Contributed by Paul Bromfield and Sally Willcock
On May 9, Weil’s London Office achieved a resounding and significant litigation win in Trillium (Nelson) Properties v Office Metro Limited EWHC 8703 of 2011. The case is of considerable general importance to restructuring and insolvency professionals in the UK, and throughout Europe, as it represents the first time the English court has ruled on key aspects of the interpretation and application of theEC Insolvency Regulation (Council Regulation EC No 1346/2000) (“EIR”) and, in particular, the requirements for the existence of an “establishment” under that regulation.
As Weil Bankruptcy Blog readers may be aware, the EIR is mandatory legislation which has been directly in force in each of Europe’s twenty-seven Member States (except Denmark) since May 2002 and it comprises a set of rules to determine, in cases where a debtor is headquartered in the European Union, in which Member State main insolvency proceedings can be opened, and similarly, where secondary proceedings can be opened.
Much of the caselaw generated to date by both the national courts of the Member States and the European Court of Justice (“ECJ”) has concerned aspects relating to the opening of main proceedings, which under the EIR are permitted to be opened only in that single jurisdiction in which the debtor’s “centre of main interests” (commonly referred to as “COMI”) is located.
The key issue in Trillium, however, was whether the English court had jurisdiction to open secondary proceedings. The EIR provides at Article 3 that, where main proceedings have been opened in one Member State, secondary proceedings are only permissible in another Member State if the debtor “possesses an establishment within the territory of that other Member State.” “Establishment” is defined at Article 2(h) EIR as “any place of operations where the debtor carries out non-transitory economic activity with human means and goods.”
Office Metro Limited was incorporated in 1998 and had its registered office in England. It was part of the Regus Group, and its principal activity was to hold shares and provide funding facilities to other companies in the Regus Group. To that end, Office Metro entered into more than 50 guarantees of mainly English, but also overseas, properties. It did not carry out any independent trade. The company had provided Trillium with a guarantee in respect of one of the leases, and when the tenant defaulted in paying its rent, Trillium called on the guarantee.
In October 2011, after Office Metro failed to meet payments due under the guarantee, Trillium petitioned the English High Court for an order to wind it up. Some days earlier, in September 2011, a Luxembourg trustee in bankruptcy had been appointed over Office Metro. By the time of the hearing in England on Trillium’s winding up petition, Trillium had accepted that the COMI of Office Metro had been transferred to Luxembourg in 2008 and that the contemplated winding up proceedings in England could therefore only be secondary proceedings. Office Metro, acting by its Luxembourg trustee, denied that there was any establishment in existence as at the date of the winding up petition so that the English court had no jurisdiction to make a winding up order.
The evidence established that, following the transfer of its head office to Luxembourg in 2008, Office Metro had rented premises, held board meetings there and had registered its headquarters in the Luxembourg companies registry. The company had retained its registered office filing in the English Companies Registry as it remained a company incorporated under the English Companies Acts and, as such, was required to continue to comply with English Companies Act requirements, including the filing of accounts. Insofar as activities were conducted from England, they were provided centrally by the Regus Group service company as agents for Office Metro, and Office Metro never had any employees in England. The service company dealt with payments of rent and communicated with landlords in respect of guarantees entered into by Office Metro, but it acted pursuant to directions given from Luxembourg. The service company also attended to or coordinated any of Office Metro’s accounting obligations that were required to be done in England (with accounting services otherwise being predominantly supplied in Luxembourg). Office Metro maintained four bank accounts in the UK where its main assets were shares in its subsidiaries and indemnities from group companies whose rent was paid by the company under the relevant guarantees.
Timing of Establishing “Establishment”
Before evaluating whether Office Metro had an establishment in England, the court was required to decide at what point in time the existence of an establishment had to be proven. Mann J concluded that this question should be tested at the date the insolvency proceedings were opened (i.e., here, the date the winding up petition was presented) rather than at the date of the guarantee transaction upon which the debt was founded. He held that such an analysis was consistent with the clear wording of Article 3 EIR, which appeared to refer to a single moment in time (both in relation to determining COMI at Article 3(1) and in relation to determining the existence of secondary proceedings at Article 3(2) and 3(3)) and that any other approach would fly in the face of this wording. Moreover, he concluded, this approach was consistent with the approach taken to determining COMI as articulated by the ECJ in Interedil and it would be odd if a different time were to apply for establishing secondary proceedings. Mann J rejected arguments that as a matter of principle, and to prevent undesirable forum manipulation, the test should be applied as at the date of the transaction giving rise to the claim, as he considered that no such policy was articulated in the EIR. The incompletely reported caselaw upon which Trillium sought to rely in this regard was wrong insofar as it held that an historic establishment rather than a current establishment was sufficient for the purposes of opening secondary proceedings.
Applying the Test to the Facts in the Case
On the question of whether as at the date of the presentation of the petition Office Metro had an establishment in England, the judge accepted both that Office Metro had a “place of operations” in England (even though it neither owned nor leased property there) and also that it did carry out some functions via agents in England so as to satisfy the “human means” requirement of the establishment definition at Article 2(h) EIR. However, he went on to find that the continued functions of the company in the UK did not amount to “economic activity” within the meaning of the EIR. This was because the evidence established that by the time of the presentation of the petition, the only “activity” carried out for Office Metro in England was or related to its continuing guarantor liabilities and its ongoing requirements to comply with English company law filings at the English companies registry. The judge concluded as follows:
Being in a state of liability, with the need sometimes to pay out on that liability and take a bit of advice, is not an economic activity for the purposes of the Regulation. Neither is seeking accounting or legal assistance on other matters. Forwarding post ….. is not an economic activity carried on there. It is something which goes on so that someone can carry it on somewhere else.
Mann J went on to hold that the residual activities were in any event not a consistent activity so that if, contrary to his view, they were “economic activities,” they were transitory for the purposes of the EIR. In the circumstances, the Court dismissed the winding up petition.