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Oxford University Comparative Law Forum

Cross-Border Insolvency under English and German Law

by Michael Bütter¹

(2002) Oxford U Comparative L Forum 3 at ouclf.iuscomp.org | How to cite this article | Discuss this article

Table of content

Introduction
Chapter 1: English Law
Chapter 2: German Law
Chapter 3: European Council Regulations of 29 May 200 on insolvency proceedings
Conclusion
Appendices
Footnotes

Introduction

The dramatic increase in international trade in modern times and the development of a global market place have inevitably led to a rise in the number, size and complexity of cross-border insolvencies. Novel problems have arisen since the creation of multinational trading corporations which, in many cases, have little or no economic connection with any particular place of incorporation. The more the boundaries in international trade disappear and ‘globalisation’ becomes reality, the greater is the need to modernize national insolvency laws in order to keep abreast of the times and provide efficient solutions from an economic standpoint.

Within insolvency law, it is undoubtedly the case that the area of greatest commercial significance – both in terms of the monetary amounts involved, and in terms of the complexity of issues encountered – concerns the insolvency of companies. The present article will only deal with the winding up or, in other words, the liquidation of companies and thus not address the bankruptcy of individuals, even though most of the fundamental principles of international insolvency law were originally conceived in the context of the insolvency of natural persons.²

Legal problems in cross-border insolvencies emerge in particular when assets of a multinational company are situated in several countries with different legal systems belonging to more than one legal entity. Different national insolvency laws have different creditor priorities and in most cases incompatible rules in terms of antecedent transactions such as transactions at an undervalue, voidable preferences and gratuitous alienations which are prejudicial to creditors. The key questions arising are which country can claim the international jurisdiction for the proceedings and which substantive insolvency law has to be applied.

In order to co-ordinate these complex issues some judges and authors expressed strong support for an International Convention on Insolvency Proceedings.³ For instance, the Vice Chancellor Sir Donald Nicholls stated: ‘There is a crying need for an international insolvency convention’.⁴ The problem was more graphically described by Judge Brozman sitting in the United States Bankruptcy Court for the Southern District of New York when dealing with the Maxwell Communications Corporation’s international insolvency:

Lurking in all transnational bankruptcies is the potential for chaos if the courts involved ignore the importance of comity. As anyone who has made even a brief excursion into this area of insolvency practice will report, there is little to guide practitioners or the judiciary in dealing with the unique problems posed by such bankruptcies. Yet it is critical to harmonise the proceedings in the different courts lest decrees at war with one another result.⁵

Today not only a Draft Model Legislative Provisions on Cross-Border Insolvency (UNCITRAL)⁶ exists, but there are also some international treaties in force which deal with the aforementioned problems. However, all of the latter are limited to small groups of countries.⁷

Finally, in May 2000, the Council of the European Union revived the failed European Union Convention on Insolvency Proceedings by enacting its wording in the form of a Regulation. This new Council Regulation on insolvency proceedings (hereinafter referred to as ‘the Regulation’)⁸ pursuant to Article 47 of the Regulation, came into force on 31 May 2002.

Its predecessor, the draft European Union Convention on Insolvency Proceedings, was ratified by 14 Member States pursuant to Article 49(2) until 23 May 1996.⁹ It failed to enter into force because the United Kingdom decided against ratification. The reasons for this decision are not clear. Officially, the United Kingdom Government chose to embark upon a policy of non-cooperation with its European partners, as a gesture of dissatisfaction over the ‘beef crisis’.¹⁰ The same decision has also been linked to a more durable impediment, i.e. the centuries-old controversy between the United Kingdom and Spain regarding sovereignty over the territory of Gibraltar.¹¹ However, whatever politically tangential reasons had been decisive at that stage, the EU Council eventually took the matter into its hands by enacting the Regulation. It appears that the EU finally lost its patience because there has not been any attempt in the past four years to revive the Convention, although this was certainly possible, despite the lapse of the deadline.¹² Although it took almost a decade until eventually an international insolvency law for the European Union was enacted, there was unanimous support for such an International Insolvency Convention all along. It is therefore not a surprise that the Council mainly simply transformed the draft European Union Convention on Insolvency Proceedings into an identically worded Regulation.

