International Journal of Law and Management

Emerald Article: Center of main interest (COMI) and jurisdiction of

national courts in insolvency matters (insolvency status)
Alexander J. Belohlvek
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Alexander J. Belohlvek, (2008),"Center of main interest (COMI) and jurisdiction of national courts in insolvency matters
(insolvency status)", International Journal of Law and Management, Vol. 50 Iss: 2 pp. 53 - 86
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Insolvency
matters
53
International Journal of Law and
Management
Vol. 50 No. 2, 2008
pp. 53-86
#Emerald Group Publishing Limited
1754-243X
DOI 10.1108/17542430810862333
Center of main interest (COMI)
and jurisdiction of national
courts in insolvency matters
(insolvency status)
Alexander J. Beelohlavek
Department of Law, Faculty of Economics,
VS

B Technical University of Ostrava, Ostrava, Czech Republic

Abstract
Purpose The applicable jurisdiction for insolvency proceedings, as provided by the Regulation
(EC) No 1346/2000 on insolvency proceedings, is the court of the Member State where the debtors
center of main interest (COMI) is located (Article 3(1)). The Regulation, however, does not provide a
comprehensive definition of the COMI. This paper seeks to explore the meaning and developments
behind the meaning of COMI as influenced by judicial reasoning and conflicts across Member States.
Design/methodology/approach The study centres around the emerging jurisprudence and
analyses case law across Member States in order to draw conclusions on the meaning of COMI and
the emerging concepts. Extensive consideration of statutory interpretation, case reports and judicial
comment is present in order to inform and develop conclusions.
Findings In the absence of a definition it appears that the only relevant European guidance
emerges from recital 13 and Article 3 (1). With little guidance in the Regulation, it has therefore been
left to national courts to decide how the notion of COMI should be interpreted. Determining the COMI
has emerged as one of the most controversial aspect and the principle point of legal conflict, with
some highly debated cases within member states courts. On the basis of the case law, it is suggested
that the interpretation of COMI is more flexible in UK and Italian courts. The approach adopted in
continental Europe is referred to as the centre of operations approach, i.e. the debtors COMI has to
be determined by the place where he is ascertainable by third parties. The Anglo Saxon approach,
on the other hand, is known as the mind of management approach, i.e. the debtors COMI must be
situated where decisions are actually made. The latter seems to enjoy a more practical and accessible
approach.
Originality/value Not only will the findings assist those seeking to understand the process and
COMI requirements across member states but it will also assist those researchers seeking to
understanding the comparative and conflict of law barriers to pan-European insolvency proceedings.
Keywords European union, European law, Property, Regulation, Bankruptcy
Paper type General review
The place of the main interest and jurisdiction of national courts in international matters
1. Insolvency proceedings in the European context
Issues concerning the so-called international bankruptcy and insolvency proceedings
(for terminology, see Mrazek, 2004) have been in the center of interest of international
legal practice for much longer than the recent years or decades; from the historical
viewpoint, attempts to instate international legal regulation for bankruptcy-related
matters could be traced as far back as the 17th century. In the European (supra-
national) context, the most important directive is Council Regulation (EC) No. 1346/
2000 of 29 May 2000 on Insolvency Proceedings (referred to as the Regulation
throughout this document), which came into effect on 31 May 2002 and which is
directly applicable in all European Union Member States with the exception of
Denmark. In the case of insolvency proceedings with an international (foreign) element
The current issue and full text archive of this journal is available at
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(Belohlavek, 2006), the Regulation is with regard to the said international (foreign and
in this case Community-related) element a document whose application takes
precedence over regulations of national origin and which represents a fundamental
standard in the area of international insolvency proceedings; starting on 1 May 2004,
the Regulation applies to the ten new Member States who joined the EU on that date
(the document also applies to Bulgaria and Romania as of the beginning of 2007). It is
unquestionably one of the most important documents of the Community law in the
economic area. In light of the importance of the Regulation and considering the
significance of insolvency proceedings and their definition in economic activities,
analyzing and commenting on the Regulation accounts for the better part of the
present review. The Regulation mainly relies on Article 61(c) and Article 67(1) of the
Treaty Establishing the European Community (TEEC).
It is somewhat arguable whether the cited provisions of the TEEC provide a
sufficient basis and authority for harmonization in the area under discussion in the
said manner. From the authors viewpoint, the Regulation should have been issued
together with the European Parliament as opposed to being a Council Regulation only,
even though it can be assumed that if the Regulation were to be approved by the
European Parliament, fundamental problems may have arisen concerning its adoption
since the Regulations political aspects cannot be overlooked. Conversely, it is
unquestionable that for the functioning of a single market a regulation of this kind, as a
minimum, is necessary (Sprecher, 2003, p. 29, marg. 29).
However, the purpose of the Regulation is not harmonizing or unifying the
insolvency law (as it is the case with other regulations that apply to the European civil
procedure and the European private law in general), but harmonizing and unifying the
effect of decisions under which insolvency proceedings are opened as well as defining
uniform rules for determining international jurisdiction and the law that is applicable
to such proceedings.
2. Basic principles of the European insolvency law according to the
regulation
As defined under the Regulation, the European insolvency law relies on
the following principles: universality, territoriality, unity, and plurality, where
these concepts are mutually intertwined. Considered most important is the principle
of universality, which consists of the automatic recognition of the foreign effect
of insolvency proceedings without any formal recognition act (without any
exequatur decision). Universality is modified by the other principles, the
territoriality principle in particular. This issue is sometimes referred to as the
principle of the so-called controlled universality (Buchberger, 2002). The reason
behind this combined approach is the fact that the original ideas about a single
system of insolvency proceedings and unlimited effectiveness of insolvency
decisions for the entire Community proved unrealistic due to fundamental
differences between the legal systems of individual nations. Universality is
therefore to a substantial extent lessened by the possibility to initiate and pursue
national insolvency proceedings that are limited solely to assets located in the
jurisdiction of individual Member States (Taupitz, 1998), provided that a debtors
establishment is located in such countries, as this term is defined for the purposes
of the Regulation in Article 2(h) of the Regulation. Another infringement on the
universality principle is the issue of applicable law. In principle, under the
Community law, insolvency proceedings and their effects are subject to the law of
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55
the country in which proceedings were opened (Article 4 of the Regulation), where
special restrictions apply in individual areas (see Articles 5-15 of the Regulation)
(Huber, 2001).
3. International jurisdiction and Article 3 of the regulation
3.1 Importance of Article 3 of the regulation
Article 3 of the regulation contains the basic jurisdictional provisions of the document
under discussion, mainly in conjunction with Article 4, which defines the law
applicable to insolvency proceedings. In accordance with the Community law, opening
and pursuing insolvency proceedings in their entirety may not be in the jurisdiction of
a court of law determined according to the debtors head office, habitual residence, or
place of business. Realizing this fact is essential and decisive for understanding not
only the principles of the European insolvency law, but also the insolvency laws of
every individual EU Member State (with the exception of Denmark).
Article 3 of the Regulation reads as follows (cit.): Article 3 - [International
jurisdiction] - 1. The courts of the Member State within the territory of which the centre
of a debtors main interests is situated shall have jurisdiction to open insolvency
proceedings. In the case of a company or legal person, the place of the registered office
shall be presumed to be the centre of its main interests in the absence of proof to the
contrary. 2. Where the centre of a debtors main interests is situated within the territory
of a Member State, the courts of another Member State shall have jurisdiction to open
insolvency proceedings against that debtor only if he possesses an establishment
within the territory of that other Member State. The effects of those proceedings shall
be restricted to the assets of the debtor situated in the territory of the latter Member
State. 3. Where insolvency proceedings have been opened under paragraph 1, any
proceedings opened subsequently under paragraph 2 shall be secondary proceedings.
These latter proceedings must be winding-up proceedings. 4. Territorial insolvency
proceedings referred to in paragraph 2 may be opened prior to the opening of main
insolvency proceedings in accordance with paragraph 1 only: (a) where insolvency
proceedings under paragraph 1 cannot be opened because of the conditions laid down
by the law of the Member State within the territory of which the centre of the debtors
main interests is situated; or (b) where the opening of territorial insolvency proceedings
is requested by a creditor who has his domicile, habitual residence or registered office
in the Member State within the territory of which the establishment is situated, or
whose claim arises from the operation of that establishment.
3.2 Authority vs jurisdiction
The boundaries for recognizing bankruptcy declaration decisions correspond to the
borders of a state and the limits of its territorial jurisdiction, i.e. the impacts and effects
of the authority of its courts. Article 3 of the Regulation defines the extent of
jurisdiction (the states judiciary power), which has the authority to open the main
insolvency proceedings. From the terminological viewpoint, this matter should be
viewed in light of problems related to the terms authority and jurisdiction, which are
strictly differentiated for example in the international private and procedural laws of
Central and Eastern European countries. While the term authority is understood as
judiciary power in general, i.e. the power of courts as bodies of the state to handle and
resolve disputes, the term jurisdiction is usually construed as the entitlement to make
such decisions from the viewpoint of a specific court, i.e. a specific judiciary body
(Pauknerova, 2004). In the sense of the terminology employed in the Regulation, this
IJLMA
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concept is designated as jurisdiction, which is the authority of courts of law in general
in the sense of the terminology employed in Central and Eastern European countries.
The issue therefore concerns international jurisdiction, i.e. the authority of courts in a
particular country. In addition, the Regulation does not deal with the issue of factual,
functional, or local jurisdiction of courts within the framework of the legal system of a
particular country.
In this case, defining the international jurisdiction has a fundamental effect on
determining and using the governing law, in this case lex fori concursus. On the other
hand, it should be emphasized that as a rule, the Regulation observes (save for
substantiated exceptions, as defined under Articles 5-15 of the Regulation) the
application of legis fori regulations, in this case legis fori concursus. Determining
the international jurisdiction therefore has a fundamental importance for ascertaining
the law governing insolvency proceedings per se and, therefore, for determining the
effect of insolvency rulings. Without determining the jurisdiction of a court in a
particular country to open proceedings in the sense of Article 3 of the Regulation, the
governing law cannot be ascertained.
3.3 Principle of universality in the context of international jurisdiction to open
insolvency proceedings
The Regulation is based on the principle of universality, but it presents a pluralist
model as opposed to a model of uniform insolvency proceedings due to the fact that
individual Member States and their territories have uniform universally effective
systems of insolvency (bankruptcy) law, which establish the universal effect of national
insolvency proceedings opened in a specific country (Smid, 2002, p. 39, marg. 30).
Both the international jurisdiction to open the main insolvency proceedings in the
sense of the Regulation and the local and factual jurisdiction determined based on
national regulations need to be understood as an exclusive jurisdiction.
