Jurisdiction in Litigation Against Insolvent Parties. Oilchart and the Opinion of AG Medina
The author of this post is Manuel Penades Fons, Reader in International Commercial Law at the Dickson Poon School of Law at King’s College London, United Kingdom.
Introduction
In Oilchart the CJEU needs to decide whether a creditor can commence proceedings in an EU Member State against a party which is already subject to insolvency proceedings in another Member State. Any reader familiar with European private international law might immediately anticipate the already classic debate between the Brussels regime (for civil and commercial matters) and the EU Insolvency Regulation (for insolvency-related matters). A theme which commenced in 1979 with the Gourdain decision and which has generated no less than 30 (!) judgments from the CJEU.
The Facts
On 21 October 2014, Oilchart supplied fuel bunkers to the vessel MS Evita K, owned by Sharsburg Navigation SA. Oilchart and Sharsburg, however, had not entered into any contract with each other. Sharsburg had ordered the bunkers from the Danish company OW Bunker & Trading A/S (‘OWB A/S’), which then forwarded that order to OWB NL, a Dutch entity of the same group. OWB NL in turn purchased the bunkers from Oilchart.
On 22 October 2014, Oilchart issued an invoice to OWB NL but it remained unpaid because OWB NL was declared insolvent on 21 November 2014 by a Dutch court. Oilchart filed its claim with the insolvency proceedings for verification by the liquidators. In parallel, Oilchart managed to arrest certain vessels to which it had supplied bunkers pursuant to contracts with OWB NL. In order to release the vessels, the shipowners and the mutual insurance associations (‘the P&I clubs’) issued guarantees to Oilchart for the amount of the invoices that it had issued to OWB NL. Those guarantees provided that they could be invoked on the basis of a court ruling or an arbitral award handed down in Belgium against either OWB NL or the shipowner.
On 11 March 2015, Oilchart brought proceedings before Belgian courts against OWB NL for the payment of the same outstanding invoice it had filed with the Dutch insolvency. The aim was to obtain a judgment against OWB NL to trigger the guarantees. OWB NL did not appear in the proceedings, which forced the Belgian courts to examine their own jurisdiction pursuant to art. 28 BIReg bis.
According to Article 25 of the Dutch Insolvency Law (NFW), “1. Legal actions concerning rights or obligations belonging to the insolvency estate shall be exercised against, as well as by, the liquidator” and “2. If such legal actions are exercised or continued by or against the bankrupt debtor and they lead to a judgment against that bankrupt debtor, then this judgment shall have no legal force against the liquidation estate’. In addition, Article 26 NFW provides that “Legal actions seeking the performance of an obligation from the liquidation estate cannot be brought against the bankrupt person in any way other than that provided for in Article 110”, which regulates the verification process within the insolvency proceeding.
The issues
The Belgian referring court asked two questions.
The essence of the first question is whether an action for the payment of a supply of goods against a company subject to insolvent proceedings in another EU Member State, and which is brought in parallel to a verification claim filed with the insolvency proceedings for the same invoice and by the same party, falls within the material scope of the BIR recast (as per the concept of ‘civil and commercial matters’ in Article 1.1 and the exclusion in Article 1.2(b) or within the scope of the EIR recast, since it is the subject of insolvency proceedings in another Member State.
The second question only follows if the Court concludes that the claim described above is insolvency-related and falls within exclusive jurisdiction of the insolvency forum. In that scenario, the Belgian court asks whether Article 25.2 NFW is compatible with Article 3.1 EIR recast, in so far as that provision allows an insolvency-related action to be brought before the courts of a Member State other than the insolvency forum.
The AG Opinion
The First Question
AG Medina approaches the characterisation exercise under the two criteria established by the European case law since Gourdain. The first criterion is whether the action derives directly from insolvency proceedings, and traditionally focuses on the legal basis which serves as foundation of the action, ie whether the claim could have been brought absent insolvency proceedings. The second criterion is whether the claim is closely connected with the insolvency proceedings, which in practice requires examining the procedural context of the action as well as the interests (individual or collective) pursued by the claim.
AG Medina accepts that, under a strict application of this test, the action before the Belgian courts would be characterised as civil and commercial. However, the AG advocates in favour of a “result-oriented approach” to the characterisation exercise in order to enforce the rule of exclusive jurisdiction of the insolvency forum, increase the effectiveness of the insolvency proceedings, avoid forum shopping, and ultimately protect the creditors’ collective interest (paras 55 and 62). Under this approach, AG Medina concludes that the action before the Belgian courts is insolvency-related and thus falls within the exclusive jurisdiction of the Dutch insolvency forum.
