CJEU guidance on detrimental acts—Lutz v Bäuerle

What does the recent CJEU case of Lutz v Bäuerle tell us about when the art 13 defence (where the beneficiary proves that the act is subject to another law which doesn't allow a challenge) can be used in practice and whether it applies to procedural provisions such as time-bars?

Original news

Lutz v Bäuerle: C-557/13

This case involved a reference to the Court of Justice of the European Union (CJEU) for a preliminary ruling under Regulation (EC) 1346/2000, arts 4 and 13 (the EC Regulation on Insolvency). Payment was made after the date on which insolvency proceedings were opened on the basis of an attachment carried out before that date. The German liquidator brought an action to set aside an act detrimental to the interests of the creditors. The recipient argued that limitation periods or other time-bars applied to the action to set the transactions aside.

How did the issue arise and what were the jurisdictional factors?

Mr Lutz (an Austrian individual) purchased a car from the Austrian subsidiary of a German car seller. He never received the car and therefore claimed in the Austrian courts for an attachment of certain of the debtor company's bank accounts in Austria. The Austrian bank paid out the monies to Mr Lutz and that payment was later challenged by the German liquidator of the company. The relevant timeline is as follows:

  • 17 Mar 2008-Austrian court issues an enforceable payment order in favour of Mr Lutz against the debtor company
  • 18 April 2008-debtor files application for German insolvency proceedings
  • 20 May 2008-attachment of three Austrian bank accounts of the company
  • 4 August 2008-German insolvency proceedings opened (as main proceedings) in respect of the company
  • 17 Mar 2009-Austrian bank pays monies to Mr Lutz

Under German law, any enforcement of security over the debtor's assets during the month preceding the lodging of the application to open proceedings is legally invalid once proceedings are opened.
Under Austrian law, an action to set aside a transaction must be brought within one year after the opening of proceedings, failing which it becomes time-barred. By contrast, the limitation period under German law is three years.

Although the attachment order was granted before the application to open main proceedings was filed, the actual attachment itself took place after that filing and the subsequent payment of monies by the bank took place after main proceedings were opened in Germany. Mr Lutz argued that art 13 applied and that the payment could no longer be challenged by the German liquidator under Austrian law as the one-year limitation period had expired.

What did the CJEU decide on art 13 (detrimental acts)?

The CJEU reached a similar decision to the European Free Trade Association Court (EFTA Court) (which has jurisdiction with regard to EFTA states which are parties to the EEA Agreement-eg Iceland, Liechten-stein and Norway) in the earlier case of LBI hf v Merrill Lynch International, that art 13 draws no distinction between substantive and procedural provisions.

In Lutz v Bäuerle, the CJEU noted that:

  • art 13 does not contain any restriction limiting its scope to the date on which the detrimental act took place and it aims to protect legitimate expectations and the certainty of transactions (para [33])
  • the art 13 exception must be interpreted strictly, and its scope cannot go beyond what is nec-essary to achieve that objective (para [34])
  • to interpret art 13 as also applying to acts which took place after the opening of insolvency proceedings would go beyond what is necessary to protect legitimate expectations and the certainty of transactions in member states other than that in which proceedings are opened. As from the opening of insolvency proceedings, the creditors are able to predict the effects of the application of the lex fori concursus (law of the main/secondary proceedings) on the legal relations which they maintain with that debtor. As noted in the Advocate General's opinion, they cannot therefore in principle claim to benefit from greater protection (para [35])
  • art 13 is not, in principle, applicable to acts which take place after the opening of insolvency proceedings (para [36])
  • notwithstanding that, the payment could have taken place on the basis of a right in rem (ie the right to attach the bank accounts), which could benefit from special protection (para [37])
  • the holders of in rem rights should be able to continue to assert those rights after the opening of proceedings (para [38])
  • since art 5 (in rem rights) covers acts carried out after the opening of proceedings, the considerations about art 13 not applying to acts taking place after the opening of proceedings cannot be applied where the creditor exercises in rem rights (para [41])
  • accordingly, the creditor cannot be precluded from relying on art 13 (para [42])

The CJEU concluded that:

  • art 13 does apply where a payment (challenged later by an insolvency practitioner (IP)) of a sum of money attached before the opening of proceedings was made only after the opening of those proceedings
  • the art 13 defence also applies to limitation periods or other time-bars relating to actions to set aside transactions under the law governing the act challenged by the liquidator. Since art 13 draws no distinction between substantive and procedural provisions and contains no criterion for identifying periods of a procedural nature, the classification of a period as procedural or substantive should necessarily be made under the lex causae (ie the law governing the act challenged by the liquidator, here Austrian law)
  • the relevant procedural requirements for the exercise of an action to set a transaction aside are to be determined according to the lex causae (here, Austrian law). The classification of a given requirement as a procedural requirement, and also the determination of the objectives pursued by that requirement, should therefore be matters for the lex causae. To interpret art 13 as meaning that requirements classified as procedural by the lex causae must be excluded from the scope of that article would lead to arbitrary discrimination on the basis of the legal-theory models adopted by the member states and would prevent a uniform application of that article