The provisions of Article 3 of the Regulation define exclusively the authority to
make a decision to open proceedings and to appoint a liquidator. However, neither
Article 3 nor any other provision of the Regulation determines international
jurisdiction to make decisions about other issues directly related to the pursuing of
insolvency proceedings (Virgos-Schmit-Report, 1995, Point 77). Such international
jurisdiction always needs to be viewed in light of the decision in question, where the
issue must be construed in close correlation with the application and interpretation
of Article 25 of the Regulation, especially in light of whether the decision is to be
made pursuant to Article 25(1) or Article 25(2) of the Regulation. Only then, it is
possible to determine the international jurisdiction of a specific court of law
authorized to issue the applicable specific decision. Article 25 of the Regulation
states (cit.): 1. Judgments handed down by a court whose judgment concerning the
opening of proceedings is recognized in accordance with Article 16 and which
concern the course and closure of insolvency proceedings, and compositions
approved by that court shall also be recognized with no further formalities. Such
judgments shall be enforced in accordance with Articles 31 to 51 (authors note: at
the present time, it is necessary to apply Articles 38-52 of the Regulation 44/2001),
with the exception of Article 34(2) (authors note: at the present time, it is necessary
to apply Article 45[1] of Council Regulation EC No. 44/2001), of the Brussels
Convention on Jurisdiction and the Enforcement of Judgments in Civil and
Commercial Matters, as amended by the Conventions of Accession to this
Convention. The first subparagraph shall also apply to judgments deriving directly
Insolvency
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57
from the insolvency proceedings and which are closely linked with them, even if
they were handed down by another court. The first subparagraph shall also apply
to judgments relating to preservation measures taken after the request for the
opening of insolvency proceedings. 2. The recognition and enforcement of
judgments other than those referred to in paragraph 1 shall be governed by the
Convention referred to in paragraph 1, provided that Convention is applicable. 3.
The Member States shall not be obliged to recognize or enforce a judgment referred
to in paragraph 1 which might result in a limitation of personal freedom or postal
secrecy.
Hence, the provisions of Article 25 of the Regulation are an important addition to
Article 3 of the Regulation despite the fact that they do not specify and the cannot
specify due to the varied nature of insolvency laws in individual Member States
which actual courts have the authority to hand down judgments in specific cases.
Finally, as follows from Paragraph 6 of the Preamble to the Regulation, it is not the
purpose of the Regulation to define international jurisdiction (authority) in respect of
all bankruptcy-related rulings delivered by courts; the sole purpose is to determine a
courts authority in connection with opening (or closing) proceedings and the actual
pursue of the same in respect of the main purpose of the Regulation, that is to ensure
the universal effect of judgments, where the precondition is setting rules for
determining international jurisdiction (authority) of courts (judiciary) of a specific
country with regard to the opening of such proceedings. The local jurisdiction or the
jurisdiction of a specific court of law in the framework of the international jurisdiction
(authority) of courts of a specific country is defined by the procedural and
jurisdictional regulations of thus determined country.
The universality principle means that a decision to open the so-called main
insolvency proceedings in a country where a debtors center of main interest (COMI) is
situated takes effect in all states of the Community without any special recognition
proceedings, regardless of the debtors head office, habitual residence, or place of
business. Further, it is not necessary to initiate any separate proceedings in other
countries (it is possible under certain circumstances see below), and a liquidator
appointed in the main proceedings in the locality of the COMI exercises his powers
automatically in all such states that are subject to the Regulation. For example, if the
main insolvency proceedings are opened against a Dutch legal person in Spain because
a Spanish court finds that the debtors COMI is located in Spain, such a decision will
also be effective and binding in the Netherlands without the need for any special
recognition proceedings, and the Spanish liquidator will exercise his powers to the full
extent thereof in the Netherlands as well as in other countries of the Community. At the
same time, it is irrelevant in what country and under what statute such a debtor is
domiciled, i.e. where its registered or actual head office is located, where the debtor is
incorporated in a public register, and where is the permanent residence of the members
of its bodies (if it is a legal person).
4. Main insolvency proceedings and territorially limited proceedings/
importance of defining an establishment
The Regulation differentiates between the main insolvency proceedings with universal
effect within the Community (within the territorial effectiveness of the Regulation) on
the one hand, and territorially limited proceedings on the other hand, where the latter
type includes secondary proceedings, which are dependent on the main proceedings
even though they are subject to their own regime in the framework of an independently
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applicable governing law, and particular proceedings, which are opened in a certain
country where a debtor does not have the center of his main interest prior to opening
the main proceedings, and which become upon the opening of the main insolvency
proceedings particular, territorially limited proceedings, but they are nevertheless
independent of the main insolvency proceedings or significantly less dependent than
secondary proceedings derived from the main insolvency proceedings opened based on
the universal effect of insolvency proceedings in the country where the debtors
establishment is located.
After the opening of the main insolvency proceedings in the country where the
COMI is located, local secondary proceedings can be initiated in other countries on
condition that a debtor has an establishment in such other countries. The term
establishment is defined in Article 2(h) of the Regulation and does not necessarily mean
an establishment in the sense of national laws in effect in the area where such an
establishment is situated (Bartosikova, 1993; Bartosikova, 1995; Fischer, 1998; Ruzicka,
1992; Schelleova, 1997; Tuma and Baca, 1994). An establishment must entail an
ensemble of assets and personal factors, i.e. there must be assets used by the debtor for
the purposes of conducting its activities, using the human (personnel) factor with a
certain degree of organization. Such secondary proceedings must always have a
winding-up character, where the objective is the maximum utilization of the debtors
assets in the applicable country, but always through winding up such an
establishment; the proceedings must be one of the types listed in Annex B to the
Regulation. Unlike secondary proceedings, the main proceedings can have various
forms based on how insolvency proceedings are defined in the law applicable in the
place where such main proceedings are opened; for instance, the main proceedings can
have the form of restructuring proceedings. The individual types of main proceedings
are listed in Annex A to the Regulation. However, the existence of bankruptcy is not a
prerequisite for opening secondary proceedings in the place (country) of the debtors
establishment, which is subject to regulations pertaining to insolvency proceedings in
effect in the country where the establishment is located; to some extent, the opening of
the main proceedings in a debtors COMI in any Member State represents the fiction of
the debtors bankruptcy in any other country, i.e. including countries where the debtors
establishments are located and where secondary insolvency proceedings can be opened
and pursued.
As regards the above example of a Dutch legal person with its COMI in Spain, the
situation under discussion can have the following form. For example, the Dutch legal
person (a legal person established according to domestic regulations and incorporated
in one of the public registers in the Czech Republic) conducts its production or trading
activity in the Netherlands, where it has all its resources, including assets, employees,
and the like. However, it is established that its COMI is situated in the Netherlands
(see below regarding a debtors COMI). The main insolvency proceedings will be
opened in Spain, and they will automatically have a universal effect on all the debtors
assets (activities) in all countries of the Community (with the exception of Denmark),
including activities in the Netherlands. Starting at the time the main insolvency
proceedings are initiated in Spain, the said Dutch debtor needs to be regarded as a
debtor in bankruptcy, a person whose assets are subject to opened insolvency
proceedings, despite the fact that such a debtor would not be bankrupt in the
Netherlands exclusively in connection with its activities in the Netherlands and despite
the fact that the prerequisites for opening insolvency proceedings in the Netherlands
have not been fulfilled under the Dutch insolvency regulations. Starting at the time the
Insolvency
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main insolvency proceedings are opened in Spain, the operations of such a Czech
debtor (a Dutch legal person) are subject to Spanish insolvency regulations, including
the right to act on behalf of the debtor (the debtors assets), which passes to a Spanish
liquidator. Considering the fact that the debtor has all business resources in the
Netherlands, i.e. all assets used for business as well as human and other resources, the
debtors establishment is indisputably located in the Netherlands; however, it is not an
establishment in the sense of Dutch regulations of national origin, but an establishment
in the sense defined in Article 2(h) of the Regulation. The so-called secondary
insolvency proceedings can therefore be opened in the Netherlands. These proceedings
will be opened by a Dutch court, where a petition may be filed either by the Spanish
liquidator appointed for the main insolvency proceedings, who has the right to file
such a petition already on the basis of the Regulation, or by any person who is
authorized to make a request for the opening of insolvency proceedings in the
Netherlands, i.e. the country where the debtors establishment is located in the sense of
the applicable Community regulation (in the model case, the Dutch legal person in
question represents an establishment only). However, this Dutch debtor does not have
to be bankrupt from the viewpoint of Dutch insolvency regulations. As regards the
Netherlands, it is therefore more important that the reason for bankruptcy in the
Netherlands is not excessive indebtedness but solely insolvency, i.e. the inability to pay
outstanding obligations. The fiction of bankruptcy is already the opening of the main
insolvency proceedings in Spain, and it is therefore possible to initiate secondary
insolvency proceedings and to appoint a Dutch liquidator. From the time a decision is
made to open domestic secondary insolvency proceedings, such a liquidator assumes
the powers of the Spanish liquidator, but only to the extent of assets located in the
territory of the Netherlands, while the main Spanish liquidator continues to exercise his
powers in both Spain and all other Community countries, including those where no
secondary insolvency proceedings have not been opened. Further, the Regulation
defines some powers of the main liquidator with regard to secondary insolvency
proceedings (for example, the possibility to propose a suspension of the sale of assets
under secondary proceedings, etc.) and at the same time outlines the information duties
of individual liquidators.
5. Center of main interest
5.1 Importance of COMI in the context of the regulation and the content of COMI
One of the essential notions of the European insolvency law is the COMI (the
German equivalent is Mittelpunkt der Interessen des Schuldners). Such a place
establishes the jurisdiction for opening the main insolvency proceedings, where the
COMI includes business (trading, industrial) and other economic activities (gainful
activities) (Fritz and Bahr, 2001, p. 224). It is therefore the place of the main
economic interest in the gainful sense, unlike the habitual residence, which is
related to the territory to which a specific person has the closest relationship. In
the meantime, the term domicile has become commonplace, and it is gaining in
factual importance in legal practice instead of the term habitual residence or the
place where a party to a legal relationship habitually resides, including in countries
where the term domicile was formerly not used (for example, Central and Eastern
European countries where the law until today relies almost exclusively on the term
permanent address in the sense of an administrative registered address). However,
the term domicile cannot be construed solely in the sense of a residence, but also
as the place to which a certain person can be assumed to have a close and stable
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relationship, which can be inferred from the applicable circumstances. In this sense,
the term permanent address or residence is most often understood as the habitual
residence, i.e. a place where a person resides most often during a reference period
and to which such a person has the closest relationship due to the fact that such a
locality is regarded as a place of the persons stable personal relations other than
those related to his profession or employment. It does not necessarily have to be
the official residency, which is important for communication with central and local
government administration because residency registration due to securing
administrative matters does not necessarily reflect an actual interest to reside in
such a locality. While the term permanent address has until recently been usually
defined in the applicable legal regulation as the place of single registration for
administrative purposes, the term residency (derived from the verb reside) is an
expression of the actual desire to stay at a certain place (Kegel and Schurig, 2000,
pp. 412-3). According to the general international practice, cases of doubts are
decided based on where a person rests during time off work (Spickhoff, 1995,
pp. 185-9; Mann, 1956, pp. 466-70; Smart, 1989, pp. 175-85). Considering that it is
not always possible to demonstrate the intention to stay at a certain place during a
protracted period for the purposes of establishing and maintaining permanent
personal ties, the international practice also relies on a substitute method, which
examines the long-term nature (i.e. not the temporary nature) of such a residency,
where the long-term nature must always be evaluated in the light of the persons
past comportment and his personal migration history. It should be noted, however,
that a different understanding of the term residency needs to be used for the needs
of social insurance, a clearly administrative area where the term residency must
always be interpreted only as the administrative residence (Belohlavek, 2005a,
pp. 2-11).