The Second Question
The purpose of Article 25.2 NFW is to provide that legal actions concerning rights or obligations belonging to the insolvency estate which are brought against the insolvent debtor rather than the liquidator shall have no legal force against the liquidation estate. The view of AG Medina is that prima facie this provision does not infringe the exclusive jurisdiction of the insolvency forum. It simply warns about the unenforceability vis-à-vis the estate of the judgments resulting from proceedings that violate such exclusive jurisdiction.
However, in line with the same results-oriented approach followed in the first question, AG Medina notes that a judgment of this nature might be used in other EU Member States to attach assets or receivables in favour of the estate that should ultimately accrue on to the estate and benefit the body of creditors. In the case at hand, that risk referred to the fact that the call on the bank guarantees which Oilchart targets through the Belgian litigation against OWB NL, in reality would realize to its individual advantage and outside of the collective process the receivable which OWB NL has with regard to the company OWB Denmark which is linked to it.
On these grounds AG Medina concludes that art. 25.2 NFW has the effect of circumventing the exclusive jurisdiction of the insolvency court as regards claims which fall within the insolvency estate and therefore is contrary to the EIR recast.
Criticism
On the First Question
The AG reaches to correct conclusion with the wrong arguments. It would have been possible to argue the inadmissibility of the Belgian proceedings under a structured four-step test without the need to adopt a wide “results-driven” approach that distorts the raison d’être of the Gourdain criteria.
The starting point should have been to clarify the nature of the Belgian action, which the AG does not examine. European case law has ruled that actions which are “limited to determining rights and obligations are different from individual enforcement actions arising from those lawsuits” (C‑85/12, LBI hf, paras. 53-55). The former are “substantive proceedings for the recognition of the existence of a debt” (as per C-250/17, Virgílio Tarragó) and do not risk undermining the principle of equal treatment of creditors and the collective resolution of insolvency proceedings, because even if they result in an order to pay, they do not attach assets of the estate. AG Medina does not address this distinction.
If the Belgian action at hand was an enforcement action resulting in the direct reduction of the insolvent estate, the claim should be prohibited due to the impossibility to conduct individual enforcement actions in violation of the collective insolvency process in the Netherlands (C-250/17, Virgílio Tarragó, paras 30-32 and C-212/15, ENEFI, paras. 33-35). This prohibition is effective in every EU Member State pursuant to the automatic recognition of the effects of the insolvency under art. 20 EIR recast. This prohibition applies to civil and commercial as well as insolvency-related claims and therefore it would have been unnecessary to characterise the Belgian action as insolvency-specific to prevent its admissibility if it had been framed it as an enforcement action.
If the Belgian proceedings are not an enforcement action, the second step should have been to examine the application of the findings of the CJEU in C-47/18, Riel. Riel decided that, once a claim is submitted for verification, any related action “for a declaration of the existence of claims under [insolvency law] derives directly from insolvency proceedings, is closely connected with them and has its origin in the law on insolvency proceedings” (para. 38). That is, what is ordinarily a civil and commercial action becomes insolvency-related and is subject to the exclusive jurisdiction of the insolvency court once it is filed for verification with the insolvency forum. A relevant factor in Riel was that the claim had been challenged by the liquidator in the insolvency process (Riel, para. 23), which did not happen in the case at hand. Still, a wide interpretation of Riel would have allowed AG Medina to conclude that not only the Dutch verification suit but also the “identical” action before the Belgian courts should be characterised as insolvency-related. Consequently, any attempt to conduct it outside of the insolvency forum would be incompatible with the exclusive jurisdiction provided by the EIR recast. This route would have been preferable to the excessively wide “results-driven” approach to the Gourdain criteria proposed by AG Medina.
The third step would apply if the AG had concluded that Riel could not be extended to the Belgian claim, which should then be classified as civil and commercial. The truth is that, but for the submission for verification, the Belgian proceedings concern an ordinary claim for the breach of a contractual duty to pay an invoice. Under the Gourdain test, this is a plain vanilla contractual claim arising out of a sale of goods agreement which is not based on insolvency law, could have well existed in a non-insolvency setting (factor 1) and pursues the private interest of an alleged creditor seeking a determination of an individual credit against the insolvent estate (factor 2).
Nothing impedes the application of the lis pendens rules BIReg recast to two competing claims when the action brought before the court second seised (the Belgian court) is civil and commercial and falls under the BIReg recast. Given that AG Medina concluded repeatedly that the Belgian claim is “identical” to the one submitted earlier to the liquidator in the Netherlands (paras 40, 51 and 62), the Belgian court should decline jurisdiction under art. 29 BIReg recast.
