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Blog 2015

2015-12-doc11 CJEU 10 December 2015, C-594/14 (Kornhaas v Dithmar)

The numbers say that over 10,000 English limited companies (Ltd’s) operate in Germany. The company director is registered in the Companies register in England, but with a branch active in Germany, which is reistered in German company registers. On 10 December 2015 the Court of Justice of the European Union decided on the question whether the liability of the director of the Ltd, that was subjected to insolvency proceedings in Germany, should be determined by English law or by German law. A comment follows on case C-594/14 (Kornhaas v Dithmar). It is also posted at On 10 December 2015 the Court of Justice of the European Union (CJEU) had to decide on the question whether the liability of a director of an English company, that was subjected to insolvency proceedings in Germany, should be determined by English law or by German law. In its judgment the CJEU on 10 December 2015, C-594/14 (Kornhaas v Dithmar) decided: German law. In one strike the Court kills a (mainly German) discussion that lasted over a decade. This is the case. Dithmar is the insolvency liquidator of Kornhaas Montage und Dienstleitung Ltd (‘KMD’), against which insolvency proceedings had been opened on 1 November 2006 by the District Court of Erfurt, Germany. KMD, of which Simona Kornhaas was the director, was registered in the Companies Register in Cardiff (UK) as a private company limited by shares (‘limited company’). However a branch of it was established in Germany and, on that basis, it was entered in the companies register administered by the District Court in Jena. The company was mainly active in Germany, installing ventilation systems and providing associated services. Some five weeks after the opening of insolvency proceedings, between 11 December 2006 and 26 February 2007, Kornhaas had made payments borne by KMD totalling over 110,000 euros. A classical theatre play unrolls: Dithmar wishes to have the money returned back to the estate and therefore sought reimbursement of that sum from Kornhaas on the basis of Paragraph 64(2)(i) of the GmbH-Gesetz (German Act on companies with limited liability). The action was upheld by the Regional Court of Erfurt and confirmed in appeal by the Higher Regional Court of Jena, which gave permission for an appeal on a point of law (‘Revision’) to the German Federal Court of Justice, taking the view that the action brought by Dithmar is well founded under German law and that the purpose of Paragraph 64(2)(i) in essence is to prevent the assets of the insolvent estate being reduced before the opening of the insolvency proceedings and to ensure that those assets are available, so that the claims of all the company’s creditors can be satisfied in the insolvency proceedings on equal terms. The Higher Regional Court states that the provision mentioned is formally integrated in legislation on company law. It therefore falls within insolvency law and is enforceable against the managing director of a limited company. Here the Higher Regional Court observes a conflict in that pursuant to Article 4(1) EU Insolvency Regulation (‘EIR’) the law applicable to insolvency proceedings and their effects is German law, which is the law of the Member State within the territory of which such proceedings are opened. The Court’s dilemma is: ‘There is no agreement in German commentaries on the question whether the first sentence of Paragraph 64(2) of the GmbHG may be enforceable against managing directors of companies established in accordance with the company law of other EU Member States, but having the centre of their main interests in Germany’. The question for the CJEU is therefore: is Article 4 EIR determinative for such action? The second question touches upon a larger European debate: case law of the CJEU following from, inter alia, the judgments in Überseering (C 208/00, EU:C:2002:632) and Inspire Art (C 167/01, EU:C:2003:512) could be interpreted as meaning that the internal affairs of companies established in one Member State but carrying on their main operations in another Member State are, in the context of freedom of establishment, governed by the company law of the Member State of formation. The application of Paragraph 64(2)(i) GmbHG to managing directors of companies of another Member State could accordingly infringe freedom of establishment within the meaning of Article 49 TFEU and Article 54 TFEU. Thus, the second question is: does an action as referred to above infringe freedom of establishment under Articles 49 and 54 TFEU? In answering the first question the CJEU held that Article 3(1) EIR must be interpreted as meaning that the courts of the Member State in the territory of which insolvency proceedings regarding a company’s assets have been opened have jurisdiction, on the basis of that provision, to hear and determine an action brought by the liquidator in the insolvency proceedings against the managing director of that company for reimbursement of payments made after the company became insolvent or after it had been established that the company’s liabilities exceeded its assets. The CJEU referred to its judgment of just over a year ago, see C 295/13, EU:C:2014:2410 (H v H.K.). It observed that it had based that decision on the view, in particular, that a national provision, such as Paragraph 64(2)(i) of the GmbHG, under which the managing director of an insolvent company must reimburse the payments which he made on behalf of that company after it became insolvent, derogates from the common rules of civil and commercial law, because of the insolvency of that company. It can be inferred from this, observes the court, that an action based on that provision, brought in the context of insolvency proceedings, is an action deriving directly from insolvency proceedings and closely connected with them (for a similar effect, see the same judgment, C 295/13). The CJEU therefore ruled that as such, that provision of national law (one of the effects of which is to require, if necessary, the managing director of a company to reimburse any payments which he made on behalf of that company after it became insolvent), may, in accordance with Article 4(1) EIR be applied by the national court hearing the insolvency proceedings as the law of the Member State within the territory of which the insolvency proceedings are opened (‘lex fori concursus’). The CJEU is not uncertain in answering the second question: for a provision of national law such as Paragraph 64(2)(i) of the GmbHG ‘… it is clear that the latter concerns neither the refusal by a host Member State to recognise the legal capacity of a company formed in accordance with the law of another Member State and having transferred its actual headquarters into the territory of that first Member State, nor the personal liability of administrators where the capital of that company has not reached the minimum amount laid down by the national legislation’. Article 49 TFEU and Article 54 TFEU therefore do not preclude the application of a national provision, such as the one mentioned to a managing director of a company established under the law of England and Wales which is the subject of insolvency proceedings opened in Germany. As a short comment, the case demonstrates that the inter-relationship between insolvency law and corporate law is a challenging and delicate one. Is a certain matter ‘corporate insolvency law’ or ‘company law’? Examples of relevant issues include the ‘punishing’ effect of insolvency law, the functioning of corporate governance, topics such as (cross-border) director’s liability and corporate governance and insolvency. It seems that different models are used for the drafting of European Regulations and Directives. European company law is based on the synchronisation (Gleichlauf) of the incorporation law and the law that applies to the consequences of transferring the corporate seat in the event that a company migrates (i.e. legally transfers its registered office) to a new jurisdiction (e.g. SE Regulation, 10th EU Directive re cross-border merger; 14th EU Directive re transfer of registered office). The company formally abandons the law of forum State A and enters the law of forum State B. Such a situation prompts the question of whether the creditors remain protected. On the contrary European insolvency law is dominated by a ‘split’ or ‘divergence’. There is a ‘split’ between the law of incorporation of a company and the law applicable to it as a debtor, e.g. the determination of the jurisdiction of a Member States’ court to open insolvency proceedings or decide on related actions. The CJEU sets a firm border post to the legal characterization of a certain ‘hybrid’ legal situation (a specific rule for director’s liability) and with subtlety the European Court invalidates heavily gunned company law arguments.

