Primer on the New European Insolvency Framework

Primer on the New European Insolvency Framework

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The European Union Convention on Insolvency Proceedings, which has been in the making for more than 30 years, was opened for signature for a period of six months on November 23, 1995. The ratification process was followed by nearly all member states; however, it was blocked by the United Kingdom at the last minute because of a major political incident (Mad Cow Disease). Insolvency practitioners growled and grumbled. At the end of 1997, the British House of Parliament finally agreed with the text, but now there seems to be another political hurdle: the debate between Spain and England about the public authority (of the airport!) in Gibraltar.

The Convention is widely seen as a milestone in cross-border insolvency within the EU. It is closely linked with the EU Convention on Jurisdiction and Enforcement of Judgements in Civil and Commercial Matters of September 27, 1968, which expressly excluded insol-vency judgements from its scope because already at that time the EU Commission was developing a separate bankruptcy convention.

In general, the EU Convention (a) determines the jurisdiction of the 15 states' courts or authorities with regard to the intra-community effects of insolvency proceedings, (b) creates certain uniform conflict of laws rules for such proceedings, (c) ensures the recognition and enforcement of judgements given in such matters, (d) makes provisions for the possibility of opening secondary insolvency proceedings, and (e) guarantees information for creditors and rights to lodge claims. Insurance undertakings, credit institutions, investment undertakings holding funds or securities for third parties and collective investment undertakings are all excluded from the scope of the Convention. The excluded entities and undertakings are not defined in the Convention but by other instruments of EU Community law. The entities and undertakings that fall under the definitions given by the relevant Community Regulations and Directives, are excluded from the Convention.

Summary of the EU Convention

The general provisions (Articles 1-15) establish the area of application of the Convention. It is confined to "proceedings which entail the partial or total divestment of a debtor and the appointment of a liquidator." Jurisdiction rests on the general principle that "the courts of the contracting state within the territory of which the centre of the debtor's main interests is situated, shall have jurisdiction to open insolvency proceedings." For a company or legal person/entity, the center of its main interests is the place of its registered office. In addition, the court of another contracting state shall have only jurisdiction, if "the debtor possesses an establishment within the territory of that other contracting state." The effects of the latter proceedings are, however, restricted to the assets of the debtor situated in the territory of the other contracting state. The law applicable to insolvency proceedings under the Convention is that "of the contracting state within the territory of which such proceedings are opened."

The recognition of insolvency proceedings (Articles 16-26) results in a judgement that produces the same effects in the other contracting states, as under the law of the state of the opening of the proceedings. Article 16 provides that insolvency proceedings opened in the contracting state where the debtor has its center of main interests will be recognized in all the other states. Nevertheless such recognition does not prohibit the opening of secondary proceedings in a contracting state where the debtor owns an establishment. This recognition includes the termination of the debtor's authority to dispose of the assets. It also puts an end to judgement executing in favor of individual creditors.

As pointed out, the opening of main insolvency proceedings in the contracting state where the debtor has his center of main interests does not preclude the opening of secondary proceedings in other contracting states where the debtor has an establishment (Articles 27-38). Secondary proceedings can be said to serve mainly two, seemingly mutually incompatible purposes: (a) protection of creditors, usually local creditors, from the main proceedings, (b) at the same time assisting and supporting the main proceedings.

The opening of secondary proceed-ings may be requested by the "liquidator" in the main proceedings or by any other person authorized to do so under local law. A creditor, for example, who thinks that his chances are better served in local proceedings than in the main proceedings in an other state, may request the opening of secondary proceedings.

Any creditor has the right to lodge claims (Articles 39-42) in writing, if his residence is located in a contracting state other than the state of the opening of proceedings. This provision is also for the tax and social security authorities. The Court of Justice of the European Community has jurisdiction to give preliminary rulings on the interpretation (Articles 43-46).1

Recent Rulings in European Cross-border Cases

The Convention shall apply only to insolvency proceedings opened after its application, by virtue of Article 49(3), which states "on the first day of the sixth month following that of the deposit of the instrument of ratification, acceptance or approval by the last signatory state to take that step." This day has yet to come, but recent court rulings show that judges are already taking the EU text into account. Two examples illustrate this trend.

