Insovency of Corporate Groups French Approach to the EU Regulation Adopts U.K. View of COMI

Journal Issue

May 2006

Column Name

European Update

Citation

ABI Journal, Vol. XXV, No. 4, p. 30, May 2006

Topic Tags

International Insolvency

Venue/Jurisdiction

Journal HTML Content

Web posted and Copyright April 1, 2006, American
Bankruptcy Institute. Editor's Note: Bravely,
given the mixed press often accorded to the French bankruptcy
system, this month we focus on a recent decision in France in an
international case. As some readers may know, the notion of "centre

of main interests" (or "COMI"—the "o"

in COMI must be pronounced as in "OK" and not as in
"odd") has been exercising EU-based bankruptcy specialists

for several years. Most of the innovative treatment of the COMI
concept was endorsed and then inspired by decisions of the U.K.
courts. Some have been critical of this approach, branding it
"forum shopping" and/or illustrative of a new-age form of
imperialism. Encouraged by this initial reaction, there are now many
U.K. cases that have followed and indeed expanded on this approach,
and it is now well-accepted that the concept of COMI is a very
useful tool in centralising the focus of a multinational EU
restructuring. And now it is the turn of France. In this edition of
European Update, the essence of the U.K. approach is warmly embraced

by the French Commercial Court. As one might expect, there is a French

nuance to the case, but the message is clear: The presumption that
COMI is in the jurisdiction of incorporation is to be viewed as of
little significance throughout the EU. U.S. practitioners will find
this of more than passing interest when making use of chapter
15. On 15 Feb. 2006, the French
Commercial Court of Nanterre rendered eight decisions, all
concerning the implementation of the EU Regulation on Cross-Border
Insolvency Proceedings. At present, only two out of the eight
judgments are available, but it is understood that the other six
reflect the same approach to interpreting the EU Regulation. 
The Facts On 31 Jan. 2006, EMTEC RPS Professional
Products, a Belgian company (EMTEC Belgium), and MPOTEC GmbH, a
German company (EMTEC Germany), filed a petition to open insolvency
proceedings before the Commercial Court of Nanterre in view of the
opening of insolvency proceedings. The judgment provideds that the
petition was specifically for the opening of main insolvency
proceedings. In a very detailed and in-depth analysis of the facts
of the case, the court described a management structure whereby the
decision-making process took place in France. The group of
companies was largely administered through a French company, EMTEC
International SAS, which was responsible for the group's overall
management, strategy, financing and accounting, and purchase
management, and the creation, design and marketing of the various
products sold by the entities within the group. The main costs of
doing this were financed under a service agreement with each group
company and charged in proportion to the turnover of each company.
 Another French company, EMTEC France, was responsible for the
management of cash flow and stock. A third French company, EMTEC RPS

International SAS, was responsible for selling the products on
behalf of all of the subsidiaries within the group. The
subsidiaries' cash flow was centralised at EMTEC France under the
authority of the French financial director of the group, an employee

of EMTEC RPS International SAS. It should also be noted that the
directors of both EMTEC Belgium and EMTEC Germany were French
residents. Conclusion: Subsidiaries' Centre of Main
Interests (COMI) Is Located in France Unsurprisingly,
the French Commercial Court ruled that both EMTEC Belgium and EMTEC
Germany had their COMI in France. The analysis developed in order to

arrive at this conclusion warrants close study. At the
beginning of the judgments, the court stated that the interpretation

of the EU Regulation would be made "by application" of the
decision rendered by the ECJ in the Staubitz-Schreiber

decision and by Advocate General Jacobs in his opinion in the
Eurofood case. The drafting of each of the judgments suggests

that the European case law was considered to be binding and that the

Commercial Court of Nanterre considered that, as a national court,
it was bound to render decisions consistent with European case law.
While such a stance is not surprising for ECJ or European Court of
Human Rights decisions, such an acknowledgment of the weight of the
decisions of other European courts is surprising and unexpected in
the context of French procedural rules. Taking into account the
decisions rendered by foreign courts on a European regulation (or
international treaty) is a good and coherent approach; French courts

are, however, only obliged to follow the interpretations set
out by the French Supreme Court. One could hardly submit that the French

Commercial Court of Nanterre was bound to abide by an interpretation

of a specific provision in the EU Regulation made by another
European court. The court set out the criteria used by European

courts when considering in which jurisdiction to locate the COMI in
the context of an insolvency of a group of companies: (1) where the
board of directors meets, (2) the applicable jurisdiction for the
main contracts, (3) where client business is conducted, (4) where
the commercial policy of the group is defined, (5) the jurisdiction
in which there is a requirement for prior approval of the parent company

for certain financial undertakings by the subsidiaries, (6) the
location of the lending banks, and (7) where the centralised
management of the purchases, human resources, accounting and IT
resources is conducted. The court mentioned that the creditors must
be in a position to anticipate the substantive risks associated with

a possible insolvency of the borrower, especially in light of the
rule providing that the opening of insolvency proceedings in one
jurisdiction implies the application of the law of such
jurisdiction. The court noted that the insolvency of EMTEC
Belgium was provoked by the insolvency of the French entities (EMTEC

