Society of Young Solicitors Ireland

Autumn Conference 2003

7-9 November 2003

Issues Relating to Corporate Recovery

Contents

Pages Chapter One Day to Day Issues 2 - 11 Chapter Two Restriction of Directors – recent case law 12 - 15 Chapter Three Insolvency generally – recent case law 16 - 25 Chapter Four Cross Border Insolvency Regulations 26 – 42 Chapter Five Transfer of Undertakings – Insolvency Issues 43 – 54

Chapter One

Day to Day Issues

INTRODUCTION

1.1 Despite the good economy, in the last few years there has been

a steady flow of liquidations. With the levelling off of the

improvement in our economy, an increase is likely to occur

during the next few years.

1.2 Statistics relating to liquidations in the last few years give an idea

as to trends.

Year No. of Liquidations

1990 501

1996 560

1997 433

1998 410

1999 337

2000 336

2001 439

2002 412

1.3 When I use the word “liquidations” I am referring to insolvent

liquidations.

There are three types of liquidation: -

(a) Members voluntary liquidation (solvent)

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(b) Creditors voluntary liquidation (insolvent)

(c) Court Liquidation (insolvent)

1.4 Today, we will be talking about both types of insolvent

liquidation.

LANDLORDS

1.5 By and large the event which brings a solicitor in touch with a

Liquidator is the fact that the solicitor acts for the Landlord of a

property. That property is occupied by a company which goes

into liquidation. The attitude of the Landlord usually determines

the attitude of the Solicitor acting for the Landlord.

1.6 This attitude can be broken down into three groups: -

(a) Practical/Common sense approach.

(b) Legalistic approach.

(c) Aggressive.

1.7 Disclaimer is a word which always crops up in the context of the

relationship between Landlord and Liquidator.

Yes, a Liquidator can disclaim an onerous contract. I will

describe this more fully shortly. But before becoming involved in

the area of disclaimer, it is important to set the scene.

1.8 Inevitably, when the liquidation starts there will be money due to

the Landlord by the Company by way of arrears of rent (or for

some other liability which stems from the lease). Obviously,

different forces are at play: more than likely, the Landlord will

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want the property back. Sometimes however, the Liquidator

wants the property for a few months to conduct an orderly wind

down of the Company’s affairs.

1.9 The reverse can happen: the Landlord doesn’t want to take the

property back and the Liquidator is very keen to give the

property back.

1.10 It is important to distinguish disclaimer from surrender. The

difference between the two words is:

(a) A “surrender” takes place by agreement. In other words

both the Landlord and the Liquidator agree the terms on

which the leasehold interest in the property will be

surrendered back to the Landlord.

(b) “Disclaimer”. This mechanism will only be triggered where

surrender is unavailable. In other words, where the

Landlord and the Liquidator do not agree on the basis for

the return of the property to the Landlord. Then the

Liquidator is usually placed in a position where something

must be done with the property but the Landlord and the

Liquidator cannot agree terms.

1.11 In essence, a disclaimer is an application to the High Court under

Section 290 of the Companies Act 1963. The application is

brought by the Liquidator on the basis that a part of the property

of the Company consists of land burdened “with onerous

covenants”.

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1.12 There is a time limit: the Liquidator may disclaim the property

“with the leave of the Court” at any time within 12 months after

the commencement of the winding up or any extended period

which may be allowed by the Court.

1.13 Forfeiture

Forfeiture is another aspect of the relationship between the

Company/Liquidator and its Landlord. Generally, leases contain

a provision for the forfeiture of the lease on the commencement

of an insolvent liquidation.

1.14 However, this provision is watered down considerably by Section

2 of the Conveyancing Act 1892 which gives the Liquidator 12

months relief from forfeiture. In essence, if the Liquidator is

prepared to pay the rent and comply with the other covenants

in the lease, then the Landlord is unable to exercise apparent

rights under a forfeiture clause in the lease for a period of 12

months after the date of the commencement of the liquidation.

You may from time to time hear the phrase “the Liquidators

year”. This is where the phrase comes from.

1.15 The legalistic approach

As I have mentioned, the Liquidator may apply to the Court for

leave to disclaim. That power is available for 12 months after the

commencement of the liquidation. However, Section 290 (5) of

the Companies Act 1963 allows someone like a Landlord, to

force the agenda. That section says that a Liquidator would not

be entitled to disclaim any property in a situation where an

application has been made in writing to him by the Landlord

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requiring the Liquidator to decide whether or not he will disclaim.

The Liquidator will not be entitled to disclaim where the

Liquidator has not given Notice of Intention to apply to the Court

for leave to disclaim with in 28 days after receiving the written

warning.

1.16 Therefore, a legalistic approach is as follows: -

(a) Company goes into liquidation.

(b) Landlord serves a Notice requiring Liquidator to decide

about disclaimer within 28 days.

(c) 28 days expires.

(d) Liquidator has not given Notice of Intention to apply to the

Court for leave to disclaim.

(e) Liquidator now deemed to have adopted the lease.

1.17 Alternatively, the sequence could be: -

(a) Company goes into liquidation.

(b) Landlord serves notice.

(c) Liquidator gives Notice of Intention to apply to Court for

leave to disclaim.

(d) Application to Court/Leave given.

1.18 By and large, Liquidators and their solicitors do not like receiving

this 28-day notice. It puts them under much greater pressure

than they would like to be under, particularly if the notice comes

at the beginning of the liquidation. They have other things on

their minds at that stage rather than having to make a very

important decision regarding the premises.

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1.19 The disadvantage (from a Landlord’s point of view) is that it

generates a possible High Court action, the outcome of which

almost inevitably in favour of the liquidator and disclaimer.

1.20 Common Sense Approach

The common sense approach is by far the most attractive.

Everyone wins. The property usually goes back to the Landlord

who is then free to let the property to another tenant.

1.21 Obligation to pay Rent

If the Liquidator uses the property for the beneficial winding up of

the Company, the rent is an expense of the liquidation. The

Liquidator is not personally liable for the amount due. However,

the expense is one of the first payments to be made by the

Liquidator out of the funds in the liquidation and, in most cases,

the rent will be paid for the period of occupation.

1.22 A miscellaneous point regarding disclaimer: a Liquidator cannot

disclaim a contract which is less profitable than another

contract. For instance, if the Company had contracted (prior to

liquidation) to sell its factory for £1,000,000 but the Liquidator

knows that a better price can be obtained in the liquidation, it is

not open to the Liquidator to set aside the contract as an

“onerous” contract and re-sell the property. This is not an

onerous contract. It is simply a less profitable contract. The

Liquidator would be obliged to specifically perform the contract

already entered into by the Company.

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INJURED PARTIES

1.23 Quite often in liquidations, the Liquidator will encounter existing

Court proceedings against the Company in relation to a

personal injury action.

