Does the EC Regulation on Insolvency apply to antecedent transactions even if the third party beneficiary is not resident in a member state?

What does Schmid v Hertel C-328/12 [2014] All ER (D) 221 (Jan) tell us about whether the EC Regulation on Insolvency applies to transactions to set aside (or other antecedent transactions ) even if the third party which benefits from that transaction is not resident in a member state (in this case Switzerland)?

In the case the Court of Justice of the European Union (CJEU) made a preliminary ruling concerning the interpretation of Council Regulation (EC) 1346/2000, art 3(1) on insolvency proceedings (the EC Regulation on Insolvency). The request had been made in the context of a dispute between Mr Schmid, acting as liquidator of the assets of Ms Zimmermann and Ms Hertel, who was resident in Switzerland, concerning an action to set a transaction aside.

What did the court decide?

The CJEU decided that:

  1. the application of the EC Regulation on Insolvency, art 3(1) does not depend on the existence of a cross-border link involving another member state
  2. the courts of the member state where insolvency proceedings have been opened (here, Germany) have jurisdiction to hear and determine an action to set aside a transaction brought against a person whose place of residence is not within a member state (here, Switzerland)

How did the problem arise?

The applicant was the liquidator of an individual debtor's assets, appointed in the insolvency proceedings opened in Germany. The liquidator brought an action in the German courts against the third party (who was resident in Switzerland, which is not a member state for the purposes of the EC Regulation on Insolvency) seeking to have a transaction set aside.

The German liquidator pursued his action to have the transaction set aside by appealing to the Bundesgerichtshof (Federal Court of Justice) in Germany. The Bundesgerichtshof stayed its proceedings to refer the following question to the CJEU for a preliminary ruling: Do the courts of the member state within the territory of which insolvency proceedings regarding the debtor's assets have been opened have jurisdiction to decide an action to set a transaction aside by virtue of insolvency that is brought against a person whose place of residence or registered office is not within the territory of a member state?

Does the EC Regulation on Insolvency apply?

Essentially the question is whether the EC Regulation on Insolvency, art 3(1) must be interpreted as meaning that the courts where insolvency proceedings are opened have jurisdiction to hear and determine an action to set a transaction aside that is brought against a person resident outside a member state (here, Switzerland).

Here, the debtor's centre of main interests (COMI) was Germany.

The CJEU dismissed the third party beneficiary's arguments that for the EC Regulation on Insolvency to apply, there must be cross-border elements in the sense that only situations involving connecting factors with two or several member states fall within the regulation's scope.

Although a number of the EC Regulation on Insolvency's provisions require the presence of connecting factors with the territory or the legal system of at least two member states, for example (i) the EC Regulation on Insolvency, Article 5(1) relating to third parties' rights in rem in respect of the debtor's assets situated within the territory of another Member State or (ii) the EC Regulation on Insolvency, Chapter III which applies only to secondary proceedings that have been opened in another Member State, this restriction doesn't apply here.

The EC Regulation on Insolvency, art 44(3)(a) provides it is not to apply in any member state, to the extent that it is irreconcilable with the obligations arising in relation to bankruptcy from a convention concluded by that member state with one or more third countries before the entry into force of the EC Regulation on Insolvency. That provision would be superfluous if the EC Regulation on Insolvency did not apply to relations between a member state and a third country.

Further, the objectives of the EC Regulation on Insolvency set out in the recitals, don't support such a narrow interpretation of the EC Regulation on Insolvency's scope: Recital 8 refers to the objective of 'improving the efficiency and effectiveness of insolvency proceedings having cross-border effects' and Recital 12 states that insolvency proceedings falling within the EC Regulation on Insolvency's field of application 'have universal scope and aim at encompassing all the debtor's assets'. These objectives are not limited solely to relations between member states but, by their nature and in accordance with their wording, apply to any cross-border situation.

