EC Insolvency Regulation: Reconciling Conflicts between Insolvency Clawback Actions in Different Jurisdictions

A summary of the recent decision in Vinyls Italia SpA v Mediterranea di Navigazione SpA C-54/16 (08 June 2017) from the CJEU.

Facts

Vinyls, an Italian company, chartered two ships from Mediterranea, also an Italian company, under a charter contract governed by English law. Vinyls later entered into insolvency proceedings in Italy. The Italian administrator claimed that payments which Vinyls had made to Mediterranea under the charter contract should be set aside on the grounds that Mediterranea had known Vinyls was facing insolvency at the time the payments were made. Under Italian insolvency law, awareness of Vinyls’ insolvency was sufficient to set the payments aside. Mediterranea raised the defence that since the contract was governed by English law, English insolvency law should apply (in which case, under section 239 Insolvency Act 1986, proof of intention would also be required to set aside the payments).

Pleadings

Vinyls submitted that the law of the state in which insolvency proceedings are brought should determine the “unenforceability of legal acts detrimental to all creditors” as stated in article 4(2)(m) of EC Regulation on Insolvency 1346/2000 (the Regulation). Mediterranea argued that, under article 13 of the Regulation, if Mediterranea could prove that the payments were subject to English law, and that English law did not allow any means of challenging the payments, then English law should apply.

Decision

The CJEU considered application of these provisions to both the procedural and the substantive elements of insolvency law. The procedure of insolvency proceedings should, on a proper interpretation of article 4(2)(m) of the Regulation, be governed by the state on whose territory insolvency proceedings were taking place. It was for the court hearing the insolvency proceedings to apply its laws on issues such as time limits. In this case, Mediterranea had raised the defence out of time under Italian law.

On the substance of insolvency law, however, article 13 takes precedence according to well-established principles of legitimate expectations and certainty. Therefore, where the contract specifies a governing law, this will be applied, but the burden of proof is on the party seeking to rely on the contract to show that a challenge to the transaction would not be engaged under the law of the contract. In this case, Mediterranea would have had to prove that s.239 Insolvency Act 1986 would not be engaged by knowledge of Vinyls’ insolvency.

Finally, although not applicable to the facts, the CJEU noted that where article 13 applies, this would not be subject to the provision in article 3(3) of the Rome I Regulation which specifies that, where all other elements relevant to the situation are located in a country different to the law chosen in the contract, the mandatory rules of the local court’s law should apply. The court recognised a difference between the two provisions and decided that the Regulation should apply without reference to the Rome I Regulation.

Practical Application

Following Vinyls, it is advisable to take extra care to insert an explicit governing law clause into contracts where English insolvency rules are intended to apply.

This should be coupled with advice that there remains a degree of uncertainty where the parties make an abusive or fraudulent choice of law. Although the CJEU asserted in Vinyls that making a choice of law in itself is not abusive, it is worth bearing in mind that the EU is also alive to preventing insolvency law “tourism” whereby companies choose jurisdictions with more relaxed transaction avoidance provisions. It is not clear where the line is to be drawn. In Kratzer, C-423/15, the test specified that to prove fraud the essential subjective aim of the transactions must be “to obtain an undue advantage” - this is a high threshold.

Finally, the procedural aspects of insolvency law will still be subject to the laws of the local courts where the insolvency proceedings are taking place, and in this respect, it is important to abide by local rules of, for example, time limits and rules of service.

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