Supreme Court Decision in Olympic Case

Trustees of the Olympic Airlines S.A. Pension and Life Assurance Scheme v Olympic Airlines SA [2015] UKSA 27

The Concept of "Establishment" under EU Regulation 1346/2000 for Winding Up Proceedings

Let’s take the following scenario:

  • Company A is based in Greece with its centre of main activities in Greece. It is in the process of liquidation. It also has an establishment in the United Kingdom. The question arises: what connection must a foreign company have with the UK to entitle the English court to wind it up where its centre of main interests (“COMI”) was in another member state of the European Union? The answer lies in the interrelationship between Regulation 1346/2000 (Insolvency Proceedings) and the Insolvency Act 1986.

On 29 April 2015, the Supreme Court provided its judgment in Trustees of the Olympic Airlines SA Pension and Life Assurance Scheme v Olympic Airlines SA [2015] UKSC 27, which concerned the interpretation to be given to “establishment” under EU Regulation 1346/2006 on Insolvency Proceedings. The Supreme Court decided that the term “establishment” must be read as a whole: it referred to a fixed place of business, including business activity that was being carried on there consisting in dealings with third parties. Acts of internal administration were not in themselves sufficient.

In arriving at its decision, the Supreme Court had regard to the following:

Facts

On 2 October 2009, Olympic Airlines SA (“OA”) was wound up by the Athens Court with on-going liquidation proceedings in Greece. The OA had a pension scheme but with a £16 million deficit. Under s.75 Pensions Act, it was required to make good the deficit but was unlikely to be able to do so. Under the Pensions Act 2004, members of the pension scheme were eligible for compensation from UK’s Pension Protection Fund where there was a shortfall. The compensation fund is payable from the date when a “qualifying insolvency event” occurred.

In this case, there were two dates for the “qualifying insolvency event”. First, the date of 20 July 2010 when the trustees of the pension scheme presented a winding up petition in England. Under the Insolvency Act 1986 (“IA 1986”), the winding up of a company is considered as a “qualifying insolvency event”: s.121(3)(g) Pensions Act 2004. English courts therefore had jurisdiction to wind up a foreign company under the IA 1986. This is subject, however, to EU Regulation 1346/2000 on Insolvency Proceedings (“Regulation”) which provides, inter alia, that where the company has its “centre of main interests” in another member state of the European Union, the English court can only wind it up if it has an “establishment” in England namely “any place of operations where the debtor carries out a non-transitory economic activity with human means and goods” (Article 2(h) of the Regulation).

Another possible date was 2 October 2014 which was the fifth anniversary of commencement of winding-up proceedings in Greece. This date may have been treated as the qualifying insolvency date event by the Pension Fund (Entry Rules) (Amendment) Regulations 2014.

The Trustees of the pension fund preferred that compensation should be treated as payable as from 20 July 2014 rather than 2 October 2014.

The issue before the Supreme Court was whether OA had an “establishment” in the UK on 20 July 2010 which would entitle the English court to make a winding up order under the Regulation in order to satisfy the requirement that a qualifying insolvency act occurred on 20 July 2010. However, by this date, OA had:

  • Closed all its offices in the UK except its head office in London
  • Ceased all commercial operations
  • Terminated all contracts of remaining staff except for some managers and an accounts clerk who were retained on short term contracts to coordinate with the Athens liquidator and assist in the disposal of assets

The head office was effectively an empty shell. Its principal task was to pay any bills and undertake administrative duties at its head office in London.

At first instance, the judge decided that OA’s activities were “non-transitory economic activities” and OA therefore had an “establishment” in the UK, so that a winding up order could be made.

The Court of Appeal did not agree and held that the remaining activity consisted only in winding up the company’s affairs and this was not sufficient to make a winding up order.