One has to admit that the current system of cross-border insolvency is surely complicated, but on the other hand even this appears vital in terms of the rapidly changing and diversified economic surroundings and in order to maintain fair decisions in individual cases. In an ideal world the law has not only to serve justice but should also provide an efficient framework in order to enable enterprises to maximise their profits. Therefore it cannot be too strongly emphasized that the civil law constantly needs to be adjusted. This is even more the case if we take into consideration the enormous complexity involved in certain areas of law, which certainly includes insolvency law. On one hand, it is therefore desirable to have a system within a legal framework which is flexible enough to meet continually the need of economic reality. In fact, this is a major argument against any statute law or statutory instrument in general, as opposed to extended judicial discretion of the courts in compliance with the rule of precedent. Turning to the cross-border insolvency law this theoretically speaks in favour of the unwritten common law rather than implementing a non-flexible or non-adjustable Regulation or any other statute law.

On the other hand any judicial discretion inevitably leads to a higher degree of uncertainty among the legal practitioners. If the legal structure is out-dated or inadequate then almost every issue becomes potentially contentious and shrouded in doubt. The crucial question is therefore whether the flexible system of cross-border insolvency rules is working sufficiently well, and how a regulatory statute such as the Regulation can effectively increase the economic efficiency of the present system.

All this is essentially connected with two pairs of antithetical propositions. One pairing juxtaposes the principle of ‘Unity of Bankruptcy’, ie one single unified process of administration, with its diametrical opposite – an acceptance of the possibility of plurality of proceedings, to be determined by the circumstances of the given case.¹³ The second pairing addresses the issue of the effects of insolvency proceedings opened under the law of a given state, and places the principle of ‘Universality of Bankruptcy’ in opposition to that of ‘Territoriality’. The former advances the claim that such proceedings enjoy worldwide – hence, ‘universal’ – effect over all property and interests of the debtor wherever these may be found.¹⁴ It is one aspect of this article to investigate whether there is a workable compromise that can be devised through a pragmatic combination of elements from all four leading doctrines. This might lead, as IF Fletcher has put it, ‘to an International Principle’,¹⁵ which is in other words simply a pragmatic approach of international cross-border cooperation.

Consequently, this leads to the key questions of what the merits of the Regulation are in comparison to the current cross-border insolvency law and what conflict of laws problems remain unsolved despite the Regulation. It will be analysed to what extent the Regulation has substantive effects for the participants, as the principle aim of the Regulation is to secure the simplification of formalities. The latter is supported by the fact that the Regulation, although making provision in relation to the jurisdiction to open (and the subsequent recognition of) insolvency proceedings, takes a conservative approach to the governing law of the proceedings. Any proceedings, whether main or secondary, are to be governed by the law of the state in which the proceedings are being conducted.¹⁶ In other words, English proceedings continues to be governed by the Insolvency Act 1986, and German proceedings by the new Insolvency Act (Insolvenzordnung, InsO) that came into effect on 1 January 1999.

With the Regulation just having come into force one has to be aware of even more diversified international cross-border insolvency rules. The Regulation is only applicable for insolvency proceedings where the centre of the debtor’s main interest, ie in the absence of proof to the contrary the place of the registered office, was situated within the European Union (intra-Community insolvencies)¹⁷. And even then, the Regulation leaves room for Member States to adopt their own rules with respect to third states, i.e. non EU Member States. Moreover, for all other companies which are registered outside the European Union, the current private international insolvency laws of the Member States continues to be applicable, regardless of the new Regulation. This means that some important cases, in particular as relates to US jurisdiction - such as Felixstowe Dock and Railway Co v US Lines Inc¹⁸ and Re Maxwell Communications Corporation plc¹⁹ - would not be covered by the new Regulation. For this reason, the following two Chapters will discuss the current English (Chapter 1) and German international insolvency law (Chapter 2), before turning to the new European Regulation on Insolvency Proceedings (Chapter 3). Comparative remarks are made in chapter 2 and 3 in order to indicate the main differences of the laws under consideration.

For both English and German law, the following issues will be examined in chapters 1 and 2:

The first part deals with the problem of jurisdiction in cross-border insolvencies (A). Secondly, issues of the applicable substantive law in English or German insolvency proceedings are discussed (B), before the international effects of these proceedings are analysed (C). Subsequently, attention is drawn to the recognition of foreign liquidations and their effects under English or German law (D) and the problem of concurrent liquidations (E). Special emphasis is finally given to international cooperation in multinational insolvencies (F).

