Complications of implementing EC regulations on insolvency proceedings

  • 2004-09-22
  • By Inga Kacevska
The European Commission's Regulation on Insolvency Proceedings 2000 (Council Regulation No. 1346/ 2000 of May 29, 2000), in effect as of May 31, 2002, provides that member states (excluding Denmark) should recognize insolvency proceedings in other member states. The regulation provides uniform rules on jurisdiction of courts and authorities in cross-border insolvency proceedings.

Within the regulation, Article 3 establishes that insolvency proceedings may be opened in a court of the member state where the debtor's main interests are situated. For the company the main interest is presumed the place of the registered office. Under Article 4, the applicable law to the insolvency proceedings is the law of the member state where such proceedings are opened. The regulation also preserves the availability of secondary insolvency proceedings to lodge claims.

As the regulation is directly applicable in Latvia, insolvency proceedings should be recognized and effective in all other member states without further formalities. What's more, the proceedings encompass all the debtor's assets on a worldwide basis, and the appointed insolvency office holder will have the authority to act in all member states provided that he complies with the laws of the local state.

Recently a client from the U.K. asked us for legal advice on whether the Latvian courts would recognize a bankruptcy order against a physical person who owns property and other assets in Latvia. The first question raised was whether Latvian courts would recognize the bankruptcy order, dated 2002, since Council Regulation 1346/2000 is directly applicable in Latvia from May 1, 2004, only. The regulation itself does not have retroactive effect, but it does not address whether it affects at the time after accession of the new member states.

We believe that the regulation may be applied as it is the procedural law, and court proceedings in civil matters shall be regulated by the norms that are in force during the adjudication of the matter, the performance of individual procedural actions or the execution of a court judgment (Civil Procedure Law, Article 3). Still, only the relevant court may decide whether Regulation 1346/2000 or the legislation that was in force at time of rendering the bankruptcy order is applicable in this case.

The second question is even more complicated: How the bankruptcy order made against a physical person should be enforced, as Annex A of the regulation in regards to Latvia does not cover bankruptcy of individuals. Only insolvency proceedings within the scope of the regulation benefit from the regulation's system of recognition. To fall within this system, the proceedings must be listed in the annexes to the regulation; proceedings not so listed shall not be eligible for recognition under the regulation. Moreover, section two of the law On the Insolvency of Undertakings and Companies clearly states that this law applies to all undertakings and companies registered in the enterprise register, thus excluding the insolvency of individuals.

This question has no clear answer, as there is no judicial practice. We contacted the institutions responsible for the implementation of the regulation, and they could not give us the legal statement on this matter, saying there was a lack of court practice in such cases.

In regards to recognition of an insolvency order against a company (as set out by Article 25 of Regulation 1346/2000), the judgment on insolvency is automatically recognized in all EU member states. The enforcement of judgments of courts in other member states shall depend on prior authorization by the authorities of the state in which it must be carried out. The system of authorization is provided by EU Council (Brussels) Regulation 44/2001 of Dec. 22, 2000, on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters, articles 31-51. But in particular, Article 39 of the Brussels regulation states that the application shall be submitted to the court or competent authority indicated in the list in Annex II. Thus, the application shall be submitted to the district court in accordance with the Latvian Civil Procedure Law.

The enforcement of foreign judgments, including bankruptcy orders, is regulated by the Civil Procedure Law part on Recognition and Execution of Foreign Court Judgments, which is harmonized with EU law as of May 1, 2004 EU Council (Brussels) Regulation is also directly applied, thus any ruling rendered by the EU member state's court is enforceable in Latvia and vice versa.

Inga Kacevska is attorney at law

at Skudra & Udris in Riga