On 22 April 2021, the Court of Justice of the European Union ruled on the law governing the avoidance of the payment of a contractual obligaton by a third party in Z.M. v. E.A. Frerichs, Case C-73/20 (see the previous reports of K. Pacula and G. van Calster).
The issue arose in the context of the insolvency of a German company, Oeltrans Befrachtungsgesellschaft, in Germany. Oeltrans had made a payment to Dutch company Frerichs, that the liquidator of Oeltrans sought to challenge pursuant to the German law of detrimental acts.
The payment had been made for the purpose of performing a contact concluded between Frerichs and Tankfracht GmbH, a German company which belonged to the same group as Oeltrans. It was accepted that Dutch law governed the contract.
While the payment could be challenged under German law, it could not under Dutch law.
In principle, it was clear that the law of the insolvency governed any action for challenging detrimental acts (Art 4 – today 7- of the Insolvency Regulation). The only exception is the famous then article 13 (today 16) of the European Insolvency Regulation, which refers to the law governing the relevant act:
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 question was, therefore, whether the law governing the relevant act, the payment, was the law of the contract. Importantly, the detrimental act was not the contract, to which the insolvent debtor was a third party. It was a payment made by a third party for the purpose of performing a contract.
Rationale of Article 13
The issue raised was primarily one of insolvency law, and the judgment rightly focuses on the interpretation of Article 13.
The court repeats that the rationale of the exception in Article 13 is to protect the expectations of the party who contracted with the insolvent debtor. That party, the court explains, cannot foresee that its debtor could become insolvent, and where such proceedings could be opened.
33. A party to a contract who has benefited from a payment made by its contracting partner or by a third party in performance of that contract cannot reasonably be required to foresee that insolvency proceedings may be opened against that contracting partner or that third party and, if so, in which Member State those proceedings will be opened.
Nothing in this rationale is convincing. Any reasonable businessman knows that his contractual partners may become insolvent. And, if this businessman has any knowledge of private international law (unlikely, but his lawyers should), he/they will know that the insolvency proceedings would be opened in the country of origin of that partner, and that the law of that country will apply. The surprise, if any, is the existence of Art. 13, and the remarkable result to which it leads: contract law trumps insolvency law.
Article 13 is more simply a failure of European integration, which prevents the recognition of insolvency proceedings within the EU. There are many other such rules in the Insolvency Regulation. This is the political compromise that the Member States reached when they negotiated the Regulation 20 years ago.
It is not for the CJEU to change this political compromise and to delete Article 13 (although the Court has not hesitated to move beyond the political compromise of Member States in other circumstances, when interpeting the Evidence Regulation for instance).
But the Court needs not extend the scope of Article 13 beyond what is necessary and encourage fraud.
In Vinyls Italia (Case C-54/16), the Court had accepted that the parties to a domestic contract could avoid the application of insolvency law by choosing a foreign law to govern their contract and shield it against insolvency proceedings.
In the present case, the insolvent debtor was asked by another company from the same group to pay under a contract concluded by the other company of the group. This looked very suspicious indeed. Was the goal to put the funds of the insolvent company beyond the reach of its creditors by releasing a company of the same group from one of its debts? Maybe not in this case, but it is now possible to do exactly that in the future.
So it might have been possible to determine the law governing the payment in a more objective way than simply submitting it to the law of a contract that the parties may freely choose (including if it is a domestic contract).
A possible solution could have been to decide that the payment was governed by the law of the place where the payment occurred.