September 16 2011 French courts await ECJ opinion on intermingling of assets Dentons | Insolvency & Restructuring - France Insolvency & Restructuring FactsExtension for intermingling of assetsIssuesOn April 13 2010 the Court of Cassation rendered a noteworthy decision sending two interlocutory questions to the European Court of Justice (ECJ). In anticipation of the ECJ's decision, this update examines the issues raised before the Court of Cassation.FactsOn May 7 2007 the Marseille Commercial Court opened liquidation proceedings against French company Médiasucre International. The court-appointed liquidator filed a claim against Italian company Rastelli Davide, applying for the liquidation proceedings to be extended to Rastelli on the basis of the concept of the intermingling of assets (Article L621-2 of the Commercial Code).The Marseille court declined jurisdiction, considering it had no jurisdiction on the matter as Rastelli had neither a registered office nor a place of business in France.However, the court of appeal decided that the lower court had jurisdiction, as the claim related not to the opening of new proceedings against Rastelli, but rather to the extension of existing proceedings to that company. The appeal court held that, pursuant to Article L621-2 of the Commercial Code, the court that has jurisdiction to extend proceedings is the one that opened proceedings against the first company and that, according to the principle of the universality of bankruptcy, only one court has jurisdiction over all the company's assets, regardless of where those assets are located.Rastelli appealed the decision before the Court of Cassation, claiming that the decision contravened Article 3 of the EU Insolvency Regulation.The Court of Cassation sent two interlocutory questions to the ECJ (filed under Case C-191/10). Extension for intermingling of assetsArticle L621-2 of the Commercial Code states: "The opened insolvency proceedings may be extended to one or more other persons if their assets are intermingled with those of the debtor or when the legal entity is a sham."DefinitionFrench law sets out no criteria for implementing this article; therefore, reference should be made to case law. There must be a body of evidence showing that there is an intermingling of assets (eg, the intertwining nature of the assets and liabilities of both companies) which makes it impossible to distinguish the assets of one company from the other.It should always be borne in mind that French judges consider there to be an intermingling of assets where there is: an unjustified absence of consideration; or abnormal financial relations. These situations are relatively common. It is not unusual in a group of companies to see a société civile immobilière as the holding company (ie, a non-trading real estate holding company), with a subsidiary acting as the trading company.In this case the holding company usually leases a property to its subsidiary and is an 'understanding' lessor. For example, should the lessor fail to recover the rental income over a long period, leading to an increase of its indebtedness as it has no other resources, this can be considered to be an intermingling of assets.In addition, there is an intermingling of assets where there is a failure to recover rental income over several years or a waiver of almost all rents that should have been paid without the lessor sending a formal notice to pay and in the absence of any valuable consideration for the lessor.Extension procedureOnly formal insolvency proceedings (ie, safeguard, receivership or liquidation) can be extended.An application to the court for the extension of formal proceedings on the basis of the intermingling of assets can be made by: the court-appointed administrator; the court-appointed creditor's representative or one of the creditors chosen by the others to represent them; or should the administrator fail to file a claim, the liquidator or the public prosecutor. An extension can also be pronounced by the court itself. However, creditors of the company to which formal proceedings might be extended are not entitled to file a claim for extension.Any claim must be filed before the adoption of a reorganisation or liquidation plan.Effects The extension of formal proceedings has both procedural consequences and practical consequences. This update focuses on the practical consequences.Through the intermingling of assets, each company becomes liable for all debts of both companies. However, the two legal entities remain in place. This has certain consequences for their legal representatives. For example, if a legal representative commits any wrongful acts in the course of the performance of his or her duties, he or she can be held personally liable only for the debts of the business that he or she ran, not for the debts of the company to which the proceedings were extended.In addition, any debt existing between the original company and the extended company vanishes by way of a set-off mechanism.Through the intermingling of assets, the creditors benefit from a general right to all assets of both companies, meaning that the creditors of the extended company, even though they are dealing with a solvent company, will compete with the creditors of the original company, which also have rights over the assets of the extended company. However, any personal security that might have been given in favour of a creditor is limited to the extent of the initial debt.After the extension has been decided, creditors of both companies must file their proof of debt only once. In other words, a single proof of claim applies to both companies. If the proof of debt was filed against the original company before the extension was pronounced, the creditor must file a second proof of claim against the extended company. In such cases the usual time limits to file a proof of claim do not apply.Issues In the case at hand Rastelli invited the Court of Cassation to rule on whether:"the jurisdiction rules set forth in the EU regulation authorise the extension -- on the basis of intermingling of assets – of formal proceedings opened by a French judge to a company having its registered office and hence, presumably, its centre of main interests, in another Member State."The question put to the court is complex. Article 4 of the EU Insolvency Regulation states that:"the law applicable to insolvency proceedings and their effects shall be that of the Member State within the territory of which such proceedings are opened, hereafter referred to as 'State of the opening proceedings... [and] the law of the State of the opening proceedings shall determine the conditions for the opening of those proceedings, their conduct and their closure."Therefore, provided that main proceedings have been validly opened in France, the French courts should be able to apply all relevant provisions of French law, including Article L621-2 of the Commercial Code.Thus, the provisions on the extension of proceedings allow a French judge to open proceedings against a company with its centre of main interests in another member state. However, this conflicts with the jurisdiction rules set forth in Article 3 of the EU Insolvency Regulation, which states that "the courts of the Member State within the territory of which the centre of a debtor's main interests is situated shall have jurisdiction to open insolvency proceedings".Therefore, the case at hand raises a number of issues. Does Article L621-2 of the Commercial Code violate the jurisdiction provisions set forth in the EU regulation? If so, how will the ECJ attempt to reconcile those provisions? Could the provisions be combined, or should Article L621-2 be applied only to French companies? If so, on what basis?Although the ECJ has not yet handed down its decision, it can safely be assumed that its decision will make for interesting reading.For further information on this topic please contact Constantin Achillas at SNR Denton by telephone (+33 1 53 05 16 00), fax (+33 1 53 05 97 27) or email ([email protected]).