Cross-Border Insolvency Under the EU Insolvency Regulation

The framework for cross border insolvency in Germany

Cross border insolvency arises whenever a debtor has assets, creditors, subsidiaries or establishments in more than one country. Within the EU (except Denmark), the European Insolvency Regulation (recast), Regulation (EU) 2015/848 (EIR), determines which courts may open proceedings, which law applies and how proceedings are recognised in other member states (Regulation (EU) 2015/848). It has applied since 26 June 2017.

For proceedings opened outside the EU, including in the United Kingdom since Brexit, German autonomous international insolvency law in §§ 335 ff. InsO applies. For German companies with foreign subsidiaries, foreign groups with German operations and international lenders, these rules decide where a restructuring can be run and whether it will be effective everywhere it needs to be.

The EIR is based on the principle of modified universality: main proceedings opened in the member state where the debtor has its centre of main interests (COMI) have effect throughout the EU, while secondary proceedings can be opened in states where the debtor has an establishment, limited to local assets. Recognition is automatic, and the law of the state of opening generally governs the proceedings and their effects, subject to important exceptions protecting rights in rem, set-off and certain contracts.

COMI and main proceedings

The courts of the member state where the debtor's COMI is located have jurisdiction to open main insolvency proceedings. The COMI is the place where the debtor conducts the administration of its interests on a regular basis and which is ascertainable by third parties. For a company, the registered office is presumed to be the COMI unless proven otherwise, but this presumption applies only if the registered office has not been moved to another member state within the three months before the request to open proceedings (Article 3(1) EIR). The look-back period addresses forum shopping by companies that move their seat shortly before filing.

In practice, COMI disputes arise where a company's registered office is in one state but its management, key decisions and creditor relationships are elsewhere, for example a holding company registered in Luxembourg or the Netherlands with its management in Germany, or a German subsidiary of a foreign group whose decisions are taken at group headquarters. Courts examine where the head office functions are carried out in a way ascertainable by creditors. A court opening proceedings must examine its jurisdiction of its own motion and state the grounds, and the decision can be challenged by the debtor or creditors.

Secondary proceedings and undertakings

Where main proceedings are opened in one member state, the courts of another member state in which the debtor has an establishment may open secondary proceedings, whose effects are limited to the assets located there.

Secondary proceedings protect local creditors and local priority rules, but they can complicate a restructuring by splitting the estate and the sale process. The EIR therefore allows the insolvency practitioner in the main proceedings to give a unilateral undertaking in respect of assets in the other state that, when distributing those assets or their proceeds, it will respect the distribution and priority rights that local creditors would have in secondary proceedings (Article 36 EIR).

If the undertaking is approved by local creditors, the court may refuse to open secondary proceedings. These so-called synthetic secondary proceedings have become an important tool in pan-European restructurings. For local creditors, the undertaking replaces a separate local estate with a contractual-style promise backed by the liability of the practitioner, so its wording and the treatment of local preferential claims deserve close scrutiny. In a cross border insolvency involving a German establishment, German employees, tax authorities and secured creditors will want to know how their position compares with a German secondary proceeding before they approve.

Applicable law and protected rights in cross border insolvency

As a rule, the law of the state of the opening of proceedings governs the conditions for opening, the conduct and closure of the proceedings, the effects on contracts, the ranking of claims and avoidance actions. The EIR, however, protects certain legitimate expectations. The opening of proceedings does not affect rights in rem of creditors or third parties in assets that are situated in another member state at the time of opening, such as mortgages, pledges and security assignments (Article 8 EIR). Similar protection applies to set-off rights permitted by the law applicable to the debtor's claim, retention of title, contracts relating to immovable property, employment contracts and payment systems.

Avoidance actions are governed by the law of the state of opening, but a defendant can resist the action if it proves that the challenged act is subject to the law of another member state and is not challengeable under that law. This defence is important for German counterparties in foreign insolvencies and for foreign counterparties in German insolvencies; see our insight on insolvency contestation under § 133 InsO for the German rules.

