EARN News

ECJ: avoidance of transactions in insolvency proceedings in cross-border business

Berlin, 2021-07-28

In insolvency proceedings conducted in Germany, it is particularly easy for insolvency administrators to successfully assert claims against creditors by means of insolvency avoidance. This practice is based on the administrator-friendly insolvency case law by the German Federal Court of Justice, which has facilitated the enforcement of avoidance claims for the insolvency administrator by lowering the standard of proof.

A judgement by the European Court of Justice (ECJ) of 22 April 2021 (Case C-73/20 – Oeltrans Befrachtungsgesellschaft) now provides a lifeline to foreign creditors domiciled in an EU Member State. In its judgment the court decided on insolvency avoidance claims asserted against a Dutch inland waterway shipping company which had received a payment for transports from a client who declared insolvency shortly after. This payment was demanded back by the insolvency administrator of the former client.

Art. 13 of Council Regulation (EC) No. 1346/2000 of 29 May 2000 (now identical in wording to Article 16 of the (EU) Regulation 2015/848 on insolvency proceedings) allows foreign defendants to invoke the insolvency avoidance law of their home country, as long as its requirements for avoidance are lower than the requirements in the country of the contesting insolvency administrator. The Dutch inland waterway shipping company used this regulation as defence against the insolvency administrator’s avoidance claim by arguing that under Dutch law the contested payment would not be voidable and thus the Dutch law would have to be applied.

Against the insolvency administrator’s objection, the ECJ ruled that the payments in question have to be assessed under the Dutch insolvency law. Hence, the German Federal Court of Justice, which requested the ECJ’s decision in the first place, now has to decide whether the contested payments are voidable under Dutch law. Chances are high that the court will decide in favour of the Dutch company and dismiss the insolvency administrator’s claim.

In case of a business partner displaying an ambiguous payment behaviour, the ECJ ruling provides a new possibility for corporations with foreign group companies to prevent future insolvency avoidance claims. It is advisable to these corporations to have the supply or provision of services to such a business partner carried out by group companies that have their registered office in countries with insolvency laws that are preferable for creditors in case of avoidance claims. To do so, contracts should be drafted in a way that effectively determines the jurisdiction of the foreign group company that provides the services and receives the potentially contestable payments as governing. Prior to contracting, it is also necessary to examine whether the law on avoidance of transactions in insolvency proceedings in the country concerned is actually preferable for the creditor. However, as stated at the outset, this will be the case for almost all EU member states. Presumably, this legal concept is, in accordance with section 339 of the Insolvency Statute, also applicable to foreign companies domiciled outside the EU.

Author: Michael Schmidt, attorney at law

PASCHEN Rechtsanwälte