In the recent case of SCI Senior Home (in Administration) v Gemeinde Wedemark, Hannoversche Volksbank eG, the Court of Justice of the European Union handed down judgment on the question of whether a right in rem created under national law should be considered a "right in rem" for the purposes of Article 5 of the Council Regulation (EC) 1346/2000 on insolvency proceedings (the "Insolvency Regulation").

Background

The case concerned a French real estate company, Senior Home ("Senior Home") which was put into court-supervised Administration in France on 6 May 2013. Crucially, however, Senior Home owns property located in Wedemark, Germany.

The local authority for Wedemark (the "Gemeinde Wedemark") applied for, and was granted, an order for the compulsory sale of Senior Home's property in order to recover arrears of real property tax. Senior Home applied to have the order set aside, and was unsuccessful on two occasions before the case finally came before the ECJ.

Legal dilemma

The relevant point for discussion was that, because Senior Home had been put into Administration in France, under Article 4 of the Insolvency Regulation French insolvency law applied, and under French insolvency law sale of Senior Home's property in Germany is prohibited. However, this conflicts with Article 5 of the Insolvency Regulation which provides that:

"The opening of insolvency proceedings shall not affect the rights in rem of creditors or third parties in respect of tangible or intangible, movable or immovable assets".

The argument of the Gemeinde Wedemark was that, according to German law, debts due in respect of property taxes are charges against the property and therefore "rights in rem". Accordingly, they therefore should be capable of enforcement by virtue of Article 5 of the Insolvency Regulation, despite the existence of the on-going French insolvency proceedings.

The question for the court was therefore whether the definition of a "right in rem" should be taken from, and applied in accordance with, German law (because that is where the property is located) or independently.

Decision

The ECJ considered the original purpose behind the enactment of Article 5 of the Insolvency Regulation. It was pointed out that Article 5 is intended to provide a number of exceptions to Article 4, which sets out the general principle that the law applicable to the conduct and effects of insolvency proceedings should be that of the Member State in which proceedings are opened.

Since Article 5 is meant to provide exceptions to the general rule, by extension it follows that the correct laws to be applied when deciding on the definition of a "right in rem" are indeed the national laws of the Member State within which the assets concerned are situated, otherwise there would have been no need for Article 5 to exist at all.

The ECJ went on to say that, although Article 5 of the Insolvency Regulation does not define a "right in rem", it does set out some examples of the rights that should be caught by the provision, and the right over the German property in this case clearly falls under the heading of one of these examples.

Finally, the ECJ considered whether Article 5 only covers "rights in rem" created by virtue of commercial transactions. It was held that there is nothing in the wording of Article 5 to suggest that it should only apply to rights created during commercial transactions. Furthermore, it was pointed out that the objective of Articles 4 and 5 in the Insolvency Regulation is to "protect legitimate expectations and the certainty of transactions in Member States other than that in which proceedings are opened", and therefore the commercial nature of the rights is irrelevant.

The owner of the German property in question therefore had to accept that the Gemeinde Wedemark could take enforcement action in relation to the tax debt against that property.