In the case of corporations and legal persons, the Regulation contains the
disprovable assumption that a debtors COMI coincides with its registered office. It can
be therefore assumed that in most cases the debtors COMI will correspond to its
registered office, but this does not always have to be the case, and existing practice
shows that in reality the COMI does not always coincide with the registered office. In
particular, in the case of entities with financial, economic, and general business
interests abroad, it is always necessary to examine whether a debtors COMI is located
in a place other than its registered office. Such a possibility exists (at least theoretically)
always when a person who exercises a certain controlling influence over a debtor is
domiciled or operates in the territory of a different country. Moreover, this possibility
exists always at least in theory if a legal person has a foreign owner, i.e. usually in
companies that are a member of a group with international ties. The most important
factor is how the COMI is understood by a debtors creditors. In the example involving
a Dutch legal person in respect of whose assets insolvency proceedings have been
opened in Spain, the Dutch legal person can conduct all its business activities in the
Netherlands but it can have Spanish owners (members, shareholders) who arrange for
the Dutch legal person in question financing from external sources (for example
Spanish banks) and at the same time secure some other activities for the Dutch entity
at their head office. From the viewpoint of large creditors (banks), the debtor is a
company that is a member of a Spanish group since for these creditors the main contact
point is a place in Spain, and such a place in Spain can be easily ascertained by such
creditors. Hypothetically, it can be concluded that strategic business and financial
processes and the strategic flow of funds take place in Spain, even though actual
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business activities are conducted in the Netherlands. Therefore, if the place can be
ascertained by third parties, the COMI of the Dutch debtor can be considered to be
located in Spain based on said facts, and the main insolvency proceedings can
consequently be opened in Spain as well. The example, however, depicts only one of
several possibilities for determining a debtors COMI, which is regrettably not
explicitly defined in the Regulation despite the fact that it is a term of a fundamental
importance.
5.2 Registered office vs COMI
As regards this issue, the question offers itself whether and to what extent a debtors
statutory registered office in conjunction with the term main interest would be affected
by a situation, where the statutory registered office is located in one country but the
administration or management of the debtor is carried out in a different country. The
Regulation does not rule out the possibility of different view of the issue concerning the
registered office determined according to the place where actual management and
control takes place, and it puts forward the question whether and to what extent a
judge deciding the opening of the main insolvency proceedings must consider the issue
of the registered office in conjunction with the place where control and/or actual
management of a debtor takes place and in connection with the debtors COMI (it is not
accidental that this is due to the substantial influence exerted by Great Britain, which
exhibited a decisive stance in shaping the final form of the Regulation, where the Great
Britains opinions and interests were among the most significant throughout the
preparation of the Regulation) in light of the principle of the statutory registered office
of a legal person, i.e. the registered office specified in the founding or statutory
documents and registered in the applicable public register. In the future, this viewpoint
will likely be the basis for the prevalent decision-making practice of insolvency
(bankruptcy) courts in Community countries, and this approach will be correct in
consideration of the concept on which the corporate law of most European countries is
based. Even though from the viewpoint of corporate and economic law of such
countries as the states in Central and Eastern Europe (new Member States) the
principle of actual management or factual control is not recognized with regard to
determining the head office of a legal person and these principles are attributed an
effect in exceptional cases only (the effect is usually of marginal importance), a certain
room for interpretation is provided to judges of insolvency courts in connection with
the issue of a debtors main interest. For example, if the statutory registered office is
situated in the Czech Republic, where some business interests of a legal person are
located in another EU Member State and the main part of the debtors assets (or all the
debtors assets) are situated outside the Czech Republic, a Czech judge may refuse his
authority (jurisdiction) not only to open the main insolvency proceedings, but also, in
the case of the absence of any of the debtors assets in the Czech Republic, parallel
(secondary, particular, local) insolvency proceedings in the Czech Republic despite the
fact that the statutory registered office stated in the Commercial Register or another
public register is situated in the Czech Republic.
However, the Regulation does not apply if a debtors (statutory) registered office is
located in the territory of a Member State, but the debtors center of main (economic)
interest (COMI) does not lie within such a Member State. Nevertheless, this principle
must not provide debtors with room for transferring assets in a contrived fashion so as
to suggest that a debtors center of main economic interest is located outside the
territorial effectiveness of the Regulation (the so-called forum shopping, where this
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activity would be one of its forms). Consequently, the court to which a request to open
insolvency proceedings is made must examine the center of main economic interest and
its actual existence in an ex officio manner, and use all legal means to cast doubt on a
situation, where the center of main economic interest is established artificially outside
the territorial jurisdiction of the Regulation.
5.3 COMI in non-Member States and territorial applicability of the regulation
If a debtors center (place) of main interest is not located in a Member State, the
Regulation does not apply, and international jurisdiction is determined and the effects
of foreign rulings in insolvency matters are viewed exclusively in accordance with
international private and procedural law in the framework of the legislation of
particular national legal systems (Virgos-Schmit-Report, 1995, Section 82) (regulations
of national origin or non-Community origin from the viewpoint of the EU law, where
the use of some bilateral agreements is possible).
In contrast, it is necessary to proceed in accordance with the Regulation and cases
are subject to European insolvency proceedings when a debtors COMI is located in the
territory of a Member State, while the debtors statutory registered office or the head
office is situated outside the Community. As regards this issue, it is necessary to refer
to the wording of Paragraph 14 of the Preamble to the Regulation. This approach has
been used in a ruling delivered by an British court in a matter concerning BRAC Rent-
A-Car International Inc. (2003) EWHC (Ch) 128 on 7 February 2003 and a similar
matter concerning Ci4net.com Inc. under a ruling handed down by the High Court of
Justice (England) on 27 May 2004 (noted for example in Entscheidungen zum
Wirtschaftsrecht, 2004, p. 847).
The territorial applicability of the Regulation (in this case its local impact) is
therefore determined by the countries that are bound by the Regulation (all EU
Member States with the exception of Denmark) on the one hand, and a debtors COMI,
which must be located in the territory of a Member State, i.e. a country subject to the
Regulation, on the other hand.
It is of a fundamental importance to realize that the provisions of Article 3 of the
Regulation conceive the authority and international jurisdiction in a manner that
differs from the private international law of most countries. For instance, while Article
3(1) of the Regulation employs a debtors COMI as the factor determining international
jurisdiction, the Czech regulation of national origin, which is used in proceedings
before Czech courts when there is no room for the application of the Regulation, i.e. Act
No. 97/1963 on Private and Procedural International Law, as amended, contains a
reference to local jurisdiction in Section 37(1), where ascertaining the same determines
the existence or absence of international jurisdiction. Section 37(1) of the said Czech
Act on Private and Procedural International Law therefore makes ascertaining and
determining international jurisdiction conditional on ascertaining and determining
local jurisdiction in the Czech Republic (in fact, it refers to the provisions of Sections 84
and following of the Czech Civil Procedure Code, the basic law that regulates civil
proceedings before courts of law, which defines local jurisdiction in the cited
provisions). It is therefore possible that while under Czech regulations (of national
origin) international jurisdiction is not ascertained due to the non-existence of a court
with local jurisdiction in the Czech Republic, Czech courts can have jurisdiction based
on Article 3(1) of the Regulation. A similar conclusion can also be reached based on a
number of regulations pertaining to private and procedural international law in effect
in other EU Member States. It is therefore possible that doubts may exist regarding
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what domestic court has local jurisdiction. There is no unambiguous reply to this
question in the Czech law and the legal systems of a number of other countries where
Germany is one exception. Even though cases of this kind are not frequent i.e.
situations where international jurisdiction exists despite the fact that a debtor does not
have a domestic head office as a fictitious center of its main interest such cases are, as
demonstrated by existing practice, very important, discussed, and very clearly suitable
for dealing with the preliminary reference in the sense of Article 234 of the Treaty
Establishing the European Community by the ECJ.
5.4 Substantial content of COMI
If a debtors COMI is determined, it is entirely logical that such a center is defined
as a specific place, a starting point from which, for example, the debtors certain
activities, financial flows, or decision-making and strategic business activities are
coordinated. Such a place cannot exist virtually if it is ascertained that it is located
in the territory of a particular country. If it is established that such a place, as a
specific starting point, is situated in a particular country, such a point can establish
the fictitious existence of the debtors assets at such a place in the same way the
existence of such assets is assumed by regulations of national origin as a
precondition for the existence of the local jurisdiction of a specific court in the
applicable country, provided that local jurisdiction cannot be determined in another
way, according to determining factors other than localizing assets at a specific
place. In addition, the material standpoint that represents the main economic
interest and what can be envisaged under this term in the sense of the European
insolvency law constitutes a certain material value (Belohlavek, 2005b, pp. 2-8),
which is often significant in its scope. In reality, such an interest therefore
corresponds to assets, and the possibility to apply regulations prescribing the
existence of assets as the factor for determining the court with local jurisdiction
may not be entirely unsuitable. In the context of international private and, more
importantly, procedural law, i.e. the procedural part of the international and
European private law, a debtors center of main economic interest (main interest)
(COMI) represents a new and entirely specific type of determining factor for
defining international jurisdiction. If, in the framework of international jurisdiction,
it is impossible to determine a court with local jurisdiction, the location of the main
economic interest must constitute a sufficient determining factor for defining local
jurisdiction, if a procedural ( jurisdictional) regulation of national origin does not
provide adequate room for determining local jurisdiction within a country that has
the international jurisdiction (its courts have the authority) to open insolvency
proceedings (in this case the main insolvency proceedings). In like manner, the
center of the main insolvency interest must be a specific place in the territory of a
particular country, and it is unsatisfactory to state, for example, that a debtors
COMI is somewhere in a particular country. While the insolvency (bankruptcy)
regulations of some countries, despite being approved (amended) at a time when the
Regulation already existed or was binding for such countries (for example the
legislation of the Czech Republic), in many regards try to adapt to the provisions of
the Regulation, the legislators of these countries have evidently overlooked that one
of the fundamental principles of the European insolvency law is the definition of
international jurisdiction, where the determining factor is a debtors COMI, i.e. a
concept that has not only been absent in the corporate and domicile laws of most
countries, with the exception of some newer national insolvency regulations in
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certain countries, where the debtors main interest as a determining factor is close to
the theory of the registered office in corporate law (from the viewpoint of the place
of control and management that determines the actual head office of a legal person)
than the incorporation theory, which is the basis (mostly) for the domestic corporate
law in respect of legal persons. The concept of determining international jurisdiction
according to the Regulation based on the application of the COMI as the
determining factor is more suitable for highly vague and rigid, and, in the authors
opinion, very impractical theory of the registered office, as employed for example in
the German law, and it does not provide a clear and unambiguous rule in the sense
that would be expected in view of the interest to ensure maximum legal assurance.
During the study and application of the Regulation and its provisions, it is therefore
necessary to realize that a debtors registered office establishes international
jurisdiction to open the main insolvency proceedings (with universal effect) only if it
coincides with a debtors COMI, as this term is defined below. The registered office
(in the sense of the incorporation theory) only represents a disprovable assumption
of the existence of the debtors COMI at the location of such a registered office.
Hence, the Regulation not only admits, but also accepts that, for instance, the main
insolvency proceedings against a legal person that is considered a legal person in a
particular country may be with no further notice opened abroad, and such
insolvency proceedings are subject to foreign regulations. However, the same applies
vice versa.