The CJEU endorsed the Advocate General's opinion on this point—COMI must be determined at the time when the request to open proceedings has been lodged (see Staubitz-Schreiber) and at that early stage, the existence of any cross-border element may be unknown. However, the determination of which court has jurisdiction cannot be postponed until such time as the locations of various aspects of the proceedings in addition to the debtor's COMI—such as the residence of a potential defendant to an ancillary action—are known. To wait for knowledge of these matters would frustrate the objectives of improving the efficiency and effectiveness of insolvency proceedings having cross-border effects.

Application of the EC Regulation on Insolvency, art 3(1) cannot therefore depend on the existence of a cross-border link involving another member state.

The CJEU then referred to Christopher Seagon v Deko Marty Belgium NV as authority that the EC Regulation on Insolvency, art 3(1) confers international jurisdiction on the courts of the member state which has jurisdiction to open insolvency proceedings to hear and determine actions which derive directly from those proceedings and which are closely connected with them.

The CJEU found that although Christopher Seagon v Deko Marty Belgium NV concluded that those courts therefore have jurisdiction to decide an action to set a transaction aside by virtue of insolvency that is brought against a person whose registered office is in another member state, this doesn't mean that jurisdiction is immediately ruled out where the defendant is established in a third country, as the court in Seagon was not asked to decide that point.

The CJEU also said the objectives of the promotion of foreseeability of bankruptcy and liquidation jurisdiction and, therefore, of legal certainty, support an interpretation that the provision also creates jurisdiction to decide an action to set a transaction aside by virtue brought against a person resident in a third country. Harmonisation of the jurisdictional rules over transactions to set aside contributes to the attainment of those objectives irrespective of whether the defendant resides in a member state or a third country.

The CJEU said that a third party would normally be able to foresee that he may be sued in a foreign court—the criterion for determining the court which has jurisdiction to decide that action (the debtor's COMI) is normally foreseeable by the defendant at the time when he participates with the debtor in an act liable to be set aside in insolvency proceedings.

Accordingly, the objectives of:

  1. foreseeability of jurisdiction
  2. legal certainty (EC Regulation on Insolvency, recital 8), and
  3. avoiding incentives for the parties to transfer assets from one member state to another, or to choose a particular forum to obtain a more favourable legal position (EC Regulation on Insolvency, Recital 4)

prevail over the concern to avoid the defendant being sued in a foreign court.

What does the case tell us about the effect of judgments on third party countries?

The CJEU also endorsed the Advocate General's opinion that the fact that the provisions of the EC Regulation on Insolvency concerning recognition and enforcement of judgments delivered by the court which has opened the insolvency proceedings cannot bind third countries does not preclude the application of the rule governing jurisdiction under the EC Regulation on Insolvency, art 3(1).

Further, even if it is not possible to rely on the EC Regulation on Insolvency itself for the recognition and enforcement of judgments, it is sometimes possible to rely on a bilateral convention.

Finally, even if the judgment is not recognised and enforced on the basis of a bilateral convention by the state where the defendant resides, it may be recognised and enforced by the other member states under the EC Regulation on Insolvency, art 25, especially if part of the defendant's assets are in the territory of one of those states. Article 25 provides that judgments which concern the course and closure of insolvency proceedings (and judgments deriving directly from the insolvency proceedings and which are closely linked with them) and compositions approved by that court shall also be recognised with no further formalities. Such judgments shall be enforced in accordance with the Brussels Convention, art 31–51, with the exception of art 34(2).

What does this mean in practice?

This decision is another boost for universalism and fairly wide ranging as it is not necessarily limited to antecedent transactions or clawback claims arising in cross-border bankruptcies, but also could apply to those arising in corporate insolvencies.

This case is a stark warning that recipients of payments or other benefits from a company or individual which later enters insolvency proceedings should be aware that those payments/benefits may potentially be clawed back by a foreign office-holder in a foreign court.

For further details, see Practice Notes: Main proceedings, secondary and territorial proceedingsPersonal insolvency and centre of main interestsWhich law applies under the EC Regulation.

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