Insolvency Forum Shopping, Revisited

Abstract

Over the past several years, European firms have been active in cross-border regulatory arbitrage to benefit from a more favourable bankruptcy regime. The European Insolvency Regulation (EIR), an instrument determining the competent courts and the applicable law in EU cross-border insolvency proceedings, has long sought to curb such efforts. A major reform which came into force in 2017 has the specific objective of further restricting abusive versions of forum shopping, in particular by introducing a three-month ‘suspension period’ for forum shopping activities carried out shortly before the debtor files for insolvency. This chapter demonstrates that these efforts fail to achieve a satisfactory response to forum shopping. The reform started from the sensible proposition to distinguish between beneficial and ‘abusive’ variants of forum shopping. However, the key element of the reform, the suspension period, is both over-inclusive and under-inclusive in its scope of application and may, at best, be entirely without effect. But even then, the new rule will also create significant uncertainty and undermine effective ways of business restructuring. At the same time, the reform does not address new variants of forum shopping, such as the use of the British ‘scheme of arrangement’ by continental European firms. Such ‘procedural’ forum shopping may be effected entirely without any physical relocation, as it does not come within the scope of application of the EIR Recast. The laudable goal of the EIR Recast to improve the pricing of risks in cross-border insolvencies is jeopardised where the rules on jurisdiction are unclear or uncertain. The 2017 reform is a missed opportunity to improve the system by attaching substantive bankruptcy law and jurisdiction to a company’s registered office as the only clear and predictable connecting factor. Instead, the reform introduces new riddles and inconsistencies. Such steps will blur rather than improve the pricing of insolvency risk and thereby ultimately drive up the cost of capital.