The Liquidator’s standard response in these circumstances is to

transfer the running of the case to the Company’s former

insurers.

Normally there is no problem but sometimes the insurers wish to

repudiate liability for a number of different reasons.

What does the plaintiff do in those circumstances?

The decision of relevance was made by the Supreme Court in

the case of PJ White Construction Limited [1989] ILRM 803. In

essence, the plaintiff can sue the Insurance Company. The

plaintiff should not be put off or stopped from proceeding with

the case on the grounds of lack of privity etc.

1.24 Proceeds of Insurance Claim – Trust Money

Section 61 of the Civil Liability Act, 1961 provides that the award

to an injured party is trust money in favour of the injured party.

The fund does not become part of the assets of the Company.

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RESERVATION OF TITLE

1.25 The rules relating to Reservation of Title have now settled down.

Liquidators are very willing to deal quickly with Reservation of Title

claims.

1.26 Inevitably, the debates centre around the documentation, the

wording of the clauses and the notification of the clause to the

purchaser i.e. the Company which is now in liquidation.

1.27 The golden rule in relation to a Reservation of Title claim is that

the creditor must act quickly.

1.28 If the goods can be identified and if the documentation is in

order, the goods are likely to be handed back straight way by

the Liquidator. The amount of litigation relating to Reservation of

Title has diminished considerably.

RESTRICTION

1.29 Practitioners are becoming more and more involved in

Restriction applications.

1.30 Restriction was introduced by Section 150 of the Companies Act

1990. Thirteen years down the line there is a large number of

directors who have been restricted by the Court.

1.31 The Court appointed Official Liquidator must apply to the Court

for a Restriction Order against the relevant directors.

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1.32 Since the enactment of the CLEA 2001 liquidators in creditors’

voluntary liquidations will be obliged to apply to the High Court

for these restriction orders, unless they are relieved of the

obligation by the Director of Corporate Enforcement.

1.33 As a result, the number of restriction applications increased

dramatically.

1.34 In the vast majority of cases, the directors seek legal advice

regarding the defence of their position as directors.

1.35 There have been a number of recent key note decisions in

which: -

(a) A number of individuals have been declared to be

shadow directors by the Court (and therefore liable to

restriction). (Vehicle Imports Ltd.; Gasco Ltd)

(b) The restriction provisions apply to anyone who is a director

of the Company at the time of liquidation (and anyone

who has been a director of the Company within the

previous 12 months). The Court cannot restrict someone

who is no longer a director of the Company for 12 months

prior to liquidation. Therefore, the Court looks particularly

at the behaviour of directors and the conduct of the

Company in the 12 months prior to liquidation. (Gasco

Ltd).

(c) Nevertheless, the Court is also obliged to look at the entire

tenure of the directorship (Re Squash Ireland).

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(d) Being a non-executive director does not mean that there

is sympathy from the Court (Re Hunting Lodges), as non-

executive directors have a residual duty to supervise the

affairs of the Company (Vehicle Imports Ltd).

1.36 It is essential to note that the onus is on the director to prove that

he or she has acted honestly or responsibly in relation to the

conduct of the affairs of the Company.

1.37 The Court has continuously emphasised the importance of

keeping proper books and records in relation to the Company’s

affairs. The Court will also look to see whether the Company has

kept its statutory returns up to date and whether it has fulfilled its

obligations to the Revenue Commissioners.

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Chapter Two

Restriction of Directors – Recent Case Law GMT ENGINEERING SERVICES LIMITED (IN VOLUNTARY LIQUIDATION)

High Court 30th July 2003: Ms Justice Finlay Geoghegan

2.1 This was an action for a declaration of restriction of directors

under s.150 Companies Act 1990.

2.2 In relation to the substantive issue, it was held that the directors

had acted honestly and responsibly in relation to the conduct of

the affairs of the company and accordingly the directors were

not restricted.

2.3 Counsel for the liquidator then applied for an order against the

respondents for the applicant’s costs in the proceedings. This

was based on the premise that if the respondents did not bear

the costs, it would have to be borne by the creditors of the

company.

2.4 Counsel for the respondents argued that the court had no

discretion to make an order for costs against the respondents

where an application for restriction had been refused.

2.5 The general jurisdiction of the High Court in relation to costs is the

Rules of the Superior Courts. The Rules provide that the costs of

every proceeding in the Superior Courts shall be at the discretion

of the court subject to any other Act or Statute.

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2.6 Section 150 (4B) Companies Act, 1990 provides that the court

“may order that the directors against whom the application is

made shall bear the costs of the application……..”

2.7 Finlay Geoghegan J concluded that s. 150(4B) of 1990 Act be

construed as limiting the discretion of the Court in orders relating

to the applicant’s costs in s.150 cases.

2.8 She explained that the Company Law Enforcement Act, 2001

introduced a filtering system which allows the Director of

Corporate Enforcement to relieve a liquidator of the obligation

to make an application under s.150 in appropriate

circumstances.

2.9 Finlay Geoghegan J held that it is consistent with this filtering

system and the constitutionally guaranteed right to one’s good

name and property that a respondent director in a s.150

application should only become obliged to bear the applicant’s

costs where the application for a declaration of restriction is

successful.

2.10 It follows that the Liquidator or the creditors of an insolvent

company are obliged to bear the costs of an unsuccessful

application by the liquidator to the High Court under s.150.

2.11 The High Court decision in Re GMT Engineering Services Ltd. may

make liquidators reluctant to wind up small companies. In cases

where the company’s assets are not sufficient to pay for legal

costs, the costs of the High Court application will have to be

shouldered by the liquidator and/ or his lawyers.

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EUROKING MIRACLE (IRELAND) LIMITED (IN VOLUNTARY LIQUIDATION)

High Court 5 June 2003: Ms Justice Finlay Geoghegan

2.12 The facts of this case revolved around a jurisdictional issue. The 4

respondents in this case resided in England. There is no express

provision in Irish Law for the service out of the jurisdiction of an

originating notice of motion seeking a declaration of restriction

pursuant to s.150 of the Companies Act 1990. The first issue to be

determined in this case was whether section 150 confers

jurisdiction on the High Court to make declarations thereunder in

respect of directors resident outside this jurisdiction.

2.13 Finlay Geoghegan J. concluded that the High Court had this

jurisdiction. Having regard to the frequency with which persons

resident outside the State are appointed directors of Irish

companies, it would clearly be absurd to suggest that the

Oireachtas, in enacting these provisions in the public interest,

only intended to restrict resident directors. The use of the phrase

“any person” in s.149 (2) underlines this intent.

2.14 In relation to the service of a Notice of Motion on a director

outside this jurisdiction, Finlay Geoghegan J. concluded that

service by registered post was sufficient.

