Actio Pauliana and Divisions: Striking the Balance in Creditors’ Protection
This post looks into the recent judgment of the Court of Justice of the European Union (CJEU) in case C - 394/18, ‘IGI’, and discusses the question of whether national legislators are (or should be) allowed under EU company law to introduce additional protective measures, such as an actio pauliana, for creditors of companies undertaking a division under the regime of the Directive 2017/1132/EU (the ‘Directive’).
Art 146 of the Directive, dealing with the protection of creditors, requires an adequate system for the protection of creditors of companies divided into two or more companies, as each company resulting from the division, including those against which creditors hold claims, may become less solvent as a result of the division. This two-level protection system works as follows:
First, creditors whose claims existed before the draft terms of the division were published in the business register but were not yet due at the time of the publication may request adequate safeguards for their claims, provided that the financial situation of the company being divided, and that of the company whose obligations resulting from creditors’ claims are to be transferred in accordance with the draft terms of division, make such protection necessary (‘ex ante measures’).
Second, if, after the division is completed, a creditor’s claim is not satisfied, the recipient companies shall be jointly and severally liable (‘subsidiary liability’) either in full or up to the amount of the net assets transferred to each company, for the satisfaction of the claim (‘ex post measures’). If, however, national legislations already provide for full liability of all companies involved in the division, they may dispense with the right to request adequate safeguards.
Article 153(1)(b) of the Directive further stipulates that when a division has taken effect, it can be declared void only in the following cases: a) there has been no judicial or administrative preventive supervision of its legality, b) it has not been drawn up and certified in due legal form, or c) it is shown that the decision of the general meeting is void or voidable under national law. Articles 146 and 153 apply to divisions where all companies involved are governed by the law of the same member state (national divisions).
In case C - 394/18, the CJEU dealt with a case where an Italian limited liability company transferred through a division part of its assets to IGI, another Italian limited liability company, which was newly established for this purpose (a ‘recipient company’). The creditors of the company being divided claimed that after the division, this company was left only with some pieces of land of low value. However, they did not make use of the ex ante protective measures provided in their national legislation about divisions but opted to file an actio pauliana based on Italian law against both companies after the division, by claiming that the company being divided and the recipient company made the division with the purpose to alienate the company being divided from almost all of its assets so that its creditors could not enforce their claims over those assets. This action was successful and as a result, the division could not be effective vis-à-vis these particular creditors, which means that they could also seize the assets transferred to IGI as a result of the division. The CJEU held that the protective measures of the Directive discussed above (formerly provided for in articles 12 and 19 of Directive 82/891/EC) are providing minimal harmonization only and therefore do not preclude creditors from the possibility of filing an actio pauliana.
In our article ‘Creditor Protection and Divisions—Did the CJEU Get It Right?’, we argue that while ex ante measures for the protection of creditors are indeed providing minimal harmonization only, the ex post measures provided for in the Directive are providing maximal harmonization. Therefore, additional ex post protective measures in national legislations, such as an actio pauliana, are not allowed. We believe that articles 146 and 153 of the Directive strike a fair balance between the rights of existing creditors in the company being divided and the recipient company(-ies) before the division (‘old creditors’) and those of creditors of the recipient companies after the division (‘new creditors’).
National legislation may treat the old creditors of the recipient companies differently than those of the divided company, as the CJEU correctly noted in IGI. However, the CJEU did not properly consider a third category of creditors, namely the new creditors of the recipient companies. Article 153 provides that after a division takes effect, it can be declared invalid only in limited circumstances. A successful actio pauliana under Italian law has similar effects as rendering a division null and void, at least as far as the transferred assets are concerned, as it results in the transfer being without effect towards the opposing creditor(s). This result is detrimental to the position of the new creditors who have relied upon the asset base of the recipient company after the division. After a division is effected, the transferred assets become part of the property of the recipient company, and both old and new creditors may rely upon them to satisfy their claims. An actio pauliana under Italian law has the result that the creditors of the company being divided would have a prior claim on these assets as compared to the recipient company’s (IGI’s) creditors (the new creditors), as they could strip the recipient company from the assets transferred to it through the division. This is a result which art 153, which sets out the conditions for nullity of a division, is designed to avoid. Differently than creditors in civil law disputes, old creditors are not blindsided by their debtor but instead they are warned of the transfer of the assets in advance by the publication of the draft terms of the division in a public register. They are also protected by the provisions of the Directive on adequate safeguards ex ante and joint liability. Hence the rationale behind the actio pauliana in civil law transactions is not vindicated in company law in the case of a division.
These arguments are relevant for cross-border divisions as well, since art 160j and 160u, which were introduced in the Directive by article 1 of Directive 2019/2121/EU (the Mobility Directive, ‘MD’) on cross-border divisions provide for an equivalent protective system to the one provided in articles 146 and 153 for national divisions. We argue that although article 160j par 1 does not contain the words ‘at least’ as is the case in article 146, the wording of the explanatory memorandum of the proposal of the MD suggests that as far as the ex ante protective measures are concerned this article provides only for minimal harmonization as well. However, as with article 146, the ex post protective measures contained in art 160j are providing for maximal harmonization. In addition, art 160u, which contains the grounds of nullity of a cross border division, is even more restrictive than art 153. Therefore, the protective system in the MD should be understood as excluding national rules providing for additional methods of protection which operate after the division has taken effect in the same way as for national divisions.
Antigoni Alexandropoulou is an Associate Professor of Commercial Law at European University Cyprus.
Martin Winner is a Professor at the Institut für Unternehmensrecht, Vienna.