Actions like those brought by the German liquidator (challenging payments for voidness, voidability or unenforceability) are subject to procedural conditions which may also seek to protect public interests, such as ensuring adequate publicity of those actions with a view to protecting the legitimate expectations, not only of the persons against whom those actions are brought but also of the third-party purchasers of goods which are the subject of those actions. Recital 24 says that the objective of the exceptions to the application of the lex fori concursus (here, German law) (including the exception in art 13), is precisely to protect legitimate expectations and the certainty of transactions in member states other than that in which the insolvency proceedings are opened (ie to protect the legitimate expectations and certainty of transactions in Austria, in this case).

What guidance did the CJEU give on in rem rights?

Article 5(2) of the EC Regulation on Insolvency lists various types of in rem rights, including the exclusive right to have a claim met (eg an attachment of assets). In addition, recital 25 confirms that the basis, validity and extent of a right in rem should normally be determined according to the lex situs (where the assets are located). Consequently, the right resulting from the attachment of the bank accounts was capable of constituting a right in rem, provided that, under the national law concerned (here, Austrian law), that right was exclusive in relation to the other creditors of the debtor company, which was a matter for the referring court (ie the German court) to ascertain.

The CJEU confirmed in Lutz v Bäuerle that in rem rights are of considerable importance for the granting of credit and the proprietor of a right in rem accrued before the opening of the insolvency proceedings should therefore be able to continue to assert, after that opening, his right to segregation or separate settlement of the collateral security (see recital 25). Article 5(1) seeks to enable the creditor to assert, effectively and even after the opening of insolvency proceedings, a right in rem established before the opening of those proceedings.

Since art 5 covers acts carried out after the opening of insolvency proceedings, the considerations about art 13 not in principle applying to acts which took place after the opening of those insolvency proceedings cannot be applied where a creditor exercises a right in rem falling within art 5(1). Accordingly:

  • although art 5(4) (rights in rem), read in conjunction with art 4(2)(m) (rules regarding voidness of legal acts detrimental to all creditors), permits the bringing of an action challenging an act which has as its object the exercise of a right in rem after the opening of insolvency proceedings
  • those provisions must be interpreted (in order to ensure the effectiveness of art 5(1)), as not precluding the creditor from relying on art 13
  • which allow the creditor to claim that the act concerned is subject to the law of a member state (here, Austrian law) other than that of the State of the opening of proceedings (here, German law) and
  • allow the creditor to claim that this (Austrian) law does not allow any means of challenging the act

Accordingly, the art 13 defence did apply here where the payment of a sum of money attached was made only after the opening of the main proceedings.

What are the practical lessons for restructuring and insolvency professionals?

This is a welcome clarification of the scope of the art 13 defence and that although it is an exception that must be construed strictly, it will apply in a range of situations and does apply where either substantive or procedural rules (such as time limits or limitation periods) would prevent the bringing of the action.
This wide interpretation of the exception to the lex concursus (law of the main/secondary proceedings) pro-tects the legitimate expectations of creditors in the validity of an act under local law. Here, the CJEU effectively agreed with Mr Lutz that the German liquidator couldn't challenge the payment to him (following the attachment of assets) as Austrian law offered no means of challenging the transaction as it was time-barred.

In future, IPs will need to be mindful when seeking to swell the debtor's estate by challenging antecedent transactions that the other party may well have a valid defence if the IP's claim is time-barred under their local law. IPs should get advice on the local law before commencing any costly proceedings to challenge antecedent transactions.

How can the INSOL Europe: European Insolvency Regulation Case Register help?

With EC case law, decisions of the CJEU bind all member states, though where the CJEU has given limited guidance on a particular area, courts may look to decisions of other courts in the member states for some guidance, although they will not be binding. The INSOL Europe case register contains summaries of over 400 judgments, from the CJEU and first instance and appeal courts of the EU member states, that consider a significant point relating to the EC Regulation on Insolvency Proceedings. For further details see: INSOL Europe: European Insolvency Regulation Case Register now available in Lexis®PSL.

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First published on LexisPSL Restructuring and Insolvency

Kathy Stones, solicitor in the Lexis®PSL Restructuring & Insolvency team.

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