A final stage would have been to rely on the choice of law rules in the EIR recast. AG Medina seems to assume that the characterisation of a claim as civil and commercial automatically results in the possibility to proceed outside the forum concursus under the jurisdictional rules of the BIReg recast. Avoiding this consequence is precisely what motivates her wide “results-driven” approach to the Gourdain criteria. This assumption is wrong, and has been the source of some of the inconsistencies in the European caselaw around this topic. While the effect of a claim being characterised as civil and commercial is that it is not caught by the exclusive jurisdiction of the insolvency court provided by Article 3 EIR recast, other provisions of the EIR recast can still impact the conduct of those claims. That is, a civil and commercial claim falls outside of the insolvency jurisdiction, but it does not fall entirely outside of the EIR recast. This is precisely the purpose of Articles 7.2(f) and 18 EIR recast, which determine the law that governs the effects of the insolvency proceedings on individual lawsuits. The lex fori concursus will apply to the effects on lawsuits brought after the opening of the insolvency proceedings (Article 7.2(f)), whereas the effects on lawsuits or arbitral proceedings which are pending at the time of the opening of the insolvency proceedings will remain subject to the law of the EU Member State where the individual action is being pursued (Article 18). One of these effects can be a stay mandated by the relevant applicable law, which would impede the commencement or continuation of the individual action in question.
The omission of these provisions from the Opinion of AG Medina is remarkable given that an established line of European caselaw such as C‑85/12, LBI hf, C-212/15, ENEFI, C-250/17, Virgílio Tarragó, C‑504/19, Banco de Cyprus and C-724/20, Paget Approbois has confirmed that these provisions of the EIR recast (or equivalent rules in Directives that mirror those provisions) apply to “proceedings on the merits” like the Belgian action.
In the case at hand, arts. 26 and 110 NFW prohibit the commencement of any claim impacting the estate outside of the insolvency proceedings. This prohibition is applicable in every EU Member State pursuant to Article 7.2(f) EIR recast and should force the Belgian court to declare the action inadmissible (even if has jurisdiction under the BIReg recast). That is, it is not Dutch law alone (as AG Medina argues in para. 39) but the choice of law rule in the EIR recast what renders the Belgian claim inadmissible. The use of Article 7.2(f) EIR recast to render a claim against an insolvent party inadmissible was well illustrated in C-294/02 DEP AMI Semiconductor, which the Opinion also omits.
In sum, it was not necessary to adopt a wide “results-driven” interpretation of the Gourdain criteria to prevent the individual litigation outside of the insolvency forum. EU law allows national legislators to make their own policy decisions on how wide they want to cast the net of the vis attractiva concursus. It is precisely the absence of a homogeneous approach across EU Member States on the admissibility of individual actions parallel to insolvency what justified inserting the choice of law rules in arts. 7.2(f) and 18 EIR recast rather than a uniform rule on jurisdiction. The EIR recast regulates the extent of the exclusive jurisdiction of the insolvency forum (the positive dimension of the vis attractiva concursus), but it does not implicitly and automatically authorise the conduct of individual claims if they are classified as civil and commercial. That will be for national law to decide, just as Dutch insolvency law prohibits lawsuits against the insolvent estate outside of the insolvency forum. If they are admissible, the jurisdiction to decide them will be determined by the BIReg recast or any other applicable jurisdictional rules (e.g., Lugano Convention).
On the Second Question
The application of a “result-oriented” approach by AG Medina to answer the second question also seems misguided. It is not compatible with EU law that a provision of national law permits the commencement of insolvency-related litigation outside of the insolvency forum (C-339/07, Seagon, para. 24). However, that is not the aim of Article 25.2 NFW, which is limited to provide that legal actions concerning rights or obligations belonging to the insolvency estate which are brought against the insolvent debtor rather than the liquidator shall have no legal force against the liquidation estate. Therefore, the effect of this provision is precisely to protect the insolvency estate, which would be immune from enforcement attempts derived from those individual actions.
This is evidenced by the circumstances of the case at hand. Oilchart does not intend to enforce any hypothetical Belgian judgment against the insolvency estate. The aim is to obtain a title that will permit the activation of the guarantees. Even the activation of those guarantees would not impact the insolvency estate, as the payment would be made by a third party who would then step into the shoes of Oilchart to recover from the insolvent estate.
Finally, the answer should not be affected by the risk, noted by AG Medina, that the call on the bank guarantees by Oilchart in reality would realize to its individual advantage and outside of the collective process the receivable which OWB NL has with regard to the sister company OWB Denmark. The EIR recast provides for a solution to this issue that is significantly less intrusive than a declaration of incompatibility with EU law, as underscored by the CJEU in C-250/17, Virgílio Tarragó, para. 30. According to Article 23.1 EIR recast, “a creditor which, after the opening of the proceedings referred to in Article 3(1), obtains by any means, in particular through enforcement, total or partial satisfaction of its claim on the assets belonging to a debtor situated within the territory of another Member State, shall return what it has obtained to the insolvency practitioner”. Therefore, Oilchart would be answerable to the liquidator if it obtained individual satisfaction outside of the insolvency forum and to the detriment of the estate.