EC Insolvency Regulation: beyond jurisdiction

The High Court has considered the effect of the EC Insolvency Regulation on the way insolvency proceedings interact with other rights.
Nick Herrod and Andrew Pullen, Allen & Overy LLP

The EC Insolvency Regulation (1346/2000) (the Regulation) has caused considerable legal debate since it came into force across the EU (with the exception of Denmark) on 31 May 2002 (www.practicallaw.com/A24144). To date, this debate has primarily focused on the scope of the Regulation and jurisdiction to open insolvency proceedings. However, the High Court has recently considered the effect the Regulation has on the way insolvency proceedings interact with other rights.

All references to articles are articles in the Regulation.

The Regulation

The Regulation aims to improve the efficiency and effectiveness of insolvency proceedings with an EU cross-border element. While not intending to harmonise the substantive insolvency laws across the EU, it provides a framework within which the different insolvency regimes in EU member states can operate and interact.

The Regulation allows the courts of the member state in which the debtor's centre of main interests is situated to open main insolvency proceedings (article 3(1)). Once main proceedings have been opened in one member state any proceedings opened in another member state must be secondary proceedings (article 3(3)).

The Regulation also extends to determine the law that will govern the effects of insolvency proceedings on various matters, including claims in the courts against the debtor (articles 4-15). Generally the law of the member state of the opening of insolvency proceedings shall determine the effects of the insolvency proceedings on actions brought by individual creditors, except for "lawsuits pending" (article 4(2)(f)). The exception for "lawsuits pending" provides that the effects of 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 15).

English stay provisions

Under English law, where a winding-up order has been made, no legal proceedings can be commenced or continued against the company or its property except with the leave of the court (section 130(2), Insolvency Act 1986). Also, there is a general principle in favour of the English courts giving assistance to foreign insolvency proceedings by preventing them being disrupted by the actions of individual creditors (Banque Indosuez SA v Ferromet Resources Inc [1993] BCLC 112).

Mazur Media

Mazur Media GmbH (GmbH) had been placed into liquidation in Germany (a provisional liquidator initially having been appointed to investigate GmbH's solvency). GmBH's parent (A)and subsidiary (L) were in administrative receivership in England. L and A, through their administrative receivers, brought various claims against GmbH, its liquidator and its directors. L claimed that an assignment of copyright in various sound recordings contained an implied term transferring legal and beneficial title in the physical tapes. A also claimed a right to the recordings under a share sale agreement with a director of GmbH. Both agreements were governed by English law and contained an exclusive jurisdiction clause in favour of the English courts.

The defendants argued that the English court did not have jurisdiction to hear the claims, and if it did have jurisdiction, the claims should be subject to a stay because of the existence of the German insolvency proceedings.

Law governing jurisdiction

The regulation on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (44/2001) (Brussels Regulation) determines jurisdiction within the EU (except Denmark) for civil and commercial matters, save for certain exceptions of which insolvency proceedings are one (see News brief "Jurisdiction agreements: Preparing for change", www.practicallaw.com/A20032).

Applying the Brussels Regulation, L's claim against GmbH for delivery up of the master tapes and A's specific contractual claim were subject to the jurisdiction of the English court because of the exclusive jurisdiction clause in the relevant agreement. Other claims (including in tort and in damages for conversion) were not covered by the jurisdiction clauses because they did not arise out of the particular contractual relationship and so the English court had no jurisdiction to hear these claims.

The granting of a stay?

The application of articles 4(2)(f) and 15 of the Regulation meant that it was English law that would determine whether the relevant English proceedings should be stayed and whether the claimants should be required to prove their claims in the German insolvency proceedings.

The English stay provisions did not apply to foreign insolvency proceedings, but would apply to an English winding-up of a foreign company. The wording "winding-up order" could not be taken to extend to foreign winding-up proceedings or their equivalent in other EU jurisdictions. Accordingly, the court did not have the power to stay English litigation proceedings against a company on the ground that it was subject to insolvency proceedings in Germany. That said, there would be a power, under the court's inherent discretion, to stay English litigation in favour of foreign insolvency proceedings. However, it would require exceptionally strong grounds for the English court to exercise this power, particularly where the parties have conferred exclusive jurisdiction on the English court. There were no such grounds in this case. In reaching this conclusion, arguments that it would save time and money, avoid multiple proceedings and reduce the risk of inconsistent findings (between the claims that could be heard in England and the claims over which only the German court had jurisdiction) were rejected.

Was the approach too simplistic?

It was accepted as common ground between the parties that article 15 applied to the claims for which the English court had jurisdiction. Accordingly, the court did not consider the precise wording of articles 4(2)(f) or 15. Was this common ground correct?

Article 15 and the exception in article 4(2)(f) only apply to lawsuits pending. This expression is not defined in the Regulation, but, by analogy with the position under the Brussels Regulation, a lawsuit may be pending once the claim form is issued, provided it is subsequently served. While articles 4(2)(f) and 15 of the Regulation do not specify the point in time at which the lawsuit has to be pending, for the purpose of the Regulation, it would be logical to conclude that this is the time when insolvency proceedings are opened.

It is not clear from the transcript whether the various lawsuits were pending (in the sense that the claim forms had been issued) before insolvency proceedings being commenced in Germany. If they were not pending, but were commenced after insolvency proceedings were opened in Germany, it is arguable that article 4(2)(f) would apply (rather than article 15) and German law would determine the effect of the German insolvency proceedings on the claims. As a matter of German law, there would be a stay on such proceedings.

Whether the German insolvency proceedings were opened on the appointment of the provisional liquidator or when the liquidation proceedings commenced is unclear (see News brief "EC Insolvency Regulation: challenging questions", www.practicallaw.com/A43383). Accordingly, the timing of the opening of insolvency proceedings may have an impact on whether legal proceedings are stayed or not.

In addition, article 15 only applies if the lawsuit pending concerns an asset or right of which the debtor has been divested. It is arguable in this case that the debtor had not been divested of an asset or a right at all. All of the claims broadly concerned an alleged failure by GmbH and its directors to deliver up master recordings for which the copyright had been assigned to L. The lawsuits did not concern an asset or a right of which the debtor has been divested but, it was argued, an asset of which the debtor should have been divested.

If the lawsuits were pending, but did not involve an asset or a right of which the debtor has been divested, the question arises as to whether article 4(2)(f) would apply. The answer would appear to be no as article 4(2)(f) only applies if a lawsuit is not pending: the additional words "asset or right of which the debtor has been divested" in article 15 are not included in the exception to article 4(2)(f). So it would appear that, based on the English text of the Regulation, there may be lawsuits that would fall between articles 4 and 15. However, it is understood that the same discrepancies do not arise in relation to the German text of the Regulation and this shows the difficulties in arriving at an autonomous meaning for the Regulation which will apply in all member states. In addition, the Belgian court has held that article 15 is not clear and has delayed giving judgment in a matter so it could hear detailed argument on article 15's precise scope and impact (Bulgarian Garden Holland BV, 17 December 2003). This hearing is still pending. What the Belgian court decides in this matter will not be binding on any member state's courts but it is hoped that it will contain useful guidance.

Nick Herrod is an associate in the global restructuring group and Andrew Pullen is an associate in the commercial litigation group at Allen &Overy LLP.

 
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