Supreme CourtOlympic Airlines, entered into winding up proceedings in Greece in 2009. It had operations in England and staff who were members of a defined benefit pension scheme with an estimated funding deficit of around £16 million.  The pension trustees presented a winding up petition in the English Courts on the basis that if Olympic could be wound up in England, the pension scheme would be eligible for Pension Protection Fund (PPF) entry.  However, as the main insolvency proceedings were taking place in Greece, where Olympic’s main interests were situated, the jurisdiction of the courts to wind up in other Member States was limited under the EU Insolvency Regulation to those in which Olympic possessed an “establishment”. “Establishment” is defined under Article 2(h) of the EU Regulation 1346/2000 on Insolvency Proceedings as: “any place of operations where the debtor carries out a non-transitory economic activity with human means and goods.”

The question for the court was the extent of the connection required between a foreign company and the UK to entitle an English court to wind it up, if its centre of main interests was in another member state of the European Union. This depended on the meaning of “economic activity” and “establishment” under the Insolvency Regulation.

Factual Background

Olympic’s operations in England consisted of a head office in London, premises in Manchester and a ticket office at Heathrow. The UK premises were shut down over time from November 2009. On 29 September 2009 all commercial operations in London were shut down and on 17 June 2010 the trustees were informed that the employment of UK staff would be terminated. Evidence was also given of there having been little contact with customers after June 2010, due to the knowledge of Olympic’s likely liquidation.  At the date of the trustees’ petition only three people were employed in the UK on ad hoc, short term contracts to deal with instructions from liquidators, the disposal of the company’s assets in England and the payment of bills, post and telephone calls etc. The London head office closed in December 2011, but the branch’s bank accounts were frozen at the end of August 2010.

Appellate history

The High Court found that the requirements for an “establishment” and in turn “economic activity” were met. The Chancellor found that on the date of the petition, there was economic activity as the remaining employees were carrying out matters concerning the winding up of the company’s affairs, by disposing of assets and distributing proceeds amongst creditors. The Chancellor in particular found that requiring external market activities would be inconsistent with the general operations of companies in liquidation which “by definition do not engage in external market activities any longer”.

The Court of Appeal overturned the decision. They found that “economic activity” had to consist of more than the winding up of the company’s affairs. In coming to their decision, the Court of Appeal placed weight on the Virgós-Schmit Report, which provided commentary on the Convention on Insolvency Proceedings on which the Insolvency Regulation is based. The report emphasized that a place of operations meant somewhere where economic activity was exercised “on the market, i.e. externally”. The court also held that the Chancellor’s findings that companies in liquidation did not engage in external market activities was incorrect, as insolvency proceedings could include instances where the company intended to trade out of its difficulties.

Supreme Court Decision

On 2 and 3 February 2015 the trustees’ appeal was heard by the Supreme Court, and Lord Sumption gave the sole judgment on behalf of the court. After the Court of Appeal decision, the law on entry into the Pension Protection Fund was changed. An additional event was defined in which main proceedings were agreed in an EU member state and secondary proceedings were opened in the UK then set aside – where schemes were eligible for PPF entry under this provision, an insolvency event is deemed to occur five years after the commencement of the insolvency proceedings in the other Member State. This meant that the Olympic’s pension scheme would be deemed to qualify on the 2 October 2014. However, the trustees sought to establish that the English court had jurisdiction to wind up the company, meaning the qualifying event occurred on 20 July 2010. The question for the Supreme Court was therefore, again, whether Olympic had possessed an “establishment” and was conducting “economic activity” under the Insolvency Regulation, at the time when the winding up order was made.

Lord Sumption again placed weight on the Virgós-Schmit Report. He highlighted the reference to economic activities being “exercised on the market (i.e. externally)” when considering whether there was an “establishment”. Reference was also made to Interdil Srl (in liquidation) v Fallimento Interdil Srl [2011] ECR I-9939 in which the Court of Justice observed that the activities must be “sufficiently accessible to enable third parties, that is to say in particular the company’s creditors, to be aware of them”. Lord Sumption said this did not simply mean that a debtor was locatable by a “brass plate on a door” but rather that the character of the economic activities must “by their nature involve business dealings with third parties”. He also found that the definition of establishment in article 2(h) had to be “read as a whole” and could not be broken down into elements as each one “colours the others”. Therefore the relevant activities must be (i) economic (ii) non-transitory, (iii) carried on from a place of operations and (iv) use the debtor’s assets and human agents. He went on to suggest this envisaged a fixed place of business and the reference to assets and human agents envisaged dealings with third parties and not pure acts of internal administration.

Lord Sumption also disagreed with the Chancellor at first instance and stated that some activities conducted by a company in liquidation may satisfy the definition. He referred to a liquidator carrying on a business with a view to disposal and disposing of stock in trade on the market, neither of which was the case on the facts of Olympic. He added that if internal administration was enough to establish jurisdiction then the “economic activities” requirement would add little to the rest of the definition and would almost always be satisfied by a debtor retaining premises in the UK.

On the facts, Lord Sumption found that Olympic was not carrying on any business activity on the relevant date; the business activities had ceased some time before. The appeal was dismissed and Lord Sumption found that showing at least some subsisting business with third parties was an ‘acte clair’ (although the degree of visibility to outsiders was open to argument). Therefore as there was no external business conducted from the London office on the relevant date, there was no point in principle in referring to the European Court of Justice.

Case Comment

As highlighted by the Virgós-Schmit Report there has long been a battle over the term “establishment” between universalists, who want a single insolvency procedure within the EU, and the territorialists, who want a local procedure based on the presence of business assets. There is in fact likely to be an amendment to the Insolvency Regulation, which is predicted to come into effect in 2017 and which is expected to alter the definition of establishment to include any place of operations where the debtor carries out or has carried out in the 3 months prior to the request to open main insolvency proceedings a non-transitory economic activity. Therefore the impact of this case may be fairly short term.

In the meantime the practical point from this case for pensions trustees wishing to gain access to the Pension Protection Fund is to seek to open proceedings as soon as possible. The longer any winding up proceedings continue the less likely a court is to find relevant economic activity and in turn an establishment under the Insolvency Regulation.