5.5 Absence of correlation in domestic regulations pertaining to the jurisdiction of
national courts
As regards the absence of adequate correlation regarding local jurisdiction in the
domestic laws of certain countries, as analyzed above, it is necessary to realize
the fundamental fact that the non-existence of a court with local jurisdiction or the
impossibility to determine a court with local jurisdiction in a country, despite the fact
that a debtors COMI is unquestionably located in such a country, does not denote the
absence of international jurisdiction per se (Liersch et al., 2004, p. 6). While the author
of this document considers for example the German domicile theory of registered office
a fundamental risk for legal assurance due to its rigidity and instability, where legal
assurance should be a matter of fact under the rule of law in a society where the rule of
law applies, the approach of the German law can be regarded very positively in respect
of implementing the COMI into regulations of national origin thanks to the fact that
Germany has adopted the Act on New Definition of the International Insolvency Law
(Gesetz zur Neuregelung des Internationalen Insolvenzrechts) of 14 March 2003, which
is, regarding the international element in insolvency matters, in particular the
requirement to apply the Regulation, a legis specialis regulation in respect of legis
generalis insolvency regulations of domestic origin, namely the German Insolvency
Code of 5 October 1994, where under Article 102, Section 1(1) of the first of the cited
laws, it applies by way of derogation from the provisions of Section 3(1) of the second
aforementioned law (insolvency code) that as a rule, insolvency matters are in the local
jurisdiction of the court in whose territory the debtors COMI is located. As regards this
issue, it is evident that the concept of the Regulation to a significant extent caters to the
German law and approach, i.e. the approach and concept of a state whose population
(natural and legal persons) have been among the principal investors on the European
scale for a protracted period, particularly during the 1980s and 1990s. The concept of
international jurisdiction under discussion provides room for opening the main
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insolvency proceedings in Germany against a corporation that does not have its
registered office in Germany according to German legis fori insolvency regulations (for
the applicable law, see Article 4 of the Regulation) despite the fact that the Regulation
by itself is not a document defining group insolvency in the sense of some attempts
that have been made. The approach that stems from the concept of the Regulation is
therefore highly protectionist, especially with regard to countries with a high
concentration of investors (countries that export or have exported capital in the past)
and creditors domiciled in such territories, as the term a debtors COMI and defining its
content or the absence of such a definition in the Regulation provides room for the
interpretation that such a place may be located in the territory from which the debtors
activities are managed, the place via which the debtor makes and receives payments,
etc. This approach demonstrates the highly political and, as mentioned above,
protectionist nature of the Regulation, which for example Germany as well as German
courts and German managers (this does not apply to Germany only) to a large extent
exploit. In addition, this concept was taken into account in the drafting of domestic
regulations pertaining to insolvency proceedings. On the other hand, it appears that
the legislators in a number of other countries (for example, the Czech Republic and
some other new EU Member States) have entirely overlooked this fundamental aspect
of the Regulation and have more or less failed to take it into consideration in drafting
new national insolvency laws. Even though the Regulation is a directly applicable law
in all EU Member States (with the exception of Denmark) and its application takes
precedence over regulations of national origin, the relevant national correlation to the
Community law is usually essential, particularly in connection with determining the
local jurisdiction of national courts in a country where a debtors COMI is located.
Although the law should be able to adapt itself, as regards its interpretation and
application, to new conditions, it cannot, a priori and as a rule, rely on the fact that the
interpretation practice will be able to adapt to such new conditions. Legal regulations
and consequently also legislators should foresee such situations to the maximum
possible extent.
According to the concept of the Regulation, the notion of a debtors COMI excludes
the use of other factors in determining international jurisdiction, i.e. for example the
determining factor consisting of the place where the debtors assets are located (for
comparison, see also for example Uncitral Model Law/Cross-Border Insolvency),
Article 17 Subsection 2(a), UNCITRAL-Guide No. 126, etc.). However, the place where a
debtors assets are located may be the determining factor for opening parallel
proceedings (secondary proceedings or particular proceedings, i.e. territorially limited
proceedings) (Luer, 1992, p. 130).
If a bankrupt debtor is a natural person, the debtors COMI may be defined with the
aid of the jurisdictional provisions of Article 2 of Regulation (EC) No. 44/2001 (for
comparison purposes only since Council Regulation [EC] No. 44/2001 cannot be applied
to insolvency proceedings). The basic determining factor for natural persons is, above
all, residency, where in respect of natural persons more than in the case of legal
persons, which are subject to the interpretation rule set out in the second sentence of
Article 3(1) of the Regulation, the COMI should be defined in connection with the place
where the bulk of the debtors assets are located. Taking into account the main
economic interest, the COMI of a debtor who is a natural person is therefore the place of
business, i.e. the place from which the debtor actually manages its gainful activity
(Taupitz, 1998, p. 327). As to self-employed persons, the place of business can be given
preference over the residence in accordance with Article 3 of the Regulation, while
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persons who are not entrepreneurs can be declared bankrupt, provided that such a
course of action is allowable under the governing law (Vogler, 2001, p. 290). However,
this point of view is not embraced by all comments and published opinions.
Nevertheless, contradicting standpoints (Leipold, 2001, p. 221), which are exhibited by
a minority at the present time, can become more important in the future in the context
of understanding jurisdiction in the sense of the concept of so-called general court. The
author of this document believes that as regards jurisdiction to declare bankruptcy the
concept of a general court with jurisdiction over a debtor needs to be fundamentally
reviewed in the context of Article 3 of the Regulation, where the author supports the
predominant interest to determine jurisdiction according to the debtors main economic
interest. Finally, this approach also makes proceedings more economical and
consequently faster. It should be noted that similar differences in opinion exist in other
countries (Leipold, 1990, p. 289).
If a debtor is a citizen of another Member State and only some of its assets or
property of non-negligible value (Belohlavek, 2005b, pp. 2-8) are located for example in
the Czech Republic (or other countries where the concept of private international law is
similar to the laws in effect in the Czech Republic, which is the case with most Central
and Eastern European countries), it is more appropriate to determine jurisdiction
according to the location of such assets for parallel (secondary, territorially limited,
particular) insolvency proceedings. According to the author of this document, the term
assets needs to be defined in a very broad manner as an ensemble of movable and
immovable property, rights, and other material values possessed by a certain entity.
Objects (Knapp and Luby, 1973, p. 144; Sokolowski, 1902, p. 390; Enneccerus, 1913,
p. 286; Holthofer, 1972) include controllable material items or controllable natural
energy, which serve for peoples needs. Receivables include mainly savings in bank and
other accounts, the right to the payment of dividends, and the right to receive
payments under contractual agreements. Some problems may be posed by the
interpretation of the term other material values. Such values are not tangible, as they
are not material objects; they can only be imagined, where such values are appraisable,
and they are not receivables. It is possible to determine their value or to set their price,
and they have a certain economic importance. This category includes for example an
authors right to use copyright and receive royalties from repeated sales of a
copyrighted work, contributions to corporations and cooperatives, know-how,
contributions of a silent partner made in accordance with the Commercial Code, etc.
According to this description, assets are an ensemble of assets a certain person owns or
has at disposal. In connection with natural persons, however, it needs to be pointed out
that Article 3(1) of the Regulation only defines international jurisdiction, while local
jurisdiction is exclusively regulated by the procedural regulations of the country where
insolvency proceedings are opened, i.e. legis fori regulations.
Another rather important issue is the question whether international jurisdiction in
the sense of Article 3(1) of the Regulation determined according to the debtors COMI
can also be applied in respect of non-Member States, i.e. in cases where despite the fact
that the (statutory) registered office is situated in a non-Member State, it is established
that the COMI is located in a Member State. There are opinions, especially in German
literature (Sprecher, 2003, p. 34, marg. 42), which support this possibility. However, the
author of this document holds the opposite opinion, where it comes as no surprise that
opinions supporting such a possibility, as mentioned above, tend to appear in
specialized German literature, since the German theory of the corporate entity of legal
persons and the German corporate law that concerns legal persons have their roots in
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the principle of a head office that derives from the place where actual control is
exercised. The reasons for this approach are mainly fiscal. In contrast, it needs to be
mentioned that with regard to this issue, Germanys approach deviates significantly
from the international standard, where, for example, the principle of determining the
head office based on the place where management actually takes place is relatively
common; however, not actual control, at least not in the sense that is the case of the
German law and judicature. At any rate, there have been cases in connection with
which this issue was dealt with, as a minimum with regard to the possibility to open
proceedings that would be quasi-secondary proceedings based on the principles set out
in the provisions of the Regulation. Probably the most significant case that has been
dealt with in connection with this issue was the insolvency of the Swiss airline Swiss
Air. On the other hand, it would probably be more than delicate (considering the
relationship to third countries) to assume a clear stance regarding this issue, even more
so at the Community level, and cases of this type will most likely have to be dealt with
in an ad hoc manner. A clear conclusion with regard to this issue could result in an
infringement on the authority of national courts, that is intrusions into the sovereignty
of non-Member States, which could be regarded as being contrary to the basic
principles of international law. This applies, for example (in the case of the potential
opening of quasi-secondary proceedings concerning the assets of a debtor who has its
registered office in a non-Member State), also to the principles of the law of the country
in which insolvency proceedings are opened, i.e. the main insolvency proceedings
according to the terminology employed in the Regulation, etc.
Hence, applying, for example, Article 33 of the Regulation to similar cases would be
highly problematic and most likely also impossible. From this viewpoint, it is more
than necessary that individual Member States have an autonomous definition of
international insolvency law; however, the pertinent regulations continue to be
inadequate in a number of Member States, and they can be considered nonexistent for
assessing the approach to the international aspect of such insolvency proceedings.
A special regulation is also necessary in connection with enforcing rulings delivered in
accession proceedings (incidental disputes, etc.), which are within Member States
subject to the provisions of Council Regulation (EC) No. 44/2001, even though this
regulation does not otherwise deal with the issue of international (European) aspects of
insolvency proceedings and does not apply to insolvency proceedings in accordance
with its negative definition of the factual scope of applicability. In the opinion of the
author of this document, the application of the Regulation in respect of other (i.e. non-
Member States) countries would have to rely on treaties signed with such countries,
similarly as is the case of the Lugano Treaty (Belohlavek, 1999; Rozehnalova et al.,
2000). With the exception of Denmark, however, no such treaties are being prepared,
and they do not represent any special priority from the viewpoint of other countries
(i.e. non-Member State). The most probable non-Member State that can be expected to
express such an interest is Switzerland, where signing the relevant treaty would be
strongly in the interest of Swiss bankruptcy trustees in the sense of Article 197 of the
Swiss Bankruptcy Act. Nevertheless, like other countries, Switzerland is not expected
to conduct any activity in this regard in the near future.
