The possible clash in powers between insolvency practitioners appointed in main and secondary insolvency proceedings were at stake in a decision of the Court of Justice of the EU in April this year.
The case. In 2017, main insolvency proceedings were opened in Germany against Air Berlin Luftverkehrs KG. Where Air Berlin had an establishment in Spain, in 2020 secondary proceedings were opened against Air Berlín Luftverkehrs KG, Sucursal en España. In both cases, IPs were appointed. After he was appointed, the German IP dismissed the employees of the airline’s Spanish establishment. As at that time, the secondary proceedings had not started, the dismissal was a consequence of the opening of the main proceedings.
The Spanish employees, however, challenged their dismissals in a Spanish Labour Court. In 2018 the Spanish court ordered Air Berlin to pay various compensations to the Spanish employees. The employees then filed claims on the basis of the compensation in the main insolvency proceedings in Germany. In addition, one of the employees also obtained a protective attachment over assets that were situated in Spain for the purposes of securing the payment of a €250,000 claim made before the Spanish Labour Court.
In 2019, the German IP sought to remove assets from the territory of Spain to Germany. He applied to a Spanish commercial court and that court allowed the transfer of €1 million that had to be paid on a fiduciary account. Note, though, that the Spanish court was not informed about the existence of the protective attachment, which covered a portion of these monies.
When the secondary insolvency proceedings were opened in Spain in 2020, the Spanish employees filed the same compensation claims in the secondary proceedings. One of the questions was whether the Spanish IP in the secondary proceedings could challenge the removal of the assets by the German IP.
Questions for CJEU. The Spanish Commercial Court of Palma de Mallorca asked the CJEU to answer four questions. On 18 April this year, the Court of Justice of the EU (CJEU) delivered two judgments in joint cases concerning the parallel proceedings opened in Germany and Spain. I will deal with its answers and make some additional remarks.
Law applicable. The first question put before the CJEU was whether the law of the state where the secondary proceedings were opened (Spanish law), applied to the treatment of claims that arose between the opening of the main proceedings in Germany (2017) and the opening of the secondary proceedings in Spain (2020), in addition to applying from the moment of the opening of the secondary proceedings.
No, the CJEU said. The law of the state of the opening of the secondary insolvency proceedings (Spain) applies only to the treatment of claims arising after the opening of those proceedings. It does not apply to the treatment of claims arising between the opening of the main insolvency proceedings (2017) and the opening of the secondary insolvency proceedings (2020)
This is what the CJEU decided. I did split its answer into two sentences.
The CJEU reached its decision by looking at Articles 7 and 35 of the recast European Insolvency Regulation (EIR 2015), read in conjunction with recital 72. It used a rather cryptic formulation, with the background being that the claims of the Spanish employees in the German proceedings were claims of the estate, whereas in the Spanish procedure, they would be ordinary claims. In general, claims of the estate do not need verification and have to be paid immediately.
The CJEU also said that the relevant time for determining the law of the secondary proceedings was the time of their opening. It left open the question what law applied to the claims that arose prior to the opening of the Spanish proceedings. Naturally, on the basis of Article 45 of the EIR 2015, any creditor may submit his claim, both in the main and in the secondary proceedings.
Assets in estate of secondary proceedings. The next question put forward to the CJEU was how to determine the assets and rights that comprise the insolvency estate in the secondary proceedings, and at what time. The answer in the literature is almost always the answer given now by the CJEU: the assets “situated” in the state of the opening of the secondary insolvency proceedings, as provided in Article 3(2) and Article 34 of the EIR 2015, comprise (a) only the assets that are situated within the territory of that respective member state, and (b) must be determined at the time of the opening of those proceedings as the reference time.
The system of the EIR 2015 is clear: a judgment opening main insolvency proceedings shall, with no further formalities, produce the same effects in any other member state as under the law of the state where those proceedings were opened, as long as no secondary proceedings are opened in another member state (Article 20(1)). Article 21 acknowledges the general authority of the main IP to exercise his powers in other member states. In principle, this IP, appointed by the court, is in charge of the main proceedings and has the authority to exercise all the powers conferred on him by the domestic law of his state. In particular, he may remove the debtor’s assets from the territory of other member states in which they are situated subject to Articles 8 (third parties right in rem) and 10 (retention of title) (see the second sentence of Article 21(1)). The main IP may also realise these assets and he may exercise his powers without any prior or further formality. His powers are not those that are provided by domestic law of the secondary proceeding, but his “own” main proceeding’s powers. The EIR 2015 is built on a model of extension – exporting powers – not on a model of assimilation.
Removing assets by the main IP? Having set the legal scene, under which conditions might the act of the main IP, in removing assets from the territory of Spain, be unlawful or abusive?
Regarding this third question, the CJEU was straightforward: Article 21(1) means that the main IP may remove the debtor’s assets from the territory of a member state other than that of the main insolvency proceedings, where it is apparent to that practitioner, first, that there are local creditors with claims arising from employment contracts that have been recognised by judgments and, second, that there is a protective attachment of assets ordered by an employment court of the latter member state.
Rights of creditors? Is there a right of set aside for creditors, against the acts performed by the main IP? The CJEU’s answer was very general: the insolvency practitioner in the secondary insolvency proceedings may bring an action to set aside an act that was performed by the insolvency practitioner in the main insolvency proceedings. And there the court stopped.
In the end, an open end. Answers from the CJEU depend largely on the text of the question that the national court asks, and the way in which lawyers explain it in court. But the shortness of the CJEU’s answer here was very striking. An action to set aside typically relates to acts taken prior to insolvency proceedings. Does this, then, also extend to the Spanish IP trying to claw back assets that were not situated in Spain at the time of the opening of the secondary proceedings, but that would have been situated there if they had not been removed by the German IP? And what about the system of dominance of the main proceedings over the secondary proceedings? What about the IP’s duties to cooperate and to coordinate?
There is still plenty for the CJEU to decide in future, through questions about other cases asked by other domestic courts.
References
Joint cases before the CJEU (Third Chamber) 18 April 2024, Luis Carlos et al v. Air Berlín Luftverkehrs KG, Sucursal en España (C-765/22) and Victoriano et al v. Air Berlin Luftverkehrs KG, Sucursal en España, Air Berlin PLC & Co. Luftverkehrs KG (C-772/22).
This is a slightly adapted version of a regular column Bob Wessels is writing for Global Restructuring Review (GRR) on the topic of cross-border restructuring and insolvency in a European context. GRR is a subscription-only publication and the column appeared in GRR on 18 June 2024. See www.globalrestructuringreview.com