Jurisdiction in insolvency proceedings: unchartered territory beyond Galapagos

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While the timing of competing English and German insolvency applications in Re Galapagos1 allowed for clear determination of jurisdiction under the UK Insolvency Regulation, there remains potential uncertainty as to how similar competing applications made following 31 December 2020 will be resolved in the post-Brexit environment.

Background

In August 2019, as part of a restructuring proposal, Galapagos SA ("Galapagos"), a company incorporated in Luxembourg, applied to the English High Court for an administration order on the basis that Galapagos’ centre of main interests ("COMI") was in England. Before the hearing of this application, a group of Galapagos’ creditors exercised certain voting rights2  to replace Galapagos’ (English) directors with a German director, in an attempt to shift Galapagos’ COMI to Germany. At the direction of that new director, Galapagos opposed the English administration application and, instead, made an ex parte application to the Düsseldorf Court for a preliminary insolvency order. 

In September 2019, the Düsseldorf Court granted the application and, under the Recast European Insolvency Regulation ("EIR"), designated the German insolvency proceedings as the "main proceedings" after finding that Galapagos’ centre of main interests ("COMI") was in Germany. Under the EIR, the Member State in which a debtor has its COMI4 has exclusive jurisdiction to open "main proceedings" and all other Member States are required to recognise and give effect to such proceedings automatically. In making such a finding, the Düsseldorf Court determined that it had exclusive jurisdiction over Galapagos’ insolvency and, accordingly, the English High Court (being within the ambit of the EIR until 31 December 2020 under certain Brexit withdrawal provisions)5, had to effect an automatic stay of the English application while the question of jurisdiction remained unresolved. 

Following various appeals6, the Bundesgerichtshof (the German Federal Court of Justice) made a preliminary reference to the European Court of Justice ("CJEU") regarding the interpretation of the EIR in order to determine whether the Düsseldorf Court did have exclusive jurisdiction to open main insolvency proceedings. The CJEU confirmed that, under the EIR, it is the court of the Member State in which the initial request to open insolvency proceedings has been made which retains exclusive jurisdiction to open main proceedings – if, at the time of such request, the debtor’s COMI is located there – unless and until that court relinquishes jurisdiction. Therefore, so long as the European regime applied to the UK (which it would until the end of the transition period on 31 December 2021), the Düsseldorf Court was prohibited from declaring jurisdiction to open main proceedings where a request remained open with the English High Court. This would be the case, the CJEU held, even if Galapagos had moved its COMI to Germany following the initial application to the English High Court (which certain creditors had tried to effect e.g., by installing the German director). 

With the benefit of the CJEU’s decision, certain other creditors of Galapagos applied to the English High Court to lift the stay of the English insolvency proceedings and for an order that the company be wound up.

Decision

Mrs Justice Bacon granted the application to make a winding-up order by reference to three questions:

(i) Should the German proceedings be characterised as "main proceedings" opened before the end of the transition period, so as to attract the application of the EIR and require the English Court to stay the English insolvency proceedings in favour of those in Düsseldorf?

Although the German proceedings were opened before the end of the withdrawal period, Bacon J considered that the CJEU decision had determined7 that the German proceedings were not validly opened and therefore the German proceedings did not attract the application of EIR. As a result, the English High Court was under no obligation to stay the insolvency application before it. 

(ii) If the EU regime did not apply, did the English High Court have jurisdiction under the post-withdrawal, UK insolvency rules, to make a winding up order?

The parties agreed that, under the Insolvency (Amendment) (EU Exit) Regulations 2019 ("UKIR"), jurisdiction to make a winding up order would be determined by the location of Galapagos’ COMI at the time of the request to commence insolvency proceedings. The Respondents argued that Galapagos’ COMI remained at the place of its incorporation (i.e., Luxembourg) and had not been shifted to England at the date the English application was made. Bacon J disagreed and, applying English case law on EIR8, found that Galapagos’ COMI had been moved to England, since the "objectively ascertainable location of the centre of management and administration of [Galapagos’] interests" was in England.9

(iii) Should the English Court should use its discretion to make a winding up order?