5.6 Group relations and jurisdiction
An important question and the subject of numerous discussions related to the
jurisdiction to open the main insolvency proceedings in connection with the
jurisdiction to open auxiliary (secondary or other territorially limited insolvency
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proceedings) is the relationship between a debtor that is a parent company and such a
debtors subsidiaries. It is evident that for example the British judicature tries to
include relations within groups under the Regulation; however, Great Britain is
somewhat alone in these efforts, which are mainly related to the Anglo-Saxon approach
and the approach of most common law countries to relations between parent and
subsidiary companies. In accordance with the Regulation, the relationship of a parent
company and a subsidiary, i.e. relations within a group (not only relations between
controlled and controlling entities), need to be regarded, as a rule, in the manner
corresponding to the European continental understanding of separate legal entities. It
is certain, however, that in the future this issue will pose problems, which will be the
subject of various interpretations and discussions. On the other hand, this situation
must be differentiated from cases where it is possible to reach the conclusion that a
subsidiary has its center of main economic interest (see Article 3[1] of the Regulation)
at the registered office of its parent company (the parent company actually manages
the subsidiary for instance from the commercial, financial, etc. viewpoint). This is
because it is impossible to rule out cases where a subsidiarys center of main economic
interest, albeit established and incorporated in the applicable public register in another
Member State, coincides with the registered office and is therefore also the center of the
main economic interest of the parent company. In contrast, the currently prevalent
opinion of the ECJ (see the case of Eurofood IFSC Ltd. ca Parmalat, Ref. No. C-341/04 of
2 May 2006) does not preclude the contrary situation, where the registered office of a
subsidiary is the same as the center of the main economic interest of the parent
company. As regards this issue, it is necessary to mention the opinions expressed by
courts in some Member States (this issue has been dealt with in detail for example by
Belgian courts) (Watte and Marquette, 2001, p. 565). The Regulation assumes that the
country where the statutory registered office of a company is located coincides with the
debtors COMI (the debtors company), where this is merely a disprovable assumption,
as described above. The reason behind this approach is entirely logical, and it stems for
instance from Paragraph 13 of the Preamble to the Regulation, as it is a place that can
usually be ascertained by third parties with no need for a further action, creditors in
particular (see for example Section 24[3] of the ECJ ruling in the matter of Eurofood
IFSC Ltd., Ref. No. C 341/04 of 2 May 2006). This approach to a large extent increases
the assurance of creditors because they can predict with a sufficient degree of
probability that in the event a debtor goes bankrupt, the main proceedings will take
place in the country of the debtors statutory registered office. Evidence needs to be
provided in the contrary case; if it is alleged that a debtors COMI does not coincide
with its statutory registered office, the person who presents this claim must propose
and submit adequate evidence. Such a contrary situation has been proven for example
to Belgian courts, which have opened the main proceedings despite the fact that a
debtors registered office was not located in the territory of the Kingdom of Belgium, by
the following facts: a company had and operated an enterprise in Belgium while it
conducted no economic activity in the country where its statutory registered office was
located, a company was established in accordance with the Belgian law and
subsequently transferred its statutory registered office to France; however, the debtor
could not be found at its statutory registered office, it was impossible to ascertain any
of the debtors staff, and it was difficult to deliver correspondence to the debtor at its
statutory registered office, a debtors statutory registered office in a different country
could be considered clearly fictitious due to other reasons and based on other
circumstances (the possibility to deliver correspondence only), etc. Finally, Belgium,
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the Belgian judiciary, and consequently the Belgian theory dealt with the issue of the
main and secondary insolvency proceedings as well as the COMI of a debtor with
regard to assets located abroad and issues concerning the so-called group insolvency in
connection with the insolvency of Sabena, the Belgian flagship air carrier. Sabena was a
subsidiary of SAirGroup, where Sabena itself had receivables from its parent company
in the amount of approximately EUR 2.4 billion (Henry, 2000, p. 221).
On the other hand, it needs to be emphasized that despite the abovementioned
disprovable assumption (concerning legal persons) and despite the fact that it can
be usually expected that a creditor (petitioner) will try to disprove such an
assumption, a court, as an official authority, must examine a debtors COMI
(Sprecher, 2003, p. 42, marg. 73). Finally, even a court, as a body of the state, must
examine the existence of authority and jurisdiction. The intensity of such
examination is not clearly defined; however, it stems from the principle of mutual
trust of the Member States in their judicial systems, and this issue is therefore
defined in regulations of national origin in individual Member States. Conversely, a
certain quasi-interpretation rule can be derived from Section 41 of the ECJ ruling
in the matter of Eurofood IFSC Ltd. (Parmalat), according to which the principles
of fair trial must be observed in the process of such an examination. As regards
this issue, however, it is very surprising that it is German courts (in the opinion of
the author of this document), more than courts in any other country that entirely
erroneously omit the necessity to substantiate their opinion (not in a detailed
manner, but at least to a sufficiently convincing extent), and it is rulings delivered
by German insolvency courts, which often contain no substantiation (description of
actual and reviewable reasons) in many cases where insolvency proceedings are
opened against a debtor with a registered office in a country other than Germany.
In contrast, the British approach, for instance, is exemplary with regard to this
issue, as British insolvency rulings contain statements of reasons that in detailed
manner outline the reasoning of courts and provide a very important guideline for
future judicial practice. Worth mentioning in this regard is for example Ruling of
the Royal Court of London regarding the bankrupt Vlieland Body, Ref. No. A2/
2004/2614a Ref. No. 1948 from the year 2004 dated 27 July 2006 ([2005] EWCA
Civ. 974). As regards this issue, the approach of British insolvency courts can
serve as an example for the judicial practice in a number of other countries
besides Germany, even though the German approach deserves the highest degree
of criticism.
5.7 Absence of definition of COMI as a serious deficiency of the regulation
Counter to the original legislative intention, the Regulation does not contain any
definition of a debtors COMI. The only basis for defining the meaning of the notion of a
debtors COMI can be found in Paragraph 13 of the Preamble to the Regulation and
Article 3(1) of the Regulation, where it is apparent that the broad possibilities of
interpreting this term are not only the result of a purely political compromise in the
drafting of the Regulation, but it also establishes a significant uncertainty in practice,
which is all the more serious in light of the fact that cross-border insolvency is one of
the most important issues in the framework of the Community law. The Regulation is
the result of a compromise in the struggle between the concept of group insolvency
proceedings, as exhibited mainly in the British approach on the one hand (this concept
has lost the fight, at least in the formal sense), and the continental concept of separate
legal existence of independent entities in the framework of group structures, on the
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other hand. Whatever the case may be, the broad possibilities of interpreting a debtors
main interest provides room for very indefinite or even speculative understanding of
this term in the sense of the necessity to take into account all economic interests of a
debtor, and it therefore provides significant room for individual subjective
consideration on the part of judges, since a judge of the insolvency court where a
petition to open proceedings is filed must in a prejudicial manner consider the
existence of a debtors COMI in the territory of the court. Both the Regulation and all
published opinions try to present a debtors COMI as an objectively existing reality
that only needs to be established based on a review of all relevant circumstances.
However, this is only a case of wishful thinking or a political argument, which is often
obscured by academic opinions, and certainly not a professional or correct approach.
The academic world, which is willing to accept the standpoint that the COMI is
sufficiently defined in the Regulation and entirely overlooks the fundamental political
reasons why the Regulation does not define this essential term at all, is either
absolutely separated from practice and incapable of conceiving practical application of
the law, or it neglects this fact deliberately, which would be even worse.
The opinion that the Regulation in fact adequately defines the COMI would be
correct, at least from the academic from-reality-detached viewpoint, if we fail to realize
that a prerequisite for ascertaining such a center based on all available facts is a
sizeable quantity of information on the one hand, and, on the other hand, a substantial
amount of practical, professional, economic, and general knowledge on the part of the
judge who must evaluate the existence of the COMI with maximum economic and
international expertise and objectiveness. In the opinion of the author of this document,
the concept of the Regulation provides contrary to its main objective, which was to be
protecting the interests of (all) creditors and preventing the so-called forum shopping
room for protecting the interests of debtors because it is debtors who usually posses
the highest amount of and in many cases all information that may be important for
determining the COMI, unlike creditors who usually possess very limited and
particular information on the economic interests of debtors (with the exception of some
categories of potential creditors, such as banks). A judge who considers the issue of a
debtors COMI should base his deliberations on an as objective as possible review of
facts presented as part of the request for opening proceedings, and proceed with
maximum cautiousness in respect of insolvency proceedings with international
elements, which in the case of some debtors may be concealed (Belohlavek, 2006, pp.
568-78; Lorenz, 1977, p. 307; De Nova, 1978, p. 307). According to the private
international law of most countries and almost all EU Member States, a specific legal
relationship can be considered a private relationship with an international element, if it
is obvious that the relationship to a foreign country is non-negligible (Kucera, 2004,
p. 18). This finding is acceptable in commonplace private-law relations. However, in the
case of insolvency proceedings, a much more profound examination is necessary,
where the international (European/cross-border) character of a matter may often stem
from the existence of only one factor (relationship) concerning objective conditions
located in the territory of another country. Such conditions usually include the
existence of a foreign creditor and/or the existence of a debtors assets in another
country. However, judges who evaluate an insolvency petition must approach a priori
every petition bearing in mind that such a European/cross-border element may exist
in the given case and assess the location of a debtors COMI regardless of whether the
existence of such a cross-border (international elements) is demonstrated at later stages
or not. Finally, it is relatively common that such a crossborder (European,
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international) element is only demonstrated after the opening, i.e. in the progress of
insolvency proceedings.
Due to the fact that the term COMI is not defined in the Regulation at all, the
Regulation not only fails to provide sufficient protection against forum shopping,
which needs to be rejected (unlike in civil contractual agreements, where this approach
can certainly be accepted in light of the principle of contractual freedom) from the
viewpoint of insolvency proceedings, but it also often constitutes a legal basis for
speculations regarding international jurisdiction and opportunities for such forum
shopping (Belohlavek, 2007, II). From the viewpoint of the European single market, a
pan-European definition of insolvency proceedings is necessary. On the other hand,
efforts to find any politically acceptable compromise, as is the case of European
insolvency regulation, are a very negative phenomenon from the viewpoint of law and
legal principles, i.e. the principles of the rule of law. Hence, this occurrence exhibits the
EUs highly negative bureaucratic approaches, which are present in the Community
more than necessary and more than acceptable from the legal viewpoint. The opinion
that the future judicature, the ECJ in particular, will bring certain evaluation criteria for
determining COMI is certainly correct. On the other hand, such a course of action may
be too protracted, and the period of uncertainty whose duration cannot be determined
in advance represents a substantial risk in connection with the potential misuse of the
European insolvency regulation, as outlined above, namely the fact that the Regulation
provides relatively large room for speculations about the meaning of COMI and
consequently for forum shopping in the settlement of bankruptcies, i.e. insolvency
proceedings with cross-border elements.
Determining a debtors COMI must therefore be based on ascertaining objective
facts in the following order: (i) a debtors COMI usually coincides with its registered
office; (ii) the center where main interests are concentrated should correspond to the
place from which a debtor usually manages its interests and which can be objectively
determined by third parties. Even though this approach, which is expressly formulated
in Paragraph 13 of the Preamble to the Regulation, is consistent with the theory of the
registered office (Sitztheorie, as this theory is implemented to its full extent especially
by the German law), it is necessary to depart to the maximum possible extent from the
corporate laws of the countries that advocate (define) the theory of the registered office
over the incorporation theory. One cannot but notice that it is the countries, which
support the theory of the registered office, that overlook the necessity for such a
viewpoint and entirely specific approach especially in judicial practice, and that they
try to interpret the concept of the COMI from the viewpoint of the theory of the
registered office, i.e. the place of control, management, etc.; (iii) a place with a
concentration of a debtors economic and other interests that is so intensive that such
interests cannot be only temporary and are objectively ascertainable, and which is
other than the registered office and/or the place from which the debtor manages and
administers its dealings.
