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Cross Border Insolvency Judge Hans Peter Kirchhof


									                           European Commercial Judges Forum
                           Dublin, Ireland 30th April -1st May 2009

                               Cross Border Insolvency
                              Judge Hans Peter Kirchhof

During the first 8 years the Insolvency Regulation of the European Community has been
in force, discussions have mainly dealt with questions of international jurisdiction,
decisions to open insolvency proceedings in one state and their recognition in another,
as well as secondary proceedings in other states.

Yet beyond these basic principles directly linked with the insolvency proceedings there
are many other questions concerning further effects of such proceedings on substantive
rights of creditors or parties of transactions with the debtor. Such questions will probably
gain in importance and interest in the future. Therefore, I will now try to give a short
outlook on what may be ahead in this respect.
The basic rule, derived from article 4 paragraph 1 of the Regulation, is that the law of the
State of the opening of proceedings determines their consequences. But there is quite a
number of exceptions.

1) It happens quite often that insolvency proceedings are opened against a party of a
lawsuit. As far as I am informed all of the national laws of the member States of the
European Community provide for a stay of individual actions against the debtor who has
been declared insolvent. Even if the insolvency proceedings have been opened in
another member State than the one where the particular lawsuit is pending, the court
dealing with it has to recognize that party to be insolvent. Yet the effect and extent of the
stay resulting from this seems to be different in many of the Member States. As a
solution, article 15 of the Regulation establishes that in this respect the relevant law is
that which govern the lawsuit in question.

2) Next, I will turn to the effect of insolvency proceedings on cross border securities. I will
try to exemplify them on the basis of a hypothetical case; I would have preferred to
present a 'real life' case to you, but unfortunately, no court decisions on this subject
based on the Regulation have become known yet.

Let us assume that Borrower B has his centre of main interests in England and assets
also in Germany. His Creditor C may be a resident of a European or of a non-European
state; this doesn't make any difference insofar. Creditor C takes full fixed and floating

                                 Judge Hans-Peter Kirchhof
                           European Commercial Judges Forum
                           Dublin, Ireland 30th April -1st May 2009

security over all the assets of borrower B in England and Germany pursuant to English
law, and he also takes local security in Germany under German law. Borrower B
becomes insolvent and the securities of C become enforceable. How would the options
for Creditor C be affected if insolvency proceedings were opened against B in a
particular jurisdiction?

  a) Main proceedings would need to be opened in England as the centre of B's main
interests is there. It doesn't matter whether the petition has been rendered by B himself
or by a creditor or whether such a creditor is secured or not. As a consequence of such
main proceedings the assets situated in England are dealt with according to English law.
However, article 5 of the Regulation establishes that the opening of insolvency
proceedings shall not affect the rights in rem of creditors or third parties in respect of
tangible or intangible, moveable or immoveable assets belonging to the debtor which are
situated within the territory of another Member State at the time of the opening of
proceedings. Therefore, creditor C is enabled to enforce his security in Germany
notwithstanding any moratorium on enforcement which might arise as a consequence of
an English administration. This must be done, though, under German law; and this
means for example that, where the security is over real property, it must be enforced by
means of public auction or court administration.

  b) If borrower B does not only have assets but also an establishment in Germany,
secondary insolvency proceedings could be initiated by the liquidator in the main
proceedings, by other creditors and possibly by debtor B himself in Germany, also. Such
proceedings would be conducted according to German law and would affect rights in
rem in Germany in exactly the same way as if they were purely domestic proceedings
here. As a consequence, the liquidator appointed in the Germany secondary
proceedings will realize all assets which borrower B has in this country. He will, however,
hand over the proceeds resulting from securities to the secured creditors, for instance C,
but only after having deducted a fee of 9% of the proceeds for his own efforts. If, by the
liquidation of the assets in Germany, it is possible to meet all claims allowed under those
proceedings, the local liquidator will transfer any assets remaining to the liquidator in the
main proceedings, that is to England in the case I am presenting.

  c) However, there is yet another potential complication. Article 5 of the regulation only
governs the rights of creditors with regard to the insolvency proceedings. Whether those

                                Judge Hans-Peter Kirchhof
                          European Commercial Judges Forum
                          Dublin, Ireland 30th April -1st May 2009

rights of the creditors are valid or not has to be established on the basis of the
substantial civil law according to which the security is set up. In this respect we have a
special problem in Germany. According to German law the proprietary on moveable
assets may be transferred without registration, and this is the case also if the property -
by way of an agreement - is to serve as a security only. If I am informed correctly, some
other States, e.g. France, do not recognize such securities in the debtor's possession
without registration. Let us now assume that one of the assets of borrower B in Germany
is a truck and that this truck happens to move across the river Rhine into France. In this
case the administrator of the English main proceedings could probably seize that truck
there because creditor C is deemed to have lost his security at the border according to
French civil law. Article 5 of the Regulation could not prevent this.

  d) No complications of that sort, however, threaten the rights of an unpaid seller who
has reserved his title within a contract of sale. For article 7 paragraph 1 of the Regulation
provides that the opening of insolvency proceedings against the purchaser of an asset
shall not affect the seller's rights based on a reservation of title where at the time of the
opening of proceedings the asset is situated within the territory of a Member State other
than the State of opening of proceedings.

3) Important rules also relate to the voidness, voidability or unenforceability of legal acts
detrimental to all the creditors, especially for revoking an insolvent debtor's pre-
bankruptcy transactions, and likewise to any acts or dispositions of property carried out
after the opening of the proceedings.

