WINDING UP EU COMPANIES WITH LIMITED PRESENCE IN THE UK

Iqbal Mohammed considers the decision of the Supreme Court in the Trustees of

the Olympic Airlines SA Pension and Life Assurance Scheme v Olympic

Airlines SA [2015] UKSC 27 concerning secondary winding-up proceedings

Background

Council Regulation (EC) 1346/2000 on insolvency proceedings (the Regulation)

aims to introduce certain conflict of law rules for insolvency proceedings concerning

debtors based in the EU operating across member states. It requires insolvency

proceedings over a debtor to be commenced in the member state where it has its

centre of main interests (COMI). Insolvency proceedings elsewhere are subservient

to the main proceedings. The Regulation merely establishes the best forum for

proceedings rather than harmonise substantive law across the EU.

Provisions

Section 221 of the Insolvency Act 1986 gives UK courts jurisdiction under to wind

up a foreign company. However, in the case of companies whose COMI is in another

EU state, the exercise of this power is constrained by the Regulation.

Article 3(2) of the Regulation states (my emphasis):

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.

Establishment is defined within the Regulation as any place of operations where the

debtor carries out a non- transitory economic activity with human means and goods.

Facts

The Appellants were the trustees of Olympic Airlines pension scheme (the

Scheme). A Greek court wound up the Respondent in October 2009 with main

proceedings commencing in Greece. As a consequence, the Scheme had to be

wound up as well, revealing a deficit of 16m, which Olympic was bound to make

good.

On 20 July 2010, the trustees presented a winding-up petition against the company

in England on the ground that it was unable to meet this liability. Recovery was

unlikely but the winding-up order was necessary to qualify the Scheme for entry into

the Pension Protection Fund (PFF) under the Pensions Act 2004. In this case,

entry was conditional upon a winding-up order being made.

Therefore, the court was required to determine whether Olympic had an

establishment in England on 20 July 2012, permitting the presentation of a winding-

up petition on that date. However, by then only three people were employed in its UK

office. Their work consisted of paying bills and essentially assisting the liquidator in

Athens.

Arguably, the employees were really only engaged in winding the

company up.

High Court and Court of Appeal decisions

It was held that to be economic an activity did not have to amount to external

market activity: [2013] 1 BCLC 415. The activities of the 3 workers constituted non-

transitory economic activities for the purpose of the definition of establishment and

made the winding-up order. The Respondent (through the Greek liquidator) appealed

arguing that the Regulations definition of establishment required economic activity

which was external and market facing, and the running down of a business did not

count.

The Court of Appeal agreed: [2014] 1 WLR 1401. In summary, they thought that the

relevant economic activity had to consist of more than the activity involved in

winding up the companys affairs, and that the three remaining employees were

doing no more than that. This decision meant that there had been no qualifying

insolvency event and the Scheme could no longer enter the PPF.

Supreme Court ruling

Lord Sumption, giving judgment for the court, noted that there was scant authority on

point. However, the he approved of commentary in the Virgos- Schmit Report which

considered the rationale behind requiring an establishment:

Place of operations means a place from which economic activities are exercised on

the market (i. e. externally), whether the said activities are commercial, industrial or

professional. The emphasis on an economic activity having to be carried out using

human resources shows the need for a minimum level of organization. A purely

occasional place of operations cannot be classified as an establishment. A certain

stability is required. The negative formula (non-transitory) aims to avoid minimum

time requirements. The decisive factor is how the activity appears externally, and not

the intention of the debtor. In this way, potential creditors concluding a contract with

a local establishment will not have to worry about whether the company is a national

or foreign one. Their information costs and legal risks in the event of insolvency of the

debtor will be the same whether they conclude a contract with a national undertaking

or a foreign undertaking with a local presence on that market.

The court also applied Interedil Srl (in liquidation) v Fallimento

Interedil Srl [2011] ECR I-9939, in which the E. C. J. said of article 3(2) in order to

ensure legal certainty and foreseeability concerning the determination of the courts

with jurisdiction, the existence of an establishment must be determined, in the same

way as the location of the centre of main interests, on the basis of objective factors

which are ascertainable by third parties.

His Lordship took the view that the definition of establishment should be read as a

whole as each word coloured the other. The relevant activities must be (i) economic,

(ii) non-transitory, (iii) carried on from a place of operations, and (iv) using the

debtors assets and human agents. This suggested a fixed place of business. Such

activities must be sufficiently accessible to enable third parties, in particular

creditors, to be aware of them. They must be activities which by their nature involve

business dealings with third parties. Mere internal administration of a winding-up,

without activities exercised on the market (such as trading or disposal of assets)

would not qualify.

Practice Point

EU companies in the process of winding down must show that they are carrying on

some degree of dealings with third parties to enter into local insolvency proceedings.

Legislation dealing with entry requirements for the PPF following insolvency currently

only covers domestic insolvency events. There is no protection provided for UK

employees of overseas entities should they suffer an insolvency event abroad,

unless they are able to bring secondary winding up proceedings.

The revised Council Regulation (EU) No 663/2014 redefining establishment as

any place of operations where the debtor carries out or has carried out in the three

months prior to the request to open main insolvency proceedings a non-transitory

economic activity with human means and asset is likely to come into force within

months. If this happens, courts must consider market activity 3 months prior to the

opening of main proceedings as well as the date on which an application is made to

open secondary proceedings.