5.8 COMI from the time viewpoint
From the viewpoint of time, a debtors COMI at the time an insolvency petition is filed
is of a fundamental importance. As regards a change of a debtors COMI after an
insolvency petition is filed, this issue was commented by the ECJ in its ruling
concerning Susanne Staubitz-Schreiber. Moreover, this principle is expressly defined in
some laws regulating insolvency proceedings of national origin, such as the laws of
France (Instruction of the French Minister of Justice Circulaire relative a` lentree
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en vigueur du re`glement no 1346/2000 du 29 mai 2000 relatif aux procedures
dinsolvabilite, Ref. No. CIV 2003-05 D4/17-03-2003, l 2.1., sub http://www.justice.gouv.
fr/actual/bo/dacs89c.thm) and Luxembourg. In fact, in most cases, a real conflict
caused by a change of a debtors COMI is exceptional. The usual scenario involves
either a deliberate change of the COMI after a request to open proceedings is made or
shortly afterwards, or only a hidden (fictitious, artificial) change of the COMI, which,
however, is not a real change and cannot be ascribed any consequences; alternatively,
there are situations where the COMI is changed solely for the purpose of forum
shopping immediately prior to filing a petition, where such cases are obvious attempts
to circumvent the law. The effect of such changes of a debtors COMI on international
jurisdiction must be rejected. A real change of the COMI not affected by seeking a
different, more suitable international jurisdiction can in most cases be accepted only
(i.e. in most cases that would correspond to this scenario) in respect of natural persons
that possess assets of very low value (Gebauer and Wiedmann, 2005, marg. 52, p. 1450),
where simple and fast migration can result in severing all ties to a past domicile.
However, even in such cases, it is necessary to examine whether the reason for such
migration was not the exclusive interest in changing the international jurisdiction for
settling a bankruptcy and opening insolvency proceedings.
Most published opinions (Gebauer and Wiedmann, 2005, marg. 47, p. 1448, etc.),
which the author of this document endorses, suggest that if a debtor terminates all
activities, the statutory registered office is of decisive importance for determining
international jurisdiction, i.e. the registered office from the viewpoint of the
incorporation theory. However, this approach cannot be applied to bankruptcies
stemming solely from the fact (depending on the governing law) that a debtor stops
making all payments, i.e. fulfilling its obligations, as a result of its bankruptcy.
5.9 Competence conflicts concerning international jurisdiction for opening the main
insolvency proceedings
There could be both positive and negative competence conflicts, even though past
practice and judicature describes only positive competence conflicts, i.e. cases where
the courts of two or more countries insist on their international jurisdiction to open the
main insolvency proceedings (Paulus, 2003, p. 1725 and following). Particularly
important is, for example, the case of Daisytek, and in the practice of the ECJ the matter
of Eurofood Ltd ca Parmalat S.p.a. Although from the viewpoint of the past judicial
practice negative competence conflicts seem to be rather theoretical, the possibility that
they may occur is very realistic, and this problem needs to be resolved.
The Regulation contains no explicit provisions for dealing with competency
conflicts. Unlike Regulation No. 44/2001, which contains definite provisions concerning
competency conflicts (conflict concerning international jurisdiction) in connection with
obstacles posed by litispendence and related proceedings (Articles 27 to 29 of
Regulation No. 44/2001). The Regulation does not deal with this issue at all. Some
purport that regulating this area is not necessary because international jurisdiction is
defined in a sufficiently clear manner. However, this opinion can in no way be
endorsed, as it only disguises the essence of this problem, namely the highly political
and politicized character of defining a debtors COMI in a detailed manner, which was
discussed during the preparation of the Regulation in connection with the concept of
European insolvency proceedings, i.e. the question whether the concept should be
based on group insolvency or insolvency understood in the framework of the separate
legal existence of individual legal persons associated in a group. A detailed definition
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of a debtors COMI would probably result in a collapse of the negotiations about the
content and character of the Regulation. The supposition that the rules for determining
international jurisdiction are sufficiently clear and that they practically prevent both
positive and negative competency conflicts cannot be accepted as true. On the contrary,
the highly politicized circumstances under which the Regulation, which can be
considered one of the most important Community laws, was drafted and the
compromises made in dealing with questions of a fundamental importance result in
the opinion of the author of this document in vagueness and ambiguousness of this
problem and its potential solutions. Pretending that this issue is not in fact a problem
can at times be comical and demonstrates the known fact that a problem cannot be
resolved by denying its existence. It is because determining a debtors COMI depends
on assessing a number of factors that can be attributed different importance by
different judges (judges of insolvency courts in different Member States). Thus, the
problem lies in the fact that assessing a collision problem is to a large extent affected by
the subjective deliberations and evaluations of a judge. This fact has already resulted
in major competency conflicts and will continue to do so in the future. On the other
hand, it is likely that the future judicial practice of the ECJ will formulate collision
criteria, which will help resolve these problems. However, it is necessary to realize that
finding such clear collision criteria and defining them in a generally usable manner will
take a relatively protracted period, and judicial practice will have to deal with this issue
in the meantime.
The typical model situation of such jurisdiction conflicts will be, and in many cases
already is, a situation, where courts in two Member States open proceedings and claim
that such proceedings are the main insolvency proceedings because they have
determined that the debtors COMI is located in the territory of their respective
countries. As regards the entire system of standards contained in the Regulation, it can
be clearly concluded that only single proceedings may be considered the main
insolvency proceedings, and there cannot exist more than one debtors COMI. This
conclusion can be reached based on, for example, the provisions of Article 16 of the
Regulation. The provisions of Article 16 of the Regulation could lead to the conclusion
that courts of another Member State are entitled to verify (in connection with
recognizing effectiveness) the authority of a court that opened the main insolvency
proceedings. However, such a postulation is fully contrary to such provisions as
Paragraph 22 of the Preamble to the Regulation. As a rule, it is therefore assumed that
authority lies with the country that opens proceedings at an earlier date (priority
principle), and other courts examine their international jurisdiction after the opening of
the main insolvency proceedings only when the court to which a request is made
earlier refuses its international jurisdiction and ascertains that the debtors COMI is not
located within the territory under its authority (in its country). This approach is highly
risky because in itself, in conjunction with the very unclear or absent definition of a
debtors COMI, almost encourages forum shopping, which is a hazardous course of
action in insolvency matters (unlike, for example, civilian matters), where the aim of
the Regulation is to prevent such comportment. Therefore, the question is how fast
both creditors and insolvency courts will be able to respond to a situation where a
debtor goes bankrupt. It is because this aspect is the most important risk and
deficiency of the Regulation, which obviously due to political reasons could not go
so far as to set out very precise criteria for determining a debtors COMI. Proceeding in
such a manner was impeded by resistance on the part of countries that promote the
incorporation theory vs countries that apply the theory of the registered office as well
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as countries that lean toward group insolvency, etc. Even though it is impossible to
embrace the idea that matters should be up to the potentially subjective judgment of
any national judge and the consequences of the fact that the main insolvency
proceedings are opened in a country to which a debtor and its activities have a certain
relationship, which the judge in question determines to be the main interest that is
prevalent and ascertainable by creditors regardless of whether the registered office or
the actual head office is located in such a country, provided that courts in such a
country act, as a minimum, in a sufficiently rapid and flexible manner. It is because in
some Member States, opening insolvency proceedings is often a matter of several
hours. In this sense, the reference to the judgment of a judge in a certain country does
not mean the judges arbitrariness, but the very fact that every judge is subject to the
national approaches and the concepts of national legal systems. This fact will most
likely result in a situation where, for example, a Czech judge will owing to the
incorporation theory that is the natural basis for his deliberations be inclined to use a
debtors statutory registered office to determine the COMI, while German and often
also French judges will be clearly under the influence of the theory of the actual head
office. For instance in Germany, this concept is at times applied in an ad absurdum
manner, which has been recently criticized with the aim to prevent efforts to seek a
debtors COMI in the country where some important business decisions are made.
Unfortunately, the European practice leans toward an interpretation according to
which priority is given to proceedings that are opened at an earlier date (Smid, 2003,
p. 400), despite the fact that it may be somewhat disputable whether the COMI is
actually located in the country in question, but such a conclusion can be reached at
least based on certain non-negligible indications. The author of this document
considers the finding, which must be accepted as the existing state of affairs based on
an examination of the opinions and practice of all large Member States, highly
alarming. The only possible protection is the high flexibility of creditors (and often also
debtors) and insolvency courts and the ability of courts to evaluate all international
aspects of individual cases and to rule on requests for opening proceedings as fast as
possible, taking into account all the potential international implications. Such an
ability must also stem from the actions of creditors and, if applicable also debtors,
where it is apparent that in the domestic conditions, one often encounters insufficient
familiarity with international laws, so that all persons involved can rapidly analyze all
possible international implications of any insolvency case. Another possibility is
(under certain conditions) proceeding according to Article 234 of the EC Treaty, where
such a course of action would result in a ruling of the ECJ regarding the preliminary
reference. However, the essence of the matter is determining whether and to what
extent judges, creditors, and parties to proceedings will be willing to use this approach,
as it is highly demanding from the professional and time viewpoints. In the event that
courts or other parties to proceedings (persons taking part in proceedings) do not want
to undergo this very demanding and complicated process, they must usually accept
that positive competency conflicts are resolved on the basis of their priority; in other
words, no other main insolvency proceedings can be opened if the main insolvency
proceedings have already been opened in another Member State (Weller, 2005).
5.10 Importance of the time of opening proceedings for international jurisdiction and
determining COMI
As a rule, the Regulation only applies starting at the time when insolvency proceedings
are opened (particularly the main insolvency proceedings, although the same may
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apply to local proceedings pursuant to Article 3[4] of the Regulation). However, there is
the question whether and what importance can be attributed to the time of filing a
petition to open proceedings from the viewpoint of the abovementioned priority
principle, especially in light of the fact that national regulations (insolvency laws of
national origin), such as the laws of the Czech Republic or a number of other Member
States, associate such a time with the effects of opened proceedings under such
national regulations. However, the guide for resolving potential conflicts of
international jurisdiction can in no way be found in national regulations of a Member
State, at least not in those that deal with the question of the opening of proceedings. All
solutions to competency conflicts must be based on arguments proposed by the
Regulation. Competency conflicts, as discussed in this documents, cannot be resolved
using the perpetuatio fori principle because the matter does not involve cases where
conditions for opening proceedings would change prior to filing a petition (Gebauer
and Wiedmann, 2005, marg. 76, p. 1456) (after all, this issue has been expressly dealt
with in the ECJs ruling in the case of Staubitz Schreiber). It is because interpreting
Article 16(1) of the Regulation in conjunction with Article 2(f) of the Regulation may
lead to the obvious conclusion that regardless of when individual petitions for the
opening of proceedings are filed, decisive are the proceedings where a decision to open
the same is made earlier, and such proceedings are subject to recognition based on the
universality principle in other countries. Although this concept, as proposed by the
Regulation, is to a large extent unacceptable for the author of this document and often
leads to fatal consequences for some debtors and creditors from certain countries, it
needs to be acknowledged that this understanding is evidently correct as regards the
interpretation of the Regulation itself and the concept on which it is based. It is because
the Regulation needs to be construed so that there do not exist two mutually competing
debtors COMI, but always only one such center, and the essence of the problem is
finding where it is. In conjunction with the unclear issues regarding the defining of a
debtors COMI, the absurdity of the Regulation therefore lies in the fact that in practice
it often does not matter where the COMI is located, but who finds such a center and
substantiates its existence first.