Chapter 3 on the European Regulation on Insolvency Proceedings will first introduce the new law (A) and then highlight some essential parts which are likely to receive controversial discussion in the future (B). Some issues of the current and the new law are then compared (C). Finally, some important remaining conflict of laws problems, which have not been resolved by the Regulation, and which relate to English security rights such as the fixed and floating charge, will be discussed in detail (D).

Chapter 1: English Law

English cross-border insolvency law appears to be extremely incoherent and relies, as we will see, mainly on the common law. Only s 426 of the Insolvency Act 1986 deals expressly with cross-border insolvencies.²⁰ Apart from that English law overlaps with international law such as the European Regulation on Insolvency Proceedings.²¹ Additionally, the UNCITRAL Model Law²² provides, similar to the European Regulation, rules for recognition of judgments and cooperation between the courts and aims, in theory, at a worldwide effect.²³ The UNCITRAL Model Law can be transferred by UN Members into their respective national laws. Section 14 of the Insolvency Act of 27 July 2000 provides for the introduction of the provisions of the UNCITRAL Model Law into UK law.²⁴ Subsection (3) enables the Secretary of State to amend the existing law by statutory instrument whereby the provisions are not confined to the Model Law’s proposals. Whether the Model Law will ultimately be implemented in the UK and other UN member states remains to be seen.

A. Jurisdiction Of English Courts In Cross-Border Insolvencies

As regards the important question whether English courts have jurisdiction in cross-border insolvency cases, Article 1(2) sent. 2 of the Civil Jurisdiction and Judgments Act 1991, which is based on the Brussels Convention on the Recognition and Enforcement of Judgments in Civil Proceedings²⁵ specifically excludes insolvency matters. Article 3(1) of the European Regulation on insolvency proceedings provides jurisdiction only where the centre of the company lies within the EU, this centre being, in the absence of proof to the contrary, at the place of the registered office. Hence, in all cases where the company is registered outside the EU or sufficient evidence is presented that despite being registered in the EU the centre of its main interest is somewhere else, the different national rules regarding international jurisdiction have to be applied.

1. Winding up of English companies doing business abroad

Section 117(1)-(2) of the Insolvency Act 1986 provides that the High Court and, if the share capital does not exceed ₤120,000 also the County Court in concurrent jurisdiction, is competent to wind up the company. Registration within the UK is sufficient for establishing jurisdiction under Part IV of the Insolvency Act,²⁶ even if all or most of the company’s assets, functional operations, including its central control and management, are located abroad.²⁷

2. Winding up foreign companies in England

As regards to foreign companies, s 220(1) of the Insolvency Act defines all companies as ‘unregistered companies’ which are not registered in accordance with the Companies Act 1985. As a result, not only unregistered English entities but also all foreign companies are subject to a compulsory winding up procedure under English law.²⁸ Pursuant to s 221(4) of the Insolvency Act voluntary winding up procedure is excluded for the aforementioned companies.

The interpretation that the wording ‘unregistered companies’ includes in general all foreign companies is uncontested under English case law even if foreign companies have been registered in accordance with the laws of the state of incorporation.²⁹ This principle was nevertheless subject to a refinement over the years, in particular with respect to winding up an unregistered company under s 221(5)(c) of the Act, which enables an unregistered company to be wound up if the court is of the opinion that it is just and equitable that this should be done.³⁰

The provisions and limitations are as follows:

As concerns a foreign corporation which had been dissolved and extinguished in the country in which it was established, there is no statutory requirement for the jurisdiction of English courts in insolvency proceedings that the company had previously established a branch or other place of business in England.³¹ It was held that it was sufficient that there were assets of the company in this country, and that creditors of the company were presenting claims in England. This serves to indicate that business had formerly been conducted in England. In Re Azoff-Don Commercial Bank³² this rule was extended, as the dissolved Russian Bank had never had an office or place of business in England, but had carried out a number of mercantile transactions in this country.

In Re Compania Merabello San Nicholas SA³³, a further extension was made.³⁴ The foreign company in question did not appear to have undergone dissolution, nor had it otherwise ceased to exist according to the law of its country of incorporation. There was no evidence that the company had ever carried out any business in England, but it was technically necessary to wind it up in order to distribute the remaining assets based in England. Megarry J. stated that a proper connection with the jurisdiction must be established by sufficient evidence to show that the company has some assets within the jurisdiction and that there are one or more persons concerned in the proper distribution of the assets over whom the jurisdiction is exercisable.

