Free Choice in International Company Insolvency Law in Europe

Abstract

Within the European Union, firms are now free under Articles 43 and 48 EC to choose a corporate form of their liking, regardless of the actual head office (real seat) of the company. However, they are not free to choose the applicable bankruptcy regime. Under Article 3(1), first sentence, of the European Insolvency Regulation (EIR), jurisdiction for main insolvency proceedings lies with the courts of the Member State in which the debtor has the centre of its main interests (COMI). The COMI standard is fuzzy and allows last-minute forum shopping by the management/shareholders of a distressed debtor, to the detriment, especially, of creditors who cannot (easily) adapt. Given the poor performance of the COMI standard, it seems worthwhile to explore the merits of an alternative approach that gives more room to freedom of choice in international company insolvency law in Europe. Various models of free choice are discussed: free choice of the applicable insolvency law, free choice of the applicable insolvency law insofar as it contains substantive – as opposed to procedural – provisions, free choice of the bankruptcy forum (‘unconstrained forum choice’) and free choice of the bank–ruptcy forum in combination with the company law applicable to a company (‘constrained forum choice’). This article shows that, on efficiency grounds, the last model is to be preferred. It would improve matters compared to the status quo, and it would also be easy to implement in practice by changing the wording of Article 3 EIR. Even though this solution is preferable as a policy option, it is not mandated by Articles 43 and 48 EC. However, these treaty provisions do not mandate the COMI standard either. European legislation is thus free to effect the desirable changes to the EIR.