First published on 4 July 2018 by Lexis Nexis
Graham McPhie, interviewed by Alex Heshmaty
Restructuring & Insolvency analysis: An interesting case from the EU Court of Justice, Tarrago da Silveira v Massa Insolvente da Espirito Santo Financial Group SA, held that the provisions on lawsuits pending in the EC Regulation on Insolvency included those relating to pure monetary claims and was not limited to those relating to assets or rights—however, enforcement actions were not included. Graham McPhie, partner at Moon Beever Solicitors, considers the case.
Tarragó da Silveirav v Massa Insolvente da Espírito Santo Financial Group SA Case C-250/17,  All ER (D) 29 (Jun)
What was the background to the case and the issues arising within it which are pertinent to insolvency professionals?
The EC Regulation on Insolvency (EC) 1346/2000 (the EC Regulation on Insolvency) raises the overarching prospect of jurisdictional and legal issues being decided according to the law of the place of the opening of the insolvency proceedings. As a general principle, this potential certainty and the uniform application of law across multiple jurisdictions would be a desirable outcome. However, there are many exceptions to this general principle which need to be considered to decide upon the applicable law in any given situation. This case deals with one such issue arising from Article 15 of the EC Regulation on Insolvency.
As a reminder, Article 4(1) of the EC Regulation on Insolvency provides that the law applicable to the insolvency proceedings and their effects shall be that of the Member State in which the proceedings were opened.
Article 4(2) of the EC Regulation on Insolvency provides that the law of the state of the opening of proceedings shall determine the conditions for the opening of those proceedings, their conduct and closure. It shall also determine in particular:
‘(f) the effects of the insolvency proceedings on proceedings brought by individual creditors, with the exception of lawsuits pending’
However, Article 15 of the EC Regulation on Insolvency provides:
‘The effects of the insolvency proceedings on a lawsuit pending concerning an asset or a right of which the debtor has been divested shall be governed solely by the Law of the Member State in which that lawsuit is pending.’
Article 16 of the EC Regulation on Insolvency provides:
‘Any judgment opening insolvency proceedings…shall be recognised in all other Member States from the time that it becomes effects in the state of the opening of proceedings.’
In 2008, the claimant, who lived in London, brought debt recovery proceedings in the courts in Portugal against a company which itself was based in Luxembourg. In 2014, the defendant company was declared insolvent by the courts in Luxembourg.
Under Portuguese law, Article 277(e) of the Código do Processo Civil:
‘There is no need to adjudicate in the event of the action becoming devoid of purpose.’
In June 2015, the court in Portugal applied this provision and held there was no need to adjudicate because of the insolvency proceedings in Luxembourg. Was this correct, and which law applied?
What were the main legal arguments raised?
The claimant argued that Article 15 of the EC Regulation on Insolvency was of no relevance as it only applied to lawsuits concerning a specific asset or right and did not apply to an obligation of a monetary nature. The applicable law and jurisdiction points should be resolved solely by reference to Article 4 of the EC Regulation on Insolvency, so that the law of the state of the opening of insolvency proceedings (Luxembourg) should apply. Perhaps not surprisingly, that law did not provide for the termination of lawsuits pending in these circumstances.
The defendant argued that Article 15 of the EC Regulation on Insolvency applies to all ongoing proceedings before a court of a Member State other than that where insolvency proceedings were opened, concerning assets or rights, specific or non-specific, provided that the debtor has been divested of them. The issue to be determined, therefore, was the width of the scope of Article 15 of the EC Regulation on Insolvency.
Given these positions, the court referred the following question to the European Court of Justice for a preliminary ruling:
‘Must Article 15 [of Regulation No 1346/2000] be interpreted to the effect that its scope includes a lawsuit pending before a Member State seeking an order that a debtor pay a monetary sum due under a contract for the provision of services and pay monetary damages for failure to comply with that obligation, bearing in mind that: (i) the debtor was declared insolvent in proceedings opened in another Member State; and (ii) the declaration of insolvency applies to all of the debtor’s assets?’
What did European Court of Justice decide, and why?
The court focussed on the words ‘an asset or a right of which the debtor has been divested’ and whether those limited the scope of Article 15 of the EC Regulation on Insolvency. The issue was whether it only applied to lawsuits concerning a specific right or a specific asset held by the debtor.
To interpret this provision, it was a requirement to look at all language versions so as to have a uniform application. It was accepted that Article 15 of the EC Regulation on Insolvency was not without ambiguity, but its interpretation could not to be limited to ongoing proceedings concerning a specific asset or right of which the debtor has been divested.
The provisions of Article 4(2) (f) of the EC Regulation on Insolvency were not limited to lawsuits concerning a specific asset or right. Therefore, the expression ‘lawsuit pending’ in Article 15 of the EC Regulation on Insolvency concerned not only those dealing with a specific asset or right but, more broadly, those assets or rights that were part of the insolvency estate.
The expression ‘of which the debtor has been divested’ refers not only to the specific assets or rights of the debtor but covers the debtor’s insolvency estate created as a result of the opening of insolvency proceedings.