An even further extension took place in the case of International Westminster Bank plc v Okeanos Maritime Corp³⁵ when Peter Gibson J. concluded that the English court has such jurisdiction even in respect of a foreign company which has no assets in the jurisdiction,³⁶ if there is a sufficient connection with England³⁷ and a reasonable possibility that benefits³⁸ will accrue to the company’s creditors (over whom the court could exercise jurisdiction)³⁹ from the winding up. Subsequently, it was held that the connection with England must be one of genuine substance, and not be only tangential.⁴⁰

Another limiting factor relates to the meaning of the term ‘association’ as used in s 220 of the Insolvency Act 1986. It has been held to bear a restricted meaning so as to denote such associations as are formed for gain or profit, and hence it does not apply to organised bodies such as sporting or social clubs or societies not conducted in the form of partnerships nor in such a way as to render their members liable over and above the amount of their individual subscriptions.⁴¹ Furthermore, an international agreement and the implementing measure can expressly confer ‘immunity from suit and legal process’, including insolvency proceedings, even if the organization was established to have ‘legal personality’ and the ‘legal capacities of a body corporate’.⁴²

Finally, a factor of limitation exists in the somewhat vague notion of jurisdictional abstention, i.e. if there is a more convenient forum to serve as the main centre for winding up purposes.⁴³ However, it is thought that forum non conveniens will rarely apply to an insolvency liquidation, for the concept of an English liquidation running in parallel with and ancillary to a main liquidation elsewhere is well established.⁴⁴

B. Substantive Law In An English Winding up

It has been acknowledged by English courts that in any winding up conducted pursuant to English legislation relating to insolvent companies, English law will apply as to matters of both procedure and substance.⁴⁵ This can be justified by the fact that many rules in insolvency law can properly be classified as procedural, and so fall within the orthodox principle of private international law that matters of procedure are governed by the lex fori (concursus).⁴⁶

The control exerted by the lex fori over the distributional process embraces such vital issues as the types of claim which qualify as provable debts, the question of the avoidance law to be applied in relation to antecedent transactions entered into with the debtor, the availability of any right of set-off for creditors of the insolvent company, and the ranking of different types of debt in terms of priority of payment. By parity of reasoning, English law regards any question of priority among creditors claiming in a foreign insolvency proceeding to be a matter for determination by the foreign lex fori. However, this rationale also enables an English court, in English proceedings, to disregard a different ranking in the hierarchy of priorities, to which a foreign creditor might be subject under the insolvency law of his or her country.⁴⁷ This is in large measure due to the fact that most of the relevant provisions of the Insolvency Act 1986 are drafted in terms which make no mention of any territorial limitations in relation to their intended scope, so that they can be read as applying to all situations, and as against all parties involved, regardless of any ties to other jurisdictions and their laws. Conversely, a rare exception is found in s 426(5) of the Insolvency Act 1986 requiring the court to have regard to the rules of private international law.⁴⁸

Hence, in Re Paramount Airways Ltd⁴⁹ the phrase ‘any person’, as used in s 238(2) of the Insolvency Act 1986 in relation to transactions entered into by a company, is not subject to any implied limitation as to its territorial effect and therefore applies to any person wherever resident, albeit the court emphasised that it rests with the discretion of the court to exercise jurisdiction only if the defendant is sufficiently connected with England. Significantly, it was for the court to decide whether to refrain from exercising its authority whether or not ‘[U]nder any relevant foreign law the defendant acquired an unimpeachable title free from any claims even if the insolvent had been adjudged bankrupt or wound up locally’.

Thus, it has to be stressed that the question whether the insolvency proceedings are subject to the jurisdiction of English courts is generally important to set the course not only in terms of the procedural law but also of the substantive law.