International SAS and EMTEC France), thus evidencing the law of
financial autonomy and confirming that the creditors should have
known, at the time of establishing the financing, that the reimbursement

of the loans would be dependent upon the sound financial situation
of the French entities. The court emphasised that the need
for centralised main proceedings is heightened for the EMTEC group
by the fact that the group's main asset is its European network of
large-scale distribution. The court also stressed that the place
where the central administration is conducted must not be confused with
the place where the company develops its business or owns its
assets. Interestingly, and correctly, the court also mentioned
that the French theory distinguishing the actual and the fictitious
head offices (siege social reel et siege social fictif)
cannot be applied for the purpose of interpretation of Article 3(1)
of the EU Regulation (as has been suggested by some French
commentators). Indeed, interpretation of European rules must not be made

on the basis of national theories, but rather such interpretation
must be made on an autonomous basis. Dicta in the French

Decision Obiter dicta are not usually included in
decisions by French courts. Indeed, the French Civil Code explicitly

prohibits French courts from making general rulings that exceed the
scope of the matter submitted to them. This is one of the main
elements that differentiates civil law systems such as France from
common law systems. However, one suspects that for educational
purposes, the decisions rendered by the court in the EMTEC matter
contain a broad analysis of the EU Regulation that sometimes exceeds

what may have been strictly necessary to grant the relief sought in
the insolvency petition. First, the court reiterated the
analysis set out in the ISA-Daisytek SAS1 and

MG Rover2 cases, according to which a European local

court cannot examine the decisions previously delivered by another
European court on the location of the COMI, except in order to check

consistency with the local public policy. The court also specified
that the concept of domestic public policy must be construed
narrowly. Secondly, the court emphasised the need for
"transparent" cooperation between main and secondary
proceedings in the context of a group of companies, when the COMI is

located in the jurisdiction in which the head offices of the
controlling entity are located and secondary proceedings are opened, in

order "to take into account the legitimate interests of local

creditors and employees." This statement is repeated three
times in the decision. Notably, the court indicated that the opening

of secondary proceedings would allow local creditors and employees
to have access to their judge and their law (emphasis
in the original text of the decision). The fact that one finds no
equivalent references in decisions made elsewhere in the EU is an
indication of the historical tendency of French bankruptcy law to
pay due regard to the interests of local creditors and employees. In the

same vein, the court also emphasised that secondary proceedings
would allow the ranking of the local creditors to be defined and the

employees to be protected in accordance with local rules, and that
the employees of EMTEC Belgium would be duly represented and heard
by the court. The French Approach to the EU Regulation

Over the past few months, French courts have demonstrated an
interesting and enthusiastic approach to the EU Regulation. Five
characteristics of the French approach are illustrated below. 
First, the French approach can be seen as orthodox in that the French

courts have recognised and accepted the weight of the decision first

rendered and have resisted the temptation to challenge foreign
decisions that held that French companies had their COMI abroad
(ISA-Daisytek and MG Rover cases). The principle of
mutual trust applies in the context of the EU Regulation, and the
public policy exception cannot be invoked too broadly. 
Secondly, the French approach is pragmatic. Indeed, the appeals court in

ISA-Daisytek has ruled that the opening of secondary
proceedings had to be legitimately justified. Specifically, it had
to be demonstrated that secondary proceedings would provide
benefits—in particular, protection to local creditors or
realisation of assets (in the MG Rover case). In other words,

even if the opening of main insolvency proceedings does provide a
basis for the petition to open secondary proceedings, local courts
should not be bound to open such secondary proceedings regardless of

the interest at stake. Bluntly, secondary proceedings must be worth
the additional costs and complexity involved. Third, the
French approach is European. French courts have been paying considerable

attention to European case law. This is evidenced in the EMTEC
matter, where the court expressly "applies"
European case law, refers to common law concepts and explicitly puts

forward the need to implement an autonomous application of the EU
Regulation. It may be worth mentioning that in France it is
generally thought that the French Supreme Court is awaiting the ECJ
decision in the Eurofood case before delivering judgment in the

ISA-Daisytek matter. In this context, the implementation of
the EU Regulation is therefore clearly not a national matter. 
Fourth, the French approach considers interests that are generally
viewed as less relevant in other jurisdictions, particularly
employees' interests. It is well-known that consideration of such
interests is one of the main features of French regulation and case
law.3 In the EMTEC case, the court again makes it plain
that such secondary proceedings may be useful in some instances in
order to take into account the interests of the employees. 
Finally, the French approach can be seen as proactive. Practitioners
should be aware that the French insolvency proceedings listed in the

Annexes of the EU Regulation will shortly be amended in order to
reflect the bill that reforms French insolvency law, which entered
into force on 1 Jan. 2006. One of the main innovations of this
reform is a new "safeguard" procedure, which can to some
extent be compared to the U.S. chapter 11 procedure that is familiar

to the many readers of this Journal. An amendment to the Annexes of
the EU Regulation is currently in progress and should result in these
safeguard proceedings qualifying as "main" proceedings for

the purpose of the EU Regulation. This may produce significant
effects, since the safeguard proceedings can be opened prior to the
actual (cash flow) insolvency of the debtor. Accordingly,
proceedings may be opened in France much earlier than under the
present system. The combination of this new procedure and the
("first in time") priority rule set out in the EU
Regulation may provide attractive tools for commencing multiple
proceedings in France at a very early stage. <h3> Footnotes</h3>
 1 Commercial Court of Pontoise, 26 May 2003, unreported. 2
[2005] EWHC (Ch), 18 April 2005. 3 Although it is often thought

that this consideration is excessive and jeopardises the efficiency
of French bankruptcy law, it should be noted that attempts to invoke

these interests as a bar to the recognition of the main insolvency
proceedings have recently failed (e.g., in the

ISA-Daisytek matter).

Journal Authors

Sandy Shandro

Journal Date

Monday, May 1, 2006 - 12:00

Bankruptcy Rule

2006

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