When a company operating in several European Union countries is placed under insolvency proceedings (safeguard, reorganisation, liquidation, etc.), we have seen that European rules govern the jurisdiction of the courts and the recognition of decisions. (for a full explanation of how cross-border insolvency proceedings work in Europe). But one essential question remains, essential in particular for understanding the comprehensive legal framework governing the difficulties of regulated companies at European level Once proceedings have been opened in country A, which law will actually determine the fate of your contracts, guarantees and claims, especially if you or the assets concerned are located in country B? Is it the law of country A that applies everywhere, or can the law of country B still play a role? The European Regulation on Insolvency Proceedings (No. 2015/848) provides nuanced answers, laying down a general principle but supplementing it with important exceptions to protect certain specific rights.
The principle: the law of the open state (lex concursus) decides
The basic rule, laid down by Article 7 of Regulation 2015/848, is seemingly simple: Unless otherwise provided, the law of the Member State in which insolvency proceedings are opened governs those proceedings and all their effects. This approach is part of a broader framework of jurisdiction of the french courts in matters of international bankruptcy and interaction with foreign laws. This law is called the lex concursus (the law of competition, i.e. of collective proceedings).
This law, referred to as the Regulation, has a extremely broad scope of application. In particular, it determines :
- What types of debtors may be subject to the procedure.
- What property The debtor's assets are included in the proceedings (including those acquired after the opening of proceedings) and the debtor is divested of them.
- The powers the debtor and the insolvency practitioner (judicial representative, liquidator, etc.).
- The conditions under which a compensation between reciprocal debts is possible or not.
- The effects of the procedure on current contracts (prosecution, termination, etc.).
- The effects on individual prosecutions by creditors (in principle, they are suspended or prohibited).
- What receivables must be declared as liabilities, including those arising after the opening.
- The rules of production, verification and admission receivables.
- The rules of classification claims (preferential, unsecured, etc.) and distribution the proceeds from the sale of the assets.
- The conditions and effects of fence of the procedure (for example, by adopting a plan).
- The creditors' rights after closing (Can they claim the outstanding balance?).
- Who supports costs of the procedure.
- Rules for annul or render unenforceable certain acts agreements entered into by the debtor prior to the commencement of proceedings which would be prejudicial to creditors (e.g. preferential payments, gifts, etc.).
In principle, therefore, if main proceedings are opened in France, French law will apply to all these issues, even for creditors located in Germany or assets located in Spain. Conversely, if the main proceedings are opened in Germany, German law will govern these aspects, including for creditors and assets in France.
Exceptions: when another law protects your rights
This principle of quasi-exclusive application of the lex concursus is, however, experiencing important exceptions. The European legislator considered that, in certain situations, blindly applying the law of the opening country could excessively prejudice the legitimate expectations and legal certainty of creditors or third parties who have relied on the law of another country (often the local law where an asset is located or a contract is performed).
These exceptions therefore make it possible, for very specific issues, to apply a law other than the French law. lex concursus. Here are the main ones:
Property rights (security interests, ownership)
This is undoubtedly the most significant exception. The opening of insolvency proceedings does not affect real rights (such as a mortgage, pledge, special lien, etc.) held by a creditor or third party on the debtor's property. located in another Member State at the time of opening (Article 8 of Regulation 2015/848).
- In practical terms, if a French company is the subject of proceedings in Paris, but you hold a mortgage on a building belonging to it in Spain, this mortgage remains valid and its effects (your right to be paid by preference from the sale price of the building) will be governed by Spanish law, and not by the French law of the proceedings. French law will not be able to call into question your Spanish right in rem.
The same principle protects the seller who benefits from a retention of title (Article 10). If proceedings are opened against the French buyer, the German seller's rights in goods delivered in Germany but still in Germany at the time of the opening of proceedings are not affected by the French proceedings. Conversely, if it is the German seller who goes bankrupt after delivering a good in France, the German proceedings cannot prevent the French buyer from becoming the owner of the good if he pays the agreed price.
Employment contracts
The effects of insolvency proceedings on an employment contract (its continuation, modification or termination) and on the employment relationship itself are as follows governed exclusively by the law of the Member State applicable to the employment contract (Article 13). This law is determined in accordance with the usual European rules ("Rome I" Regulation), which often designate the law of the country where the employee usually works.
- For example, if a German company opens insolvency proceedings in Germany, but employs employees in France under employment contracts governed by French law, French law will determine the conditions and consequences of any dismissal of these employees, even if the main proceedings are German.
- But be careful: the question of whether the wage claim (unpaid wages, allowances, etc.) benefits from a lien and what its ranking is in relation to other creditors remains subject to the law of the insolvency proceedings (the "insolvency law"). lex concursus).
Contracts relating to real estate
In a similar way to rights in rem, the effects of insolvency proceedings on a contract granting the right to acquire (promise of sale, etc.) or enjoy (commercial lease, residential lease, etc.) a property are as follows governed exclusively by the law of the Member State in which the property is situated (Article 11). The law of the place where the property is located therefore takes precedence over the law of the proceedings.
Compensation
If you are both a creditor and a debtor of a company in difficulty, you may wish to offset your mutual debts. The law of procedure (lex concursus) may prohibit or limit offsetting after commencement. However, the Regulation (Article 9) provides a safeguard: the initiation of proceedings does not affect your right to invoke set-off if this is permitted by the law applicable to the insolvent company's claim (i.e. the law governing the company's debt to you). You could therefore compensate even if the law of the procedure prohibits it.
Duties subject to public registration
For certain specific assets whose rights are registered in a public register (buildings, ships, aircraft), the effects of the insolvency proceedings on these rights are as follows governed by the law of the Member State under whose authority the register is kept (Article 14). This is intended to ensure consistency with local legal advertising systems.
Protection against the annulment of acts performed prior to the proceedings
The law of procedure (lex concursus) often allows certain acts (payments, sales, guarantees, etc.) performed by the debtor prior to the opening of the insolvency proceedings to be annulled if they are deemed to be prejudicial to creditors. However, the Regulation (Article 16) protects the person who has benefited from this act: he or she may oppose the annulment if he or she proves that the act is subject to the law of another Member State and that that law does not permit, in the present case, by any means whatsoever, the act to be challenged. Confidence in local law can therefore prevail.
Protection of third-party purchasers
La Protecting third-party acquirers is a major challenge for the security of financial markets and payment systems.. Si, after the opening of the insolvency proceedings, the debtor succeeds in selling an immovable property, a ship, an aircraft or registered securities to a third party, the validity of this sale will be determined by the court. governed by the law of the State where the property is located or the register kept (Article 17). This protects the purchaser who could legitimately be unaware of the proceedings initiated in another country.
Ongoing proceedings
If a lawsuit or arbitration procedure was already underway at the time of the opening of the insolvency proceedings, and it concerns an asset or a right of which the debtor is divested, the effects of the insolvency proceedings on this instance (suspension, resumption, etc.) are as follows governed exclusively by the law of the Member State where the proceedings or arbitration take place (Article 18).
Determining which law applies to your specific situation in a European bankruptcy - the law of the opening country or a protective local law - can have considerable financial consequences. The rules are complex and there are many interactions. A case-by-case analysis by a professional is often essential to best defend your rights, whether you are a creditor, a co-contractor or an affected third party. Our team can advise you on the strategy to adopt. Contact us for a personalised analysis and strategic advice on the law applicable to your rights and obligations in the event of cross-border bankruptcy in the EU, in order to secure your interests as a creditor, co-contractor or affected third party..
Sources
- Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (in particular Articles 7 to 18).
- Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations ("Rome I") (relevant to the law applicable to employment contracts).
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