Nonetheless, in view of the seemingly paradoxical position whereby there can be a winding up in England of a company formed under the law of a foreign country – and, by English criteria of recognition, domiciled in that country and ultimately controlled by its law – it is pertinent to consider what adjustments will be made to the rule that English law applies as the lex fori to all aspects of English proceedings. Particularly, this is the case if the foreign company has all its assets outside the UK and conducts its main business in a foreign country. As a matter of fact, there have not been any indications so far in that direction. As Fletcher has put it⁵⁰: ‘The dominant consideration appears to be that, as a procedure that is entirely the product of statutory provisions in which the requirements of public policy are constantly to the fore, it would be unthinkable to attempt a fusion of legal cultures within the framework of an English liquidation.’ This concept of the English process has been upheld by the courts even when English proceedings took place contemporaneously as ancillary proceedings with a winding up in the country of incorporation.⁵¹ In Re Bank of Credit and Commerce International SA (No 10)⁵² the court ruled that even in the context of an internationally agreed arrangement for pooling of claims, it was not within the power of the court to disregard English insolvency law.

Nevertheless there are some exceptions from the powerful grip of the ‘lex fori’ rule:

First, the lex fori rule is inapplicable as far as the existence of a contract is concerned as opposed to its treatment in winding up proceedings. Rather, the former question is governed by The Rome Convention on the Law Applicable to Contractual Obligations⁵³, even if a party is being wound up which has been incorporated in a country which is not a party to that Convention.

Reference to the law which governs the obligation in question will also be necessary if this obligation is alleged to be unenforceable on account of some factor such as illegality, or the elapse of time under the applicable statute of limitations, or due to a discharge that, although ineffective under English law –⁵⁴ is effective according to the law which governs the discharge.⁵⁵

Furthermore, it may be necessary to refer to provisions of foreign law in order to establish the validity of any security which has been asserted by a creditor in the context of an international insolvency case. To determine the validity and effects of any transaction intended to give rise to some form of real security, English private international law takes as its starting point the law of the situs of the property at the time of the relevant events.⁵⁶

Reference to foreign law also becomes necessary if it is alleged that the company was non-existent at a relevant point in time, either because it was not founded according to the applicable system of law, or because it had undergone dissolution by operation of that very law.⁵⁷

The same necessity occurs if there is a need to ascertain the identity of the parties who are liable to make payments as contributories in the liquidation, or who are eligible to share in any surplus, under the English winding up of a foreign company.⁵⁸ Finally, foreign law can also apply to the validity of the appointment of any of the company’s officers or directors, eg when a director is acting as a representative to bind the company on its behalf.⁵⁹

C. International Effects Of An English Winding up

English cross-border insolvency law is based on the principle of universality. Therefore an English winding up is not confined to the company’s English activities and business operations, but is intended to constitute a collective, global administration of its entire undertaking⁶⁰ and will extend to all the company’s assets, both in England and abroad.⁶¹ In opposition to the principle of universality it is also acknowledged that this rule is subject to acceptance of this extraterritorial effect by any foreign country in which property of the company happens to be situated. Whatever English law may presume to say about the consequences of an insolvency adjudication that takes place in England, these cannot immediately take force somewhere else in the world except with respect to those items of property currently to be found within the territorial jurisdiction over which English law enjoys sovereign application. Everywhere else, the net outcome is determined by the laws of the situs, and therefore governed by the rules of private international law that are operative in that country.

In those cases where the company was originally formed and registered under English law, international recognition is likely to be at its widest. If the company’s central control and management has been exercised elsewhere than in England, however, this is likely to diminish the extent to which the proceedings will qualify for recognition under the laws of those countries which adhere to the ‘real seat’ theory for determining the governing law. A further attenuation of the extent of international recognition will take place where English courts exercise their jurisdiction to wind up a company formed under foreign law. For obvious reasons it is an important factor regarding the recognition whether any parallel proceedings take place in the country of incorporation. Equally, it might be an advantage if the company has previously been dissolved under the law of its state of incorporation, as there is a possibility that any continuing interest in the company’s affairs on the part of that legal system is small.

On the other hand, even if we assume that the standing of English liquidators may be recognised in principle, the local law may relegate his claim behind that of some other party, for example because the latter has succeeded in perfecting a security interest, or in completing a process of execution against the property, that is valid according to the law of the situs. Thus, the international effects of an English winding up in relation to the company’s foreign assets are subject to the control of the positive law of the situs.

