The Eurofood Decision of the European Court of Justice

Journal Issue

Sep 2006

Column Name

Feature

Citation

ABI Journal, Vol. XXV, No. 7, p. 46, September 2006

Topic Tags

International Insolvency

Venue/Jurisdiction

Journal HTML Content

Editor's Note: In the
last issue of the Journal, Sandy Shandro of Freshfields
(London) described the Eurofood decision of the European
Court of Justice (ECJ), particularly in the matter of establishing the
location of the Center of Main Interests (CoMI) and related
jurisdictional questions. This article discusses the other import
issues submitted to the ECJ.</blockquote>The European Court of Justice (ECJ) issued its
Eurofood ruling on May 2, 2006.1 This ruling
resulted from the referral by the Supreme Court of Ireland2
of five questions of EU law, based on the EU Insolvency Regulation (EU
Regulation),3 preliminary to the Irish Supreme Court
deciding a pending appeal on the Dublin High Court's decision to open a
main insolvency proceeding4 for Eurofood IFSC Ltd. in
competition with a parallel main insolvency case for the same entity
in Parma, Italy.5 The two parallel main proceedings arose
because each court decided that Eurofood's center of main
interests (CoMI) was located in its own country. Consequence of
Appointing a Provisional Liquidator The ECJ next turned to the
inquiry of whether the Dublin court's appointment of a provisional
liquidator constituted "a judgment opening insolvency proceedings
for Eurofood within the meaning of Article 16(1). The clear
import of this question was to inquire as to whether the Jan. 27, 2004,
decision of the Dublin High Court appointing a provisional liquidator
took priority over the Feb. 9, 2004, decision of the Italian Minster
for Production Activities admitting Eurofood to extraordinary
administration, pursuant to Article 16(1). A ruling in Ireland's
favor on this point would give the Dublin proceeding jurisdictional
priority over the Parma proceeding, even assuming that everything was
done properly in connection with the Parma proceeding. Irish law lacks a
step in the commencement of an insolvency proceeding that is
designated as a "judgment to open" such a proceeding.
Furthermore, under Irish law, the precise point where an insolvency
proceeding is opened, for the purposes of the EU Regulation,
apparently varies from case to case. The ECJ decided to bypass this
formal gap and to focus on the substance of what constitutes a decision
to open an insolvency proceeding. The ECJ ruled that Article
1(1)6 of the EU Regulation requires that to qualify for
recognition, a national insolvency proceeding have four characteristics:
(1) it must be a collective proceeding, (2) it must be based on the
debtor's insolvency, (3) it must result in at least a partial
divestment of the debtor, and (4) it must involve the appointment of a
liquidator.7 Whether a statute qualifies under this
provision is not left to judicial decision: Annex A to the Regulation
specifies the statutes for each EU country (except Denmark, where the
EU Regulation is not applicable) that meet this qualification, and
Annex C lists the titles of the liquidators in each country who meet the
definition in Article 2(b).8 The ECJ recognized that
priority, for recognition purposes under Article 16(1), is based on
which decision on opening a main proceeding is handed down
first.9 However, the Regulation does not define with
sufficient precision what constitutes a "judgment to open
insolvency proceedings."10 The ECJ noted that the
conditions and formalities for opening an insolvency proceeding are
determined by domestic national law, not the EU Regulation, and they
vary considerably from one EU country to another.11 In some
countries, the proceedings are opened very soon after the submission of
the application, while in other countries it may take a substantial
period of time before a decision to open a case is made.12

