Air Berlin Online Symposium: the Scope of the Lex Concursus
This is the third post of the online symposium on the recent judgment of the CJEU in Air Berlin (see also here). It is authored by Patrick Wautelet (University of Liege, Belgium), who contributed to the recent Elgar Commentary on the European Insolvency Regulation and Implementing Legislations. The first post was authored by Ilaria Queirolo and Stefano Dominelli and the second by Antonio Leandro.
Cross-border insolvency proceedings remain a minefield fraught with bootstraps. The Air Berlin case decided by the CJEU demonstrates that the road to the resolution of such proceedings is not always smooth ride.
The first bump on the road in this case came when the insolvency practitioner appointed in Germany following the opening of main proceedings in that Member State, failed to seek the prior authorization of a Spanish court before dismissing employees who had been working for the Spanish branch of the debtor. Under Spanish law, the insolvency practitioner must obtain such authorization from the court before dismissing employees. As is well known, the Recast Regulation makes it possible to seek such approval in a Member State “even if no insolvency proceedings have been opened in that Member State” (Art. 13(2)). One is left to guess whether this was a mere negligence on the part of the insolvency practitioner or a deliberate attempt to circumvent a requirement deemed too troublesome.
The failure on the part of the insolvency practitioner led a Spanish court to order Air Berlin to pay compensation to the employees. At that time, the insolvency proceedings had been opened for six months already. As a consequence, the claims of the ex-employees were considered, under German law, to be claims against the assets of the insolvent debtor (so-called ‘Masseforderungen’ or ‘créditos contra la masa’) which could enjoy a preferential treatment. The ex-employees had, however, set their eyes on an important claim held by Air Berlin on assets located in Spain, with a special privilege. Much to their surprise, the practitioner appointed in Germany managed to transfer the claim to his fiduciary account in Germany, even though part of the claim had been provisionally attached. This secund bump in the road may be linked to a lack of coordination between various courts within a Member State rather than a shortcoming in the scheme of the Regulation. It shows, however, that navigating cross-border insolvency proceedings also requires well-functioning cooperation mechanisms at the domestic level.
Finally, the uncertainty surrounding the status of the claims of the ex-employees also added to the confusion. The claims arose out of a decision issued by a Spanish employment court after the main insolvency proceedings were opened, but well before the former employees requested the opening of secondary proceedings in Spain. As such, they could be subject either to German law, which governed the main proceedings, or to Spanish law, which applied to the secondary proceedings. The uncertainty surrounding the issue of the applicable law was a third bump on the road and one with important consequences, as the claims were deemed to be privileged under German law while their status was unclear under Spanish law.
These three examples demonstrate that the road to a harmonious European resolution of cross-border insolvency proceedings is a long one, and one in which debtors, creditors and insolvency practitioners may well get lost.
True, the (recast) Regulation aims to make the ride smoother. It does so by providing for a nuanced approach reconciling seemingly opposed interests. The choice for a nuanced universalist approach as a cornerstone of the Regulation (as underlined in Recital 22) is, however, only robust to the extent that the dividing line between main and secondary proceedings can be drawn very clearly. In most cases, there will not be much hesitation on the respective realm of the main and secondary proceedings.
In the Air Berlin case, the unusual entanglement between main and secondary proceedings contributed, however, to somewhat blur the distinction. The claims held by the ex-employees related directly to the operations of the Spanish branch. Because of the peculiar sequence of events, however, no secondary proceedings were yet opened when the claims were granted by the court in Spain. These claims were therefore floating in the air between the main and secondary proceedings.
The Court first confirmed that the former employees could not avail themselves of Art. 13 (para. 55). As is well known, this exception to the lex concursus only deals with the immediate consequences of dismissal, not with the question “whether the employee’s claims are protected by preferential rights” (Recital 72). This issue remains solely governed by the lex concursus (for further details, see Crespi Reghizzi, in Cuniberti, Leandro, 2024, art. 13, para. 13.026).
Once it was accepted that the treatment of the claims fell under the lex fori concursus, the Court had to decide whether the claims could be considered to have arisen after the opening of insolvency proceedings and, if yes, which one. This was necessary because the Spanish court had firmly brought Art.7(2)(g) of the Regulation to the center of the debate: by doing so, the referring court sought to protect “local interests” (para. 30) by opening up the possibility to apply a provision of Spanish law specifically aimed at claims arising after the opening of insolvency proceedings (Art. 242, 8° Spanish law).