Hence, even though a transaction or execution in question might be capable of avoidance according to the provisions of English insolvency law, these provisions cannot command extraterritorial effect and it is therefore left to the law of the situs to control the outcome of this contest. Particularly fatal to the liquidator’s prospects of enlisting the aid of foreign courts in a concrete way may be the abiding force of the public policy rule, as conceived under the law of the situs.⁶²

D. Recognition Of Foreign Liquidations And Their Effects Under English Law

1. General recognition

Just as the country of an individual’s domicile has been traditionally regarded by English law as the ‘natural’ forum for bankruptcy proceedings,⁶³ so in the case of companies the importance attached to the law of the country of incorporation in determining the essential qualities concerning the company’s birth, life and also its demise ensures that the English recognition rule looks primarily to the courts of that country to supply the forum for winding up.⁶⁴ This approach also reflects the view of English law that the domicile of a corporation is located, possibly immutably, in its country of formation. It follows therefore that winding up proceedings that have commenced in the country under whose laws the company was originally incorporated will be recognised in England. This would appear to hold true even in cases where the company’s central management and control are shown to be located in some other jurisdiction: the analogy with the statutory precept whereby the English court retains the competence to wind up any company registered in England and Wales is likely to provide a powerful argument for accepting the competence of the foreign court in a like situation. Following the state of incorporation doctrine, office holders will be accepted if they are appointed under the law of incorporation.⁶⁵

As regards to insolvency proceedings in a country other than that in which the company’s incorporation occurred, there has been no explicit authority so far, but it is likely that in England foreign proceedings may be recognised as ancillary proceedings, if the company’s main business has been conducted in the other country and winding up proceedings are already in progress in the country of incorporation. If there are no assets in England, nor any English creditors with interests to defend, recognition of foreign insolvency proceedings appears to be possible despite the company having been formed in England. Dissolution may be reserved to the Registrar of Companies.⁶⁶

The degree of uncertainty rises if the country of incorporation is not involved in any insolvency proceedings at all. In this respect it is unlikely that there is scope for a ‘reciprocal recognition’ of foreign judgments or orders. It is suggested that English courts retain an element of discretion whether to recognise liquidations which take place outside the country of incorporation.

2. Effects on assets situated in England

Even though a foreign liquidation is accorded recognition in the general sense, there are under English law no direct and automatic consequences in relation to any property of the company that happens to be situated in England.⁶⁷ Only in the case of individual bankrupts, movable property in England is able to become vested in the foreign trustee in bankruptcy.⁶⁸ The lex situs rule is even stricter as concerns real property: a foreign bankruptcy confers upon the foreign assignee no title to immovables in England.⁶⁹

Apart from that, any complementary rules of the foreign law whose effect is to cause the trustee’s title to relate back to an even earlier point in time, thereby defeating acts of diligence by creditors during the period immediately before the debtor’s adjudication, are unfortunately denied any extraterritorial effect over English assets.⁷⁰ Therefore, in some cases the liquidator’s efforts may be completely frustrated, with consequential loss to the estate in terms of costs and disbursements. Due to the fact that such an outcome is foreseeable for the liquidator he therefore will be very reluctant to challenge such acts of diligence, as he may not be able to justify the high costs of the litigation. This appears neither efficient nor just with respect to the general body of creditors, especially where it proves to be the case that the avoidance provisions of both systems of law, where they can be applied, are identically in treating the creditors’ acts as impeachable at the instance of the liquidator. In order to solve this inconsistency it is suggested that, first, the time which the foreign liquidator’s entitlement to the English assets is deemed to become effective should be backdated so as to coincide with the commencement of his appointment under the foreign law. Secondly, the powers of avoidance of antecedent transactions, and of cancellation of the benefits of incomplete executions, should be made available to a foreign liquidator whose general standing, and entitlement to claim property here, is recognised by English law.

3. Recognition and stay of English proceedings

An English winding up order automatically stays proceedings in England but the same is not true of an order in foreign proceedings.⁷¹ The court has a discretion to order a stay of English proceedings where there is a foreign liquidation or other insolvency process, but will only exercise this where it considers it appropriate to do so.⁷² In particular, it will not normally restrain a secured creditor from enforcing his security or otherwise inhibit the in rem effect on an asset of a judgment of a foreign court of competent jurisdiction.⁷³ The court, in the exercise of its in personam jurisdiction, may grant an order restraining an English creditor from pursuing proceedings abroad, eg by trying to attach foreign assets when the creditor has established his position in an English winding up.⁷⁴ But where the English proceedings are ancillary to a main liquidation abroad a court in England will not normally grant an injunction to restrain proceedings in the foreign liquidation, taking the view that it is for the foreign court to decide whether the action should be allowed to proceed.⁷⁵

E Concurrent Liquidations

Taking the intertwining of multinational companies into account it is clear that circumstances will arise in which the same company will simultaneously be wound up in two or more jurisdictions, of which England may be one. Although the basic English approach supports the principle of universality, it has not become an dogmatic policy. English law will still endeavour to achieve the goal of equality of treatment of all creditors as the net result of the insolvency process. Therefore a pragmatic view can be chosen to be as cost-effective as possible. While duplication of proceedings can be wasteful under some circumstances, at other times it may offer significant advantages in terms of efficiency and speed at the same time enhancing the value made available to creditors.

