Select Committee on European Communities Second Report


Letter from Lord Tordoff, Chairman of the Committee, to Dr Kim Howells MP, Parliamentary Under-Secretary of State for Consumers and Corporate Affairs, Department of Trade and Industry

  Sub-Committee E (Law and Institutions) considered the draft Regulation at its meeting on 3 November. You will recall that the Committee examined in detail the proposal for a Convention and reported on it in 1996 (Convention on Insolvency Proceedings, Seventh Report 1995-96). The Committee notes your observation that the draft Regulation is in most respects a replica of the draft Convention. For this reason the Committee has concentrated on the implications of the conversion of the Convention into a Regulation under Title IV of the EC Treaty.

  You may recall that during the negotiations of the Convention a number of technical points (concerning floating charges, netting agreements and settlement arrangements in financial markets) of great importance in practice in the United Kingdom were dealt with by appropriate amendments to the Explanatory Report to the Convention. How will these matters be dealt with in the context of the Regulation? Has the Explanatory Report been satisfactorily transferred into the recitals and/or substantive Articles of the Regulation?

  A further point of difficulty at the time of conclusion of the Convention was its territorial application. Your Explanatory Memorandum does not address the question of the applicability of the Regulation to Gibraltar. Could you confirm that as an EC Regulation the proposed regime would, consistent with Article 299(4) of the EC Treaty, apply in relation to Gibraltar?

  The Committee would also be grateful if you could give your views on the implications of the conversion, from Convention to EC Regulation, as regards the external competence of the Community and the ability in future of the United Kingdom to enter into agreements (Treaties, Conventions etc.) with third States on insolvency matters. What are the consequences for participation by the UK in any other international forum and for the UK negotiating bilateral arrangements with non-Member States? Further, can you confirm that the Regulation would not prejudice the operation of section 426 of the Insolvency Act 1986 and the designation of countries and territories under that section?

  Your Explanatory Memorandum indicates that the United Kingdom has notified its wish to "opt in" to the Regulation. Has Ireland done likewise? Denmark has, as you will be aware, a different position under the Treaties. What will be the consequences of Denmark not being subject to the Regulation? Is it envisaged that there will be an arrangement whereby the Regulation's regime will apply as between Member States and Denmark? If so, what form will it take?

  Finally, the Committee notes that the Government is consulting practitioners on the proposed Regulation. The Committee is interested to learn the outcome of that exercise. It would be helpful if in due course you could provide a summary of responses.

  The Committee looks forward to receiving the information requested above. In the meantime the draft Regulation remains under scrutiny.

4 November 1999

Letter from Kim Howells MP, Parliamentary Under-Secretary of State for Consumers and Corporate Affairs, Department of Trade and Industry, to Lord Tordoff, Chairman of the Committee

  Thank you for your letter of 4 November.

  Before addressing the detail of the points you have raised, it may be helpful if I take this opportunity to bring you up to date with both recent and likely developments concerning the Regulation. The EU Civil Law Committee completed its consideration of the proposals on 3 November. The Regulation is now likely to be considered by COREPER on 17 or 24 November and by the Council of Ministers on 2 or 3 December. We have, of course, advised that the matter has not yet cleared parliamentary scrutiny. A revised text of the Regulation has just been received and I shall shortly submit a supplementary Explanatory Memorandum.

  Dealing now with the specific issues raised in your letter—


  We have secured amendments to Article 5.1 of the Regulation which I believe ensure that the floating charge is recognised as a right in rem. Article 5.1 now reads: "The opening of insolvency proceedings shall not affect the rights in rem of creditors or third parties in respect of tangible or intangible, movable or immovable assets (both specific assets and collections of indefinite assets as a whole which change from time to time) belonging to the debtor which are situated within the territory of another Member State at the time of the opening of proceedings".

  I am advised that the words in italics provide the certainty we are seeking in this area but the text may yet be subject to challenge at COREPER.


  It has not been possible to have all the details of the Convention's Explanatory Report transposed into the Recitals. Nevertheless I believe that the wording of Recital 24 (which remains unchanged) established clearly that contracting parties will continue to be entitled to rely on legal certainties, existing before insolvency proceedings were opened, remaining in place.