The move by the Spanish referring court was a bold one: Art. 7(2)(g) refers to “claims arising after the opening of insolvency proceedings”. This category classically covers the “administration costs, including the compensation of the [insolvency practitioner] and the obligations of contracts adopted or created by the [insolvency practitioner]” (Westbrook, Booth, Paulus & Rajak, A Global View of Business Insolvency Systems, 2010, p. 86). In the present case, the claims of the former employees did not squarely fell into this category, as they were not linked to the actual expenses of the proceedings, nor to new liabilities incurred to keep the business running. The former employees were dismissed shortly after the opening of the main proceedings. They sought “compensation and outstanding remuneration that had fallen due during the proceedings and challenging the dismissals” (para 23).
By accepting that their claims fell under Art. 7(2)(g), the Court seems to have somewhat expanded the scope of that provision: not only does it cover the expenses incurred by the insolvency practitioner or liabilities linked to contracts he concluded or chose to continue. It may also, according to the Court, be used for claims which are upheld by a court following the opening of insolvency proceedings, even if they relate to contracts concluded before such opening.
If the Court confirms this interpretation in future cases, it would not substantially change the balance achieved by the Regulation between competing interests. Had the Court indeed rejected the suggestion of the referring court to apply Art. 7(2)(g), the status of the claims held by the former employees would have nonetheless been governed by the lex concursus.
A much more significant question concerned the next bold move suggested by the Spanish court: the referring court indeed sought to know whether under Art. 7(2)(g), Spanish law should apply as lex concursus to claims arising after the opening of main proceedings, because in the meantime secondary proceedings had been opened in Spain. In other words, the referring court sought, again in the name of “the protection of local interest” (para. 30) to broaden the scope of Art. 7(2)(g) to include claims arising before the secondary proceedings were opened.
The Court flatly refused to condone such a broad interpretation of Art. 7(2)(g). As main justification, the Court put forward the need to guarantee the legal certainty (para. 60). Beyond the need to safeguard legal certainty, accepting that Art. 7(2)(g) could be applied to claims which have arisen before the relevant proceedings were opened, would contradict the very foundation of the provision. Art. 7(2)(g) directs that the lex concursus be applied to “the expenses of the proceedings and also the debts and liabilities arising from the administration of the estate as a result of new contracts or torts” (Virgos/Garcimartin, at p. 77) because these claims arise precisely after the proceedings have been opened.
This ruling helpfully clarifies that claims can only be deemed to be post-commencement claims if they truly arise or are upheld following the opening of the relevant proceedings. In other words, the Court gave to secondary proceedings what belong to secondary proceedings. Unfortunately, the Court expressed this solution in very general terms. Reading para. 62, one could be under the impression that the lex concursus of the secondary proceedings may not be applied to claims which have arisen before the proceedings were opened. This must be read to apply solely to Art. 7(2)(g). It would indeed make no sense to provide that the law of the Member State where secondary proceedings have been opened, cannot apply to e.g. the ranking of claims which have been lodged in those proceedings. Admittedly, with this caveat in mind, the ruling of the Court is, on this issue, of minor importance. It is indeed difficult to think of other examples in which claims will be sandwiched between main and secondary proceedings.
One issue not tackled by the Court remains : do creditors have the possibility to cross-file their claims in both main and secondary proceedings, as allowed by Art. 45, when their claim is a post-commencement one? It has been suggested that this possibility should be reserved to regular creditors (Damman/Sénéchal, Art. 45). There may, however, be convincing arguments to adopt a more generous reading of Art. 45.
A final word on the fate of employees: the Air Berlin case demonstrates that unless they very rapidly request the opening of secondary proceedings, they depend very much on the protection afforded (or not) by the lex concursus. This may give rise to serious tensions, as the issue of the competing priorities between employees and secured creditors is one of the most contentious in insolvency proceedings. No wonder that the Regulation itself acknowledges that a future recast should focus on the improvement of the preferential rights of employees at European level (Recital 22). Let’s hope that the European legislator will seize this opportunity to address this significant bump on the road to smooth pan-European insolvency proceedings.