In a recent judgment, the Court of Justice of the European Union (CJEU) confirmed the extent to which an English law governed contract can be subject to the transaction avoidance provisions of the insolvency law of other another member state if one of the counterparties enters into insolvency in that member state (eg Italy): Vinyls Italia SpA v Mediterranea di Navigazione SpA C-54/16 (8 June 2017).

The decision should give some comfort to those dealing with a counterparty in another EU jurisdiction, where they have chosen some other law to govern their contract (eg English law); the upshot is that they should not be exposed to the (potentially very strict) transaction avoidance rules that may apply on insolvency in the counterparty's jurisdiction, so long as the transaction would not be subject to challenge under the law of the contract. However, a party may be subject to the procedural laws of the counterparty's jurisdiction, which may introduce strict time limits or rules of evidence for those seeking to protect their rights.

The court reached that result under the EU insolvency regime alone and without reference to the main EU instrument on the choice of law applicable to contractual obligations (the Rome I Regulation).


The facts are straightforward, involving the charter of two ships by one Italian company (Vinyls) from another (Mediterranea). Vinyls paid approximately €450,000 to Mediterranea under the charter contract. The contract was governed by English law, although neither party had any substantial connection to England.

Vinyls later entered special administration insolvency proceedings under Italian law. The insolvency administrator claimed that the charter payment should be set aside as a preference under Italian law on the grounds that, at the time the payment was made, Mediterranea was aware that Vinyls was facing insolvency. Mediterranea contended that English law governed whether the payment could be set aside and that, as a matter of English law, the payment could not be set aside (whether as a preference or on other grounds). In English law, an unlawful preference requires proof of intention, not mere knowledge.

Legislative framework

EC Regulation 1346/2000 (the "Insolvency Regulation") provides, at article 4(2)(m), that the law of the place in which insolvency proceedings have been commenced will determine "the rules relating to the voidness, nullity, voidability or unenforceability of legal acts detrimental to all creditors". In this case, this provision pointed towards Italian law.

However, article 13 of the Insolvency Regulation provides that where a person who benefitted from the challenged act proves that the act is subject to a different law and such law does not allow any means of challenging the act, the different law will apply. The Insolvency Regulation does not itself specify any criteria by which to determine whether an act is subject to a different law but cases establish that traditional choice of law factors will generally be applied to identify the jurisdiction with which the act is most closely connected. This will include any agreement between the parties as to choice of law.

EC Regulation 593/2008 (the "Rome I Regulation") provides at article 3 that parties can select the law applicable to their contract but (under article 3(3)), where "all other elements relevant to the situation at the time of the choice are located in a country other than the country whose law has been chosen, the choice of the parties shall not prejudice the application of provisions of the law of that other country which cannot be derogated from by agreement". The purpose of this rule is to prevent parties choosing the law of another country to govern their relationship so as to avoid mandatory rules of law in their home jurisdiction. Its effect is that, where Italian parties having no connection with England choose English law to govern their contracts, mandatory provisions of Italian law will apply nevertheless.

The issues before the CJEU were, in summary, as follows:

  1. Where article 13 of the Insolvency Regulation applies, does the law other than that of the insolvency proceedings govern the procedural rules relating to the setting aside of transactions or just the substantive law?
  2. In order to prove that the other law provides no means of challenging an act, must it be proven that (a) there is no legal rule that would permit the act to be set aside; or only (b) on the facts of this particular case, no legal rule would permit the act to be set aside?
  3. Where parties in the same member state have made a contractual choice of law in favour of the law of a country with which they have no connection, is article 4(2)(m) a mandatory rule of their home country that must be applied to override the parties' choice of law?

Issue 1: Does article 13 import procedural or only substantive law?

Under Italian law, Mediterranea was required to object to the setting aside within a particular time limit after the insolvency administrator gave notice of his intention to set aside the payment. Mediterranea missed the time limit. The insolvency administrator argued that the effect of article 4(2)(m) was that Italian law provided "the rules" relating to the setting aside of an act, including the procedural rules. Mediterranea contended that, as article 13 disapplied Italian law, the Italian procedural time limits must also be disapplied.

The CJEU held in favour of the insolvency administrator. EU law promotes national autonomy in respect of procedural law. Italian law would therefore govern the process by which Mediterranea could assert an article 13 objection to the setting aside of the payment, including in particular any time limits which applied to the raising of such an objection.

Further, Italian law would govern the rules of evidence for the article 13 objection. In this case, Mediterranea had submitted a sworn opinion from an English lawyer but had not properly pleaded English law in its statement of defence, contrary to Italian procedural law.

Issue 2: What needs to be proved to engage article 13?

