On 25 May 2007 the German Government
presented its Draft Act on Modernisation of the German GmbH law (MoMiG,
Draft Act), which is expected to become effective in the first half of
2008. Amongst other regulations, it extends the existing duty to file a
petition for the opening of insolvency proceedings if the company is
overindebted or illiquid. While presently this duty only applies to
directors of companies incorporated under German law, under the Draft
Act any kind of corporations and partnerships will be affected, as long
as they do not have an individual as a general partner: In principle,
the Draft Act now constitutes also for non-German companies and their
directors the duty to file for insolvency not later than three weeks
from the occurrence of over-indebtedness or illiquidity. But contrary
to several publications, the Draft Act does not provide such duty for
non-German companies which even do not possess assets in the territory
of Germany.
In fact, one has to distinguish between non-German companies, whose COMI is located beyond Germany, but within the territory of the European Union, respectively the territory of the Council Regulation (EC) No 1346/2000 on insolvency proceedings (Denmark!; EIR), and companies established outside the European Union. Following this EIR and its mechanism built for domestic, hence, secondary proceedings, EU-companies are only affected by the Draft Act, if they possess an establishment within the territory of Germany. By the wording of the Draft Act, on non-EU companies the duty to file for insolvency is already imposed if they have assets in Germany, since the German international insolvency law (for non-EU companies) provides for commencement of secondary proceedings in Germany only the requirement of assets – as opposed to an establishment - in Germany.
But in this respect, however, the wording conflicts with the legislative history and reasoning. According to this, non-German companies shall only be subject to such duty, if the COMI is located in Germany and German insolvency law is applicable. Hence, during the legislative procedure a clarification in the wording is due. Definitely and in any event, non-German companies neither with establishment nor with assets within Germany, are not affected by the Draft Act. Obverse notions apparently conflict both with the wording and the legislative history.
Pursuant to the German international insolvency law and the EIR, the Draft Act’s relevant regulation will only be applicable on non-German companies if the (hypothetical) main insolvency proceedings can be opened in Germany. Basically, this is only the case if the company’s COMI is located in the territory of Germany. If the COMI is situated outside of Germany, German courts do only have jurisdiction to open secondary insolvency proceedings if the company possesses assets (in the case of non-EU companies) or an establishment (in the case of EU-companies) in the territory of Germany. In that case, the effects of secondary proceedings are restricted to the assets of the company situated in Germany.
Federal Court of Justice of Germany submits questions regarding jurisdiction for insolvency avoidance actions to the European Court of Justice for a preliminary decision
In a decision of the Federal Court of Justice of Germany (BGH) dated 21 June 2007, the European Court of Justice (ECJ) was presented with questions for a preliminary decision as to whether the courts of the filing state have international jurisdiction according to European Insolvency Regulation (EIR), or if the insolvency avoidance is subject to the jurisdiction of Council Regulation on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (ECR), or if it is even excluded thereby.
The facts are rather simple: The insolvency debtor transferred an amount of 50,000.00 Euros to an account of a company subject to Belgian law with its registered seat in Belgium. The plaintiff, shortly thereafter appointed insolvency administrator, filed a complaint with the Regional Court Marburg for reimbursement of said amount under the aspect of insolvency avoidance. The Regional Court dismissed the complaint as inadmissible. After the appeal was dismissed, the plaintiff filed an appeal with the BGH, which has now presented the question of jurisdiction by way of proceedings for a preliminary decision according to Art. 68 I in connection with Art. 234 of the EU Treaty, to the ECJ.
The Regional Court Marburg had no jurisdiction, neither according to the regulations of the ECR, nor according to the stipulations of EIR. Jurisdiction according to the ECR could not be reasoned based on exceptions according to Art. 1 II lit. b ECR being subject to a narrow interpretation. On the other hand, according to the opinion of the appellate court in Art. 3 I EIR, no regulations for an international jurisdiction are provided for annex proceedings, so that a similar application of the EIR cannot be used due to that lack.
The insolvency administrator opposes said interpretation and claims that Art. 3 I EIR also regulates the international jurisdiction for insolvency avoidance and that German courts are therefore competent.
