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8 September 2011
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German and European Legal News

The German Federal Court of Justice has recently issued a new decision regarding the effects of a reorganization plan for the right to set-off. In the following, we give insight into the background and the implications of the decision. Besides, we inform you about some new jurisprudence from the European Court of Justice concerning the debtor’s “Centre of Main Interest” (COMI). Finally, our today’s newsletter discusses the legal aspects of the so-called nuisance payment in the context of junior land charges.

Dr H. Philipp Esser, LL.M. (Chicago)
Attorney at Law in Germany and in New York State

Dr. H. Philipp Esser

Schultze & Braun - Recent Publications

Dr Annerose Tashiro, Attorney at Law
Japan”, in “Creditors‘ Rights in Insolvency Proceedings – A Practical Guide for Smaller Practices”, INSOL International, London, July 2011, 177-185

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Report from Germany: Bank Restructuring as an Instrument to Counter ‘Moral Hazard’?
European Company Law, 08/2011, 175-178

Dr Christoph von Wilcken, Attorney at Law
Update on cross-border restructurings in Europe: English Schemes of Arrangement
Financier Worldwide 08/2011, 56

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Discharge of Claims in Reorganization Plan Does not Bar Later Set-Off

In Germany the promotion of the reorganization plan by the Act for the Further Facilitation of the Restructuring of Companies (ESUG) is expected to be enacted soon. At the same time the Federal Court of Justice (Bundesgerichtshof – BGH) has recently issued a new decision regarding the effects of a reorganization plan for the right to set-off (decided on 19 May 2011 – IX ZR 222/08). In this case a German state only received minimal satisfaction under the reorganization plan on its recognized tax claims, of which 94% were deemed discharged. After the confirmation of the plan the prior insolvency debtor asserted a claim for pre-insolvency construction services against the state. However, the state set-off this claim against its tax claims previously discharged under the reorganization plan. The BGH considered the set-off to be effective.

The BGH sets out that claims discharged under a reorganization plan are “imperfect, legally not enforceable claims” that are generally not subject to a set-off any more which, however, continue to exist. On the basis of such claims the creditor may for instance demand payment from a guarantor. In addition, the German Insolvency Act (Insolvenzordnung) protects a right to set-off which already exists at the commencement of the insolvency proceeding. The legislator intended that this protection prevails against a reorganization plan. This was also the law before the enactment of the Insolvenzordnung. The legislator did not intend to restrict but rather to broaden the right to set-off in insolvency. A party secured by a right to set-off at the commencement of the proceeding shall not automatically be deprived of its security by the reorganization plan. This case is similar to that of a creditor secured by security interests granted by a third party.

The decision emphasizes the importance of having the reorganization plan carefully drafted by an experienced insolvency law counsel. In insolvency, the pre-insolvency right to set-off has the effect of an in rem security. The reorganization plan in the present case could easily have provided for a waiver or could have forced the cancellation of the right to set-off, but the drafters of the plan apparently forgot to address this issue. The BGH rejected any interpretation of the approval of the plan by the creditors as a waiver of the right to set-off. The parties’ behavior can only be interpreted as a waiver in very clear and limited circumstances. Old samples of reorganization plans must urgently be amended according to this decision of the BGH.

Dr H. Philipp Esser, LL.M. (Chicago), Rechtsanwalt, Attorney at Law (New York State)

Opinion Advocate-General Julianne Kokott dated 10 March 2011 in respect of Interedil Srl (in liquidation) v Fallimento Interedil Srl, Banca Intesa Gestione Crediti Spa, Case C-396/09, Tribunale Ordinario di Bari

On 10 March 2011, Advocate-General Julianne Kokott filed her opinion in respect of Interedil Srl (Interedil). Her opinion could give rise to some new jurisprudence from the European Court of Justice (ECJ) in respect of the definition of a corporate debtor’s “Centre of Main Interest” (otherwise known as COMI) for the purposes of the EU Insolvency Regulation (the “Regulation”) and the rebuttal of the presumption contained in Article 3 of the Regulation.

Frank Tschentscher
Attorney at Law
Solicitor (England und Wales)

Frank Tschentscher

Facts of the Case

Interedil Srl was originally incorporated in Italy. However, on 18 July 2001, it transferred its registered office to England and Wales and was incorporated at Companies House as a Foreign Company. At or around the same time, Interedil was removed from the Italian equivalent of Companies House. Pursuant to the request for a preliminary ruling, once Interedil had been registered in England and Wales, it was acquired by an entity known as Canopus; furthermore, a few months thereafter, Interedil’s assets in Italy (being buildings situated in Taranto) were transferred to Windowmist Limited. On 22 July 2002, Interedil Srl was dissolved and removed from the register of companies.