  Recital 25 recognises the need for special protection for payment systems and financial markets. It states unequivocally that: "For such transactions, the only law which is material should thus be that applicable to the system or market concerned". This is clearly an important provision for all Member States and I am advised that the Regulation provides adequate safeguards.


  I am advised that by virtue of Article 299(4) of the EC Treaty the Regulation would apply in relation to Gibraltar.


  The conversion of a Convention to an EC Regulation made under a Title IV legal basis can give rise to a co-extensive external Community competence. If the UK opts into the Regulation, it would not be free to enter into agreements with third countries which would affect the Regulation. I consider that the nature, scope and effects of the Regulation are such that it would be unlikely to give rise to a substantial extension of external competence by the Community. I do not consider that the Regulation will restrict the applicability of section 426 of the Insolvency Act 1986 in relation to third countries. The operation of that section in relation to such countries will not affect the Regulation. Moreover, designation of countries under section 426 is not dependent on agreement with the country in question, nor on reciprocal treatment by that country.


  I can confirm that Ireland has exercised its opt-in. The position of Denmark is covered by a separate Protocol to the Amsterdam Treaty but I can let you known that it has indicated that it would wish to enter into appropriate arrangements with other Member States.

  You have asked me to provide a summary of the responses received by the Department to the limited consultation referred to in paragraph 11 of the Explanatory Memorandum. I presume that the Committee is in fact interested primarily in those areas of possible difficulty which consultees have identified. These can be summarised as follows:—

    (1)  Inadequate identification of entities to which the Regulation would not apply, that is investment and insurance undertakings.

    (2)  Time of opening of proceedings in a creditor's voluntary winding-up.

    (3)  Is a floating charge a right in rem?

    (4)  Netting and set off.

    (5)  Languages in which notifications to creditors are to be given.

    (6)  Equal treatment of creditors throughout the Community.

  You will recognise that a number of these concerns mirror those which your Committee previously expressed and with which I have already dealt. I believe that other concerns are already adequately addressed in the Regulation and, as regards the identification of investment and insurance undertakings, my officials are exploring ways in which that identification can be achieved.

17 November 1999

Letter from Lord Tordoff, Chairman of the Committee, to Kim Howells MP Parliamentary Under-Secretary of State, for Consumers and Corporate Affairs Department of Trade and Industry

  Thank you for your letter of 17 November. This was considered by Sub-Committee E at its meeting on1 December. The Committee is grateful for the information you have given and has decided to clear the document from scrutiny.

  As regards the application of the Regulation to Gibraltar, the Committee notes that you are advised that the Regulation would apply. Can the Committee infer from your statement that the problems which beset the conclusion of the Convention have now been satisfactorily addressed and that insolvency proceedings commenced in Gibraltar will be recognised in all other Member States?

2 December 1999

Letter from Kim Howells MP, Parliamentary Under-Secretary of State for Consumers and Corporate Affairs, Department of Trade and Industry, to The Lord Tordoff, Chairman of the Committee

  Thank you for your letter of 2 December. I am pleased to note that the Regulation has now been cleared from scrutiny.

  I am afraid that the Gibraltar issues remains unresolved, although nothing has happened to affect the advice that by virtue of Article 299(4) of the EC Treaty the Regulation would apply in relation to Gibraltar. After consultation with the authorities there, we are also satisfied that the UK's entries in the annexes to the Regulation are apt to include Gibraltarian insolvency proceedings.

  The text of the Regulation was agreed at a meeting of the Justice and Home Affairs Council on 2 December. However, the proposal was not adopted then because the opinion of the European Parliament and of the Economic and Social Committee is still awaited and particularly because Spain maintained a reservation on the territorial scope of the Regulation. Of course, that reservation is not unique to the Regulation and it would seem that further progress will not depend on successful completion of negotiations between ourselves and Spain on the Gibraltar question as it affects a wide range of draft EC legislation.

23 December 1999

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