Avoiding Avoidance: CJEU Endorses Freedom to Select Insolvency Avoidance Rules

For creditors, insolvency proceedings hold the promise of a peaceful afterlife. If their debtor fails to satisfy their claim, an impartial liquidator will take over and, to the extent possible and in the order of their priority, give everyone his due. Obviously, that promise would be meaningless if a debtor would be allowed to favour related or influential parties (such as company insiders or important financiers) immediately prior to his divestment. That is why insolvency law typically allows the liquidator to avoid transactions which the debtor has concluded in the twilight zone prior to insolvency and which are detrimental to the creditors.

However, in a recent preliminary ruling (Vinyls Italia, C-54/16), the Court of Justice of the European Union (CJEU) offers the debtor an interesting escape route: he is allowed to contract around an avoidance provision by submitting an otherwise voidable transaction to a law under which the transaction is not avoidable.

1. How Safe Is Article 13’s Harbour?

In Vinyls Italia, the Court of Justice had to answer several questions on the interpretation of Article 13 of the Insolvency Regulation.

That provision states, in essence, that the avoidance rules contained in the law of the insolvency proceedings (the lex concursus) do not apply where the person who benefited from an allegedly voidable act proves that it is subject to the law of another Member State (the lex causae) which does not allow any means of challenging the act in the relevant case.

Two of the questions put before the Court merit particular examination:

(1) Does Article 13 require proof that the lex causae does not provide, in the abstract, any means to challenge the contested act? Or does it require proof that the conditions for avoidance under the lex causae have not actually been fulfilled in the relevant case?
(2) May Article 13 be relied upon in case all the elements relevant to the situation in question are located in a country other than the country whose law is chosen by the parties to the challenged transaction?

2. The CJEU Allows Parties to Contract Around Avoidance Provisions

In answer to question (1), the Court found that Article 13 indeed only requires that the conditions for avoidance under the lex causae have not actually been fulfilled in the relevant case.

In answer to question (2), the Court held that Article 13 may be validly invoked even if all relevant elements (including the parties’ registered office) are located in the State where the insolvency proceedings were opened. The only exception is fraud or abuse, which requires that: (i) the purpose of Article 13 has not been achieved (objective element); and (ii) the essential aim of the transaction concerned was to obtain an undue advantage (subjective element).

All this puts the beneficiary of an insolvent debtor’s act which is detrimental to his creditors in a very comfortable position:

- such a transaction is voidable only if both the lex concursus and the lex causae contain a similar avoidance provision which is applicable to it; even if
- parties have selected a lex causae which has no link whatsoever with that transaction and all factual elements are located in the State of the opening of proceedings; unless
- the transaction is fraudulent or abusive; however, virtually all Member States have adopted avoidance provisions against fraudulent transactions prior to insolvency, so that Article 13 is arguably not relevant in such cases anyway.

3. According to the CJEU, Creditor Protection Strengthens the Position of… the Debtor

Logic dictates that a rule aimed at protecting third parties should not be freely selectable by its addressees. As mentioned, insolvency avoidance rules aim to protect creditors against harmful acts by their debtor. That is why, in accordance with the Insolvency Regulation, they are linked to a (predominantly) objective connecting factor: the centre of the debtor’s main interests (COMI). Article 13 of that Regulation, however, provides an exception in case the application of the avoidance rules of the COMI would prejudice the legitimate expectations of the debtor’s counterpart.

The CJEU now interprets the exception laid down in Article 13 in such a broad manner that it arguably becomes an absolute rule. Even if all factual elements of a transaction are located in the State where insolvency proceedings were opened, and none are located in the selected legal system, the latter has the final word on whether or not the transaction is voidable. This is all the more remarkable given that the conflict-of-laws rules in relation to contracts – in particular Article 3(3) of the Rome I Regulation – acknowledge that in such a situation the choice of law cannot prejudice the application of mandatory provisions. Indeed, the Court expressly states that Article 13 of the Insolvency Regulation derogates from Article 3(3) of the Rome I Regulation.

The CJEU thus seems to award creditors less protection under insolvency law than under contract law. It is hard to see the logic behind this, if there is any.

Gillis Lindemans is a Fellow of the Research Foundation of Flanders and a PhD student at the University of Leuven.