In the past there were two decisions confirming that insolvency avoidance actions are exempt from the ECR, the Brussels EEC Agreement and/or the European Communities Convention on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters (CISG). The ECJ decided in this way on 22 February 1979 (ECJ 1979, 733) in the case Gourdain/Nadler-Rs C-133/78) with regard to single case proceedings directly resulting from the insolvency proceedings. This was then confirmed by the Federal Court of Justice on 11 January 1990 (IX ZR 27/98), stating that insolvency avoidance by the insolvency administrator is excluded from the regulations under Art. 1 II 2 CISG. This is the state of present jurisprudence according to Art. 1 II lit. b ECR.
In the meantime, the EIR came into effect and regulates the international jurisdiction for opening insolvency proceedings in Art. 3. However, it does not apply to any single case proceedings.
The BGH explains in its submitting decision the different interpretations, which have particularly developed since the EIR became effective. On the one hand, there is the frequently stated opinion that Art. 3 I EIR was also applicable to single case proceedings immediately caused by insolvency proceedings or being in a close connection thereto. On the other hand, there are voices that want the ECR to be applicable, in which the exceptions according to Art. 1 II lit. b ECR have to be interpreted more narrowly and only aggregate procedures are excluded. This is complemented by the still existing and supported opinion that international jurisdiction remains subject to national law.
The arguments and reasons stated by the Ninth Division seem to suggest that the BGH itself tends to allow single case proceedings, even in that member state in which the insolvency proceedings were initially filed and thus to concentrate jurisdiction there in an analogy to Art. 3 EIR.
The discussion of this question by the ECJ after almost 30 years and after the EIR becoming effective is particularly decisive and important. The discussion shows that this question is of the utmost urgency. This should lead to an important component of European insolvency law.
For insolvency administrators, this decision remains decisive until a harmonisation of the substantial European insolvency law has been achieved. Insolvency avoidance actions with local courts, particularly in the context of the law regarding e.g. in Germany equitable subordination, allow a significantly more cost-effective and efficient implementation of the right of the administrator to avoid. Then, insolvency administrators are no longer obligated to attempt to explain and prove the regulations of insolvency laws to foreign courts with the help of translations and experts etc. Rather, the opposing parties of such avoidance actions have to raise their arguments according to Art. 13 EIR and its domestic insolvency avoidance requirements regarding legal acts disputed by the respective domestic laws in the administrator’s language and to “his” courts. The practical strengthening of the insolvency administrator and the insolvency law of the opening member state are, therefore, undeniable.
It remains questionable, though, whether the codified protection of Art. 13 EIR remains effective. However, the opposing parties are already at an unjustified advantage by the action avoided.
Presently it is not discernible to what extent the ECJ leans toward the opinion of the Ninth Division of the BGH stated in the submission. It is also not discernible when such a decision might be made.
A European awareness of all practitioners can, however, be assured for such a decision.
In fact, one has to distinguish between non-German companies, whose COMI is located beyond Germany, but within the territory of the European Union, respectively the territory of the Council Regulation (EC) No 1346/2000 on insolvency proceedings (Denmark!; EIR), and companies established outside the European Union. Following this EIR and its mechanism built for domestic, hence, secondary proceedings, EU-companies are only affected by the Draft Act, if they possess an establishment within the territory of Germany. By the wording of the Draft Act, on non-EU companies the duty to file for insolvency is already imposed if they have assets in Germany, since the German international insolvency law (for non-EU companies) provides for commencement of secondary proceedings in Germany only the requirement of assets – as opposed to an establishment - in Germany.
But in this respect, however, the wording conflicts with the legislative history and reasoning. According to this, non-German companies shall only be subject to such duty, if the COMI is located in Germany and German insolvency law is applicable. Hence, during the legislative procedure a clarification in the wording is due. Definitely and in any event, non-German companies neither with establishment nor with assets within Germany, are not affected by the Draft Act. Obverse notions apparently conflict both with the wording and the legislative history.
Pursuant to the German international insolvency law and the EIR, the Draft Act’s relevant regulation will only be applicable on non-German companies if the (hypothetical) main insolvency proceedings can be opened in Germany. Basically, this is only the case if the company’s COMI is located in the territory of Germany. If the COMI is situated outside of Germany, German courts do only have jurisdiction to open secondary insolvency proceedings if the company possesses assets (in the case of non-EU companies) or an establishment (in the case of EU-companies) in the territory of Germany. In that case, the effects of secondary proceedings are restricted to the assets of the company situated in Germany.
