection of the Court and make
proposals to their creditors for the payment or compromise
48
of their joint and separate liabilities, the Court may
adjudicate all of the members bankrupt if any of the
proposals are not accepted.
(e) Section 87
Any debtor who is unable to meet his/her commitments to
creditors and petitions the Court for an approval of a
composition of his/her debts under Court control may be
protected until further order from any action or other
process (including a bankruptcy summons and the
registration of a judgment mortgage).
CORPORATE INSOLVENCY
5.15 Under the 2003 Regulations corporate insolvency is confined to
situations which come within Section 213 (e) of the Companies
Act 1963. This sub-section reads as follows:
“A company may be wound up by the court if -
(e) the company is unable to pay its debts”
RECEIVERSHIP
5.16 The High Court considered the application of the 1980
Regulations in the context of a receivership in the case of
Mythen –v- Employment Appeals Tribunal [1980] 1 IR 98. In that
case an employee whose employment had been terminated by
a receiver appointed by a debenture holder on grounds of
redundancy on the same day as the part of the business in
49
which he was engaged was sold to a purchaser successfully
argued that Irish domestic legislation relating to redundancy and
unfair dismissals should be interpreted in light of the provisions of
the Acquired Rights Directive.
5.17 The High Court reviewed in detail Abel’s case and affirmed the
importance of judicial control in determining whether the
exclusion from the Acquired Rights Directive should apply. It was
held that it could not be assumed that because the Directive
would not apply to a court ordered liquidation that it would not
also apply to a receivership which was an extra-judicial process.
VOLUNTARY LIQUIDATION
5.18 In Blaney and others –v- Vanguard Plastics Ireland Limited (in
voluntary liquidation) and others3 the Employment Appeals
Tribunal (“EAT”) considered whether the Acquired Rights
Directive and the 1980 Regulations applied to the sale by a
liquidator of a business as a going concern. The liquidator had
been appointed by the members of the company in general
meeting as part of a members’ voluntary liquidation process.
During the course of the liquidation the company continued to
trade. The purchaser of the business, the second named
respondent in the action, claimed that the business was insolvent
and that although the liquidator continued to trade that was
with a view to maximising the value of its assets.
5.19 The case is instructive because in the course of the decision the
EAT reviewed the ECJ authorities and also had regard to the
provisions of Council Directive 98/50/EC which contained the
50
3 EAT case no. UD 271/00
provisions relating to insolvency similar to those now set out in
Article 5 of the Directive. The EAT held that the 1980 Regulations
would apply to a transfer of the business unless the company
involved is the subject of a court liquidation (and has been
adjudged insolvent by a competent judicial authority).
5.20 The majority decision of the EAT stated
“ We are of the opinion, by a majority, that unless the
winding up of a business results in the cessation of that
business in its entirety the Directive, the purpose of which is
clearly to protect employment, logically should apply to
the situation”.
5.21 The principal ECJ authorities considered by the EAT were: -
5.22 (a) In the Jules Dethier Équipment case4 [1998] ECR 1061 the
company was in court ordered liquidation but was not under
Belgian Law the subject of insolvency proceedings. The objective
of the procedure was the liquidation of the company’s assets for
benefit of its creditors. The company had continued to trade
during the liquidation. The ECJ held “the Directive applies in the
event of a transfer of an undertaking which is being wound up
by the court if the undertaking continues to trade”.
(b) In the case of Sanders [1998] ECR 6965 the company was
in voluntary liquidation and the ECJ commented: “ it should be
noted that the reasons which led the court to hold in Dethier
Equipment that the Directive can apply to transfers that occur
while an undertaking is being wound up by the court are all the
51
4 Jules Dethier Equipement SA v-v Jules Dassy, Sovram SPRL, in liquidation
more pertinent when the undertaking transferred is being wound
up voluntarily”.
EXAMINERSHIP
5.23 In the case of D’Urso and others –v- Ercole Marelli [1991] ECR
3057 the ECJ held that the Acquired Rights Directive applied to
the company which was undergoing a compulsory Court
administrative liquidation where by Order it had been decided
that the undertaking was to continue trading for so long as that
decision remained in force.
5.24 Applying the analysis of the D’Urso case and the new definition of
insolvency contained in the 2003 Regulations the appointment of
an examiner under the Companies (Amendment) Act 1990
would seem to come within the provisions of the Directive and is
not specifically covered by the exceptions set out in Regulation 6
of the 2003 Regulations.
FAILURE TO COMPLY WITH 2003 REGULATIONS
5.25 A significant feature of the 2003 Regulations is the possibility that
a Court will, in the event of any claim brought before it, examine
the motivation of the parties in instituting the insolvency
proceedings. It is difficult to see how, in the absence of clear
bad faith, a Court can come to a conclusion that the “the sole
or main reason for the institution of a bankruptcy or insolvency
proceedings in respect of a transferor is the evasion of an
employer’s legal obligations”5 under the 2003 Regulations. The
52
5 Section 5(3) of 2003 Regulations
effect of such a determination by a Court is that the 2003
Regulations will apply to a transfer effected by that transferor.
5.26 Nonetheless, insolvency practitioners will now have to actively
consider the situation of employees and the possible application
of the 2003 Regulations in circumstances where assets or
businesses are disposed of as part of the winding up of a
company’s affairs.
5.27 Any strategm to avoid the application of the 2003 Regulations
may fall foul of Regulations 5(3) and/or 9 (1). The latter provides
that any provision in any agreement shall be void insofar as it
purports to exclude or limit the application of the 2003
Regulations.
5.28 The penalties for failure to comply with the notification and
consultation of employees’ requirements of the 2003 Regulations
and the overall remedies for employees set out in the
Regulations should also be considered.
CONCLUSION
5.29 The introduction in the 2003 Regulations of a definition of
“bankruptcy” and “insolvency proceedings” for the purpose of
excluding such proceedings from the ambit of the Regulations
will provide enhanced clarity to practitioners in determining
whether the 2003 Regulations must be considered at the time of
disposal of assets of the business.
5.30 The motivation of parties in instituting insolvency proceedings
which have the effect of depriving employees of protection of
53
54
the 2003 Regulations is likely to be the subject of judicial
examination. While this is consistent with the approach adopted
by the ECJ since the Acquired Rights Directive was introduced
the inclusion of a specific sanction for “abuse” of the insolvency
exclusion may have the effect of further limiting the
circumstances in which employers seek to rely on the exclusion.
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