As far as the necessary co-ordination in concurrent liquidation is concerned there is no requirement that particular arrangements should be in place or be agreed in principle for an English court to be prepared to allow a winding up to take place in parallel with foreign proceedings involving the same debtor. Quite to the contrary, it may be the case that the fairest way in which to administer such assets as are subject to the control of the English court is to enable them to be distributed through a liquidation. This is certainly the case if foreign proceedings are destined to be conducted in a manner which unfairly discriminates against foreign creditors, or if they are so substantially dominated by claims of the local revenue authorities that a pooling of assets between the two administrations would risk violating the rule of English public policy that forbids the direct or indirect enforcement of foreign penal or revenue claims.⁷⁶

Due to the absence of any provisions in the past or current Companies Acts or in the Insolvency Act itself, the problem with concurrent liquidations can give a good example for how effective a flexible and discretionary system can work to produce an efficient solution in a particular case. The courts have shown that they will act upon the maxim that ‘what is not expressly forbidden may, if reasonable, be done’.⁷⁷ However, in general the country of incorporation has been the primary forum for proceedings which take place on a multi-jurisdictional basis. The principle that has regularly been applied is that the proceedings in the country of the company’s domicile – its state of incorporation – are regarded as the principal liquidation,⁷⁸ and any other courts are to act as ancillary, as far as they can, to the principle liquidation.⁷⁹ Not only has this proven to be cost effective⁸⁰ but also the best way of securing assets in the interim, without prejudice to enter subsequently into an arrangement to enable a pari passu distribution to take place, in which all creditors could participate.⁸¹

The lack of any formal statutory provisions has hitherto left the courts free to improvise, which they have done in a mostly constructive manner. Nonetheless, there is a degree of uncertainty due to the relative inaccessibility of case law, as opposed to legislation, when viewed form the standpoint of those operating outside the common law tradition. Therefore, it is advisable to incorporate the framework of concurrent liquidations into the law, whereby flexibility, through the retention of judicial discretion with regard to the final disposition of particular cases, should be retained. This still provides the courts with an effective instrument but also guarantees that its full potential may be more widely appreciated.

F. International Cooperation In Multinational Insolvencies

1. International Cooperation and ‘cross-border Protocols’

In an attempt to address many of the aforementioned issues arising out of multinational insolvencies, several judges and practitioners have suggested parties subject to international insolvencies practice a kind of ‘self help’ regime through the use of cross-border insolvency Protocols to obtain customised and speedy resolutions. Under English law these Protocols can also deal with the recognition of foreign receiverships⁸² and foreign rescue procedures.⁸³

(a) The Maxwell ‘Protocol’

After the much debated judgment in Felixstowe Dock and Railway Co v US Lines Inc⁸⁴, where judicial restraint in favour of cooperation was denied in order to protect English creditor interests, the earliest reported Protocol occurred in the Maxwell case.

The basic facts were as follows:⁸⁵ on 5 November 1991 Mr Robert Maxwell disappeared over the side of his boat and died. Maxwell Communications Corporation was an English holding company controlled by Mr Maxwell. Its principal assets consisted of shares in MacMillan Inc, Official Airlines Guide Inc and Berlitz International Inc being American registered companies. On 16 December 1991 the company filed a petition under Chapter 11 in the United States Bankruptcy Court for the Southern District of New York. The United States had jurisdiction on the grounds of the holdings in the American subsidiaries under 11 USC s 109(a). The effect of the presentation of the petition was to bring into operation an automatic stay on proceedings against the company according to 11 USC s 362. This in itself would not have prevented action being taken by creditors not subject to the jurisdiction of the Untied States court. On 17 December 1991 the company presented a petition to the Companies Court for the appointment of an administrator. On 20 December 1991 the court appointed three administrators. Later that same day Hon Tina L Brozman, United States Bankruptcy Judge in New York, ordered the appointment of an examiner under 11 USC s 1104(b).