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E HOST EUROPE LIMITED (IN VOLUNTARY LIQUIDATION)

High Court 14 July 2003 Ms Finlay Geoghegan J

2.15 Section 52(1) of the Company Law Enforcement Act 2001

imposes a time limit of 6 months on a liquidator to produce a

report to the Director of Corporate Enforcement (“the Director”).

Section 56(2) provides that not earlier than 3 months and not

later than 5 months after this report has been produced to the

Director, the liquidator is obliged to make a restriction

application to the High Court, unless relieved by the Director

from that obligation. Failure to comply with this section is an

offence.

2.16 Finlay Geoghegan J concluded that although a liquidator will be

guilty of an offence for contravening these sections, this in itself

does not bar the liquidator’s entitlement to bring a section 150

application. There is no express prohibition in s.56 (2) against a

liquidator bringing an application at a later date. Furthermore,

s150 (4A) gives a liquidator power, without any time limitation, to

bring an application under s.150.

2.17 It’s important to point out that Finlay Geoghegan J, pointed out

that this application was among the first batch of applications,

and therefore the liquidator could be excused from fully

appreciating the time constraints. Therefore, in granting a time

extensions to the liquidator in this case, the judge was not

signalling to liquidators and their solicitors that other such time

extension can easily be obtained. There is a very clear legislative

intent that the application should be made within the specified

time.

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Chapter Three

Insolvency Generally – Recent Case Law

Re Ruby Property Company Ltd (in receivership)

3.1 Sale of Assets by a Receiver and the Obligations Imposed by

Section 316(A)(1) of the Companies Act 1963.

3.2 There was a recent judgment which is very relevant to this issue.

The Judgment of Mr Justice McKechnie was delivered on 31

January 2003 in the case of in Re Ruby Property Company

Limited (In Receivership).

3.3 Section 316 Companies Act, 1963 allows a Receiver to apply to

the High Court for directions on any aspect of the receivership.

Section 316(A) places an obligation on a Receiver, in selling the

property of a company, to exercise all reasonable care to obtain

the best price reasonably obtainable for the property at the time

of sale. It is generally accepted that this was putting into

statutory form an obligation on the Receiver which had long

since been recognised at common law.

3.4 The Ruby Property Company Limited case involved the sale by

the Receiver of a property in Sutton, County Dublin, under the

powers contained in a collateral mortgage. The challenge to

the disposal was mounted by the company itself and its

controlling shareholders. The ultimate issue before Mr Justice

McKechnie was an alleged breach by the Receiver of his duties

under Section 316(A) of the 1963 Act and included among the

allegations were the following:-

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(i) That the property should have been sold by public

tender.

(ii) That the property should have been publicly advertised

in the press.

(iii) That the market was not tested.

3.5 McKechnie J made a number of observations in his judgment:-

(i) He cited with the approval the Judgment of

O’Dalaigh C.J. (Holohan -v- Friends Provident and

Century Life Office 1966 1 I.R.) that the duty on a

mortgagee when exercising its power of sale is to

act in good faith and, in addition, to act “in all the

circumstances as a reasonable man would”.

(ii) “The duty on a Receiver is to exercise reasonable

care to obtain, at the time of sale, the best price

reasonably obtainable for the property in question”.

(iii) “Each case must depend and must be determined

on its own individual circumstances.”

(iv) “There are no pre-determined, fixed or rigid rules by

which such disposal of property must take place.

Public auction, exposure by media or bill board,

market strategy, expenditure of money, generous

time limits and the hiring of experts were all matters

for consideration, as are many others but not for

mandatory engagement.”

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3.6 The Judgment also addressed the onus of proof in such cases.

The Court rejected the Plaintiff’s contention that the Receiver

had the responsibility of satisfying the Court that he had not

been in breach of Section 316(A).

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Re W & R Morrogh Stockbrokers

3.7 The issue of the application of pari passu distribution or the Rule in

Clayton’s case to cash funds in an insolvency

3.8 This issue was addressed in the reserved Judgment of Mr Justice

Murphy delivered in the High Court on 6 May 2003. The firm of

W&R Morrogh Stockbrokers ceased to trade in April 2001 and a

Receiver and Manager was appointed to the firm by the High

Court. In July 2002, the Receiver sought directions on a number

of issues.

3.9 The only aspect of the Judgment considered here is the

treatment of the money in the firm’s bank accounts in the

context where overall, the liabilities of the firm were

approximately double the realisable assets. This meant that the

manner of distribution was crucial in that the application of the

rule in Clayton’s case, namely ‘first in first out’ would result in

some claims being discharged in full and other claimants

receiving little or nothing whereas if a rateable distribution was

made all creditors would suffer a proportionate case.

3.10 The money in the firm’s bank accounts comprised:-

(a) Amounts due to clients following the sale of

investments or cash provided by clients for

acquisitions.

(b) Amounts due to clients following the sale of

investments undertaken without the knowledge or

consent of the client.

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(c) Parties who sought to trace their funds to funds held

in the bank accounts of the firm.

3.11 The Receiver expressed the view that there were two categories

of claimants in relation to these monies, namely:-

(a) Those parties who could trace their monies into the

accounts by the application of the rule in Clayton’s

case.

(b) Those parties who would suffer a substantial loss by

the application of that rule.

3.12 Murphy J recognised that the application of the ‘first in first out’

rule would greatly benefit those whose money was lodged to the

firm’s bank accounts in the period immediately before the

collapse. It was calculated that this period was so short that any

money lodged more than one week before the collapse would

have been lost. Other parties contended that the application of

the ‘first in first out’ rule was not appropriate. The Court agreed

and found that the monies in the client bank accounts of the firm

shared at least some of the characteristics of a “pool” and had

not been appropriated as between one client and another. The

Court concluded that the principle that “equity is equality”

should be applied. Therefore, although declining to make a

declaration in favour of a general pooling of the assets of the

firm, it did hold in favour of a pari passu distribution of the funds

to credit of the firm’s bank account.

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3.13 The Order made following this Judgment is under appeal.

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Re C.B. Readymix Limited (in liquidation)

3.14 The application of disqualification and restriction provisions of the

Companies Act 1990 to Liquidators.

3.15 The restriction and disqualification provisions of the Companies

Act 1990 had been virtually exclusively applied to directors until

the Judgment of Smyth J in the High Court on 20 July 2001 in the

case of in Re C.B. Readymix Limited (In Liquidation). Smyth J

disqualified Dr Michael Grimes from being concerned in the

management of the company as a liquidator, receiver or

examiner for a period of seven years from 20 July 2001, and

imposed conditions limiting the right of the Respondent to act as

auditor, director or secretary of any company during the same

period. Dr Grimes appealed this decision and the Judgment of

the Supreme Court was delivered by Mr Justice Murphy on 1

March 2002.

