The law of the State where an insolvency procedure is opened, applicable according to Art. 4, second paragraph, lett. m) of the Regulation (lex concursus), can be unenforceable pursuant to Art. 13 of the Regulation if according to the law applicable to the contract (lex contractus) the transaction cannot be challenged.
A German company, creditor of an Italian company, started an expropriation procedure of shares held by the Italian company in order to satisfy its claim. A settlement agreement was then reached – governed by German law due to a specific clause of the agreement – whereby the receivable was in part reduced pursuant to the set-off of the purchase price of the shares which had been seized and which were sold to the German company.
The debtor was declared insolvent before a year elapsed after the execution and performance of the settlement agreement. The creditor filed its residual receivable which was admitted to bankruptcy. Subsequently, the bankruptcy receiver claimed that the purchase price of the shares be repaid to the procedure challenging the set-off which had reduced the creditor’s receivable.
Pursuant to Art. 67, first paragraph, IBL payments made with means different from cash or other normal means of payment can be declared unenforceable and repaid to the bankruptcy procedure, if made within the period of a year before the declaration of bankruptcy. German insolvency laws provides at §§ 130 e 131 of the InsolvenzOrdnung that the receiver’s avoiding powers can reach only transactions performed within the period of three months before the petition was filed for the declaration of bankruptcy.
Art. 4, second paragraph, lett. m) of CE Regulation No. 1346/2000 provides that the receiver can exercise avoiding powers according to the law of the State where the insolvency procedure is opened (lex concursus). Art. 13 of the Regulation provides, however, that the lex concursus is unenforceable if the defendant proves that the transaction cannot be challenged according to the law applicable to the contract (lex contractus).
The settlement of the dispute
The German company, assisted by our Firm, objected to the claim of the receiver on the grounds that (i) first of all the residual claim resulting from the settlement agreement was duly admitted as a recognized claim to the insolvency procedure, thereby barring the receiver to challenge the underlying settlement agreement, as ruled by the Italian Court of Cassation with a decision of 14 July 2010, No. 16508; (ii) secondly, German law applicable both to the receivable and to the settlement agreement did not allow the receiver to challenge the transaction.
The parties then reached a settlement whereby the German company paid to the receiver a lower amount than that which was claimed.
This case points out that a claw-back action based on Italian insolvency laws within an insolvency procedure opened in Italy can have further limits than those provided by domestic laws, when the transactions which the receiver seeks to challenge are governed by a foreign law providing for conditions to challenge the transaction which are stricter than those provided by Italian law. Italian case law initially followed an interpretation which in substance refused to apply this principle of EU law to Italian insolvency procedures, but more recently it has been fully recognized.
It should be pointed out that the Regulation does not require that one of the parties be domiciled in a State different from that where the insolvency procedure was opened, but only that the law of a State different from the latter be applicable to the transaction. According to some commentators, a limit to the avoiding powers of a receiver should not be allowed when the foreign law was chosen by the parties, because this could allow a law shopping which may allow the parties to circumvent principle of the law of a State protecting the creditors generally.
Another point which must be underlined is that according to the Regulation the laws of two different States can be applicable to the claw-back action of the receiver: the lex concursus as to the grounds for bringing the action, and the lex contractus as to possible limits or exceptions in the specific case.