The Supreme Court held (Lord Sumption giving the only judgment with the other Law Lords agreeing) that the definition of “establishment” under the Regulation must be read as a whole. It referred to a fixed place of business. Further, the business activity carried on there must consist in dealing with third parties. Merely dealing with internal administration was not sufficient. AS OA was not therefore carrying on a business activity at its head office on 20 July 2010, it did not have an establishment in the UK.

Comments

  • The principal issue for consideration was what connection must a foreign company have with the UK to entitle the English court to wind it up where its centre of main interests (“COMI”) was in another member state of the European Union? This depended upon the interpretation to be given to the words “economic activity” under Regulation 1346/2000 and its interrelationship with the IA 1986.
  • The case highlights the interconnection between European Law and English law. S.221 IA 1986 provides that the English court has jurisdiction under domestic law to wind up a foreign company. Where, however, companies have COMI in another member state of the EU, the English court’s power is regulated by Article 3 of the Regulation concerning international jurisdiction. This provides, inter alia, that the courts of the member states within the territory of which the centre of a debtor’s main interests is situated will have jurisdiction to open insolvency proceedings. The place of the registered office will be presumed to be the centre of its main interests in the absence of proof to the contrary. Further, where the centre of a debtor’s main interests is situated within the territory of a Member State, the courts of another Member State will have jurisdiction to open insolvency proceedings against the debtor only if he possesses an “establishment” within the territory of that Member State. The effect of those proceedings will be restricted to the debtor’s assets situated in the territory of the latter Member State.
  • The term “centre of its main interests” (“COMI”) is not defined under the Regulation. However, Recital (13) of the Regulation provides that it should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties.
  • According to the Supreme Court, the jurisdiction to bring secondary proceedings in another European jurisdiction is based on the existence of an “establishment” within its territory. Article 2(h) of the Regulation defines an “establishment” as “any place of operations where the debtor carries out a non-transitory economic activity with human means and goods”. The term “goods” effectively refers to “assets”. The Supreme Court relied on various sources to identify the meaning of “establishment”. First, it relied heavily on the Vigos-Schmit Report (“Report”) which provided detailed commentary on the Convention on Insolvency Proceedings (which Convention was not ratified by member states) on which the EU Regulation is based. The Report highlighted that an “establishment” referred to a place of operations through which the debtor carries out an economic activity on a non-transitory basis, and where he uses human resources and assets. Place of operations means a place from which economic activities are exercised on the market (externally) whether of a commercial, industrial or a professional nature. There should be a minimum level of organisation. A purely occasional place of operations cannot be an establishment. A certain degree of stability is required. The main factor is how the activity appears externally and not the intention of the debtor. See too Case C-396/09 Interedil Srl (in liquidation) v Fallimento Interedil Srl [2001] CCR 1-9939; and Shierson v Vlieland-Boddy [2005] 1 WLR 3966; and In re Office Metro Ltd [2012] BCC 829.
  • Article 2(h) definition of “establishment” must be read as a whole and not broken down into discrete elements. The relevant activities must be:
    • Economic
    • Non-transitory
    • Carried on from a “place of operations”
    • Using the debtor’s assets and human agents
  • There is a requirement for:
    • a fixed place of business
    • business dealings with third parties
    • activities being exercised on the market
    • consideration of the character of the economic activities
  • The following will not suffice:
    • merely internal administration
    • where the company has no subsisting business
  • OA was at the tail end of its business operations in London. It had ceased further dealings with third parties, closed its offices, and significantly reduced the number of employees to the bare minimum. OA was reduced to an empty shell. There was no further economic activity involved and it was transitory in nature. It was not a place of business operations through human resources and assets. These factors taken as a whole pointed to OA not being an “establishment” within the meaning of the Regulation, and were not sufficient to give English courts jurisdiction to wind up OA in England. Had OA carried on some economic activity including dealings with third parties, the position may have been different.

Company Law Handbook 2015-100

Saleem Sheikh is author of Company Law Handbook 2015 (Bloomsbury Professional, 2014)

 

 

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