Tag: Directive 2001/24

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Kaupthing: the High Court interprets (and rejects) Lugano insolvency exception viz the Icelandic Banking crisis.

Thank you Eiríkur Thorláksson (whose expert report fed substantially into the Court’s findings) for flagging and for additional insight: In Tchenguiz v Kaupthing, the High Court had to review the insolvency exception to the Lugano Convention, combined with Directive 2001/24 on the reorganisation and winding-up of credit institutions. Directive 2001/24 applies to UK /Iceland relations following the EFTA Agreement. See my earlier post on Sabena, for Lugano context. Mr Tchenguiz is a London-based property developer. He claims against Kaupthing; Johannes Johannsson, a member of Kaupthing’s winding-up committee; accountants Grant Thornton; and two of its partners.

While Directive 2001/24 evidently is lex specialis vis-a-vis the Insolvency Regulation, much of the ECJ’s case-law under the Regulation is of relevance to the Directive, too. That is because, as Carr J notes, much of the substantial content of the Regulation has been carried over into the Directive. Carr J does emphasise (at 76) that the dovetailing between the Lugano Convention /the Judgments Regulation, and the Insolvency Regulation, carried over into the 2001 Directive does not extend to matters of choice of law. [A bit of explanation: insolvency was excluded from the Judgments Regulation (and from the Convention before it) because it was envisaged to be included in what eventually became the Insolvency Regulation. Consequently the Judgments Regulation and the Insolvency Regulation clearly dovetail when it comes to their respective scope of application]. That is because neither Lugano nor the Judgments Regulation consider choice of law: they are limited to jurisdiction.

On the substance of jurisdiction, the High Court found, applying relevant precedent (German Graphics, Gourdain, etc.), that the claims against both Kaupthing and Mr Johansson are within the Lugano Convention and not excluded by Article 1(2)(b) of that Convention. That meant that Icelandic law became applicable law by virtue of Directive 2001/24, and under Icelandic law proceedings against credit institutions being wound up come not be brought before the courts in ordinary (rather, a specific procedure before the winding-up committee of the bank applies). No jurisdiction in the UK therefore for the claim aganst the bank. The claim against Mr Johansson can go ahead.

[For the purpose of this blog, the jurisdictional issues are of most relevance. For Kaupthing it was even more important that the Bankruptcy Act in Iceland was found to have extra-territorial effect. The Act on Financial Undertakings implemented the winding-up directive and the Icelandic legislator intented it to have extra-territorial effect].

A complex set of arguments was raised and the judgment consequentially is not an easy or quick read. However the above should be the gist of it. I would suggest the findings are especially crucial with respect to the relation between Lugano /Brussels I, Directive 2001/24, and the Insolvency Regulation.

Geert.

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Lex causae, securitisation and insulating agreements from the lex concursus. The ECJ in Lutz.

Postscript for an example of where Article 4(2)m, lex fori concursus for rules relating to the voidness, voidability or unenforceability of legal acts detrimental to all the creditors, applies without correction, see C-594/14 Kornhaas.

This post has been some time in the making, notwithstanding my promise to have it up soon. Let’s just say I got distracted.

The wide interest in Lutz, Case C-557/13, illustrates the increasing relevance of the actio pauliana in protecting creditors from their debtor’s insolvency. The core underlying issue for Lutz is that, in the absence of considerable capital in companies (arguably a direct result indeed of the regulatory competition in Member States’ corporate law following the ECJ’s case-law on freedom of establishment), civil law mechanisms have become more relevant than classic recourse to companies’ liability, relying on their capital.

If one relies on more classic modes of securitisation, one may want to have more predictability in what law will apply to those securitised agreements. That is where the Insolvency Regulation comes in, in providing for a mechanism which allows parties to choose applicable law for the relevant agreements.

Article 4(2)m of the Insolvency Regulation (in the new Regulation this is Article 7(m) – unchanged) makes the lex concursus applicable in principle: lex concursus applies to ‘(m) the rules relating to the voidness, voidability or unenforceability of legal acts detrimental to all the creditors.’ However Article 13 (16 new – unchanged) insulates a set of agreements from the pauliana: ‘Article 4(2)(m) shall not apply where the person who benefited from an act detrimental to all the creditors provides proof that: – the said act is subject to the law of a Member State other than that of the State of the opening of proceedings, and – that law does not allow any means of challenging that act in the relevant case.’ 

The crucial consideration in Lutz was whether the absence of means of challenge in the lex causae, relates to substantive law only, or also to procedural law. Randi summarise the time-line and relevant distinction in German and Austrian law as follows:

  • “17 Mar 2008-Austrian court issues an enforceable payment order in favour of Mr Lutz against the debtor company
  • 18 April 2008-debtor files application for German insolvency proceedings
  • 20 May 2008-attachment of three Austrian bank accounts of the company
  • 4 August 2008-German insolvency proceedings opened (as main proceedings) in respect of the company
  • 17 Mar 2009-Austrian bank pays monies to Mr Lutz

Under German law, any enforcement of security over the debtor’s assets during the month preceding the lodging of the application to open proceedings is legally invalid once proceedings are opened. Under Austrian law, an action to set aside a transaction must be brought within one year after the opening of proceedings, failing which it becomes time-barred. By contrast, the limitation period under German law is three years. Although the attachment order was granted before the application to open main proceedings was filed, the actual attachment itself took place after that filing and the subsequent payment of monies by the bank took place after main proceedings were opened in Germany. Mr Lutz argued that art 13 applied and that the payment could no longer be challenged by the German liquidator under Austrian law as the one-year limitation period had expired.”

(Randi also have good review of the questions in Lutz relating to rights in rem and Article 5, triggered in the case at issue by the attachments of bank accounts).

Essentially, the Court expresses sympathy for the cover of procedural limits to fighting detrimental acts to be determined by the lex causae. (It dismissed any relevance of Article 12(1)d of Rome I Regulation, which provides that prescription and limitation of actions are governed by ‘the law applicable to a contract’: for the Insolvency Regulation is most definitely lex specialis). However leaving the matter up to the lex causae would cause differentiated application of the Insolvency Regulation across the Member States.

Consequently the ECJ opts for autonomous interpretation, ruling (at 49) that Article 13 of Regulation No 1346/2000 must be interpreted as meaning that the defence which it establishes also applies to limitation periods or other time-bars relating to actions to set aside transactions under the lex causae.’

The ECJ’s judgment essentially confirms the EFTA Court’s views on the similar proviso in Directive 2001/24 on the winding-up of credit institutions (Lbi hf v Merrill Lynch). A pity the ECJ did not refer to that finding. Geert.