The failure of a bank or insurance company in another EU country may seem like a distant event. However, because of the interconnection of financial markets, its consequences can spread rapidly across borders and directly affect companies, creditors and policyholders in France. To avoid the legal and economic chaos that would result from multiple and contradictory insolvency procedures, the European Union has put in place a specific framework based on the principle of universality. Understanding this mechanism is essential for any company interacting with European financial partners. A a global approach to the difficulties faced by regulated companies is necessary to grasp all the issues involved, particularly their European dimension.
European harmonisation in the face of cross-border financial crises
The objective of European law in this area is clear: to ensure a single, coherent and predictable management of the difficulties of a financial entity operating in several Member States. Prior to this harmonisation, the bankruptcy of an international banking group could trigger separate winding-up proceedings in each country where it had a branch. This led to fragmentation of assets, unequal treatment of creditors depending on their location and considerable legal uncertainty, paralysing economic activity.
To counter this systemic risk, the European Union has developed a set of rules designed to ensure that a single main procedure, governed by a single law, has effect throughout the Union. This system is based on two inseparable pillars: the principle of universality and the principle of mutual recognition of decisions. The aim is to ensure that measures taken by the authorities in one Member State are respected and applied in all the others, without the need for complex local procedures.
The principle of universality and mutual recognition
The core of the European system is the rule whereby reorganisation or liquidation measures taken in the home Member State of the entity in difficulty, known as the "home State", are recognised by operation of law and have effect throughout the European Union. In practical terms, this involves a single EU-wide procedure, conducted by the authorities of the State in which the establishment has its registered office. This unified approach has been transposed into French law, notably in the Monetary and Financial Code and the Insurance Code.
This principle aims to centralise crisis management, ensure fair treatment of all European creditors and preserve the value of the assets of the failing company as far as possible. Confidence in this mechanism is fundamental to the stability of financial markets. These mechanisms, particularly resolution procedures, are directly in line with this framework of universality and recognition. For more information on these aspects, see our article on recovery and resolution of financial institutions by the ACPR.
Scope: establishments and measures concerned
The scope of this principle is broad and covers the main entities in the financial sector. This mainly concerns credit institutions (banks), investment firms, but also insurance and reinsurance companies. The legislation applies where the entity has its registered office in a Member State of the European Union and branches in one or more other Member States.
The measures covered by mutual recognition are of two types. Firstly, reorganisation measures, the aim of which is to preserve or restore a company's financial situation in order to avoid bankruptcy. In France, this may take the form of safeguard or receivership proceedings, or certain precautionary measures taken by the Autorité de contrôle prudentiel et de résolution (ACPR). On the other hand, liquidation measures are taken when rescue is no longer possible and the aim is to organise the sale of assets to pay off creditors. The French judicial liquidation procedure is a typical example.
The scope of mutual recognition
Mutual recognition means that proceedings initiated in one Member State are automatically recognised and applicable in the others, without any additional formalities being required. For example, if a Spanish bank with a branch in Paris is placed in compulsory liquidation by the Spanish authorities, this decision has immediate effect in France. The Spanish liquidator is entitled to take control of the assets of the Paris branch.
This rule, enshrined in Directive 2001/24/EC and transposed in Article L. 613-31-3 of the Monetary and Financial Code, implies that the law of the home state (the lex concursus) governs in principle the whole of the procedure: the conditions under which it is opened, the effects on current contracts, the ranking of creditors and the powers of the organs of the procedure. This is a major departure from the principle of territoriality of laws.
Adjustments to the principle of universality
This principle, although powerful, is not absolute. The European legislator has provided for exceptions and mitigations to protect certain rights and interests deemed legitimate, which remain subject to local law (the lex rei sitae or the law of the place where the property is located). These adjustments are designed to avoid disrupting entire areas of national law and to preserve the legal certainty of certain transactions. They prevent the law of another Member State from overturning fundamental rules of French law, for example in property or social matters.
Setting aside the law of the state of origin
Article L. 613-31-5 of the French Monetary and Financial Code lists a number of cases where the law of the home country is set aside in favour of local law. These exceptions must be interpreted strictly.
Thus, employment contracts continue to be governed by the law that is normally applicable to them. French employment law will therefore apply to employees of a French branch of a foreign bank in bankruptcy. Similarly, contracts relating to immovable property (rental, sale) are governed exclusively by the law of the country where the property is located. The same applies to rights in ships or aircraft entered in a public register, which are governed by the law of the State that maintains the register.
Another important exception concerns rights in financial instruments registered in an account or deposit system. The law of the country where the account is held applies, a rule that is essential for the security of financial markets.
Protection of creditors and securities
In addition to the application of local law, certain situations are protected so as not to affect the rights acquired by creditors prior to the opening of the procedure. Article L. 613-31-6 of the Monetary and Financial Code provides that the European procedure does not affect certain specific rights.
This is particularly the case for rights in rem, such as a mortgage or pledge, over property located in France. The creditor holding such a security interest will be able to exercise it in accordance with French law, without the law of the country of origin being an obstacle. Similarly, the rights of a seller who has stipulated a retention of title clause on an item delivered in France are protected. Finally, the right of a creditor to set off his claim against that of the institution in difficulty is preserved if the law applicable to his claim allows this. This last provision is fundamental, as the right of set-off is particularly protected, notably to guarantee the security of payment and settlement systems.
The role of the procedural bodies in a European context
For the principle of universality to be effective, it is imperative that the bodies appointed in the State of origin, such as the administrator or liquidator, are able to act in the other Member States. European law and its transposition into French law give them broad powers.
An administrator or liquidator appointed by an authority of another Member State is entitled to exercise in France all the powers conferred on him by the law of his country. He may, for example, take possession of the branch's assets, manage its activities, terminate contracts or dismiss employees. He may also be represented or assisted by local professionals to facilitate his actions.
However, the exercise of these powers is not without limits. Article L. 613-31-9 of the Monetary and Financial Code specifies that the foreign body must comply with French law in certain practical matters, such as procedures for realising assets (the way in which assets are sold) or rules for informing and consulting employees. In addition, its powers do not allow it to resort to compulsory enforcement measures (such as seizure by bailiff) or to settle disputes, which remain within the jurisdiction of the French courts.
Specific features for European insurance companies
The insurance sector benefits from a regime very similar to that of credit institutions, also based on the principles of universality and mutual recognition. The rules, transposed into Articles L. 326-20 et seq. of the Insurance Code, follow the same logic: reorganisation or winding-up proceedings initiated in the Member State in which the insurer has its registered office produce their effects throughout the Union.
The measures concerned are, once again, reorganisation measures (aimed at turning the company around) and liquidation proceedings. Recognition is automatic and ipso jure. The exceptions provided for are also similar to those existing for the banking sector. French law will continue to apply to the employment contracts of employees in France, to rights in immovable property located in France, and to creditors' rights in rem in such property. This consistency between the banking and insurance sectors ensures greater predictability and legal certainty for all economic players.
Cross-border insolvency proceedings involving regulated entities are complex and raise sensitive legal issues. The assistance of a lawyer is essential to navigate these proceedings and effectively defend your rights. Our firm has the necessary expertise to assist you. Contact us for an analysis of your situation.
Sources
- Monetary and Financial Code, in particular articles L. 613-31-1 et seq.
- Insurance Code, in particular articles L. 326-20 et seq.
- Directive 2001/24/EC of 4 April 2001 on the reorganisation and winding-up of credit institutions.
- Directive 2014/59/EU of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms (BRRD).
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