Many of the early cases concerning the EC Insolvency Regulation have looked at aspects of COMI (centre of main interests). The location of COMI dictates the single jurisdiction in which main proceedings can be opened. COMI issues are now broadly settled, and recently the English courts and the Court of Justice of the European Union (‘CJEU’) have been asked to rule on a number of issues relating to secondary proceedings and where those proceedings can be opened. Essentially this involves an analysis of what constitutes an establishment for the purposes of the Regulation.
In the first of those cases, Office Metro v Trillium [2012 EWHC] 1191 Ch, Weil acted for the liquidator of Luxembourg main proceedings who successfully argued that a run-off of activities in England did not satisfy the definition of establishment. This meant that the English court did not have jurisdiction to open secondary insolvency proceedings. In Trustees of the Olympic Airlines SA Pension & Life Assurance Scheme v Olympic Airlines SA  EWCA 643 the English Court of Appeal last week has for the first time ruled on the meaning of the establishment. Building on arguments deployed by Weil in Office Metro, the Greek main proceedings liquidator in Olympic Airlines argued that there had to be an on-going business operation at the time that secondary proceedings were initiated and that the mere process of winding up a company was not enough. The Court of Appeal agreed.
The Definition of Establishment:
Article 2(h) of the EC Insolvency Regulation provides that an establishment shall mean any place of operations where the debtor carries out a non-transitory economic activity with human means and goods.
In summary the Court of Appeal in Olympic Airlines has held as follows:
- The issue of whether the company has an establishment for the purposes of the Regulation has to be decided as at the point at which the jurisdiction of the insolvency court is invoked (here 20th July 2010, the date the petition was presented to Court).
- It follows that the key focus of the analysis should be on the company’s activities immediately leading up to that date.
- There is therefore no difficulty in giving the definition of establishment a meaning which required more economic activity than the mere process of winding up. What was being looked for was a location where there was still, at the critical date, a business operation (‘a place of operations’ performing ‘economic activity’.)
- It was not true that the Regulation contemplated that a debtor company in secondary proceedings could not be a trading company with outward facing market activity. First, secondary proceedings which were opened before main proceedings could be rescue proceedings (under the Regulation these proceedings are termed territorial proceedings.) Secondly, to a limited extent, companies in liquidation can continue to trade for the benefit of the liquidation.
Olympic Airlines SA (‘Olympic’), the Greek state-owned airline, stopped all its commercial operations in September 2009 after a ruling by the European Commission that it had received illegal state aid. A few days later it entered special liquidation proceedings in Greece by way of main insolvency proceedings. The airline had carried on in business in England from a head office in London and at other locations and it employed 27 employees in England. Most of the employees were members of the airline’s pension and life assurance scheme. Olympic was the principal employer under the scheme which was in excess of £15M in deficit.
At the direction of the Greek liquidator, the English employees had, following his appointment, dealt with the winding down of company matters, including the disposal of Olympic’s assets in England and the closing of its bank accounts there. At the beginning of July the Greek liquidator notified the 27 employees of the termination of their employment with effect from 14th July 2010. After that, the final wind down of Olympic’s business was completed by two former employees who were engaged on an ad hoc basis, based at the London premises. The London premises were finally closed in December 2010.
Meanwhile on 20th July 2010 the trustees of the pension scheme presented a petition to wind-up Olympic in England. The trustees did so in order to trigger an insolvency qualifying event for the purposes of S127 Pensions Act 2004, with the intention that the Pension Protection Fund (‘PPF’) would assume responsibility for the scheme and so as to enable pension scheme members to receive compensation from the PPF. The airline’s liquidation in Greece is not a qualifying insolvency event for these purposes.
The Greek liquidator opposed the winding-up petition when it was heard by the English High Court. He contended that the court had no jurisdiction to make a winding-up order because at the time that the petition was presented Olympic had no establishment in England.
The Outcome of the Court Hearing:
At the core of the Greek Liquidator’s argument was the proposition that in order to satisfy the requirements of an establishment the company had to be carrying on some on going business activity and that implementing the closure of its business did not suffice. This followed a similar line of reasoning to that deployed by the Luxembourg liquidator in Office Metro. Although the Office Metro case was mentioned in the Olympic Airlines case, it was not subjected to detailed scrutiny by the High Court judge who held that the liquidation of an insolvent company and the winding-up of its affairs was not incompatible with the possession of an establishment and that any analysis that secondary proceedings could only be pursued where the pre-liquidation business was continuing must be wrong.
Although there are some significant differences in the fact patterns of Office Metro and Olympic Airlines (Office Metro had effectively relocated its COMI and its day to day business operations from England to Luxembourg some years before it ran into financial difficulties), the judgments were to an extent inconsistent and this created some uncertainty as to what is required to satisfy the economic activity requirement of the establishment definition.
The Court of Appeal reviewed the existing case law, including Office Metro and the CJEU judgment in Interedil Srl v Fallimento Interedil Srl: C- 396/09 AER (d) 219. In finding in favour of the Greek liquidator and upholding his appeal the Court of Appeal lined up squarely behind the approach adopted in Office Metro. On the facts of the case, by the time that the trustees issued the winding up petition on 20th July 2010, Olympia had already been in liquidation in Greece for some 10 months, had ceased all commercial operations for almost as long, and the remaining staff had been dismissed so that the Court of Appeal concluded that definition of establishment had not been fulfilled.
Impact of the Decision:
As the Appeal Court Judges recognised, the impact of their decision on the facts of the case were harsh in that it meant that members of the Olympic Airlines pension would not be entitled to claim compensation for their loss of pension benefits as the protections offered by the PPF were not triggered by the commencement of foreign insolvency proceedings. This is a shortcoming in the pensions legislation which presumably had not been contemplated at the time that it was drafted.
As to the more general impact of the decision, the finding of the Court of Appeal that a continuing business operation is a necessary ingredient to a finding of an establishment may have the effect of encouraging creditors to initiate secondary proceedings at as early a point as possible, before it can be evidenced that there is no continuing business operation and the creditors’ opportunity to establish an establishment disappears. Experience to date in the UK has shown that there may be more effective ways of ensuring that local creditors’ interests are protected without the need for them to open secondary proceedings. For example, the main proceedings administrator may be able to honour local employee preference claims. The gap in the pensions legislation is therefore unfortunate and may encourage the opening of secondary proceedings which might not otherwise be in overall creditors’ interests.
View our posting on Office Metro – ‘Thanks a Trillium!’ – The High Court holds that a run off of liabilities does not comprise ‘economic activity’’ on Weil’s European Restructuring Watch.
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