Federal Court of Justice of Germany submits questions regarding jurisdiction for insolvency avoidance actions to the European Court of Justice for a preliminary decision
In a decision of the Federal Court of Justice of Germany (BGH) dated 21 June 2007, the European Court of Justice (ECJ) was presented with questions for a preliminary decision as to whether the courts of the filing state have international jurisdiction according to European Insolvency Regulation (EIR), or if the insolvency avoidance is subject to the jurisdiction of Council Regulation on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (ECR), or if it is even excluded thereby.
The facts are rather simple: The insolvency debtor transferred an amount of 50,000.00 Euros to an account of a company subject to Belgian law with its registered seat in Belgium. The plaintiff, shortly thereafter appointed insolvency administrator, filed a complaint with the Regional Court Marburg for reimbursement of said amount under the aspect of insolvency avoidance. The Regional Court dismissed the complaint as inadmissible. After the appeal was dismissed, the plaintiff filed an appeal with the BGH, which has now presented the question of jurisdiction by way of proceedings for a preliminary decision according to Art. 68 I in connection with Art. 234 of the EU Treaty, to the ECJ.
The Regional Court Marburg had no jurisdiction, neither according to the regulations of the ECR, nor according to the stipulations of EIR. Jurisdiction according to the ECR could not be reasoned based on exceptions according to Art. 1 II lit. b ECR being subject to a narrow interpretation. On the other hand, according to the opinion of the appellate court in Art. 3 I EIR, no regulations for an international jurisdiction are provided for annex proceedings, so that a similar application of the EIR cannot be used due to that lack.
The insolvency administrator opposes said interpretation and claims that Art. 3 I EIR also regulates the international jurisdiction for insolvency avoidance and that German courts are therefore competent.
In the past there were two decisions confirming that insolvency avoidance actions are exempt from the ECR, the Brussels EEC Agreement and/or the European Communities Convention on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters (CISG). The ECJ decided in this way on 22 February 1979 (ECJ 1979, 733) in the case Gourdain/Nadler-Rs C-133/78) with regard to single case proceedings directly resulting from the insolvency proceedings. This was then confirmed by the Federal Court of Justice on 11 January 1990 (IX ZR 27/98), stating that insolvency avoidance by the insolvency administrator is excluded from the regulations under Art. 1 II 2 CISG. This is the state of present jurisprudence according to Art. 1 II lit. b ECR.
In the meantime, the EIR came into effect and regulates the international jurisdiction for opening insolvency proceedings in Art. 3. However, it does not apply to any single case proceedings.
The BGH explains in its submitting decision the different interpretations, which have particularly developed since the EIR became effective. On the one hand, there is the frequently stated opinion that Art. 3 I EIR was also applicable to single case proceedings immediately caused by insolvency proceedings or being in a close connection thereto. On the other hand, there are voices that want the ECR to be applicable, in which the exceptions according to Art. 1 II lit. b ECR have to be interpreted more narrowly and only aggregate procedures are excluded. This is complemented by the still existing and supported opinion that international jurisdiction remains subject to national law.
The arguments and reasons stated by the Ninth Division seem to suggest that the BGH itself tends to allow single case proceedings, even in that member state in which the insolvency proceedings were initially filed and thus to concentrate jurisdiction there in an analogy to Art. 3 EIR.
The discussion of this question by the ECJ after almost 30 years and after the EIR becoming effective is particularly decisive and important. The discussion shows that this question is of the utmost urgency. This should lead to an important component of European insolvency law.
For insolvency administrators, this decision remains decisive until a harmonisation of the substantial European insolvency law has been achieved. Insolvency avoidance actions with local courts, particularly in the context of the law regarding e.g. in Germany equitable subordination, allow a significantly more cost-effective and efficient implementation of the right of the administrator to avoid. Then, insolvency administrators are no longer obligated to attempt to explain and prove the regulations of insolvency laws to foreign courts with the help of translations and experts etc. Rather, the opposing parties of such avoidance actions have to raise their arguments according to Art. 13 EIR and its domestic insolvency avoidance requirements regarding legal acts disputed by the respective domestic laws in the administrator’s language and to “his” courts. The practical strengthening of the insolvency administrator and the insolvency law of the opening member state are, therefore, undeniable.
It remains questionable, though, whether the codified protection of Art. 13 EIR remains effective. However, the opposing parties are already at an unjustified advantage by the action avoided.
Presently it is not discernible to what extent the ECJ leans toward the opinion of the Ninth Division of the BGH stated in the submission. It is also not discernible when such a decision might be made.
A European awareness of all practitioners can, however, be assured for such a decision.