The English High Court found that it had discretion under the UKIR to make the winding up order sought, and that it also had discretion under s.221 of the Insolvency Act 1986 on the basis that: (i) there was a sufficient connection to England10; and (ii) winding up in England offered practical benefit to creditors.11

Comment

This decision suggests that the English Court will apply its previous decisions on the EIR and apply, or at least take into account, CJEU decisions, to interpret the UKIR COMI provisions. In this sense, the decision offers reassurance that the meaning of "COMI" under UKIR is unlikely to diverge from its meaning under the EIR in the immediate future. If an EU Member State court/CJEU determines a company’s COMI is in that Member State, Galapagos indicates that an English Court would likely follow that conclusion. 

However, the decision also nods to potential uncertainty as tensions between the EIR and UKIR are yet to be tested. The English High Court acknowledged that, had the application to open insolvency proceedings in Germany been made after the expiry of the withdrawal period, the fact of any pending English proceedings would not have prevented a German court from declaring jurisdiction to open main insolvency proceedings where Galapagos’ COMI was, by then, situated in Germany. The English Court considered that such declaration would be "valid".12

Galapagos therefore suggests that, following the withdrawal period, the same set of facts that had existed in this case might see: 

(i) a court of an EU Member State declare jurisdiction to open main proceedings there, notwithstanding that an application was pending in the English Court and the company's COMI was, at the time of the English application, in England; and 

(ii) the English Court also conclude it has jurisdiction, on the basis that the company's COMI at the date of the original application was in England. 

This possible outcome might encourage creditors to take steps to move a company's COMI to a jurisdiction (considered) more favourable to their particular rights than England, and to start insolvency proceedings there, in a bid to frustrate the primacy of pending insolvency action in England. In any event, it seems likely that this tension has the potential to result in future disagreements over jurisdiction where insolvency proceedings are commenced in parallel in England and EU Member States.

The decision provides a useful example of the impact of Brexit on cross-border insolvency proceedings and the increased potential for the divergence of legal opinion between the EU and the English courts on valid jurisdiction in the post-Brexit environment. Although some of the challenges raised by this case are likely to become less significant as we move further away from the end of the transition period (i.e., whether the EIR applies to insolvency proceedings commenced in the UK prior to 31 December 2020), Galapagos illustrates the possible lack of cohesion between the EU regime and the UKIR, and the scope for that to increase as the English courts apply the UKIR in future. Currently, the UKIR broadly reflects the EIR, but it will be interesting to observe developments in this area as the English Court is asked to apply and interpret the UKIR. For example, while the UKIR preserves the grounds of jurisdiction in the EIR, it expressly extends this to include "any grounds for jurisdiction to open such proceedings which apply in the laws of any part of the United Kingdom."13

1 Re Galapagos SA [2022] EWHC 1633 (Ch).
2 Afforded to them under a share pledge.
3 Regulation (EU) 2015/848 on insolvency proceedings [2015] OJ L141/9.
4 A determination of COMI is based on factual considerations and is generally held to be where the company conducts the administration of its business and is ascertainable by third parties. 
5 Withdrawal Agreement [2019] OJ C384/1.
6 In particular, there had been doubts as to whether or not the Dusseldorf Court had properly been made aware of the English application.
7 It did not matter for the English Court's analysis that the German Courts had not set aside the German insolvency order, in accordance with the CJEU judgment.
8 In particular, the Court applied the principles summarised by Trower J in Re Swissport [2020] EWHC 3556 (Ch) 15.
9 [84]. The Court arrived at this conclusion because "the company management activities" such as in-person meetings and conference calls "were as a matter of fact conducted predominantly from England", from the office the company had established in Hampshire.  The fact that the company retained a bank account in Luxembourg and its meetings were deemed, on the basis of the company's Articles of Association, to have occurred in Luxembourg did not undermine the Court's conclusion.
10 As to (i), the Court found sufficient connection to England in the fact that there was a separate application before the English Courts seeking declarations as to the validity of a restructuring that had taken place of Galapagos' debt pursuant to an English law and courts-governed intercreditor agreement.  
11 As to (ii), the Court found benefit to creditors in the fact that a winding up order would put the company under the control of a receiver.  This would allow the company to participate in the parallel restructuring litigation more objectively than with the incumbent German director, who was under the control of creditors opposed to the restructuring.
12 Bacon J summarised: "…up to and until 31 December 2020, the combined effect of the pending application before the High Court and the Recast EIR was to prohibit the German courts from declaring jurisdiction to open main insolvency proceedings. After that date, however, they could quite validly do so, if GSA's COMI was by then situated in German territory." [48].
13 UKIR, Article 1.

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