In November 1996, the German Supreme Court (Bundesgerichtshof) ruled in a case where a Swedish trustee tried to apply avoidance powers (paulian action) according to the law of Sweden in a case in Germany. The Supreme Court applied with anticipatory effect Article 102 paragraph 2 of the Einführungsgesetz zur Insol-venzordnung (EGInsO; Implementation Act to the new German Insolvency Act, coming into force in 1999). The law of Sweden can be applied and will determine the voidness, voidability or unenforceability of all legal acts. These provisions are quite similar to Article 4 paragraph 2 section m and Article 13 of the EU Convention, although the German Article is not limited to insolvencies opened and decided in a member state of the EU.

The Supreme Court in the Netherlands (Hoge Raad) decided a case in September 1997. This ruling is, in more respects, of great importance for Dutch international insolvency law, but here we will only deal with the issue with regard to the EU Convention. A German business—BBB—contracted in July 1992 with Mosk, a company in the Netherlands. Mosk was to deliver and lease materials. The contract implied a choice for Dutch law. In August 1992 a German Court ruled that a "Sequester," Mr. Gustafsen, be appointed on an interim basis for BBB. BBB, in cooperation with Gustafsen, informed Mosk that its due and enforceable claim would be paid by check, (dated September 16, 1992). Two weeks later, BBB went bankrupt and Gustafsen then was appointed trustee (Konkursverwalter). With the status of trustee, Gustafsen claimed the repayment of the amount paid by check. He argued that according to German law, he can invoke the voidness of the payment, because Mosk knew of BBB's financial problems.

In its principal ruling the Dutch Supreme Court decided that it is, according to "the present state of the legal development," not proper to block the action of Gustafsen with the argument that a foreign bankruptcy estate does not include property located in the Netherlands. According to "present Dutch international private law," the law applicable to the insolvency proceeding (lex concursus) is decisive for the existence and contents of the powers of a foreign trustee. The principle of legal certainty, however, demands to take into account that a Dutch counterpart of the foreign insolvent debtor will not be prepared for application of non-Dutch rules in a case where the legal act (of payment) is not subject to that foreign law, and those foreign rules are less strict when granting a claim than the law applicable to the legal act itself (lex causae, which was in this case Dutch law). And because of the fact that the Dutch Bankruptcy Act has some other, more strict provisions, Gustafsen's claim was denied.

The Supreme Court explicitly states that its ruling "is supported by international legal development, as particularly is seen in the EU Convention on Insolvency Proceedings...," referring to the above mentioned Articles 4 and 13. The Supreme Court's language is general, so it will also apply in cases outside the scope of the EU territory.

Judges Are Carrying the Flag

It's too early to assume that supreme courts in other countries will follow the same approach as the German and Dutch courts. It is fair to say that the Dutch judges may embrace the EU Convention, but the full effect of its application will not be evident until further down the road. Regardless, the Netherlands have to become accustomed to the universal effect of a foreign insolvency under the Convention. Despite questions about the effects of the EU Convention, one thing is perfectly clear: where governments fail, judges play a major role in cross-border insolvency cases as "deputy-legislators."2


1See Balz, International Financial Law Review, July 1994; Omar, International Company and Commercial Law Review, 1996/5; Dahan, The Company Lawyer, 1996/6; Johnson, International Insolvency Review, 1996, 81-107; McKenzie, European Review of Private Law, 1996, 181-200; Bogdan, International Insolvency Review, 1997, 114-126. Return to article

2See the Special Issue 'The Internationalisation of Insolvency', International Business Lawyer, May 1996, and on the important role of judges in this context: Millett, International Insolvency Review, 1997, 99-113. The growing importance of judicial cooperation is also expressed in UNCITRAL's Model Law on Cross-Border Insolvencies. Return to article

Journal Date: 
Wednesday, July 1, 1998