Security Rights and the European Insolvency Regulation
- Start date: 1 May 2014
- End date: 1 May 2016
- Funder: Economic and Social and Humanities Research Council (ESRC)
- Primary investigator: Professor Gerard McCormack
- External co-investigators: Sophia Tang (Leeds); Reinhard Bork (Hamburg); Laura Carballo Pineiro (Santiago de Compostela); Renato Mangano (Palermo); Tibor Tajti (Central European University)
The project will critically analyse and evaluate the provisions governing rights in rem (security rights) and transactional avoidance in the European Insolvency Regulation (Regulation 1346/2000) and address whether there is scope for reform of the law. Security rights are essentially rights over property intended to secure payment of a debt or obligation. The project will
(1) assess the extent of the protection given to security rights under the main EU legal traditions;
(2) evaluate the policy reasons behind protection;
(3) consider whether, and to what extent, this protection also applies in the context of insolvency proceedings affecting the debtor;
(4) consider the strength of the case for divergence from general legal norms in insolvency;
(5) assess the rationales for the invalidation of security rights in the interests of the general body of creditors;
(6) assess whether, and under what conditions, security rights created prior to the institution of insolvency proceedings can be set aside in those proceedings;
(7) evaluate the appropriateness of the description of security rights in Article 5 and whether this description is in conformity with the standard attributes of security rights under the main EU legal traditions;
(8) assess the appropriateness of the protection given to rights under Article 5 in light of the Regulation’s overriding objectives to facilitate the more effective administration of cross-border insolvency cases in Europe; to ensure the equitable treatment of creditors and to prevent the movement of assets from one jurisdiction to another so as to take advantage of a more favourable legal position (forum shopping);
(9) to assess the compatibility with Article 5 of particular provisions of national law that may (a) impose temporary stays on the enforcement of security rights during the course of insolvency proceedings or (b) permit the paying off or writing down of secured debt contrary to the wishes of the secured creditor;
(10) evaluate the reasons behind subjecting security rights over assets located in another EU State to the law of the State that opens the insolvency proceedings in respect of avoidance of pre-insolvency transactions;
(11) evaluate whether the safe harbor protection from the effects of avoidance law given to rights in rem under Article 13 is in conformity with the general philosophy of the Regulation and reflects policies that are common to the main EU legal traditions
(12) address whether reform of the law relating to security rights and the avoidance of transactions is appropriate and desirable.
Security rights are of fundamental importance to the granting of credit - recital 25 of Regulation 1346/2000. They are generally considered to increase the availability and lower the cost of credit but there appear to be divergent views on the extent to which it should be possible to create security rights over assets - see recital 11.
Moreover, laws in many countries – avoidance laws - strike at advantage gaining by creditors in the period immediately before formal insolvency proceedings are instituted. It is seen as potentially unfair to other creditors who may be forced into taking enforcement proceedings against the debtor and this may precipitate the premature liquidation of the debtor with an overall loss of economic value.
The project will assess the conception of security rights according to the different European legal traditions and evaluate the appropriateness of the protection given to security rights in light of:
- developments in those European legal traditions
- the objective of Regulation 1346/2000 to facilitate the more effective administration of cross-border insolvency cases
- the need for security in the context of the financial crisis
- the basic principles of ensuring fairness between creditors
- forestalling premature liquidation
- reinforcing the collective nature of the insolvency process.
The growth strategy put forward by the Commission, Europe 2020, is designed to achieve economic recovery and sustainable growth, targeting as primary goals a higher investment rate and the preservation of employment. The rescue of troubled enterprises is at the core of this strategy and the project is intended to facilitate a greater concordance between the strategy and the evolution of Regulation 1346/2000.