Another questionable issue is the course of action that offers itself and is sometimes
mentioned in literature (Gebauer and Wiedmann, 2005, marg. 76, p. 1457), i.e. a course
of action that is analogical to the procedure proposed by Article 27 of Regulation
No. 44/2001 (see the final part of this commentary regarding Article 3 of the
Regulation). According to this concept, the order of requests for opening proceedings
would be decisive, where the second and subsequent approached courts could rule on
their authority (jurisdiction) only at a time when courts approached earlier would reject
their authority (international jurisdiction), and such subsequently approached courts
would in the interim be only authorized to impose preliminary injunctions to secure a
debtors assets and status. However, the author of this document strictly rejects such
an approach, although it may appear logical at first sight. If the Regulation stems
from the principle that within the territorial applicability of the Regulation only single
main insolvency proceedings may take place and according to this concept the
Regulation there may exist only one COMI, which every debtor has, such an approach
is unacceptable. This approach can be used within the factual applicability of
Regulation No. 44/2001 and in a system of discretionary jurisdiction, that is in
situations involving commonplace civil relations where contractual freedom is
permitted to a significant extent as to procedural agreements, prorogatory agreements
in particular. Nevertheless, such a concept cannot be accepted in a situation involving
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the protection of a superior interest, i.e. the protection of all creditors of a debtor with a
significant involvement of state power. According to the author of this document, these
are two entirely different approaches, and for this reason a course of action analogical
to what is presented by Article 27 of Regulation No. 44/2001 can in no way be accepted.
It is because such an approach would only result in a situation referred to as race of the
courts; in other words, it would provide additional support for the concept under which
the actual circumstances often do not matter, and what matters is who is faster and
better familiar with international dealings. This approach would be contrary to the
fundamental principles based on which the Regulation was conceived.
The Regulation contains no provisions pertaining to cases where several main
proceedings are opened despite the fact that it should not be possible to open more than
single main insolvency proceedings regarding the assets of any debtor, for example, in
a case where courts are not aware of petitions filed with other courts and in other
potential scenarios. In such a case, one of the proceedings should be stopped or its
nature changed either to local proceedings or to secondary insolvency proceedings, in
the sense in which these proceedings and procedures are discussed below as part of the
comments on Article 3 of the Regulation and other parts of this publication. In the
meantime, however, such a court, its lack of jurisdiction to open the main insolvency
proceedings notwithstanding, can make important steps whose consequences must be
dealt with. According to the author of this document, it must be assumed that halting
the main insolvency proceedings or transforming them into a different type of
proceedings (territorially limited proceedings) if priority has to be given to other
parallel proceedings as the main insolvency proceedings, always and fundamentally
has the effect of ex nunc. However, this will apply solely to some actions that only have
national impact, i.e. impact on domestic assets, if domestic proceedings are
transformed into territorially limited proceedings due to other proceedings opened
abroad, and if actions pertaining to such assets abroad (securing tasks in particular)
have not been completed by a foreign trustee. On the other hand, the effect of the actual
opened main insolvency proceedings (for example in connection with Article 16 of the
Regulation) cannot compete with the effect of other proceedings. As to this general
effect of the opening of insolvency proceedings or bankruptcy decisions, the potential
halting of proceedings due to the fact that the main insolvency proceedings have been
opened in another country and such proceedings must be given priority, has the effect
of ex tunc. However, considering the absence of specific provisions in the Regulation,
the effect of ex tunc vs ex nunc in such cases will have to be regarded according to the
governing law in a lex concursus primariae manner on the one hand, and it will have to
be understood in the context of the general interest to protect creditors and assets on
the other hand. It is perhaps for this reason that the fact that the Regulation does not
set out a specific procedure can be considered positive, since the Regulation contains no
mechanism for dealing with competency disputes.
Although it is likely that negative competency conflicts will not be very frequent (no
such case has been described in literature up to now), such a situation cannot be ruled
out. If a court decides that a debtors COMI is not located within its jurisdiction, the
court must also ascertain where such a COMI is situated. In addition, the author of this
document opines that negative rulings that reject the opening of proceedings (rulings
rejecting a petition) have a universal effect, which is subject to Article 16 of the
Regulation. In contrast, it is unacceptable that under such a decision, a court in one
Member State should force a court of another country to accept international
jurisdiction. In doing so, the court would significantly overstep the powers of the EC
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and consequently the powers bestowed on the EC legislation, as part of which the
Regulation was adopted. In the opinion of the author of this document, it is therefore
necessary to split the effect of a negative ruling delivered due to a lack of international
jurisdiction (not based on the non-existence of other formal or substantive grounds for
opening proceedings) into the part that ascertains a lack of international jurisdiction
that will have a universal effect and into the part that determines a debtors COMI in
another country and will have a universal effect with the possibility to suspend a
negative ruling of a court in such other Member State, in which the first of the said
courts finds the debtors COMI. It needs to be pointed out, however, that some Member
States harbor the opposite opinion and believe that if courts of a Member State reject
their authority (or international jurisdiction) to open the main insolvency proceedings
due to the absence of a debtors COMI and designate another country as the state where
such a COMI is situated, such a court of such other Member State cannot refuse its
international jurisdiction by stating that the debtors COMI cannot be found in such a
country. Even though the author of this document does not endorse this interpretation,
as it involves an intrusion into the sovereignty of another country, i.e. a violation of one
the essential principles of international law, such opinions can be encountered in actual
practice. According to the author of this document, such cases tend to provide room for
a course of action, where territorially limited particular proceedings are opened in
individual countries, i.e. local proceedings in the sense of the terminology used in this
publication. According to the author, under certain circumstances, such a situation can
be viewed in accordance with the provisions of Article 3(4)(a) of the Regulation, as
described below.
6. Insolvency status and the law governing proceedings in insolvency
matters
6.1 Insolvency status and lex fori concursus
Insolvency proceedings are subject to the law of the country where such proceedings
are opened (lex fori concursus), where this conflict rule applies to both the main and
auxiliary proceedings (secondary insolvency proceedings and local proceedings).
Fundamentally important in this sense are the provisions of Article 4 of the Regulation,
and it is no accident that they are tied to provisions defining international jurisdiction.
Article 4(1) of the Regulation reads as follows (cit.): Save as otherwise provided in this
Regulation, 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,
hereafter referred to as the State of the opening of proceedings. This guarantees the
uniformity of international jurisdiction and insolvency status, i.e. the fact that courts
that have international jurisdiction to open and pursue the main insolvency
proceedings proceed in accordance with the law of their respective countries.
Paragraph (2) of the same provisions of Article 4 proposes, in an exemplary manner for
the purpose of emphasizing the issue, some questions thus defined right sets out: The
law of the State of the opening of proceedings shall determine the conditions for the
opening of those proceedings, their conduct and their closure. It shall determine in
particular (authors note the following are examples, not an exhaustive list of all
cases):
.
against which debtors insolvency proceedings may be brought on account of
their capacity;
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.
the assets which form part of the estate and the treatment of assets acquired by
or devolving on the debtor after the opening of the insolvency proceedings;
.
the respective powers of the debtor and the liquidator;
.
the conditions under which set-offs may be invoked;
.
the effects of insolvency proceedings on current contracts to which the debtor is
party;
.
the effects of the insolvency proceedings on proceedings brought by individual
creditors, with the exception of lawsuits pending;
.
the claims which are to be lodged against the debtors estate and the treatment of
claims arising after the opening of insolvency proceedings;
.
the rules governing the lodging, verification and admission of claims;
.
the rules governing the distribution of proceeds from the realization of assets, the
ranking of claims and the rights of creditors who have obtained partial
satisfaction after the opening of insolvency proceedings by virtue of a right in
rem or through a set-off;
.
the conditions for and the effects of closure of insolvency proceedings, in
particular by composition;
.
creditors rights after the closure of insolvency proceedings;
.
who is to bear the costs and expenses incurred in the insolvency proceedings;
.
the rules relating to the voidness, voidability or unenforceability of legal acts
detrimental to all the creditors.
As regards this issue, it can be concluded that the provisions of Article 28 of the
Regulation concerning the law applicable to secondary insolvency proceedings (cit.):
Save as otherwise provided in this Regulation, the law applicable to secondary
proceedings shall be that of the Member State within the territory of which the
secondary proceedings are opened.), essentially corroborate the general provisions
contained in Article 4 of the Regulation. Article 4 of the Regulation defines in a general
manner the use of lex fori, similarly as the provisions of Article 3 determine
international jurisdiction to open the main insolvency proceedings and, in connection
therewith, also the jurisdiction to open territorially limited insolvency proceedings
having the form of secondary insolvency proceedings or local proceedings. The
applicability of Article 4 to local proceedings can be inferred for example from
Paragraph 23 Preamble to the Regulation (cit.): This Regulation should set out, for the
matters covered by it, uniform rules on conflict of laws which replace, within their
scope of application, national rules of private international law. Unless otherwise
stated, the law of the Member State of the opening of the proceedings should be
applicable (lex concursus). This rule on conflict of laws should be valid both for the
main proceedings and for local proceedings; the lex concursus determines all the
effects of the insolvency proceedings, both procedural and substantive, on the persons
and legal relations concerned. It governs all the conditions for the opening, conduct,
and closure of the insolvency proceedings. The lex fori concursus conflict rule as a
guideline for a uniform insolvency status defines both the substantive and procedural
effects of insolvency proceedings (Virgos-Schmit-Report, 1995, Item 90), but it does not
set out procedural rules, the definition of which the Regulation leaves up to the
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legislatures of individual Member States. By way of derogation from lex fori concursus,
defined are for instance the material rights of creditors or third parties, which remain
unaffected by the opening of insolvency proceedings if they concern tangible and
intangible assets possessed by a debtor and located in the territory of another Member
State at the time of opening insolvency proceedings. Thanks to a uniform insolvency
status for both procedural- and substantive-law issues, it is not necessary to
differentiate between the substantive and procedural aspects of the applicable law,
since the rule for determining the governing law in the sense of Article 4 of the
Regulation leads to the same result (Duursma-Kepplinger et al., 2002, Comments on
Article 4, marg. 9).
6.2 Exemptions from the uniform insolvency status
The provisions of legis fori concursus regulations apply to insolvency proceedings
per se as well as to the effects thereof. In general, it can be said that insolvency status in
this regard includes the conditions for opening proceedings, the definition of the
method and conditions for pursuing and conducting proceedings, the termination of
proceedings, where some special issues that fall under insolvency status in the sense of
Article 4 of the Regulation are dealt with in Article 4(2) of the Regulation, which
contains a list of examples (Duursma-Kepplinger et al., 2002, Comments on Article 4,
marg. 9), as cited above.
Exceptions are set out mainly in Articles 5-15 of the Regulation, where the
provisions of these articles lessen the universal effect of the Regulation and decisions to
open insolvency proceedings. The provisions of Articles 5-15 have in part an immunity
character and in part they define special conflict rules regarding the conflict rule set
out in Article 4 of the Regulation. These are cases that are so closely related to another
substantive-law statute that subordinating them to legis fori concursus regulations
would be significantly detrimental to third-party rights or interests, which must be
guaranteed even after the opening of insolvency proceedings (Wimmer, 2002, p. 2429).