2015-12-doc10 In France: large insolvencies before a specialised court

In France, as from 1 March 2016, specific commercial courts will have exclusive jurisdiction over conciliation, safeguards, reorganisation and liquidation proceedings, when the debtor meets certain criteria. It is one of a group of changes made in August 2015 to the French insolvency law system. These include (i) the specialization of certain commercial courts, (ii) changes to the applicable rules to administrators and judicial officers, and (iii) various provisions of direct interest to the conduct of insolvency proceedings. The law 2015-990 of 6 August 2015 for the growth, activity and equal economic opportunities (called: Loi Macron) introduces the specialization of some commercial courts. These provisions will apply to collective proceedings opened on 1 March 2016 (Article 231) and must be supplemented by a decree listing these specialized commercial courts. Article L. 721-8 of the Code of Commerce specifies that these courts will be competent to deal with certain French insolvency proceedings (‘les procédures de conciliation, de sauvegarde, de redressement judiciaire et de liquidation judiciaire, lorsque le débiteur exerce une activité commerciale ou artisanale') and in the case the debtor is (a) a company whose number of employees is greater than or equal to 250 and where the debtor is a company whose net turnover is at least 20 million euros, or (b) when the debtor is a company whose net turnover is at least  40 million euros. Most notably, the same specially designated commercial courts will be competent for the procedures for the opening of insolvency proceedings in accordance with acts of the European Union relating to insolvency proceedings (which seems more extended than the EU Insolvency Regulation) or for procedures which arise from the presence within its jurisdiction of the centre of main interest (COMI) of the debtor. Companies facing an insolvency proceeding with subsidiaries in a similar position will be subject to the same court, which will enable the negotiation of a workout much more efficiently. If the specialised commercial court has jurisdiction over the parent company, it will also have jurisdiction over the subsidiaries (see