In October 2003, the Italian bank Intesa Gestione Crediti SpA presented a winding-up petition against Interedil Srl to the Tribunale Ordinario di Bari. Interedil opposed that petition on the ground that, following the transfer of its registered office to England and Wales, the Italian Court no longer had jurisdiction over Interedil; the company made an application to a higher Italian Court for a determination of that issue. However, without waiting for that determination, the Tribunale Ordinario di Bari made a winding-up order in May 2004. Interedil appealed. The Corte di Cassazione rejected the appeal on 20 May 2005. That Court held that the following factors were enough to displace the presumption in favour of the registered office: (a) immovable property in Italy, (b) a lease agreement concluded with another company in respect of two hotel complexes in Italy and (c) a contract with a banking institution.

Questions referred to the ECJ

The questions referred to the ECJ by the Tribunale Ordinario di Bari were whether the legal term “COMI” is to be interpreted in accordance with Community law or national law, and if it is to be interpreted in accordance with Community law, then what are the decisive factors or considerations? Further, the ECJ was asked to supply an answer to a slightly narrower question on the issue of the presumption pursuant to Article 3 of the Regulation, which provides that “the place of the registered office shall be presumed to be [the company’s COMI] in the absence of proof to the contrary”. The question whether there is proof to the contrary and – more importantly - what constitutes sufficient proof to rebut the presumption pursuant to Article 3 of the Regulation has seen different tests applied by different national courts. In Interedil, the referring Italian Court asked whether it was sufficient to rebut the presumption if “the company carries on genuine business activity in a State other than that in which it has its registered office” and also whether it was sufficient if the corporate debtor undertakes no business activity in the State in which it has its registered office. Further, if the company has, in a Member State which is not the Member State in which it has its registered office, immovable property, a lease agreement concluded with another company in respect of two hotel complexes and a contract with a banking institution, are these factors individually or together sufficient to rebut the registered office presumption? Lastly, the Italian Court wished to know whether these factors were at least sufficient for the relevant company to be regarded as having an “establishment” in such other Member State.

Advocate-General Kokott’s Opinion

In dealing with the first two questions, Advocate-General Kokott did not dwell on them too much but simply referred back to the ECJ’s decision in Eurofood (Eurofood IFSC Ltd, European Court of Justice Case C-341/04, Judgement of the Court (Grand Chamber), 2 May 2006), stating that the concept of COMI was peculiar to the Regulation, that it has an autonomous meaning and, therefore, had to be interpreted in a uniform way, independently of national legislation.

In addition, on the unusual facts of Interedil, she considered that the relevant COMI of the company is the last COMI which existed immediately before the dissolution of the company. Of course, Recital 13 of the Regulation reads that the COMI should “correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties, the difficulty in Interedil being that the company had been dissolved and that a dissolved company does not conduct the administration of its interest (any more). Consequently, on the strict wording of Recital 13 alone, this test could not be applied to establish a company’s COMI. Advocate-General Kokott acknowledged that this problem would be resolved if in cases like Interedil, a company’s COMI was to be established by its registered seat alone, without any means to rebut the presumption contained in Article 3 of the Regulation.  However, she subsequently dismissed this suggestion because inter alia it was leading to unacceptable results in cases where a company’s COMI had never been at the place of its registered seat and also because it was contrary to the principles and the design of the Regulation, which has the concept of COMI at its heart, thus upholding the Freedom of Movement and/or Establishment contained in the European Treaty. In her view, if a corporate debtor chose to move its COMI to a different Member State purely for the purpose of its dissolution or liquidation pursuant to that Member State’s insolvency regime, then that was also a legitimate purpose and an expression of the Freedom of Establishment. With that in mind, Advocate-General Kokott considered that, in cases like Interedil, any activities of a corporate debtor following the transfer of its registered seat and in respect of and/or leading to its dissolution were also relevant factors for the determination of its COMI.

As regards when the registered office presumption contained in Article 3 can be rebutted, Advocate-General Kokott expressed the opinion that, in order to rebut the presumption, again in line with Eurofood and Recital 13 of the Regulation, it is necessary to identify factors which are both objective and ascertainable by third parties. Here, she stressed the importance of considering the relevant factors from the perspective of the creditors of the debtor. She declined to endorse any form of checklist by reference to which COMI can be generically tested; she considered that each case must turn on its own facts, and in each case the Court must take into account all relevant circumstances. Having said that, Advocate-General Kokott did observe that the location of the majority of the debtor’s assets can be excluded from consideration because all to often, it will be difficult for a third party to determine the location of the majority of the debtor’s assets.

