Principles of European Insolvency Law

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Sep 2003

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EU Regulation (EC) No. 1346/2000 on insolvency proceedings in Europe entered into force in May 2002. The
regulation, which is directly binding on this E.U.'s 14 member states, merely deals with issues of jurisdiction and
the recognition of insolvency proceedings that are commenced in member states. The law of the member state where
the proceedings are begun (lex concursus) determines all of the procedural and substantive effects of the insolvency
proceedings for purposes of all countries in the European Union.

To protect legitimate expectations and the certainty of transactions in member states, however, a number of
exceptions to the general rule of applicability of the lex concursus have been made. The regulation is limited in its
scope.<a href="#1a">1</a> Why didn't Europe devise a single exclusive universal form of insolvency proceedings for the whole of the
community? The answer is this: diversity. It was considered too difficult to implement a universal proceeding
without modifying, by the application of the law of any state of its opening of proceedings, pre-existing rights
created before the insolvency under the different national laws of the member states.

The main reason lies in the lack of a uniform system of security rights in Europe and in the great diversity
of national insolvency laws as to the priority to be given to the different classes of creditors. In fact, the basic
elements of insolvency laws still differ widely from country to country, even in legislation that has been revised in
the last decade, as in France, Belgium and—in 1999—in Germany<a href="#2" name="2a">2</a> and Italy. Both England and Scotland have
substantially revised their insolvency laws, and Spain and Poland are expected to follow this year, while a
substantial revision is underway in the Netherlands. Nevertheless, some member states provide for a variety of
insolvency proceedings (e.g., Denmark, England, Italy, the Netherlands and Scotland) that are often laid down in
several different statutes and regulations, where other countries have only one (comprehensive) proceeding (e.g.,

Germany and France). The EU Insolvency Regulation coordinates 54 types of proceedings. A principal difference
furthermore is in the scope of application. In France and Belgium, for instance, insolvency law applies only to
debtors with commercial or professional activities, but in England, Germany and the Netherlands, insolvency law
applies in principle to all types of debtors, although the last two countries treat the insolvency of financial
institutions, e.g., banks and insurance companies, quite differently.

<blockquote><blockquote>
<hr>
<big><center>
The principles, although limited in scope and
concerned countries, are a valuable first attempt to
tackle an area of (international trade) law that is of
great commercial importance.
</center></big>
<hr>
</blockquote></blockquote>

The International Working Group on European Insolvency Law has concluded that it is remarkable that
even the more recent European insolvency laws continue to show substantial differences in underlying policy
considerations, both in structure and in content. The Working Group was founded in 1999 and consists of an
academic group of 15 professionals, originating from 10 EU countries,3 and is chaired by Sebastian Kortmann
(University of Nijmegen). The group has studied the question of how these differences can be reconciled with the
ongoing economic integration of Europe, especially where the activities of companies that transgress national
borders are regulated by European legislation. It considers that the development of a European market requires (1)
an understanding of the differences among legal systems, (2) a move toward uniformity in legal terminology and
concepts and (3) the avoidance of diversity resulting from a lack of knowledge about other European jurisdictions.
Although the idea of establishing in the short-term a single universal insolvency proceeding for the entire European
Union may seem illusive, the Working Group concluded that this does not mean that national insolvency laws do
not share common characteristics.

These common elements were captured in Principles of European Insolvency Law, which was presented in
Brussels in June. The principles are the result of looking beyond these differences in structure, scope, concepts and
formulation. The Working Group presents Principles as "...the essence of insolvency proceedings in Europe as they
reflect, on a more abstract level, the common characteristics of the insolvency laws of the European member states."
The other aim of Principles is to provide a foundation for greater harmonization.

The Working Group developed 14 principles that deal with the following topics: 
<ol>
<li>insolvency proceedings 
</li><li>institutions and participants 
</li><li>effects of the opening of the proceeding 
</li><li>management of the assets 
</li><li>obligations incurred by, and fees of, the administrator 
</li><li>treatment of contracts 
</li><li>position of employees

</li><li>reversal of juridical acts 
</li><li>security rights and set-off 
</li><li>submission and admission of insolvency claims 
</li><li>reorganization 
</li><li>liquidation 
</li><li>closure of the proceeding 
</li><li>debtor-in-possession.
</li></ol>

Principles is followed by a general commentary,<a href="#4" name="4a">4</a> which starts with a brief introduction to the problem,
followed by an explanation of the principle itself. The commentary does not provide exhaustive comparative
reflections, but references the various approaches and solutions of national insolvency law systems. It also indicates
where these systems substantially deviate from a particular principle and refers, where appropriate, to the EU
Insolvency Regulation.<a href="#5" name="5a">5</a> Principles focuses mainly on business insolvency and does not deal with insolvency
proceedings concerning, e.g., insurance undertakings and credit institutions, does not address voluntary
debtor-creditor-arrangements (workouts) outside insolvency law, does not include obligatory information systems
that have been set up in some countries and does not address the issue of liability of directors and shareholders, as
these grounds of liability can vary substantially from country to country.