The ECJ also noted that a "provisional" opening may be in
place for several months.13 In contrast, the ECJ declared
that in order to assure the effectiveness of the recognition
provisions of the EU Regulation, it is necessary that recognition be
applied as soon as possible in the course of the
proceedings.14 The principle that only one main proceeding
is permitted would suffer serious disruption, the ECJ noted, if
competing courts could claim concurrent jurisdiction for a main
proceeding over an extended period.15 Thus, the phrase
"opening of insolvency proceedings" must be interpreted in
light of the objective of assuring the effectiveness of the
Regulation.16 For example, the urgency of recognition is
highlighted in the context of the application of the moratorium or
automatic stay resulting from the filing of an insolvency case in an
EU country. Article 16(1) exports the home country moratorium
(i.e., that of the country where the case is filed) in a main
proceeding to all other EU countries. A court in another country needs
to know immediately if a proceeding is pending when the first main
insolvency case is filed or commenced thereafter is subject to the
home country moratorium. Similarly, such a court needs to know whether
assets that may be involved in its own case are in custodia
legis in the home country court. A decision to open an insolvency
proceeding under the law of an EU country, the ECJ held, includes any
decision under a statutory scheme referred to in Annex A that meets
the formal criteria of Article 1(1) and appoints a liquidator of the
kind specified in Annex C.17 It does not matter, the ECJ
held, that the liquidator is initially appointed on an interim
basis.18 The clear import of this interpretation, again
not drawn out in detail by the ECJ, is that the Jan. 27 decision of
the Dublin High Court to appoint a provisional administrator
constituted the opening of a main insolvency case for Eurofood that
was entitled to recognition from that date forward by the courts in
Italy. The decision by the court in Parma to open a main proceeding
for Eurofood on Feb. 19, 2004, thus violated the EU Regulation.

Impact of Procedural Irregularities on Recognition Obligation
The Irish Supreme Court also asked the ECJ to determine whether
it was required to recognize an insolvency proceeding opened in
another EU country where the procedure leading to the decision
disregarded procedural rules guaranteed by the public policy of the
country where the court is located.19 The ECJ ruled:
<blockquote> [O]n a proper interpretation of Article 26 of the
Regulation, a Member State may refuse to recognize insolvency
proceedings opened in another Member State where the decision to
open the proceedings was taken in flagrant breach of the fundamental
right to be heard, which a person concerned by such proceedings
enjoys.20 </blockquote>In responding to this inquiry,
the ECJ addressed both the public policy exception to the EU
Regulation and the importance of considerations of fair legal process.
Public Policy ECJ jurisprudence (case law), in the context
of the Brussels Convention on the Enforcement of Judgments, permits
recourse to a public policy exclusion only in exceptional
cases21 <blockquote> only where recognition or
enforcement of the judgment delivered in another Contracting State
would be at variance to an unacceptable degree with the legal order
of the State in which enforcement is sought inasmuch as it infringes
a fundamental principle. The infringement would have to constitute a
manifest breach of a rule of law regarded as fundamental within that
legal order.22 </blockquote>This same case law, the
ECJ found, applies to the EU Regulation, and permits application of
the public policy exclusion only in exceptional cases.23