2015-12-doc9 Expedited corporate debt restructuring

Forthcoming in: International Company and Commercial Law Review – [2016] ICCLR , Issue 2, a short review of: Rodrigo Olivares-Caminal (ed.), Expedited corporate debt restructuring in the EU, Oxford University Press 2015, LV + 800 pp. ISBN 9780198706502. £ 195. In Europe, insolvency law is a restless possession. Two decades ago international and national insolvency law looked like a solid rock, certain, predictable and stable. However, the state of affairs then was not geared to upcoming international and modern business. Therefore, international insolvency opened up and developed and national insolvency laws have been disordered to look for new points of orientation. These processes have not gone parallel, but undoubtedly have influenced each other. On a European level the Insolvency Regulation in 2002 created a breakthrough. After a discordant start (with controversial cases such as Daisytek and Eurofood), thirteen years later the Recast is published, based on the idea that the Regulation generally works well, but needs some clarifications and improvements. On a national level, with Germany (1999) many European countries found that their insolvency frameworks could not achieve economic results that are potentially better than those that might be achieved under bankruptcy liquidation. Substantial legislative revisions in insolvency laws and related laws have taken place, starting off with England (Enterprise Act 2002) and nearly all Western European countries following, whilst Eastern European countries started their market oriented economies with more modern insolvency laws right from the beginning. In many of these countries the U.S. Bankruptcy Code’s Chapter 11 procedure has served as a model for legislators. The start of the second decennium of this century has shown an immense increase of political attention for matters of rescue and insolvency. At the end of 2012 – in addition to the overall objective of the revision of the Insolvency Regulation to improve the efficiency of the European framework for resolving cross-border insolvency cases – a new policy was launched: harmonisation of certain aspects of insolvency law in view of ensuring a smooth functioning of the internal market and its resilience in economic crises. The idea was presented that Europe needs modern insolvency laws that help basically sound companies to survive, encourage entrepreneurs to take reasonable risks and permit creditors to lend on more favourable terms. A modern insolvency law allows entrepreneurs to get a second chance and ensures speedy procedures of high quality in the interest of both debtors and creditors. Europe – thus the idea – needs to establish conditions for the EU-wide recognition of national insolvency and debt-discharge schemes, which enable financially distressed enterprises to become again competitive participants in the economy. In this process of harmonisation, the book shortly reviewed here, comes very timely. It contains an overview of expedited corporate debt restructuring in all 28 EU Member States and three cross-jurisdictional themes: expedited corporate debt restructuring and tax and competition law implications in the EU and procedural law implications under the EU Insolvency Regulation. All these chapters are preceded by a theoretic analysis, written by the editor, on expedited corporate debt restructuring: conceptual framework and practical issues. He engages in the challenge of defining the terms used in a non-liquidation context and distinguishing three options, court-supervised reorganisations, out-of-court mechanisms (private workouts) and the ‘hybrid approach’, being contractual arrangements supported by the intervention of courts or administrative authorities. The whole collection provides the reader with detailed analysis and information. It should be noted however that not all chapters follow the same format, many of the chapters also provide illustrations with recent cases (e.g. Belgium: Decto Fleurus; France: Technicolor; Poland: PKM Duda; Sweden: Saab) or case hypotheticals, some provide ‘fact and figures’. Where the book provides such a valuable source with all 28 Member States explaining their position as per early 2015, it is with some regret that I note that the book misses a concluding chapter presenting a comparison and analysis of some key questions on expedited corporate debt restructuring. The editor would most certainly be equipped to write it and thus contribute to the present harmonisation process in the EU in a distinctive way. Be that as it is, in all the work will be very beneficial for insolvency practitioners wishing to know more about the jurisdiction they are negotiating with, for European and national legislators in further amending their legislations, as well as courts, in cases where they are dealing with two or more jurisdictions, to better understand what is required or possible under domestic law. An indispensable book for anyone interested in corporate rescue in the EU.