3.16 The relevant facts were that Dr Grimes had purportedly been

appointed liquidator of C.B. Readymix Limited (“the company”)

on 15 January 1996 in circumstances where the appointment

was clearly invalid. Shortly thereafter, on 25 April 1996 a

provisional liquidator was appointed but Dr Grimes continued to

hold himself out as being liquidator and disputed the entitlement

of the provisional liquidator to act in that capacity. Some time

after the appointment of the provisional liquidator Dr Grimes

decided to destroy the books and records and sought to justify

so doing on grounds that were clearly unsustainable. Murphy J

expressed the view that the fact that Dr Grimes had deprived

the Official Liquidator of the books and records of the company

was extremely serious and “in his decision to destroy or permit

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the destruction of the books and records of Readymix was a very

serious wrong indeed”. He therefore held that the High Court

was entitled to make the Order in the form given by Smyth J and

in particular was entitled to limit the terms upon which Dr Grimes

could act as an auditor, director or secretary of a company as

an alternative to making an absolute disqualification order

against him. To meet the circumstances in which Dr Grimes was

never properly appointed liquidator to the company, Murphy J

held that the relevant legislation is as applicable to a de facto

liquidator as it is to a de facto director.

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Re Macks Bakeries Limited (in voluntary liquidation)

3.17 The “Solicitors Lien” in the context of Section 244(A) of the

Companies Act 1963.

3.18 For many years, it had been a considerable comfort to the

solicitor’s profession to know that, in the event of the insolvency

of a corporate client, the solicitor would have a lien over files

and title deeds of the client, other than statutory books and

records, for the discharge of unpaid costs and outlay. This

comfort appeared to have been removed by the addition,

under the provisions of the Companies Act, 1990, of Section

244(A) of the Companies Act 1963 which provided that in the

winding up by the Court or by means of a creditors’ voluntary

winding up “no person shall be entitled as against the Liquidator

or provisional liquidator to withhold possession of any deed,

instrument or other document belonging to the company, or

books of account, receipts, bills, invoices or other papers of a like

nature relating to the account or trade dealings or business of

the company, or to claim any lien thereon”.

3.19 It was contended in the case of in Re Macks Bakers Limited (In

Voluntary Liquidation) firstly that a solicitor’s lien in common law

had been expressly recognised by the Irish Courts and secondly

that by virtue of Section 284(1) Companies Act, 1963 the law of

bankruptcy is to be applied in an insolvent liquidation in order to

establish the rights of creditors of the insolvent company.

3.20 Section 3(1) of the Bankruptcy Act 1988 includes in the definition

of a secured creditor “ any creditor……holding

any……lien…….as security for a debt due to him”. The ingenious

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argument was then made that if the new Section 244(A) was to

be interpreted as removing the solicitors’ lien, it would bring it

into conflict with Section 284(1) of the Companies Act, 1963 and

bring about a change in the law of insolvency which was not

intended. The Respondents contended that the law of lien is

well established and to interpret Section 244(a) in the manner

sought by the liquidator would give effect to radical and far

reaching changes.

3.21 Mr Justice Kelly concluded that the language used in Section

244(A) “ is clear and unambiguous” and “allows of no other

interpretation but that the legislature intended that the holder of

a lien would not be entitled to claim such as against the

liquidator”. Kelly J recognised that Section 244(A) had brought

about a change in the law of insolvency relating to holders of

liens. However, these changes could not be regarded as

unintended or ambiguous. Consequently the claim to a lien

failed.

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Chapter Four

European Union

Cross-Border Insolvency Regulation

INTRODUCTION

4.1 On 31 May 2002, Council Regulation (EC) No. 1346/2000 (“the

Regulation”) came into force. The Regulation does not apply to

Denmark.

4.2 The introduction of the Regulation brings to an end a long period

of effort on the part of the various members of the European

Community to co-operate in relation to cross-border insolvency

cases.

4.3 The Regulation does not attempt to harmonise substantive law.

Instead, the EU has identified that the proper functioning of an

internal market requires that cross-border insolvency cases

should operate efficiently and effectively.

4.4 The Treaty of Rome included “judicial co-operation” as one of

the methods by which an internal market could operate

successfully. The introduction of the Regulation comes within the

scope of the concept of judicial co-operation.

4.5 The Regulation is to be welcomed because more and more

insolvency cases involve cross-border issues. The EU had

identified the fact that the proper functioning of an internal

market would be hindered if there were incentives for parties to

transfer assets or judicial proceedings from one Member State to

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obtain a more favourable legal position (forum shopping).

Accordingly, action at a Community level was required.

4.6 The Regulation tries to achieve its objectives with three

mechanisms:-

(a) Jurisdiction.

(b) Recognition.

(c) Applicable law.

4.7 The implementation of the Regulation involves two key

strategies:-

(a) Main Proceedings.

(b) Secondary (territorial) Proceedings.

4.8 The Regulation sets out how the Main Proceedings and

Secondary Proceedings will interact against the backdrop of

jurisdiction, recognition and applicable law.

LANGUAGE

4.9 Compiling a Regulation inevitably leads to problems regarding

language. The words used in the Regulation must be

approached with care. Some of the words, on first reading, will

give a misleading impression given our normal use of those

words. However, once that mindset has been altered, then the

position becomes clear.

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4.10 For instance:-

“Proceedings”:- This word is used throughout the Regulation.

For us, we should think: “procedure”.

“Liquidator”:- This word is used extensively throughout the

Regulation. For us, it would be preferable to

keep in mind the image of “insolvency

practitioner”.

“Open”:- This word effectively means “begin”.

SCOPE

4.11 The Regulation applies to a company with a branch or assets in

more than one Member State. The Regulation does not apply to

companies with subsidiaries in other Member States.

4.12 The Regulation also applies in personal bankruptcy, but this

paper addresses the issues of corporate insolvency only.

4.13 Because it relates only to a single entity, the Regulation will have

limited effect - most businesses operating on an international

scale will have subsidiaries in other countries.

4.14 From an Irish perspective, “insolvency proceedings” (i.e.

procedures) covered by the Main Proceedings are:

(a) Creditors’ voluntary liquidation (with confirmation of

Court).

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(b) Compulsory winding up by the Court.

(c) Company examinership.

For the sake of completeness, the following are also covered:-

(e) Bankruptcy.

(f) The administration in bankruptcy of the estate of persons

dying insolvent.

(g) Winding up in bankruptcy of partnerships.

(h) Arrangements under the control of the Court which involve

the vesting of all or part of the property of the debtor in

the Official Assignee for realisation and distribution.

4.15 The areas which we will concentrate on are:-

(a) Creditors’ voluntary liquidation (with confirmation of

Court).

(b) Compulsory winding up by the Court (i.e. Court

liquidation).