There has long been doubt as to whether the party relying on article 13 must show that the law with which the act is most closely connected has no means by which to challenge the act in question or that, while that law does provide such means, they are not engaged on the particular facts of the case.

The CJEU held that the party relying on article 13 need only prove the latter, ie that, in the particular case, any test for setting aside the transaction under the most closely connected law would not be satisfied. This was for a number of reasons, including that it will almost always be impossible to prove that another member state's law has no means by which to set aside a transaction. Most EU jurisdictions' laws incorporate transaction avoidance rules particularly in insolvency.

Issue 3: Scope for mandatory provisions

The final issue for consideration by the CJEU was whether the challenged act could be subject exclusively to English law for the purposes of article 13 of the Insolvency Regulation when, under the Rome I Regulation, the parties' choice of English law would not abrogate Italian law mandatory rules applying to the contract. (On the particular facts of this case, Rome I was inapplicable because the charter contract had been entered into a few days before the Rome I Regulation took effect. However, the CJEU gave guidance on this point anyway.)

The CJEU referred to recital 23 of the Insolvency Regulation, which states that the regulation should set out, for matters falling within its scope, uniform conflicts of laws rules. The Rome Convention, the predecessor to the Rome I Regulation, had been in force when the Insolvency Regulation was adopted and had contained the equivalent of article 3(3) of the Rome I Regulation. Yet article 13 of the Insolvency Regulation had not limited the extent to which the law of the act being challenged would apply so as to make that law subject to mandatory rules. This was in contrast to article 3(3) of the Rome I Regulation. The CJEU considered the difference between the two provisions to be instructive.

Article 13 of the Insolvency Regulation must therefore be applied so that, where an act is challenged and the act arises under a contract governed by the law of another member state, there is no room to apply the mandatory rules of the local court's law, even where the parties all have their seat in the local court's country and they have no connection to the other member state other than their choice of law (so that, in a non-insolvency context, article 3(3) of the Rome I regulation would have introduced local mandatory rules).

The CJEU did note, however, that EU law can never be used to promote abusive or fraudulent acts. To the extent, therefore, that parties choose a law for abusive or fraudulent reasons, a court should not give effect to their choice under article 13. It is for the local court to determine whether abuse or fraud can be established on the facts of a particular case. The mere act of choosing a foreign law to govern a contract is not in itself abusive or fraudulent.


The CJEU has confirmed that article 13 of the Insolvency Regulation will provide a last line of defence to protect parties' legitimate expectations when choosing a particular law to govern their contract. It promotes certainty by ensuring that parties are not exposed to what can be very strict transaction avoidance rules which apply in several EU member states, even where those rules might be thought to be mandatory in the relevant legal system.

The fact that the CJEU promoted this certainty in this particular case is encouraging. The case concerned Italian parties and their contract which had no connection with England. Nevertheless, the CJEU gave effect to their decision to choose English law thereby modifying the transaction avoidance regime as between them.

However, there is a note of caution. Even though a chosen law may govern the substantive law of transaction avoidance as between the parties, a party to a contract can still be exposed to an unfamiliar judicial insolvency procedure (possibly in another language) in another member state. This will be the case even where the parties have made an exclusive choice of jurisdiction in their contract. Even if the law governing the substantive issues between the parties is certain, under article 13, a party may be at the mercy of another state's procedural laws as to time limits for bringing an article 13 objection and the proof required to demonstrate that article 13 is engaged.

Though the eventual result in this case is unknown (as the matter has been referred back to the courts in Venice), it is possible that Mediterranea could find itself able to prove, under English law, that there is no basis for the court to set aside the transaction but prevented by Italian procedural law from relying on the relevant evidence due to the point being raised late.

Parties should also be alive to the risk that a foreign court might enquire into whether the chosen law is abusive or fraudulent and will determine that fact by reference to its own laws and procedures.

Whenever a counterparty enters into an insolvency process, the other contracting parties should seek immediate legal advice. Those parties need to determine the extent to which they should participate in the insolvency process (which this case shows should occur if they are subject to the Insolvency Regulations, but which may not be the case if the counterparty is in a country outside the EU). Failure to act quickly may expose a contracting party to a claim in a foreign insolvency proceeding for which they are no longer able to assert proper defences.

On 26 June 2017, a recast Insolvency Regulation (No. 2015/848) came into effect. It contains provisions which substantively replicate articles 4 and 13 of the previous Insolvency Regulation so the decision in this case should remain good law.

Of course, the extent to which the UK remains subject to the Insolvency Regulations will be determined in the next two years as part of the Brexit negotiations. The consequences of those negotiations could well substantively determine the rights and obligations of counterparties, debtors and creditors resident in England with exposure to insolvent debtors in European companies. The outcome of those negotiations will need to be carefully considered when they are concluded.