2015-12-doc8 In 2017: Netherlands Commercial Court opens for large disputes

A Dutch court will open for international trade conflicts. Will it be a success? As of 2017 the Dutch Judiciary aims to open for the settlement of large national and international trade conflicts a special facility in the Netherlands Commercial Court (NCC). The NCC will be a part of the Amsterdam District Court. Cases in appeal come to the Court of Appeal in Amsterdam. The aim is to start on 1 January 2017, when the Dutch government will timely adopt a bill that facilitates litigation in the English language. Two weeks ago, I reported that as of 1 January 2016 in Rotterdam Specific Procedural Rules are in place when parties are opting for conducting international sales and maritime cases in the English language for the District Court in Rotterdam. See The Dutch Judiciary, in promoting the NCC in Amsterdam, says that for large companies there is a need for such a Court to quickly, reliably and efficiently adjudicate cases. According to Frits Bakker, Chairman of the Dutch Council for the Judiciary, the government and the legal industry is fully supportive to the idea. Based on research, it is expected that in time annually 100 disputes at first instance and on appeal 25 will be treated. I just wonder whether the initiative isn’t too optimistic. In the meanwhile, in cases to which English law applies parties can go to a special London court even before the legal conflict breaks out in all its glory, see Moreover, not many international parties make a choice for the applicability of Dutch law or to have their dispute decided by Dutch courts. In my personal experience, I encountered however a notable exception. Two years ago I acted as chairman of an ICC arbitration between parties from the UK and Taiwan. In their contracts they ended up with a choice for Dutch law and for arbitration in The Hague, chosen because ‘The Hague is the global legal city in the world’! But that’s arbitration, supported by the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The New York Convention is the key instrument in international arbitration and applies to the recognition and enforcement of foreign arbitral awards and the referral by a court to arbitration via which the award can be recognised in 156 states (including, since September 2015 Andorra!). For civil and commercial judgments within the EU the Brussels I Regulation applies to 28 Member States, but beyond Europe? USA, Australia, Brazil? Recognition and enforcement of civil or commercial judgments is many times, if at all possible, a slow and cumbersome process. Therefore, a challenge for the NCC to be as successful as predicted.

2015-12-doc7 Sovereign Debt Restructuring

Yesterday, Wednesday 9 december, Miss Yanying Li defended with success her dissertation Sovereign Debt Restructuring. Towards the Establishment of a Multilateral Legal Framework. The event took place in te Academy building University of Leiden. I acted as her supervisor (promotor). Miss Li (1987, born in Chongqing, China, with law degrees in China, the USA and from Leiden, and since a few months working at Clifford Chance, London) defended her research in front of a commission, which included professors Tirado (Madrid) and Paulus (Berlin) as well as the Dutch professors Castermans, Haentjens and Schrijver. As her main argument Yanying Li submits that a multilateral legal framework for sovereign debt restructuring should (i) not take the form of a collective proceeding and (ii) not include claims with all kinds of maturities. It is her view that in the context of a cram-down procedure, a safeguard procedure should be favored to ensure that any amendment of the contract terms imposed by majority bondholders is fair and equitable with respect to minority bondholders who have voted against the amendment. She submits that investment arbitration could serve as an appropriate forum to develop such a safeguard provision. A new arbitral tribunal, preferably modelled after the tribunal concerning the Bank for International Settlements, could apply the safeguard provision once developed, because not all sovereign debt claims can be filed before investment treaty tribunals. Her book has been published in the series of the Meijers Research Institute and Graduate School of the Leiden Law School. For the summary of her research, see 2015-12-09 Yanying Li - Summary of PhD