(c) Company examinership (i.e. Examinership).

NOTE: Receiverships are not covered by the Regulation.

4.16 An issue immediately arises in relation to a creditors’ voluntary

liquidation. Before the implementation of the Regulation, there

was no process involving a creditors’ voluntary winding up being

“confirmed by a Court”. This been remedied by Statutory

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Instrument 333/2002. This S.I. allows the Master of the High Court

to “confirm” a creditors’ voluntary liquidation.

MAIN PROCEEDINGS : SCOPE

4.17 The “Main Proceedings” can cover all of the following:-

(a) Creditors’ voluntary liquidation.

(b) Court liquidation.

(c) Examinerships.

SECONDARY (TERRITORIAL) PROCEEDINGS : SCOPE

4.18 Secondary (territorial) Proceedings do not include Examinerships.

Therefore, the Secondary (territorial) Proceedings only cover:-

(a) Creditors’ voluntary liquidation.

(b) Court liquidation.

EXCLUSION

4.19 Insolvency proceedings involving the following are not covered

by the Regulation:-

(a) Insurance undertakings.

(b) Credit institutions.

30

(c) Investment undertakings

4.20 The reason for this is that these undertakings are subject to

special arrangements and, to some extent, the national

supervisory authorities have extremely wide ranging powers of

intervention.

JURISDICTION: MAIN PROCEEDINGS

4.21 Article 3.1 of the Regulation provides that the Courts of the

Member State in which the “centre of a debtor’s main interests is

situated” has the jurisdiction to open (i.e. begin) insolvency

proceedings (i.e. procedures). The place of the registered office

of a company is presumed to be the centre of its main interests,

unless there is evidence which suggests otherwise.

4.22 Some guidance to be found in paragraph 13 of the Preamble

which states that “the centre of main interests” should

correspond to the place where the debtor conducts the

administration of its interests on a regular basis and is therefore

ascertainable by third parties.

4.23 The State before which the proceedings are opened is called

“the State of the opening of proceedings”.

JURISDICTION : SECONDARY PROCEEDINGS

4.24 Article 3.2 says that where the centre of a debtor’s main interests

is located within the territory of any Member State, the courts of

another Member State have jurisdiction to open insolvency

proceedings against that debtor if there is “an establishment”

31

within the territory of that other Member State. However, the

effect of the Secondary (territorial) Proceedings is restricted to

assets of the debtor located in the relevant territories.

4.25 There are two circumstances where the Secondary Proceedings

may be opened before the opening of the Main Proceedings:-

(a) where the Main Proceedings cannot be opened because

the conditions for doing so in the “Main” State cannot be

satisfied.

(b) where Secondary Proceedings are requested by a creditor

in the second Member State within which the debtor has

an establishment or where the creditor’s claim arises from

the operation of that establishment.

4.26 The word “establishment” is defined as “any place of operations

where the debtor carries out a non-transitory economic activity

with human means and goods” (Article 2).

4.27 The purpose of the requirement for “an establishment” is to limit

forum shopping. The mere presence of assets in a Member State

will not be sufficient to enable the courts of that State to exercise

insolvency jurisdiction on a territorial basis.

RECOGNITION

4.28 Chapter II of the Regulation sets out the rules for recognition of

insolvency judgments. A judgement opening insolvency

proceedings delivered by a Court of a Member State which has

the appropriate jurisdiction will be recognised in all other

32

Member States from the time the Judgment becomes effective

“in the State of the opening of proceedings”.

4.29 Consequently, the appointment of a liquidator (i.e. insolvency

practitioner) will be recognised in other Member States without

any further formalities. This extends not only to the Order

appointing the liquidator but also the powers conferred on

him/her by the laws of the “main” State.

4.30 A certificate issued by the Court will be evidence of a liquidator’s

appointment. The liquidator may exercise all powers which

derive from his/her appointment including the power to remove

the debtor’s assets from the territory of any Member State in

which they are located, subject to special rules concerning

“rights in rem”.

4.31 The liquidator must give notice of his/her appointment in the

Member State in which he/she has been appointed and in any

other relevant Member State. The notice must state whether

he/she is the liquidator in the Main Proceedings or in the

Secondary Proceedings.

4.32 Publication is important in relation third parties honouring

obligations to the debtors. Article 24 provides that where an

obligation has been honoured in a Member State for the benefit

of a debtor who is the subject of insolvency proceedings

(opened in another Member State) when it should in fact have

been honoured for benefit of the liquidator in those proceedings,

the person honouring the obligation is deemed to have

discharged the obligation only if he/she was unaware of the

opening of the proceedings.

33

4.33 If the obligation is honoured before the appointment has been

advertised in the relevant Member State it is presumed that the

third party was unaware of the opening of the insolvency

proceedings. If the appointment has first been advertised in that

Member State, the third party is presumed to have been aware

of the opening of the proceedings and the onus will fall on

him/her to prove otherwise.

4.34 Recognition extends not only to judgments concerning the

opening of insolvency proceedings and the appointments of

liquidators but also to judgments concerning the course and

closure of insolvency proceedings. Those judgments can then

be enforced in accordance with Regulation 44/2001 (i.e. Brussels

2).

4.35 Article 25 deals with judgments handed down by a Court whose

judgment concerning the opening of proceedings is recognised

in accordance with the Regulation and which concern:-

(a) The course (of insolvency proceedings) and,

(b) The closure (of insolvency proceedings) and,

(c) Compositions (approved by the Court).

4.36 Judgments will also be recognised where those judgments derive

directly from the insolvency proceedings and which are closely

linked with them, even if they were handed down by another

Court. (Article 25).

34

4.37 This is a significant substantive provision because it extends the

concept of recognition and enforcement beyond basic issues

such as the liquidator’s appointment.

4.38 It is likely that judgments concerning the following issues will be

recognised:-

1. Fraudulent preference (S. 286, Companies Act 1963).

2. Invalidity of floating charges (S. 288, Companies Act 1963).

3. Return of assets improperly transferred (S. 139 Companies

Act 1990).

4. Contribution to debts (S. 140, Companies Act 1990).

5. Pooling of assets (S. 141, Companies Act 1990).

6. Personal liability – fraudulent/reckless trading (S. 297,

Companies Act 1963).

7. Personal liability – failure to keep proper books and records

(S. 204, Companies Act 1990).

8. Personal liability – misfeasance (S. 298, Companies Act

1963).

9. Examination by Court (S. 245, Companies Act 1963).

4.39 Until now, the ability of the insolvent company (through its

insolvency practitioner) to recover assets situated abroad to

35

discharge Court judgments has been very limited. These

recognition issues open up numerous possibilities for insolvency

practitioners.

APPLICABLE LAW

4.40 Article 4 of the Regulation states that 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. That Member State is referred to in the Regulation as

“the State of the opening of proceedings”. This is the concept of

lex concursus.