Applying the lex fori concursus concept to such situations would often result in the
opposite or at least substantially different effect than what is intended by the
Regulation and the principles on which the Regulation is based (Kemper, 2001, p. 1615).
These immunities and exemptions, as defined under Articles 5-15, apply both to the
law governing the main proceedings and to the law governing secondary and any
territorially limited proceedings in all cases where there is room for the application of
the Regulation in the framework of its factual, local, and chronological applicability. In
contrast, it is evident that the special cases referred to in Articles 5-15 (for example the
effect on property rights, transfer of property to monetary and other markets and
systems, labor-law relations, etc.) do not always represent cases (situations) caused by
bankruptcy/insolvency proceedings. On the contrary, they are frequently general
situations that must be taken into account in the framework of insolvency proceedings
in light of their special character. Such situations (as referred to in Articles 5-15 of the
Regulation) will in most cases have to be regarded in accordance with the general
conflict rule, i.e. private international law, depending on the character, using either the
conflict rule of the state of the opening of proceedings (i.e. legis fori concursus conflict
rules) or the conflict rule of the country where some effects of such situations originate
or to which refer some other correlations in the sense of such regulations (Duursma-
Kepplinger et al., 2002, Comments onArticle 4, marg. 15).
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6.3 Extensive interpretation of the insolvency status
Hence, some published opinions recommend an extensive interpretation of the term
insolvency status or an extensive interpretation of the factual scope of Article 4 of the
Regulation (Duursma-Kepplinger et al., 2002, Comments on Article 4, Ha et al., 2005,
Comments on Article 4, marg. 11, pp. 550-90). The author of this document
recommends a certain restraint in whether and to what extent the factual extent of
insolvency status referred to in Article 4 of the Regulation may be construed in an
extensive manner, where individual specific situations will have to be based mainly on
the purpose of the Regulation and where standardizing the interpretation of the factual
scope of the Regulation may be very harmful, particularly in view of Article 4 of the
Regulation. As an example, it is possible to cite the interpretation of the term dispute
caused by bankruptcy or dispute caused by bankruptcy/insolvency proceedings,
where the interpretation is not entirely unequivocal (Habscheid, 1999, p. 1113 and
following; Hannisch, 1990, pp. 1241-51; Hart, 1999, p. 407 and following; Pielorz, 1977;
Pohl, 1999, p. 7; Rozehnalova, 1985, p. 344 and following, 1994, p. 37/p. 36; Ruzicka,
1996, p. 11; Schelleova, 1999, p. 57; Schmidt, 1987, pp. 1905-9; Tyc, 1997, p. 187; Weller,
2005; Winkler von Mohrensfels, 1987, p. 20; Winterova, 1967, p. 93).
Nevertheless, the factual scope of Article 4 of the Regulation evidently does not
include the everyday administration of a debtors assets (Duursma-Kepplinger et al.,
2002, Comments on Article 4, marg. 7), which should be subject to legis rei sitae
regulations, particularly in cases involving the application of imperative standards, but
not exclusively in the framework of the same. The potential transfer of a debtors assets
to another country is described, for example, in Article 18 of the Regulation. This
conclusion is entirely logical. It is because the opposite approach would mean that the
Regulation in itself would have significantly greater impact than intended by its
creators, and it would considerably exceed the scope of the First Pillar of the
Community in the framework of which the Regulation was approved and promulgated.
Such an approach would constitute an excess in the framework of the fundamentals of
the Community law. Expanding the powers of the Community in excess of the
Communitys expresis verbis primary laws is in no way acceptable.
6.4 Article 4 of the regulation and the liability of governing bodies and provisions of
corporate laws
The scope of insolvency status and its definition in Article 4 of the Regulation has a
significant importance in view of some issues of corporate law, in particular, the
potential liability of governing and other bodies for bankruptcy, as this issue is
regarded in the case (for example) of Czech legal persons that have their COMI abroad
in reference to regulations defining a debtors COMI, i.e. the place where the main
insolvency proceedings should (can) be opened. It is because the regulations of some
Member States stipulate relatively strict assessment requirements and consequences in
the event correlation is established between a debtors bankruptcy on the one hand,
and, on the other hand, the actions of its governing and other bodies (in the case of legal
persons) or the actions representing the debtor in general. The principles and intensity
of this liability differ. Worth mentioning are for example the provisions of Articles 213
and 214 of the British Insolvency Act (Insolvency Act 1986) defining fraudulent
trading or wrongful trading, respectively, the liability of business management set out
in Section 64 and Sections 30-32b of the German law defining limited liability
companies (GmbHG) and other German regulations, or the so-called action en
comblement du passif defined in Article L624-3 of the French Code de commerce as
Insolvency
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81
well as the regulations of other Member States; noted in this regard should be for
example the relatively strict definition of the liability of governing bodies for causing
bankruptcy under the Austrian law (Ha et al., 2005, Comments on Article 4 of the
Regulation, marg. 12, pp. 550-91).
In the event a debtors COMI coincides with the debtors (statutory) registered office
or the debtors COMI coincides with the place where decisions are made by governing
bodies that may be responsible for the debtors bankruptcy (including and especially
cases involving civil-law liability to creditors), the situation is relatively simple, and the
application of legis fori concursus does not pose any problems. However, the issue
gains a completely different dimension in a scenario, where it is ascertained that a
debtors COMI differs from the debtors statutory registered office and/or the place
where important business decisions are made by the debtors management or other
corporate bodies, i.e. the place where the members of such bodies can be held liable for
their actions.
The use of insolvency status certainly does not substitute the general personal
status of a bankrupt person. On the contrary, the personal status of a bankrupt debtor
must be used primarily, and only beyond this framework it is possible to employ the
insolvency status defined in Article 4 of the Regulation in conjunction with Article 3 of
the Regulation, where the provisions of Article 4 of the Regulation can essentially be
employed only in insolvency cases as an addition or modification of liability issues in
connection with the settlement freedom guaranteed by the Community law (Ha et al.,
2005, Comments on Article 4 of the Regulation, marg. 14, p. 550-92, including Footnote
No. 24, which contains references to differing opinions). The boundary between these
two statuses is very often represented by deliberations about the potential abuse of the
law. Nonetheless, members of the governing bodes of legal persons and persons
completing legal acts on behalf of any entrepreneur must always consider liability not
only according to the personal status of such an entrepreneur in the sense of the
general provisions of the law applicable to such personal status (usually the registered
office or place of business and in the case of natural persons the entrepreneurs habitual
residence), but also according to regulations pertaining to the personal liability of such
persons regarded in view of the potential insolvency status in the event of bankruptcy.
Such deliberations will be necessary always when activities conducted by a specific
person (potential debtor) involve an international element.
6.5 Related proceedings and the so-called_vis attractiva concursus
As was mentioned in connection with the issue of international jurisdiction to open the
main insolvency proceedings, i.e. in connection with the above passage that analyzes
Article 3 of the Regulation, there have been debates about whether and to what extent
the opening of insolvency proceedings (particularly but evidently not only the main
insolvency proceedings) affects the jurisdiction to handle related and ensuing deputes
relating to a debtors assets, including disputes where trustees have active rights and
disputes where trustees have passive rights (exclusion actions, declaratory actions,
actions concerning performance relating to bankrupts assets, etc.). According to the
laws of some countries, such as Italy, Austria, and France (in contrast to Germany for
example), opening insolvency proceedings changes the jurisdiction on favor of the
courts authorized to open and pursue insolvency proceedings also in related and
ensuing disputes, including, but not limited to, incidental disputes, disputes related to
the collection of payments in favor of the bankrupts assets, etc. In the opinion of the
author of this document, it is necessary to reject vis attracativa concursus in the
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82
supra-national sense, i.e. in the sense of both European and international insolvency
proceedings, and, regardless of the definition of this issue (i.e. the jurisdiction to handle
related disputes) in accordance with legis fori concursus regulations, to preserve the
jurisdiction as if no change has occurred in this sense and to evaluate jurisdiction in
these matters, where an element other than a purely national element exists in
connection therewith (Belohlavek, 2006, pp. 568-78; Belohlavek, 2005a, pp. 2-11)
(regardless of whether it is an element international or related to European insolvency,
i.e. any supra-national element), since regulations setting out the concentration of
jurisdiction for related and ensuing disputes in cases insolvency proceedings are
opened usually do not take such an element and, more importantly, the application of
the Regulation into consideration. This issue is likely to be regarded individually
according to what courts of what Member State will have international jurisdiction to
open and pursue the main insolvency proceedings, and it can be expected with a
certain degree of certainty that this issue will in the future be dealt with by the ECJ, as
it involves questions that are certain to cause considerable doubts and problems. This
case, however, clearly involves the primary problem of jurisdiction. From the viewpoint of
the law decisive for assessing claims in related disputes, however, the author of this
document opines that no changes take place as a result of opening insolvency
proceedings, and there is therefore no change in the contractual or other status of claims
that could be subject to review under such related proceedings. In any case, this question,
as a polemic issue, can only concern claims made under proceedings opened after the
opening of the main insolvency proceedings in the sense of Article 4(2)(f) of the
Regulation, even though the list included under Article 4(2) of the Regulation is not
exhaustive. From the viewpoint of Article 4 of the Regulation, however, it is significant
that Article 4 of the Regulation and its provisions cannot change the contractual or
factual status of claims dealt with under such related or ensuing proceedings (Habscheid,
1999, p. 1113).
6.6 Reference
Article 4(1) of the Regulation contains provisions defining insolvency status and
special provision determining the law that is decisive for such insolvency status.
Article 4 of the Regulation is directly tied to the provisions of Article 3 of the
Regulation concerning international jurisdiction to open and pursue insolvency
proceedings. As regards this issue, there exists the question whether and to what
extent it is possible to take into effect another factor, namely the reference to another
law (Kucera, 2004, Chapter 12.2, pp. 158-166), if a law defined according to Article 4 of
the Regulation does not contain such a reference in its definition of national origin. In
the opinion of the author of this document, which coincides with other published
standpoints, such a reference cannot be accepted because it would be fundamentally
opposing to the concept introduced by the Regulation, i.e. the concept of unity between
international jurisdiction and insolvency status and the mutual interaction of Article 3
and Article 4 of the Regulation. In fact, such other reference could not be accepted
under the Czech national regulations pertaining to the private and procedural
international law, since accepting another reference would unquestionably go against
the concept of reasonable and just arrangement of the pertinent relationship (compare
with Section 35 of the Czech Act No. 97/1963 Coll. on Private and Procedural
International Law, as amended, as well as the private international law regulations of a
number of other countries). Finally, such a reference could not even be applied in the
case of Article 3 of the Regulation, and no other reference can be employed, for
Insolvency
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83
example, in the case of the application of Article 25 of Regulation No. 44/2001 (Geimer
et al., 2004, marg. 1-26/11, p. 436).
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stavnepravn aspekty vstupu C

eske republiky do Evropske

unie (title translated Constitutional aspects of the Czech Republics accession to the
European Union), Rocenka evropskeho prava (Yearbook of the European Law),
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Valdhans, J. and Pavlova, B. (2005), Evropsk yy justicn prostor ve vecech civiln ch (title
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ast VII
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Praha (Prague) Vol. 4 No. 8, pp. 269-78.
Corresponding author
Alexander J. Belohlavek can be contacted at: a.belohlavek@ablegal.cz
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