Judicial cooperation in insolvency proceedings (ENEFI v DGRFP)

How does the European Insolvency Regulation apply to cross border insolvencies? Paul Sidle, a senior professional support lawyer at Linklaters, answers some questions on the issues that arose out of the decision in ENEFI v DGRFP.

Original news

C-212/15: ENEFI Energiahatékonysági Nyrt v Directia Generala Regionala a Finantelor Publice Brasov (DGRFP) [2016] All ER (D) 110 (Nov)

The Court of Justice of the European Union gave a preliminary ruling, deciding that article 4 of Council Regulation (EC) 1346/2000 (EIR) had to be interpreted as meaning that provisions of domestic law of the state of the opening of insolvency proceedings which provided, in relation to a creditor who had not taken part in the insolvency proceedings, for the forfeiture of its right to pursue its claim or for the suspension of the enforcement of such a claim in another Member State, came within its scope of application. Further, the fiscal nature of the claim pursued by means of enforcement in a Member State other than the state of the opening of proceedings had no bearing on the court’s answer.

How did the issue arise?

In this case, a Romanian tax authority was seeking to enforce the non-payment of a VAT liability by a Hungarian company with an establishment in Romania. But, the Romanian tax authority had failed to lodge that tax claim in the Hungarian insolvency proceedings opened in respect of the Hungarian company. As a matter of Hungarian insolvency law, this meant that the Romanian tax authority could not bring the VAT claim against the debtor and the associated enforcement proceedings were void.

The EIR allocates international jurisdiction on insolvency matters between Member States and also provides for choice of law rules to determine the applicable law in cross-border insolvencies. The starting point is the general choice of law rule in EIR, art 4. That provides that the jurisdiction where insolvency proceedings are opened shall apply its own laws and procedural rules to the opening, conduct and closure of the insolvency proceedings. In the case of main insolvency proceedings (determined by reference to a debtor’s centre of main interests) this means that, other than where particular exceptions apply, the insolvency law of the state where those proceedings are opened shall have effect across all other Member States. Article 4 sets out a list of matters which, in particular, are determined by application of the general choice of law rule.

What were the main legal arguments and what questions were referred to the ECJ?

In relation to the enforcement of the Romanian tax claim, the local Romanian court referred two questions to the ECJ about the scope of the general choice of law rule in art 4:

  • Does it include provisions of domestic insolvency law leading to the forfeiture of a creditor’s claim and suspension of its enforcement and affecting the bringing and enforcement of that claim in another Member State?
  • Does it make any difference if the claim and its enforcement relate to the non-payment of tax and is brought by a tax authority of another Member State?

The Romanian court had three main arguments:

  • that the enforcement proceedings were ‘lawsuits pending’—this meant that the effect of the Hungarian insolvency proceedings fell to be determined not by Hungarian law (as the law applying under the general choice of law rule in art 4) but by Romanian law as an exception to that general rule (found in art 15)
  • that while Hungarian insolvency law would govern creditors’ rights after the closure of insolvency proceedings, it could not govern the effect of the insolvency proceedings on the rights of creditors who did not participate in those proceedings, and
  • that a provision, such as found in Hungarian law, limiting or excluding the possibility of submitting a claim not lodged in the insolvency proceedings would preclude the opening of secondary insolvency proceedings, contrary to what EIR provided

What did the ECJ decide?

The ECJ held that the scope of EIR, art 4 included provisions such as that found in Hungarian insolvency law which would take effect across all Member States and that the fiscal nature of the claim made no difference at all.

The ECJ rejected the arguments of the referring court. In general, it stated that art 4 was clear that, other than as provided in EIR, the law applicable to insolvency proceedings and their effects (both procedural and substantive) should be that of the state of the opening of proceedings. EIR, art 4(2)(g) and (h) makes clear that such law determines which claims must be lodged, the treatment of claims arising after the opening of insolvency proceedings and the rules governing the lodging, verification and admission of claims. To give proper effect to those provisions, art 4 must be interpreted so that the law of the state where proceedings were opened would determine the consequences for failing to respect the domestic claims filing rules (such as filing deadlines). This could properly include a forfeiture of the right to bring a claim and, as a corollary, a suspension of enforcement proceedings relating to that claim.

The main points to note from the ECJ’s reasoning are:

  • it was clear from EIR that enforcement proceedings were not ‘lawsuits pending’. EIR recognised the principle that creditors should be treated equally such that individual enforcement proceedings against the debtor’s assets would generally be precluded (in particular EIR, art 20 required creditors to return recoveries made against the debtor’s assets located in another Member State)
  • the effects of the closure of insolvency proceedings and the rights of creditors after such closure are expressly stated in EIR, art 4(2)(j) and (k) to be determined by the law of the state where proceedings are opened. While there is no express reference to creditors who have not participated in the insolvency proceedings, the ECJ held there was no doubt that such effects and rights must also be assessed on the same basis. Article 4 did not contain an exhaustive list of matters coming within its scope. In addition, a contrary interpretation would seriously undermine the effectiveness of those insolvency proceedings (ie allowing non-participating creditors to pursue their claims against the debtor after closure of the proceedings would frustrate any composition plan agreed)
  • a provision, such as found in Hungarian law, limiting or excluding the possibility of submitting a claim not lodged in the insolvency proceedings did not prevent secondary insolvency proceedings from being opened at all, but only by the particular creditor whose claim had been forfeited. To hold otherwise would enable such a creditor to frustrate the main proceedings by opening secondary proceedings, contrary to the idea that main proceedings should have a dominant role given their protective nature, and
  • there was nothing in EIR to suggest fiscal claims should be treated any more favourably to other claims and no distinction is made between public and private law creditors

What are the practical implications for lawyers?

The ECJ’s decision highlights the need for creditors (and their advisors) to pay careful attention to the local law requirements for submitting a claim. The procedure for lodging claims in the insolvency of a debtor varies across the 28 EU Member States. For example, there may be particular forms to complete, fees to be paid or filing deadlines to be met. For foreign creditors not familiar with the local insolvency process, such practicalities may pose a real concern. This will be particularly so if the consequences for failure to meet the local rules for the lodging, verification and admission of claims would mean that a creditor lost its right to bring or enforce its claim.

Paul Sidle is part of the knowledge and learning team for Linklaters’ international banking group. His focus is on English and international restructuring and insolvency, including the resolution of financial institutions, providing R&I advice across the firm.

Interviewed by Janine Isenegger.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

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Which law applies under the EC Regulation on Insolvency

How creditors lodge claims under the EC Regulation on insolvency

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First published on LexisPSL Restructuring and Insolvency



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