Article 7(2)(m) of Regulation No. 2015/848 (“Regulation”) (as Article 3 of 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). Article 16 (replacing Article 13 of Regulation No. 1346/2000) 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 or lex causae).
According to the Regulation, therefore, the laws of two different States can be applicable to an avoiding or claw-back action by the receiver: the lex concursus as to the grounds for bringing the action, and the lex causae as to possible limits or exceptions in the specific case.
This unusual rule is meant to achieve (i) predictability as to the law applicable to the action which could be brought by a future insolvency receiver, in the sense that this law is linked to the Centre of Main Interests (COMI) of the debtor, recognizable by third parties, which determines the Member State where the main insolvency proceedings could be opened and in turn the law applicable to avoiding actions (lex concursus), and (ii) reliability for creditors as to the certainty of transactions which cannot be voided or disregarded under the law applicable to the transaction itself (the lex contractus or lex causae), which the parties chose or which is determined on the basis of general choice of law rules.
According to the Regulation, therefore, an avoiding action based on, for example, Italian insolvency law within an insolvency procedure opened in Italy, can have limits in addition to those provided by domestic law (the lex concursus), when the transaction which the receiver seeks to challenge is governed by a foreign law, say German law, which allows a challenge to the transaction which is stricter than those provided by Italian law (for example, German law provides for shorter look-back periods when a receiver is exercising avoiding powers). Italian case law initially refused to apply this principle of EU law to Italian insolvency procedures, but more recently it has reversed this position fully recognising the principle concerned.
- a) choice of law clauses of the contract
The Regulation does not require that one of the parties be domiciled in a State different from that where the insolvency procedure was opened. Rather it only requires that the law of a State different from the latter is applicable to the transaction. According to some scholars, a limit to the avoiding powers of a receiver should not be enforced when the foreign law was chosen by the parties, because this could allow law shopping resulting in a circumvention of principles of the law of a State protecting the creditors generally. However, the ECJ recently held in Vinyls (C-54/16) that Article 13 (now Article 16) applies irrespective of the parties being established in different Member States, as long as there is no fraudulent intent or abuse in the choice of a foreign law (in Vinyls both the insolvent company and the defendant were Italian entities and they chose English law to govern a charter agreement).
- b) procedural rules – burden of proof – statute of limitations
Another issue regards the procedural rules applicable to the receiver’s action. In Vinyls the ECJ ruled, with respect to time bar rules for the defendant to raise the Article 13 objection (based on Regulation No. 1346/2000), that these are the rules of the Member State where the action is brought (the lex fori). However, procedural rules may also affect the burden of proof and statute of limitations exceptions, which are not consistently considered as such in different jurisdictions (e.g., in Italy these are considered as rules of substantive law):
(i) in Nike (C-310/14) the ECJ ruled that the burden of proof lies on the defendant to show that the lex causae does not allow the transaction to be voided, but once this has been satisfied, then a national Court may rule that the burden of proof is then on the plaintiff (the receiver) to show that there is a rule or principle of the lex contractus which indeed allows the transaction to be challenged. The ECJ also ruled that if the defendant objects that the transaction can be voided only in certain circumstances, the burden of proof lies on the defendant to prove that those circumstances do not exist in the specific case;
(ii) in Lutz (C-557/13) the ECJ ruled that the defendant has the right to raise procedural defences such as a objection on the basis of a statute of limitations based on the lex causae and not on the lex fori.
- c) scope of the lex contractus relevant for an Article 16 objection
Within the context of Article 16 of the Regulation (identical to Art. 13 of Regulation No. 1346/2000) which provides that the defendant should prove that the lex causae «does not allow any means of challenging that act in the relevant case» it is uncertain whether this refers only to the insolvency law provisions or to any other provision or principle of the law governing the Article 16 objection. In Nike the ECJ ruled that the lex contractus should be taken as a whole and not limited to insolvency provisions. In Lutz the ECJ expanded this idea to include rules which are not consistently considered as procedural, such as those relating to statute of limitations.
The ECJ also ruled (both in Vinyls and Nike) that the lex causae should be considered not in an abstract manner, but referring to the specific factual circumstances of each case.
Article 6 of the recast Regulation provides that the courts of the Member State within the territory where insolvency proceedings have been opened in accordance with Article 3, shall have jurisdiction for any action which derives directly from the insolvency proceedings and is closely linked with them, such as avoidance actions. Regulation No. 1346/2000 did not provide expressly for such rule, which was however established by the ECJ in Seagon (C-339/07) from 2009. The new Regulation does not therefore add anything to the applicable EU law.
- a) new rules for bringing avoiding actions along with related actions
Article 6 of the new Regulation contains new provisions according to which the receiver is expressly entitled to bring avoiding actions along with other connected actions, against the same defendants, so that the receiver can bring the avoiding action before the Courts of a Member State having jurisdiction in civil and commercial matters pursuant to Regulation No. 1215/2012 for such connected actions. This new rule thus widens the choice of the Courts where the receiver can lodge the avoiding action.
- b) non-EU domiciled defendant
When the defendant in an action brought by the receiver is domiciled in another Member State, there is no doubt that the Courts of the Member State where the insolvency procedure was commenced are competent to hear the case.
This conclusion becomes uncertain when the only cross-border element of the insolvency procedure is the domicile of the defendant in a non-Member State: in this case, it is uncertain whether it should be the domestic law of another State to be applied (and not the Regulation) in order to determine which Courts have jurisdiction.
In Schmid (C-382/12) the ECJ ruled that the Regulation applies to an avoiding or claw-back action brought by the insolvency receiver when the defendant is not domiciled in a Member State. The approach taken by the ECJ is important for the following reasons:
(i) the general principle of the so-called vis attractiva of the place of jurisdiction determined according to Article 3 of the Regulation is not only confirmed, but is widened in scope;
(ii) a primary role is attached to the aim of determining competence in cross-border insolvency proceedings according to foreseeable criteria;
(iii) this aim is linked to the COMI test, which becomes the main criterium in order to determine competence in insolvency procedures, not only for commencing the procedure, but also for all the actions and situations connected with the procedure arising at a later time.
However, the approach taken by the ECJ may raise the risk that the decision – taken by the Court whose competence is determined according to Article 3 of the Regulation – cannot be subsequently enforced, when it needs to be recognized in another State. The risk is that the law of the State which is not part of the EU does not recognize the vis attractiva concursus according to the Regulation as a sufficient link to the Member State whose Courts took jurisdiction and issued the decision. In this case, the decision may not be granted an exequatur and could not therefore be enforced, being of no use to the receiver.
In Schmid therefore, the Court of Justice chose in favour of certainty with respect to the place of jurisdiction rather than to actual enforceability of the decision.
A possible remedy to this potential problem is to conclude bilateral agreements between single EU Member State and third countries. Another possible remedy in a specific case – i.e. when the receiver knows that seizable assets of the defendant are located in another State and there is a risk that the decision may not be recognized there – is to waive the effects of the vis attractiva concursus and bring the claw-back action before the Courts of the State where the defendant is domiciled.