The commentary is followed by 10 national reports that are all structured in the same general manner and
contain information on the most important types of insolvency proceedings, the players (institutions and
participants involved in the proceedings), the protective effect of insolvency proceedings, the position of creditors
and other important issues such as the reversal of juridical acts, set-off, the effect of insolvency on existing contracts
and the adoption, contents and effects of reorganization plans and compositions. These national reports are written
with admirable oversight and clarity. Principles, with its commentary, and the national reports serve two other
aims. They will enable lawyers with different national backgrounds to better understand the existing systems of
insolvency law in Europe.<a href="#6" name="6a">6</a> With the EU Insolvency Regulation coming into effect, there clearly is a need to better
understand the insolvency laws of the member states. It is unfortunate that the publication<a href="#7" name="7a">7</a> lacks reports from
Austria, Greece, Finland, Portugal and Sweden.

The Working Group also aims to provide working material for further study, which could result in
proposals for legislation on a supranational level and—in the shorter term—provide support in the efforts to
modernize national insolvency laws by serving as a European framework. This goal could be extended to other
European countries that may join the European Union in the coming years.

The columns of the Journal do not permit extensive comments on the contents of Principles. It may be
noted however that principle 14 recognizes the debtor-in-possession principle where, according to the commentary,
every jurisdiction covered provides for an alternative to the classic insolvency (liquidation) proceeding, where the
debtor is left in possession during a reorganization of its liabilities.

The principles, although limited in scope and concerned countries, are a valuable first attempt to tackle an
area of (international trade) law that is of great commercial importance. After several decades of discussion and
studying of differences, many would have thought that common foundations in Europe in this domain would never
be revealed. As a modest attempt for some design in the present European insolvency hodgepodge, the Working
Group has taken the realistic approach of not providing model provisions for a national legislation, as currently is
underway in the project of UNCITRAL's Legislative Guide on Insolvency Law. On the other hand, the group does
not shy away to mention the "c" word in that it refers to a "European Insolvency Code." It recognizes that the
principles do not try to reflect the ideal rules for such a Code, but the Group is firm in its belief that the principles
identify the areas of conformity and divergence and will thus be helpful when a Code could be developed. In the
much shorter term, Principles, its commentary and the national reports provide scholars and practitioners with a
much needed "catalogue raisonné," bringing to the surface common foundations, policies and effects in constituent
parts of Europe's insolvency law.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> See Wessels, Bob, "European Union Regulation on Insolvency Proceedings," ABI Journal, November 2001, p. 24-25, 31; Moss, Gabriel, Fletcher, Ian I. and Isaacs, Stuart (eds.),

The EC Regulation on Insolvency Proceedings: A Commentary and Annotated Guide, Oxford University Press, 2002; and Wessels, Bob, European Union Regulation on Insolvency
Proceedings: An Introductory Analysis, American Bankruptcy Institute, 2003. <a href="#1a">Return to article</a>

<a name="2">2</a> See Ziechman, Business Bankruptcy in Germany, American Bankruptcy Institute, 1997. <a href="#2a">Return to article</a>

<a name="3">3</a> Belgium, Denmark, England, France, Germany, Italy, Luxembourg, the Netherlands, Scotland and Spain. EU member states Austria, Finland, Greece, Portugal and Sweden are
not represented. <a href="#3a">Return to article</a>

<a name="4">4</a> Written by Profs. McBryde (Scotland) and Flessner (Germany). <a href="#4a">Return to article</a>

<a name="5">5</a> The EU Insolvency Regulation has chosen—not unquestionably—to refer to the "liquidator" as the person who administers or liquidates assets. Principles uses the term
"administrator." <a href="#5a">Return to article</a>

<a name="6">6</a> In this aim, one can recognize the result of the approach chosen by American Law Institute (ALI) to describe, although much more extensively, the bankruptcy laws of Canada,
Mexico and the United States in Transnational Insolvency: Cooperation Among the NAFTA Countries, Juris Publishing Inc., Huntington, NY, 2003 (4 volumes). <a href="#6a">Return to article</a>

<a name="7">7</a> McBryde, W.W., Flessner, A. and Kortmann, S.C.J.J. (eds.), Principles of European Insolvency Law, Series Law of Business and Finance, Volume 4, Kluwer Legal Publishers,
Deventer, the Netherlands, 2003, ISBN 90 130 0597 7. The text of Principles of European Insolvency Law will be posted on ABI World (www.abiworld.org). <a href="#7a">Return to article</a>

Journal Authors

Bob Wessels

Journal Date

Monday, September 1, 2003 - 12:00

Bankruptcy Rule

2003