4.41 The law of the State of the opening of proceedings determines

all the effects of the insolvency proceedings, both procedural

and substantive. It governs all the conditions for the opening,

conduct and closure of the insolvency proceedings.

4.42 Therefore, the following issues will be dealt with under the law of

the State of the opening of the proceedings:-

(a) The ascertainment of assets/liabilities.

(b) Powers of debtor.

(c) Powers of the liquidator i.e. the insolvency practitioner.

(d) Conditions under which set offs may apply.

(e) The effect of the insolvency proceedings on contracts.

36

(f) Lodging/verification/admission of claims.

(g) Distribution of proceeds from realisation of assets.

(h) Ranking of claims.

(i) Rights of creditors.

(j) Costs/Expenses.

(k) Voidness /voidability /enforceability of acts detrimental to

all creditors.

EXCEPTIONS

4.43 There are a number of exceptions to the principle of

determination according to the law of the State of the opening

of proceedings. These matters concern:-

(a) Rights in rem.

(b) Set off.

(c ) Reservation of title.

(d) Immovable property.

(e) Payment/settlement systems.

(f) Employment contracts.

37

(g) Rights subject to registration (ships/aircraft).

SECONDARY PROCEEDINGS

4.44 The Regulation allows the opening of Secondary Proceedings in

another Member State after the commencement of the Main

Proceedings. However, to open Secondary Proceedings, the

debtor must have “an establishment” in that other Member

State.

4.45 As mentioned, an establishment means “any place of operations

where the debtor carries out non-transitory economic activity

with human means and goods”. This would encompass not only

a branch of the debtor but could include a commercial agent.

4.46 Secondary Proceedings do not apply to examinership – they are

purely winding up proceedings.

4.47 In addition, the Secondary Proceedings are restricted to the

assets of the debtor located in the territory of the relevant

Member State.

4.48 The law applicable to the Secondary Proceedings is the law of

the Member State within which those Secondary Proceedings

are opened. This is particularly important when it comes to the

priority/ranking of claims, the effects on contracts and the

potential for challenges to transactions such as fraudulent

preference. The laws of the State of the Secondary Proceedings

only apply in relation to realisation and distribution of the assets

within that State.

38

4.49 Secondary Proceedings may be requested by the liquidator (i.e.

insolvency practitioner in the Main Proceedings or any other

person empowered to request the opening of insolvency

proceedings under the law of the Member State within which the

Secondary Proceedings are requested. Therefore, if the

liquidator in the Main Proceedings does not request Secondary

Proceedings, it is foreseeable that a creditor in the second

Member State will do so.

4.50 The existence of parallel insolvency procedures will result in the

need for considerable co-operation between the relevant

insolvency practitioners.

4.51 The liquidator in the Main Proceedings, can request the Court in

the Secondary Proceedings to suspend those (secondary)

proceedings. This presumably may be required in a situation

where the liquidator is trying to benefit all the creditors of the

debtor.

4.52 A creditor may lodge a claim in both the Main Proceedings and

in any Secondary Proceedings. Each liquidator must lodge (in

the other proceedings) claims which have already been lodged

in his individual liquidation provided that doing so advances the

interest of the creditors concerned. Each liquidator is

empowered to participate in the other proceedings, as if he/she

were a creditor, in particular by attending creditor’s meetings

(Article 32).

4.53 Where the Secondary Proceedings result in a surplus after

payment of all claims allowed under the proceedings, the

second liquidator must transfer that surplus to the main liquidator.

39

CREDITORS – INFORMATION/CLAIMS

4.54 The Regulation promotes the basic principle of equality of

treatment of creditors.

4.55 Article 39 allows a creditor in a Member State (other than the

State of opening of proceedings) to lodge claims in the main

insolvency proceedings.

4.56 This will include tax authorities. The ability of a tax authority to

claim in the liquidation in another State overturns the widely

practiced rule of private international law by which Courts of

one State refused to enforce the Revenue laws of another. The

Regulation does not alter issues such as the priorities of claims

under Irish law. In Ireland, only debts to which Section 285,

Companies Act 1963 (as extended) will enjoy preferential status

in a liquidation. This means that the claim of a foreign revenue

authority must be admitted in the liquidation but not within a

category to which preferential status attaches.

4.57 There are two other important provisions preserving the

fundamental right of the equal treatment of creditors. These are

contained in Article 20:-

(a) After insolvency proceedings have been opened if a

creditor obtains total/partial satisfaction of his/her claim

from assets of the debtor situated in another Member

State, those assets must be returned to the liquidator.

(b) Where a creditor receives a dividend in the course of

insolvency proceedings in any State (main or secondary)

40

that creditor can only share in dividends in another set of

insolvency proceedings where creditors of the same rank

have already obtained an equivalent dividend.

4.58 Once the insolvency proceedings have commenced, the

liquidator/Court must inform known creditors in other Member

States. The notification will include time limits and other details

concerning lodging claims. It must be given in one of the official

languages of the State of the opening of proceedings. The form

must bear a heading “Invitation to Lodge a Claim: Time Limits to

be Observed”. That notation must be in all the official languages

of the institutions of the EU.

4.59 The creditor may then lodge a claim in the official language of

his/her own State. However, the lodgement of the claim must

bear the heading “Lodgement of Claim” in one of the official

languages of the State of the opening of proceedings.

4.60 Creditors can be required to provide a full translation of the

claim into the language of the State of the opening of

proceedings.

INSOLVENCY PRACTITIONERS : CO-OPERATION

4.61 It will be the duty of both the main liquidator and any other

liquidator appointed under Secondary Proceedings to keep

each other informed and to co-operate for the benefit of

creditors. There will be a duty on the liquidator to ensure

exchange of information and co-operation.

4.62 A creditor may lodge a claim in the Main Proceedings and also

41

in one, two or even more Secondary Proceedings if these have

been opened. Ultimately, creditors of the same standing are

entitled to the same proportion of distribution of the total assets.

Therefore, there will be high degree of co-ordination, co-

operation and exchange of information required between the

various insolvency practitioners.

4.63 It would appear that the reconciliation of all the claims will

eventually fall on the liquidator in the Main Proceedings. That

liquidator will be entitled to any surplus in Secondary

Proceedings.

CONCLUSION

4.64 The Regulation will transform the conduct of cross-border

insolvency proceedings involving member countries of the EU.

From an Irish perspective, there will be an immediate need for

reform of procedures/formalities (particularly in relation to the

treatment of claims and information for creditors).

4.65 That said, the Regulation will achieve its objective of improving

the efficiency and effectiveness of cross border insolvency

proceedings. It will also give greater powers to insolvency

practitioners in relation to remedies available to them. Given the

complexity of modern business, this regulation will have an

immediate impact and is to be welcomed.