Some weeks ago the European Court of Justice rendered the first decision concerning
the impeachment of detrimental transactions (decision of 12 February 2009, C 339/07).
The Court held that article 3 paragraph 1 of the Regulation applies to lawsuits lodged by
the liquidator of insolvency proceedings in one Member State to make void a preferential
transfer against the recipient living in another Member State. In other words, the courts
of the Member State within the territory of which the insolvency proceedings have been
opened are also competent for lawsuits entered to revoke the debtor's pre-bankruptcy
detrimental transactions against any person living in another Member State who has
received the benefit. Such lawsuits are deemed to be closely linked with the insolvency
proceedings themselves. This may be a very important step because article 25
paragraph 1 subparagraph 2 provides that not only judgments concerning the opening of

                                Judge Hans-Peter Kirchhof
                           European Commercial Judges Forum
                           Dublin, Ireland 30th April -1st May 2009

insolvency proceedings, but all judgments deriving directly from such proceedings and
being closely linked with them shall be recognized in all the other Member states. Many
different lawsuits may arise as a result of insolvency proceedings, and the questions
facing us in the future might be: a) do they directly derive from such proceedings, and b)
how close does the link have to be so that the proper forum is in the state where the
proceedings have been opened?

According to article 4 paragraph 2 letter m of the Regulation the law of the state of the
opening of proceedings shall also establish the substantial rules which determine the
voidness, voidability or unenforceablity of such acts in question. Thus, the judge who is
competent to decide the lawsuit also has to apply the law of his own state. But there is
an important exception to this rule which is set out in article 13. According to this
provision the beneficiary of the detrimental transfer may defend himself by invoking the
rules of the law of another state if this is the law governing the act of transfer itself. If
according to this law there are no means of challenging the detrimental act in question,
the good faith of the recipient prevails.

4) Next, I will address set-offs. Let us assume that debtor D, whose centre of main
interests is in Belgium, has a claim against his customer C, who is living in Germany.
Insolvency proceedings are opened against D in Belgium. The liquidator appointed for
these proceedings brings an action against C to a German court to pursue D's claim. C
allows this claim but sets off a counter-claim against D which arises from a different
transaction. It is doubtful whether this set-off is permitted because there are 2 provisions
of the Regulation pertaining to set-offs which cannot be reconciled easily with one
another. On the one hand, article 4 paragraph 2 letter d lays down that the law of the
State of the opening of proceedings shall determine the conditions under which set-offs
may be invoked. If we apply this general rule to the case I have presented, the set-off
does not seem to be allowed, because Belgian insolvency law - to my knowledge -allows
a set-off only concerning claims arising from the same legal cause, and there are
different causes to the claim and the counter-claim in the case at hand. By contrast,
neither the insolvency law nor the civil law of Germany restrains set-offs in such a

Therefore, the defendant C would probably take recourse to article 6 paragraph 1 of the
Regulation, which determines that the opening of insolvency proceedings shall not affect

                                 Judge Hans-Peter Kirchhof
                           European Commercial Judges Forum
                           Dublin, Ireland 30th April -1st May 2009

the right of creditors to demand the set-off of their claims where such a set-off is
permitted by the law applicable to the insolvent debtor's claim. Thus, German law might
prevail if D's claim lodged by the liquidator against C should be governed by German
law. This legal question would have to be determined on the basis of the Rome
Convention to the Law Applicable to Contractual Obligations concluded in 1980.

As the 2 provisions of the Regulation which I have mentioned seem to contradict each
other, authors hold different views as regards their proper construction. I have not heart
of any court decision in this matter, yet.

5) Insolvency proceedings in modern times quite often end with the debtor being
discharged of all his remaining debts. Relevant to such a discharge is article 4
paragraph 2 letter k of the Regulation. It stipulates that the law of the State of the
opening of proceedings shall determine the creditors' rights even after the closure of
these proceedings. This means that the discharge granted in one Member State makes
the claims of the creditors unenforceable in all other Member States, too, even if the law
of one of these states does not provide for a discharge at all.

6) I should like to end with a few words concerning cross-border insolvencies with regard
to Denmark. As this State has decided not to accept the EC Regulation, insolvency
cases involving another Member State of the European Community on the one hand and
Danish creditors or debtors on the other hand in my opinion must be decided on a strictly
national basis. If, for an example, insolvency proceedings are pending in Germany, the
rights of Danish creditors in these proceedings would be decided on the basis of the
German national Insolvency Act regulating cross-border insolvencies. This national law
is very similar to the provisions of the EC Regulation and offers almost the same
conditions to all states world-wide. If, on the other hand, insolvency proceedings are
opened in Denmark, Danish law decides upon the status of foreign creditors.

I have confined myself to the most important problems only, which may arise as a
consequence of the Insolvency Regulation. It does seem to me that commercial judges
all over Europe will probably have a lot to think about. But - like Judge Rordorf - I am
convinced that the common rules for almost all Member States of the European
Community will make the task of judges much easier than it would be if they still had to

                                 Judge Hans-Peter Kirchhof
                           European Commercial Judges Forum
                           Dublin, Ireland 30th April -1st May 2009

verify the national law applicable to every single case of cross-border insolvencies and,
possibly, find out the solution it might present.

                                 Judge Hans-Peter Kirchhof

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