The European Court of Justice (ECJ) recently provided useful guidance on how to interpret Article 13 of the EU Insolvency Regulation.
Previously, the ECJ had held that if insolvency proceedings have been opened, the court where the insolvency proceedings are pending has jurisdiction in cases where the insolvency office holder wishes to challenge a transaction based on Article 13 of the Insolvency Regulation.(1) The ECJ ruled that this is the case even if a defendant is domiciled in a non-member state.
In accordance with Article 13 of the Insolvency Regulation, the law of the member state in which insolvency proceedings are opened (lex concursus) does not apply where the beneficiary of an act detrimental to all creditors provides proof that:
- the act is subject to the law of another member state (lex causae);(3) and
- that law allows no means of challenging the act in the case at hand.
The application of Article 13 of the Insolvency Regulation entails a double test. An act is subject to annulment due to prejudice to creditors only if this is the case according to both the lex concursus and the lex causae. If pursuant to either jurisdiction the act is not contestable, the claim by the insolvency office holder will fail.(4)
In Lutz v Bäuerle(2) the ECJ considered the position of a creditor or third party in respect of a commercial transaction in the event that such commercial transaction is later challenged by an insolvency office holder. In particular, the court examined the extent to which such parties can rely on the defence offered under the law governing the transaction. The case itself might not be unusual, but the number of non-parties which submitted observations to the court – including the European Commission and the German, Greek, Spanish and Portuguese governments – demonstrates that the outcome was eagerly awaited.
The question of which law applied depended on the interpretation of Article 13 of the Insolvency Regulation. The German Federal Court of Justice referred the following questions to the ECJ:
- Is Article 13 of the Insolvency Regulation broad enough to enable the beneficiary of the act to rely on limitation periods or other time bars available under the law which governs the challenged transaction?
- Are the relevant procedural requirements for asserting a claim for the purpose of Article 13 of the Insolvency Regulation also to be determined according to the law governing the transaction or by the law governing the insolvency proceedings?
The ECJ provided further clarification with three basic rules:
- The Insolvency Regulation also applies to a situation where the payment of a sum of money attached before the opening of the insolvency proceedings, but made only after the opening of those proceedings, is challenged by an insolvency office holder.
- The defence established by Article 13 of the Insolvency Regulation also applies to limitation periods or other time bars relating to actions to set aside transactions under the lex causae.
- For the purposes of the regulation, the relevant procedural requirements for the exercise of an action to set aside a transaction are to be determined according to the law governing the act challenged by the insolvency office holder.
In Lutz v Bäuerle the ECJ clarified that both the procedural and substantive provisions of the law governing the challenged act (ie, not the law of the insolvency proceedings) are available to provide a defence to a challenge brought by the insolvency office holder in the context of the insolvency proceedings. Although the ECJ considered that Article 12(1)(d) of the EU Rome I Regulation (593/2008), which refers to the prescription and limitation of contractual remedies of the law governing a contract, does not apply to actions within the scope of Articles 4(2)(m) and 13 of the Insolvency Regulation, the solution adopted by the ECJ leads to the same result: the lex causae also governs the prescription and limitations of actions based on voidable preference. The ECJ referred to the comments made by the European Commission, which argued that if procedural aspects were excluded from Article 13 of the Insolvency Regulation, this would result in an arbitrary approach driven by how individual member states categorised whether something was procedural or substantive. The court noted that the wording of Article 13 of the Insolvency Regulation draws no distinction between the types of defence available under that provision. Similarly, in relation to the second question, the ECJ held that the law governing the detrimental act also determines the procedural requirements needed to assert the defence in Article 13 of the Insolvency Regulation.
An interesting point raised in the preliminary observations of the judgment is whether the right to attach the credit balance on bank accounts is a right in rem within the meaning of Article 5 of the Insolvency Regulation. If it can be so characterised, the individual attachment of bank accounts held with banks in other member states will not be adversely affected by the opening of insolvency proceedings in the member state where the debtor has its centre of main interests. According to the ECJ, this could be the case provided that this "right was exclusive in relation to the other creditors of the debtor company". Even if an attachment can be so characterised, Article 5(4) of the of the Insolvency Regulation makes clear that the protection offered by Article 5 of the Insolvency Regulation does not extend to actions based on voidable preference, for which Articles 4(2)(m) and 13 of the Insolvency Regulation remain decisive.
For further information on this topic please contact Erwin Bos, Evert Verwey or Rick Verhagen at Clifford Chance LLP by telephone (+31 20 711 9000) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org).
(3) If the act is subject to the law of a third state, the beneficiary may derive protection from the lex causae when this is in accordance with the national conflict rules of the forum state: Rapport Virgos/Schmit, nr 93; Asser/Kramer&Verhagen, nr 404.
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