German proceedings with foreign elements

Where German courts open main proceedings, the German rules on international insolvency law in §§ 335 ff. InsO complement the EIR and apply directly in relation to non-EU states. The basic rule is that insolvency proceedings and their effects are governed by the law of the state in which they are opened (§ 335 InsO). A German insolvency administrator therefore claims assets abroad on the basis of German law, but whether a foreign court or registry cooperates depends on recognition there. Outside the EU, administrators may need local recognition proceedings, for example under laws based on the UNCITRAL Model Law, before they can take control of foreign assets.

For groups with several German companies, the court competent for one group company can, on application, declare itself competent for the proceedings of other group companies as well, unless the applicant is obviously of minor importance for the group (§ 3a InsO). Administrators of group companies are obliged to inform each other and cooperate, as long as this does not prejudice the creditors of their own proceedings (§ 269a InsO). These rules complement the EIR cooperation duties in a cross border insolvency where some group companies are in Germany and others elsewhere in the EU.

For creditors, the practical consequences of a cross border insolvency are often more important than the theory. Lenders need to know which court will open proceedings, which law governs their security, whether foreign avoidance rules can reach payments they received and which practitioner they will deal with. Suppliers and customers need to understand how contracts are treated under the law of the opening state. Early analysis of these questions helps creditors decide whether to support a restructuring, seek protective measures or file claims in several jurisdictions, and it avoids missing filing deadlines in foreign proceedings.

Group insolvencies and coordination

The EIR does not create a single group insolvency; each group company is subject to its own proceedings, in the state of its own COMI. It does, however, require insolvency practitioners and courts in proceedings concerning members of the same group to cooperate and communicate (Articles 56 to 60 EIR), and it offers optional group coordination proceedings in which a coordinator develops a group coordination plan (Articles 61 to 77 EIR). German law adds its own group insolvency rules, including a group venue at which proceedings for several German group companies can be concentrated and cooperation duties for administrators and debtors in self-administration.

In practice, group restructurings often aim to establish COMI for several group companies in one jurisdiction, where the facts support it, so that proceedings can be run in one court with coordinated plans or sales. Our page on insolvency proceedings and self-administration explains the German procedure.

Brexit, UK schemes and third-country proceedings

Since the end of the Brexit transition period, the EIR no longer applies to proceedings opened in the United Kingdom, and UK courts no longer benefit from automatic recognition in Germany. Recognition of foreign insolvency proceedings in Germany is now governed by German autonomous law: the opening of foreign insolvency proceedings is recognised unless the foreign courts lacked jurisdiction by German standards or recognition would lead to a result obviously incompatible with essential principles of German law, in particular fundamental rights (§ 343(1) InsO).

This regime applies equally to proceedings from the United States, Switzerland and other non-EU states. Recognition is automatic in the sense that no separate recognition procedure is required, but a foreign representative may still need to prove the opening and the appointment, and German registries and courts may examine whether the conditions of § 343 InsO are met before giving effect to the foreign proceedings, for example when a foreign administrator seeks to dispose of German real estate or shares in a German company.

Whether English schemes of arrangement and restructuring plans under Part 26A of the UK Companies Act are recognised in Germany is less clear, because they are not insolvency proceedings in every case and the Brussels Ia Regulation no longer applies to UK judgments. Recognition may depend on the characterisation of the procedure and on the general rules on recognising foreign judgments, and German courts have not settled the question definitively. Restructurings of German companies with English-law debt documents therefore increasingly use German tools such as the StaRUG, sometimes alongside UK proceedings. Our insight on cross-class cram-down under the StaRUG explains the German alternative.

How TRW & Co helps

We advise companies, groups, lenders, investors and insolvency practitioners on cross border insolvency and restructuring involving Germany. We analyse COMI and forum options, coordinate German proceedings with foreign main or secondary proceedings, advise on undertakings under Article 36 EIR, assess the effect of foreign proceedings on German assets and security, and represent clients in recognition and avoidance disputes. For international groups we design coordinated restructuring strategies, working with our international clients team and counsel abroad. This page is general information, not legal advice. To discuss a matter, please contact us.