On the other hand, she took the view that it was also necessary to seek to determine what, if any, activities the debtor undertakes from its registered office which are ascertainable by third parties. The location of a debtor’s assets will thus only become relevant if it can be shown, from the perspective of the debtor’s creditors, that the debtor’s central administration is not undertaken from its registered office, and even then, additional objective factors ascertainable by creditors will be necessary; the location of assets will not be sufficient. In this case, it appeared that the liquidation activities of Interedil were undertaken from its registered office in London; it would therefore not be possible to rebut the COMI presumption.

Establishment

In relation to the questions relating to the scope of the expression “establishment” for the purposes of the Insolvency Regulation, Advocate General Kokott relied upon the drafting of the Regulation’s unsuccessful predecessor, the Convention of 23 November 1995. From her point of view, the presence of assets in a jurisdiction is not sufficient to be an establishment for the purpose of the Regulation. Instead, the search had to be for the presence of “human means” and a minimal level of economical activity. The fact that Interedil had (a) immovable property, (b) a lease agreement concluded with another company in respect of two hotel complexes and (c) a contract with a banking institution in Italy did not mean that Interedil had an establishment in Italy, unless Interedil also had a place of operations where Interedil carried out a non-transitory economic activity with human means and goods.

Comments

Advocate-General Kokott’s opinion is to be welcomed and will hopefully lead to further well-established case law on the subject of Comity. The ECJ has, of course, dealt with the (basic) principles of COMI in its Eurofood decision; however, the case really only established that where a company carries on its business in the territory of the Member State where its registered office is situated, the mere fact that its economic choices are or can be controlled by a parent company in another Member State is not enough to rebut the presumption laid down by Article 3 of the Regulation.

It is not a surprise, therefore, that even after Eurofood, different national courts expressed different views on the matter of COMI. Here, it has to be borne in mind that the Regulation does not contain a legal definition of COMI; Recital 13 in itself is not a definition and only meant to provide guidance as to the factors relevant to be able to establish COMI. That is why it reads that the centre of main interest should correspond to the place where the debtor conducts the administration of his interest. It also ties in with the presumption contained in Article 3, which can be rebutted if other factors lead an objective observer to conclude that a corporate debtor’ COMI is not at its registered seat but elsewhere.

One would also hope that the ECJ will take this opportunity to provide further guidance on the factors relevant to identify COMI and also to comment on the tension between the Regulation’s goal to prevent forum shopping and the Freedom of Movement and/or Freedom of Establishment contained in the European Treaty. It stands to reason that is a necessary incident of a debtor's freedom to choose where he carries those activities which fall within the concept of 'administration of his interests', and also that he may choose to do so for a self-serving purpose. He must be free to relocate his home and/or his business. And, if he has altered the place at which he conducts the administration of his interests on a regular basis - by choosing to carry on the relevant activities (in a way which is ascertainable by third parties) at another place - the courts must recognise and give effect to that.

Frank Tschentscher, Attorney at Law, Solicitor (England and Wales)

Demanding Nuisance Payment May Cause Liability for Damages

Real properties in Germany are often encumbered by various land charges of different owners which value in a total amount exceeding by far the value of the real property. Currently, many owners have to sell their real property, although the purchase price is not even enough to repay the obligations secured by the senior land charges. Nevertheless, a junior secured creditor often demands a nuisance payment for the release of its land charge. If this demand prevents the free hand sale and a subsequent realization – e.g. in a foreclosure proceeding – yields a lower purchase price, the junior creditor is liable for damages according to an order of the Higher Regional Court (Oberlandesgericht – OLG) Schleswig dated 23 February 2011 (5 W 8/11).

According to the OLG Schleswig, the loan agreement and the security agreement relating to the land charge create contractual obligations of due care. In long term loan agreements in particular such obligations require the parties to apply mutual respectfulness regarding the economic interests of both parties. Under a bona fide standard the parties may therefore neither harm each other inadequately nor proceed against each other without any regard for the other’s interests. In this case, a concrete purchase offer appeared after lengthy sale efforts and any other realization of the real property (e.g. foreclosure) appeared likely to yield a lower purchase price and no satisfaction of the junior creditor at all. In such a situation, to make the release of security conditional upon a nuisance payment constitutes such inadequate harm to the counterparty.

The decision of the OLG Schleswig is in line with case law holding nuisance payments to be avoidable for lack of legal basis (BGH NZI 2008, 365). If creditors demand such payments they expose themselves to a material liability, if they cannot prove that the demand only related to a non-abusive reimbursement of the costs of the release or that an alternative method of realization would have led to an economically more favorable result. The legal challenge in handling such a prohibition to obstruct is of course to draw the line of abuse correctly. In the future, German courts will have to address this issue more frequently.

Dr H. Philipp Esser, LL.M. (Chicago), Attorney at Law in Germany and New York State

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