42

Chapter Five

Transfer of Undertakings – Insolvency Issues

INTRODUCTION

5.1 The European Communities (Protection of Employees on Transfer

of Undertakings) Regulations 2003 (“the 2003 Regulations”) set

out specific provisions relating to bankruptcy and insolvency.

Under Council Directive 2001/23/EC of 12th March 2001 (“the

Directive”) relating to the transfer of undertakings, Member

States were given the right to tailor the requirements of the

Directive to local bankruptcy and insolvency situations with the

overriding statement that Member States were to take

appropriate measures with a view to preventing misuse of

insolvency proceedings in such a way as to deprive employees

of the rights provided for in the Directive.

5.2 The general principle is that the provisions of the Directive and

the 2003 Regulations transferring employment rights and

obligations from the transferor of a business or undertaking to its

acquirer shall not apply where the transferor is the subject of

insolvency proceedings. It is important to note that even before it

was defined by the 2003 Regulations the scope of this

“insolvency exclusion” has been considered by the European

and Irish Courts and given a narrow interpretation.

5.3 The case law of the European Court of Justice (“ECJ”) in

interpreting the Acquired Rights Directive 1 and of the Irish Courts

in considering the application of the precursor to the 2003

43

1 Council Directive 77/187/EEC

Regulations, the European Communities (Safeguarding of

Employees’ Rights on Transfer of Undertakings) Regulations, 1980

and 2000 (the “1980 Regulations”) will continue to be highly

relevant to situations arising under the 2003 Regulations.

5.4 The concern of the courts, reflected in one of the first cases to

consider the application of the Acquired Rights Directive to

insolvency situations, Abel’s Case2 is to ensure that undertakings

will not “engineer insolvencies so that employees can be

dismissed before businesses are transferred”. It is for this reason

that Courts have tended to suggest that any extra-judicial

process, such as the appointment of a receiver by a debenture

holder, is within the Directive whereas any insolvency process

under Court supervision may fall outside the Directive.

5.5 While the 2003 Regulations define for the first time in domestic

legislation the circumstances which are regarded as constituting

insolvency proceedings, the definition is based on the Directive

and reflects the case law of the ECJ.

DEFINITION OF “INSOLVENCY” UNDER THE DIRECTIVE

5.6 Article 5(1) provides:

“ Unless Member States provide otherwise, Articles 3 and 4 shall

not apply to any transfer of an undertaking, business or part of

an undertaking or business where the transferor is the subject of

bankruptcy proceedings or any analogous insolvency

proceedings which have been instituted with a view to the

liquidation of the assets of the transferor and are under the

44

2 Abels v Bedrijfsuereriging voor de Metaalindustrie en de Electrotechnische Industrie [1985] 2 ECR 469 (“Abel’s Case”)

supervision of a competent public authority (which may be an

insolvency practitioner authorised by a competent public

authority)”.

5.7 The Directive clearly contemplates that any insolvency

proceedings which will have the effect of excluding the general

provisions of the Directive as to transfer of employment rights and

obligations will be under the supervision of a competent public

authority. In Ireland the “competent public authority” for this

purpose would be the Courts which have jurisdiction under the

Companies Acts and the Bankruptcy Act 1988 (“the Bankruptcy

Act”).

5.8 The Directive also provides in Article 5 (2) for Member States to

provide, where Articles 3 and 4 apply to a transfer during

insolvency proceedings which are under the supervision of a

competent public authority that:

(a) the transferor’s debts relating to contracts of employment

which pre-date the transfer shall not transfer to the

transferee and/or alternatively that

(b) the parties may agree alterations with the representatives of

the employees to the employees’ terms and conditions of

employment with a view to ensuring the survival of the

business.

5.9 The Directive further provides that Member States may apply

Article 5(2) (b) to any transfer where the transferor is in a situation

of “serious economic crisis, as defined by national law” as

declared by a competent public authority and open to judicial

45

supervision.

DEFINITION OF “INSOLVENCY” UNDER 2003 REGULATIONS

5.10 Regulation 6 of the 2003 Regulations provides as follows:

“(1) Regulations 3 and 4 of these Regulations [transfer of

employee rights and obligations] shall not apply to any

transfer of an undertaking, business or part of an

undertaking or business where the transferor is the subject

of bankruptcy proceedings or insolvency proceedings.

(2) For the purposes of paragraph (1) bankruptcy

proceedings or insolvency proceedings shall mean the

following:

(a) Proceedings whereby the transferor may be adjudicated

bankrupt under section 14 or 15 of the [Bankruptcy] Act of

1988;

(b) Proceedings whereby the estate of a deceased transferor

may be administered in bankruptcy under section 115 of

the [Bankruptcy] Act of 1988;

(c) Where the transferor is a partnership, proceedings whereby

all the members of the partnership may be adjudicated

bankrupt under section 106 of the [Bankruptcy] Act of 1988;

(d) Proceedings whereby the transferor may become the

subject of a protection order under section 87 of the

[Bankruptcy] Act of 1988 where all or part of the property of

46

the transferor vests (under section 93 of that Act) in the

Official Assignee for realisation and distribution;

(e) Proceedings where the transferor may be wound up under

section 213 (e) of the [Companies] Act of 1963;

(3) Notwithstanding paragraph (1), if the sole or main reason

for the institution of a bankruptcy or insolvency

proceedings in respect of a transferor is the evasion of an

employer’s legal obligations under these Regulations, the

Regulations shall apply to a transfer effected by that

transferor”.

5.11 The 2003 Regulations do not take advantage of the opportunity

afforded by Article 5 (2) of the Directive to introduce provisions

allowing for the non-transfer of pre-transfer employment

obligations or the variation of post-transfer employment terms.

5.12 Irish law does not recognise the term “serious economic crisis”

Section 5(3) of the Directive will not apply in Ireland and the

specific definition of insolvency set out in Regulation 6 of the 2003

Regulations will apply.

BANKRUPTCY

5.13 Although Regulation 6 defines in some detail the circumstances

constituting “bankruptcy” for the purpose of the insolvency

exclusion, in practice most of the situations in which the Courts

have considered “insolvency” in the context of the Acquired

Rights Directive and the 1980 Regulations have to date related

to corporate insolvency.

47

5.14 The various categories of “bankruptcy” situations set out in

Regulation 6 are as follows:

(a) Section 14, Bankruptcy Act, 1988

S.14 relates to presentation of a petition for adjudication

by a creditor. Before such petition is presented certain

requirements set out in S.11 of the Bankruptcy Act must be

complied with and proven to the Court.

(b) Section 15, Bankruptcy Act, 1988

Under S.15 where a debtor presents the petition, the Court

will also require proof that he/she is unable to meet his/her

commitments to his/her creditors and as to the state of

his/her assets.