Thus, as a general principle, the public policy exclusion to the
mandatory recognition of the opening of an insolvency proceeding in
another EU country or the enforcement of any judgment in such a
proceeding can be invoked only in extraordinary situations. While the
ECJ did not rule on whether the Irish Supreme Court could properly
invoke the public policy provision to deny recognition of the opening
of the Italian main insolvency proceeding for Eurofood (because
this conclusion was beyond the scope of the questions submitted), the
clear implication is that the ECJ would not consider this a proper case
to invoke public policy. Fair Legal Process Nonetheless,
the ECJ noted, ECJ jurisprudence recognizes that everyone is entitled
to fair legal process.24 This principle is inspired,
according to the ECJ, by the fundamental rights forming an integral
part of the general principles of EC law and the constitutional
traditions common to the EU countries.25 In addition, it
derives from the guidelines of the 1950 European Convention for the
Protection of Human Rights and Fundamental Freedoms.26 The
principle is also very similar to the "procedural due process"
principle in U.S. law. The right to be notified of procedural
documents and the right to be heard "occupy 'an eminent position'
in the organization and conduct of a fair legal process," the ECJ
stated.27 In addition, the ECJ found that in the context of
insolvency proceedings, the right of creditors and their
representatives to participate in accordance with the "equality of
arms" principle28 is particularly
important.29 Any restriction on exercise of the right to
be heard, the ECJ stated, "must be duly justified and surrounded
by procedural guarantees ensuring that persons concerned by such
proceedings actually have the opportunity to challenge the measures
adopted in urgency."30 "Fair legal process"
is an important issue in the Eurofood cases. The Dublin High
Court took sufficient time to give Enrico Bondi, the Italian
administrator appointed in the Italian Eurofood case (and also
in all the other Parmalat cases filed in Italy), a full and fair
opportunity to be heard before deciding that the Dublin case was the
main case for Eurofood. In contrast, Bondi gave notice to Pearce
Farrell, the Irish provisional liquidator, at 5:15 p.m. on a Friday
afternoon of the Parma hearing on the opening of a main proceeding
that was scheduled (and took place) the following Tuesday at noon.
Furthermore, Bondi refused to provide to Farrell copies of the
voluminous papers that he had filed in the Parma court. The ECJ
recognized that the application of these principles to the

Eurofood case may be problematic. The ECJ cautioned the Irish
Supreme Court not to insist that a fair legal process requires an oral
hearing, and stated that the court "must assess, having regard to
the whole of the circumstances, whether or not the provisional
liquidator...was given sufficient opportunity to be heard" in the
Parma court. <blockquote> <blockquote> <blockquote> <h3 align="center">There is a very important collateral impact of the
"fair procedures" decision of the ECJ in the
Eurofood case. It is apparently the practice of the
English courts to decide whether to open a main insolvency case
as a first-day order, which is issued with no notice to
creditors whatsoever. </h3> </blockquote>
</blockquote></blockquote>On the issue of fair procedure, the impact
in the Eurofood cases of the ECJ decision is not clear. The
Irish Supreme Court and the Dublin High Court were both very seriously
concerned with the procedures followed by the court in Parma. It is
difficult to predict whether, "having regard to the whole of the
circumstances," the Irish Supreme Court will decide that the
procedures in the Parma court were fundamentally unfair, and to deny
recognition of the decision there to open a main case for Eurofood.
Given the ECJ's determination that the appointment of the temporary
liquidator on Jan. 27 constituted an opening of a main case for
Eurofood, the Irish Supreme Court may well find it unnecessary to
reach this issue. There is a very important collateral impact of the
"fair procedures" decision of the ECJ in the Eurofood

case. It is apparently the practice of the English courts to decide
whether to open a main insolvency case as a first-day order, which is
issued with no notice to creditors whatsoever.31
Corporate Groups Eurofood, and especially the
Italian court decisions on its CoMI, directly raise the issue of how
to deal with the CoMI of corporate groups. A corporate group can
normally deal with the financial difficulties of a particular member
of the group (unless it is the principal operating entity) in the
ordinary course of business. Thus, it is unusual for a single member
of a corporate group to file an insolvency proceeding. However, if
the entire group encounters financial difficulty, as happened for the
Parmalat group, a group-wide solution to the financial problems is often
required. As a result, many of the group members will typically have
to file insolvency proceedings. If the insolvency proceedings of
the group members are dispersed in a number of different countries, a
group-wide solution to the financial problems is much more difficult
to negotiate. If the proceedings are all filed in one court, on the
other hand, there will be one judge to administer the cases and one set
of lawyers and other professionals. Most important, the insolvency
proceedings will all be governed by one legal regime (except where
conflict-of-law rules lead to the application of another country's
law) and one set of legal procedures. In contrast, if proceedings are
filed in a variety of countries, as happened in Parmalat, there
are a variety of judges and a variety of groups of lawyers and other
professionals.Most important, there are also different applicable
legal regimes and different sets of legal procedures. The ECJ decision
in Eurofood gives no assistance in dealing with this problem.
The ECJ stated, "each debtor constituting a distinct legal
entity is subject to its own court jurisdiction."32 As
a consequence, the CoMI of each legal entity must be determined
separately from the CoMI of any related entity in the corporate group.
This separate determination determines the proper national venue for
the main proceeding for that particular entity.

