Using the challenge to jurisdiction defence in insolvency proceedings (Tünkers France and another v Expert France)

Using the challenge to jurisdiction defence in insolvency proceedings (Tünkers France and another v Expert France)

Rose Lagram-Taylor, barrister at South Square, says that using the challenge to jurisdiction defence in insolvency proceedings should not be the first port of call.

Original news

Tünkers France and another v Expert France C-641/16, [2017] All ER (D) 80 (Nov)

Article 3(1) of Regulation (EC) 1346/2000 (the EC Regulation on Insolvency) should be interpreted as meaning that an action for damages for unfair competition by which the assignee of part of the business acquired in the course of insolvency proceedings was accused of misrepresenting itself as being the exclusive distributor of articles manufactured by the debtor, did not fall within the jurisdiction of the court which had opened the insolvency proceedings. The Court of Justice of the European Union (CJEU) so held in a preliminary ruling in proceedings concerning an action for unfair competition brought by the respondent company against the applicant companies.

Briefly what was the background to the case and what issues arose within it that are pertinent to insolvency professionals?

The court of cassation in France made a request to the Court of Justice for a preliminary ruling under Article 257 of the Treaty on the Functioning of the European Union on the interpretation of Article 3(1) of the EC Regulation on Insolvency.

The request was made in the context of proceedings between Tünkers France (TF) and Tünkers Maschinenbau GmbH (TM) and Expert France (EF) concerning an action for unfair competition brought by EF against TM and TF.

Following the opening of insolvency proceedings in Germany against Expert Maschinenbau GmbH (EM), a German company which had given exclusive distribution rights to EF in France, TM agreed a transfer agreement for EM. TM subsequently invited the clients of EF to make direct orders with it, representing itself as an assignee of EM. EF viewed this as constituting unfair competition and issued proceedings in France.

TM and TF challenged EM’s action on the basis of the jurisdiction of the French court, asserting the dispute fell within the jurisdiction of the German courts, them having opened the insolvency proceedings of EM. Both the commercial court and Court of Appeal in Paris rejected this argument, causing TM and TF to bring an appeal before the court of cassation which referred the following question to the Court of Justice:

‘Must Article 3 of the EC Regulation on Insolvency be interpreted as meaning that the court which opened insolvency proceedings has exclusive jurisdiction over an action seeking to establish liability by which the assignee of part of a business acquired in the course of those insolvency proceedings is accused of misrepresenting itself as the exclusive distributor of the goods manufactured by the debtor?’

The pertinent issue therefore involved the scope of Article 3(1) of the EC Regulation on Insolvency, and the extent to which it can be said an action derives directly from insolvency proceedings.

What were the main legal arguments raised?

The legal arguments centred on the meaning behind Article 3(1) of the EC Regulation on Insolvency, as well as Articles 1(1) and 1(2) of Regulation (EC) 44/2001 (the Judgments Regulation) on jurisdiction and the recognition and enforcement of judgments.

Article 3(1) of the EC Regulation on Insolvency provides that the courts of the Member State within the territory where the debtor’s centre of main interests (COMI) is situated has jurisdiction to open insolvency proceedings.

Article 1(2)(b) of the Judgments Regulation, which applies in civil and commercial matters, excludes from its scope ‘bankruptcy, proceedings relating to the winding-up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous proceedings’.

Attention was given to Nickel & Goeldner Spedition, Case-157/13, which held that actions which fall outside the scope of Article 3(1) of the EC Regulation on Insolvency fall within the scope of the Judgments Regulation.

‘Civil and commercial matters’ as referred to in the Judgments Regulation should be interpreted broadly. However, the EC Regulation on Insolvency should not be interpreted broadly.

Only those actions which derive directly from insolvency proceedings, and are closely connected with them, are excluded from the scope of the Judgments Regulation.

In order to determine whether an action derives directly from insolvency proceedings, the decisive criterion is not the procedural context of the action, but its legal basis.

What did the CJEU decide, and why?

The CJEU decided that the action for unfair competition did not fall within the jurisdiction of the court which opened the insolvency proceedings. This was for the following reasons:

  • EF merely sought to establish the liability of TM and TF, and did not challenge the validity of the assignment carried out during the course of the insolvency proceedings
  • the matter could be distinguished from SCT Industri Case-111/08 which challenged a transfer of shares during insolvency proceedings, as the dispute in this case concerned the conduct of the assignee, rather than the insolvency practitioner
  • EF acted exclusively to protect its own interests rather than the creditors in the insolvency proceedings
  • the action against TM and TF was subject to other rules, rather than those applicable in insolvency proceedings, meaning the consequences of the action would not have any influence on the insolvency proceedings
  • while the action was directed against TM in the context of insolvency proceedings, an acquired right, once part of the assignee’s assets, cannot retain a direct link with the debtor’s insolvency
  • the link between the action and the insolvency proceedings was neither sufficiently direct or close so as to exclude the Judgments Regulation

What are the practical implications of this case for insolvency lawyers advising their clients?

Insolvency lawyers must be mindful of the fact that if insolvency proceedings have been brought in one Member State, the EC Regulation on Insolvency will not prevent the courts of another Member State from having the jurisdiction to hear an action commenced against a party connected with those insolvency proceedings.

This judgment highlights the difficulties which parties could have in relying on a challenge to jurisdiction as a form of defence. Insolvency lawyers will have to advise their clients that the circumstances in which such a challenge will be successful are narrow, and will only be accepted by the courts where the action has a direct and clear link with the insolvency proceedings. The fact an action may arise in the context of insolvency proceedings will not be sufficient.

To what extent is the judgment helpful in clarifying the law in this area?

The judgment confirms the two-stage test that the court will use when determining whether Article 3(1) of the EC Regulation on Insolvency applies:

  • does the action derive directly from the insolvency proceedings
  • is the action closely connected with those insolvency proceedings

It also reiterates the narrow scope of the EC Regulation on Insolvency, coupled with the broad interpretation the courts will take of the Judgments Regulation. It is now clear that the courts will not view an action which has arisen in the context of insolvency proceedings, such that they would not have been brought without those insolvency proceedings, as sufficiently connected to those proceedings to enable the EC Regulation on Insolvency to apply.

To what extent is the judgment unhelpful, and what practical lessons are there to be learned?

This judgment is largely unsurprising given the procedural history of the action, together with the recent case law of the CJEU which has pointed towards the narrow interpretation of Article 3(1) of the EC Regulation on Insolvency. However, it may be viewed as unhelpful by insolvency practitioners and their lawyers as it adds another nail in the coffin to the ability to challenge an action commenced after insolvency proceedings have already been issued on the basis of jurisdiction.

In terms of lessons to be learnt, it is now apparent that should a party wish to challenge the jurisdiction of an action using Article 3(1) of the EC Regulation on Insolvency, they should focus their attentions on the factors which make the action directly connected to the insolvency proceedings, and which can show a close connection between the action and the proceedings.

Parties seeking to defend an action brought in another Member State should also be aware that challenging the jurisdiction of the courts may not be the best use of resources, and if another defence is available to use, that should be followed as a first port of call.

Interviewed by Stephanie Boyer.

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

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