Leiden Law Blog

Which insolvency law applies to a cross-border payment transaction

Which insolvency law applies to a cross-border payment transaction

Last month, the Court of Justice of the EU was able to provide an interpretation of Article 13 EU Insolvency Regulation (Law applicable to detrimental acts) (EIR).  Article 13 EIR relates to Article 4 EIR, providing that the law applicable to insolvency proceedings and their effects shall be that of the Member State within the territory of which such proceedings are opened (lex concursus). This applicable law shall determine in particular in paragraph 2 ‘… (m) the rules relating to the voidness, voidability or unenforceability of legal acts detrimental to all the creditors.’ Article 13, however, states that Article 4(2)(m) shall not apply where the person who benefited from an act detrimental to all the creditors provides proof that (i) the said act is subject to the law of a Member State other than that of the State of the opening of proceedings, and (ii) that law does not allow any means of challenging that act in the relevant case.

In the case at hand, ECZ GmbH, a company incorporated in Germany, sells cars. The Austrian market is served by a subsidiary established in Bregenz (Austria), the insolvent debtor in this case. Lutz purchases a car from that company but, owing to the failure to deliver the car, he brought an action before the District Court of Bregenz, seeking reimbursement of the price which he had paid to the company. On 17 March 2008, the court issued an enforceable payment order against the company for EUR 9566 plus interest. A month later, on 13 April 2008, the debtor company filed an application before the District Court of Ravensburg (Germany) for insolvency proceedings to be opened, which indeed occurred on 4 August 2008. On 20 May 2008, the court in Bregenz granted leave to enforce its payment order of 17 March 2008 and three bank accounts held by the debtor company at a bank established in Austria were attached. The attachment was notified to the bank on 23 May 2008. On 17 March 2009, the bank holding the debtor company’s bank accounts that had been attached paid Lutz the sum of EUR 11778. Prior to that date, the insolvency liquidator at that time had, by a letter of 10 March 2009, given notice to the bank that he reserved the right to challenge  any payment made in favour of the debtor company’s creditors in connection with the insolvency. By a letter of 3 June 2009 he informed Lutz that he was indeed challenging the enforcement which had been authorised on 20 May 2008 by the court in Bregenz, and also the payment made on 17 March 2009. On 23 October 2009, Ms Elke Bäuerle, now acting as liquidator of the debtor company, brought an action against Lutz seeking to have the transaction set aside and recovery of the total sum paid to him on 17 March 2009. Courts in first instance and in appeal upheld Bäuerle’s action.
Lutz then approaches the German Federal Court that refers questions regarding the interpretation of Article 13 EIR (law applicable in the case of a detrimental act). In this dispute in the main proceedings, according to the applicable lex concursus, Paragraph 88 Insolvenzordnung applies and the right to attach the credit balance on the debtor company’s bank accounts became legally invalid on the date when the insolvency proceedings against the company were opened, since the attachment was authorised and effected after the application to open the proceedings. The Federal Court states that the subsequent payment of the attached sum from the balance on the bank accounts is therefore also invalid. The Federal Court adds that, according to Mr Lutz, who relies on Article 13 EIR, the payment at issue in the main proceedings can no longer be challenged under the law applicable to that payment, namely Austrian law. Paragraph 43(2) of the Austrian Insolvenzordnung lays down a limitation period of one year, from the date when the insolvency proceedings were opened, for commencing an action to set aside. The Court notes that that period had not been respected in the case in the main proceedings and observes that, by contrast, under German law, the limitation period for bringing an action to set a transaction aside is three years and that, in the case in the main proceedings, that period had been respected.
In summary, the Court of Justice of the European Union (First Chamber) ruled on 16 April 2015:
1. Article 13 EIR must be interpreted as applying to a situation in which a payment, challenged by an insolvency administrator, of a sum of money attached before the opening of the insolvency proceedings was made only after the opening of those proceedings.

2. Article 13 EIR must furthermore be interpreted as meaning that the defence which it establishes 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.

3. For the purposes of applying Article 13 EIR the relevant procedural requirements for the exercise of an action to set a transaction aside are to be determined according to the law governing the act challenged by the liquidator, i.e. German law.

This does all not seem very spectacular. Law, however, especially insolvency law, also looks for certainty and predictability, which is what the Court in this case offers.

See: http://curia.europa.eu C-557/13

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