<blockquote><blockquote> 
</blockquote></blockquote><hr><h3>Footnotes</h3> 1 Case 341/04,
Eurofood IFSC Ltd, 2006 E.C.R. ___. (Eurofood-ECJ).
2 In re Eurofood IFSC Ltd., [2004) IESC 45 (Ir.). 3
Council Regulation 1346/2000, 29 May 2000, on insolvency proceedings,
2000 O.J. (L160) 1-18 (as amended). 4 According to the language
used in the English version of the EU Regulation, a
"proceeding" corresponds to a "case" under U.S.
bankruptcy law. See, e.g., 11 U.S.C. §§301-03
(providing for the filing of a "case" under the bankruptcy
statute). 5 See In re Eurofood IFSC Ltd., Parma Civil

& Criminal Ct., Feb. 19, 2004 (unpublished opinion on file with
author), aff'd., Trib. Amm. Reg. 10 June 2004, n. 6998/2004 (on file
with author). 6 See EU Reg. Art. (1)(1), which
provides: "This Regulation shall apply to collective insolvency
proceedings which entail the partial or total divestment of a debtor
and the appointment of a liquidator." 7 See
Eurofood-ECJ |46. 8 EU Reg. Art. 2(b) defines a
liquidator as "any person or body whose function is to administer
or liquidate assets of which the debtor has been divested or to
supervise the administration of his affairs. Those persons and bodies
are listed in Annex C." 9 See Eurofood-ECJ |49.

10 See id. |50. 11 See id. |51. 12
See id. 13 See id. 14 See id. |52.
15 See id. 16 See id. |53. 17 See
id. ||54, 58. 18 See id. |55. 19 EU Reg. Art.
26 provides: Any Member State may refuse to recognize insolvency
proceedings opened in another member State or to enforce a judgment
handed down in the context of such proceedings where the effects of
such recognition or enforcement would be manifestly contrary to that
State's public policy, in particular its fundamental principles or the
constitutional rights and liberties of the individual. 20

Eurofood-ECJ |67. 21 See id. |62 (citing
Case C-7/98 Krombach [2000] ECR 1-1935, ||19, 21). 22
See id. |63 (citing Krombach ||23, 37). 23 See
id. |64. 24 See id. |65 (citing Case C-185/95 P

Baustahlgewebe v. Comm'n, [1998] ECR I-8417, ||20, 21; Joined
Cases C-174/98 P and C-189/98 P Netherlands v. Comm'n, [2000]
ECR I-1, |17; Krombach, |226). 25 See id. 26
See id. 27 Id. |66. 28 "Equality of
arms" is a concept that is unknown in U.S. law. However, it is
generally known in the international legal community, and applies
particularly in criminal prosecutions. Generally, it means that,
"each party [must be] afforded a reasonable opportunity to
present his or her case under conditions that do not place him at an
appreciable disadvantage vis-a-vis his opponent." Prosecutor
v. Brdjanin, Case No. IT-99-36-PT, Public Version of the
Confidential Decision on the Alleged Illegality of Rule 70 at 2 (May
6, 2002). 29 See Eurofood-ECJ |66. 30 See
id. 31 See, e.g., In re Daisytek-ISA
Ltd., [2003] B.C.C. 562, [2004] B.P.I.R. 30, 2003 WL 21353254, Ch.
Leeds (May 16, 2003) (UK). 32 Eurofood-ECJ

|30.

Journal Authors

Samuel L. Bufford

Journal Date

Friday, September 1, 2006 - 12:00

Bankruptcy Rule

2006

none