The court considered the effect of Article 16 of the EC Regulation on Insolvency and the automatic recognition in other states of judgments made in the Member State of the opening of insolvency proceedings. The purpose of the regulation is to improve the efficiency and effectiveness of cross-border insolvency and so concluded:
‘…to oblige the court hearing the case, in relation to judicial proceedings concerning a monetary obligation, to apply in the course of proceedings a foreign law with the sole aim of determining the effects that the opening of insolvency proceedings in another Member State would have on that case. That would risk delaying the judgment of that court relating to the determination and fixing the amount of any debt and, if applicable, would prevent the creditor from registering in due time his claim in the insolvency estate in those insolvency proceedings.
‘Thus, in accordance with the objective mentioned in the preceding paragraph, the interpretation of Article 15 of Regulation No 1346/2000 in para 23 of this judgment enables the court, when hearing a lawsuit pending, to determine the effects of the opening of the insolvency proceedings on that lawsuit in accordance with its national law.’
The answer to the preliminary question was that Article 15 of the EC Regulation on Insolvency applied to a lawsuit pending before the court of a Member State seeking an order that a debtor pay a sum of money due under a contract for the provision of service and pay monetary damages for failure to comply with that contractual obligation in the event that the debtor was declared insolvent in insolvency proceedings in another Member State and that declaration of insolvency applied to all of the debtor’s assets.
What are the practical implications of this case and development for insolvency lawyers advising their clients?
The ambit of Article 15 of the EC Regulation on Insolvency has been clarified and in a way that might surprise many if the strict wording itself is looked at alone. If we take the example of a company in liquidation under English law, we would say that there is no divesting of assets with no automatic vesting in the liquidator. Article 15 of the EC Regulation on Insolvency should not apply, and so the continuation of lawsuits should be determined by English law if we are dealing with English insolvency proceedings.
It was considered by many, perhaps with some justification, that Article 15 of the EC Regulation on Insolvency applied to antecedent lawsuits to recoup assets such as undervalue type claims. It would make sense for those claims still to be considered according to the law of the jurisdiction in which they were proceeding, as they could affect the local property rights of individuals.
However, that would appear to be an incorrect interpretation of Article 15 of the EC Regulation on Insolvency. The applicability of the insolvency process to all the company’s assets would be sufficient to engage Article 15. The effect of this is that the law to be applied for the continuation of any lawsuits will be that of the state in which the claim is proceeding.
In this context, it is submitted that this is an unwelcome decision which does not promote the stated desire for efficiency in all cases. This leaves office-holders potentially having to deal with proceedings in other Member States according to a multitude of differing legal systems, as opposed to applying the uniform legal provisions of the Member State in which the proceedings were opened.
To what extent is the judgment helpful in clarifying the law in this area?
It is helpful to the extent that now we know that the ambit of Article 15 of the EC Regulation on Insolvency is wider than perhaps might first have been thought. In particular, what seems to be a widening of the meaning of that provision to apply to a purely contractual, debt claim.
To what extent is the judgment unhelpful, and what are the practical lessons to be learned?
Purely from the perspective of English law, we would expect that any action would be stayed and the claim of the creditor to be made and adjudicated within the insolvency proceedings. The continuation or otherwise of any claim which is being made in another Member State will be determined by the law of that state. This adds a layer of complexity and costs.
The European Court of Justice seemed to be acting under the premise that the continuation of the proceedings in accordance with domestic law would be necessary for the efficient determination of the rights of the creditor so as not to delay the ability to make a claim in the insolvency estate. It is submitted that would not be correct for an English insolvency in which office-holders could form a view on claims as part of the adjudication process.
On the positive side, it could be said that an office-holder could take a view that a claim cannot be admitted until there has been a court determination. On the negative side, this could mean that office-holders are inadvertently drawn into proceedings unnecessarily, or perhaps could be bound to accept the determination of claims made in other jurisdictions with no real adjudication process involved.
Although the European Court of Justice will not have decided the following issue, the interesting aside is that the finding would mean that Portuguese law applies to the claimant’s action which would mean his claim would be stayed.
Could this case be applied to the similar provisions on lawsuits pending appearing in Article 18 of the Recast Regulation on Insolvency (EU) 848/2015?
Article 18 of the Recast Regulation on Insolvency (EU) 848/2015 says: ‘The effects of insolvency proceedings on a pending lawsuit or pending arbitral proceedings concerning an asset or a right which forms part of a debtor’s insolvency estate shall be governed solely by the law of the Member State in which that lawsuit is pending or in which the arbitral tribunal has its seat.’
It is a provision that is similar to Article 15 of the EC Regulation on Insolvency, but with differing wording. Taking the purposive approach as the court has clearly done here, it can be said that this equally is to apply to proceedings against entities in which an insolvency estate has been created.
Insofar as it could be said the European Court of Justice was creative in its interpretation of Article 15 of the EC Regulation on Insolvency, there is no reason why the same rationales of certainty and efficiency will not apply to this provision, so that Article 18 of the Recast Regulation on Insolvency (EU) 848/2015 will also apply to claims against the insolvent entity for a contractual or other debt. If so, those claims will continue to be governed by the law in which the claim is proceeding and not the law of Member State for the opening of the insolvency proceedings.