(c) Section 115

Either a creditor or the personal representative of the

deceased may present petitions to the Court in the case

of a deceased person where there are circumstances

which would have been sufficient to support a bankruptcy

petition against the deceased if he had been alive.

(d) Section 106

Under this section where two or more members of a

partnership obtain the protection of the Court and make

proposals to their creditors for the payment or compromise

48

of their joint and separate liabilities, the Court may

adjudicate all of the members bankrupt if any of the

proposals are not accepted.

(e) Section 87

Any debtor who is unable to meet his/her commitments to

creditors and petitions the Court for an approval of a

composition of his/her debts under Court control may be

protected until further order from any action or other

process (including a bankruptcy summons and the

registration of a judgment mortgage).

CORPORATE INSOLVENCY

5.15 Under the 2003 Regulations corporate insolvency is confined to

situations which come within Section 213 (e) of the Companies

Act 1963. This sub-section reads as follows:

“A company may be wound up by the court if -

(e) the company is unable to pay its debts”

RECEIVERSHIP

5.16 The High Court considered the application of the 1980

Regulations in the context of a receivership in the case of

Mythen –v- Employment Appeals Tribunal [1980] 1 IR 98. In that

case an employee whose employment had been terminated by

a receiver appointed by a debenture holder on grounds of

redundancy on the same day as the part of the business in

49

which he was engaged was sold to a purchaser successfully

argued that Irish domestic legislation relating to redundancy and

unfair dismissals should be interpreted in light of the provisions of

the Acquired Rights Directive.

5.17 The High Court reviewed in detail Abel’s case and affirmed the

importance of judicial control in determining whether the

exclusion from the Acquired Rights Directive should apply. It was

held that it could not be assumed that because the Directive

would not apply to a court ordered liquidation that it would not

also apply to a receivership which was an extra-judicial process.

VOLUNTARY LIQUIDATION

5.18 In Blaney and others –v- Vanguard Plastics Ireland Limited (in

voluntary liquidation) and others3 the Employment Appeals

Tribunal (“EAT”) considered whether the Acquired Rights

Directive and the 1980 Regulations applied to the sale by a

liquidator of a business as a going concern. The liquidator had

been appointed by the members of the company in general

meeting as part of a members’ voluntary liquidation process.

During the course of the liquidation the company continued to

trade. The purchaser of the business, the second named

respondent in the action, claimed that the business was insolvent

and that although the liquidator continued to trade that was

with a view to maximising the value of its assets.

5.19 The case is instructive because in the course of the decision the

EAT reviewed the ECJ authorities and also had regard to the

provisions of Council Directive 98/50/EC which contained the

50

3 EAT case no. UD 271/00

provisions relating to insolvency similar to those now set out in

Article 5 of the Directive. The EAT held that the 1980 Regulations

would apply to a transfer of the business unless the company

involved is the subject of a court liquidation (and has been

adjudged insolvent by a competent judicial authority).

5.20 The majority decision of the EAT stated

“ We are of the opinion, by a majority, that unless the

winding up of a business results in the cessation of that

business in its entirety the Directive, the purpose of which is

clearly to protect employment, logically should apply to

the situation”.

5.21 The principal ECJ authorities considered by the EAT were: -

5.22 (a) In the Jules Dethier Équipment case4 [1998] ECR 1061 the

company was in court ordered liquidation but was not under

Belgian Law the subject of insolvency proceedings. The objective

of the procedure was the liquidation of the company’s assets for

benefit of its creditors. The company had continued to trade

during the liquidation. The ECJ held “the Directive applies in the

event of a transfer of an undertaking which is being wound up

by the court if the undertaking continues to trade”.

(b) In the case of Sanders [1998] ECR 6965 the company was

in voluntary liquidation and the ECJ commented: “ it should be

noted that the reasons which led the court to hold in Dethier

Equipment that the Directive can apply to transfers that occur

while an undertaking is being wound up by the court are all the

51

4 Jules Dethier Equipement SA v-v Jules Dassy, Sovram SPRL, in liquidation

more pertinent when the undertaking transferred is being wound

up voluntarily”.

EXAMINERSHIP

5.23 In the case of D’Urso and others –v- Ercole Marelli [1991] ECR

3057 the ECJ held that the Acquired Rights Directive applied to

the company which was undergoing a compulsory Court

administrative liquidation where by Order it had been decided

that the undertaking was to continue trading for so long as that

decision remained in force.

5.24 Applying the analysis of the D’Urso case and the new definition of

insolvency contained in the 2003 Regulations the appointment of

an examiner under the Companies (Amendment) Act 1990

would seem to come within the provisions of the Directive and is

not specifically covered by the exceptions set out in Regulation 6

of the 2003 Regulations.

FAILURE TO COMPLY WITH 2003 REGULATIONS

5.25 A significant feature of the 2003 Regulations is the possibility that

a Court will, in the event of any claim brought before it, examine

the motivation of the parties in instituting the insolvency

proceedings. It is difficult to see how, in the absence of clear

bad faith, a Court can come to a conclusion that the “the sole

or main reason for the institution of a bankruptcy or insolvency

proceedings in respect of a transferor is the evasion of an

employer’s legal obligations”5 under the 2003 Regulations. The

52

5 Section 5(3) of 2003 Regulations

effect of such a determination by a Court is that the 2003

Regulations will apply to a transfer effected by that transferor.

5.26 Nonetheless, insolvency practitioners will now have to actively

consider the situation of employees and the possible application

of the 2003 Regulations in circumstances where assets or

businesses are disposed of as part of the winding up of a

company’s affairs.

5.27 Any strategm to avoid the application of the 2003 Regulations

may fall foul of Regulations 5(3) and/or 9 (1). The latter provides

that any provision in any agreement shall be void insofar as it

purports to exclude or limit the application of the 2003

Regulations.

5.28 The penalties for failure to comply with the notification and

consultation of employees’ requirements of the 2003 Regulations

and the overall remedies for employees set out in the

Regulations should also be considered.

CONCLUSION

5.29 The introduction in the 2003 Regulations of a definition of

“bankruptcy” and “insolvency proceedings” for the purpose of

excluding such proceedings from the ambit of the Regulations

will provide enhanced clarity to practitioners in determining

whether the 2003 Regulations must be considered at the time of

disposal of assets of the business.

5.30 The motivation of parties in instituting insolvency proceedings

which have the effect of depriving employees of protection of

53

54

the 2003 Regulations is likely to be the subject of judicial

examination. While this is consistent with the approach adopted

by the ECJ since the Acquired Rights Directive was introduced

the inclusion of a specific sanction for “abuse” of the insolvency

exclusion may have the effect of further limiting the

circumstances in which employers seek to rely on the exclusion.

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