The English administrators very soon recognised the very different culture and objectives under chapter 11, one very fundamental difference being that the very management who had to bear some responsibility for the company’s failure remained in office. The advice given by the administrators was that trying to terminate the Chapter 11 proceedings would be expensive, productive of delay with no assurance of success and certainly not in the immediate best interests of creditors. On both sides of the Atlantic it came to be appreciated that there was every reason to cooperate. Hence there came into being the so-called ‘Maxwell Protocol’ regulating the tasks to be carried out respectively by the English administrators and the US examiner. These tasks included the disposal of non-core assets, limits on authority to act without the approval of each other or the court, the raising of finance on the assets of the company, admission of creditors to proof and the equal treatment of interest on creditor’s claims.

Between them, it was possible for the English administrators and US examiner to co-ordinate a reorganisation plan, a scheme of arrangement which was overwhelmingly endorsed by creditors on both sides of the Atlantic. There was a practical recognition that the primary objective lay in achieving a global as opposed to territorial realisation of the debtor’s assets. Similar considerations of cooperation prevailed between Hoffmann J (as he then was) and Judge Brozman in the application of the extra-territorial effect of the respective insolvency laws of the United Kingdom and the United States. Ultimately, once the Protocol was approved, the Maxwell case disappeared from the English courts. Lord Hoffmann, speaking later extra-judicially, stated that ‘in general, the attitude of the court is that if the administrator’s business judgment is that doing something would be in the best interest of creditors, the court will accept that judgment’.⁸⁶

(b) Consequences of the Maxwell case

Since Maxwell a number of different Protocols have been developed.⁸⁷ Recently, Justice Farley, of Ontario’s Superior Court of Justice (Commercial List), who approved a 1995 Protocol in the Everfresh reorganisation again gave broad approval to the use of Protocols. He emphasized the need to co-ordinate concurrent bankruptcy proceedings to determine whether deferring to the other court on material issues more directly affecting that jurisdiction might be possible and with reciprocal treatment.⁸⁸ He further indicated that, through the use of the Cross-Border Insolvency Concordat and the Protocol developed in the Everfresh reorganisation, ‘there was a 40 per cent enhancement or preservation of value as a result of the use of the Protocol and the ensuing cooperation which it engendered amongst the parties’.⁸⁹ Justice Farley concluded that the successful resolution of complex international insolvencies must be effected through reliance on ‘skilled practitioners in the field to implement these proposals and generally to assist in these matters’.⁹⁰

The clear conclusion of Maxwell and all the following cases is that judicial restraint in favour of cooperation leads to efficiency in rescue proceedings. Admittedly, the facts of the individual case have to be analysed carefully in order to guarantee a pari pasu treatment of all creditors and to avoid a justification of rulings such as Felixstowe Dock and Railway Co v US Lines Inc⁹¹ where any cooperation was denied on the ground that the interest of English creditors should be protected. Additionally, the courts have to rely on skilled practitioners in order to achieve an efficient agreement. The invention of Protocols is definitely one of the advantages common law countries can offer as opposed to inflexible civil law systems as we will see below in chapter 3 F.

2. International assistance under Section 426(4) and (5) of the Insolvency Act 1986

Sometimes the courts of the UK may be asked by foreign counterparts to invoke their jurisdiction in the case of an overseas company’s insolvency. Section 426 of the Insolvency Act 1986 is the key provision in such a context. This section makes possible the enforcement of insolvency court orders throughout the UK. Furthermore, s 426(4) and (5) state that on receiving a request for assistance from a court of another part of the UK or of a relevant territory, English courts may invoke their insolvency jurisdiction.⁹² However, this provision operates in relation to a few states only.⁹³

The provision was first utilised in Re Dallhold Estates (UK) Pty Ltd⁹⁴ where the courts of Western Australia asked the English courts to appoint an administrator of a company incorporated in Western Australia which had assets located in the UK. The English court made an administration order in respect of a company incorporated in Australia. If it had not been for s 426, neither the Australian nor the English court could have made such an order. At the time, Australia had no form of administration procedure at all, while the English court could make an administration order only in respect of a company incorporated in England. However, Chadwick J held that the section conferred an original jurisdiction on the English court, which enabled it to make the order at the request of the Australian court even though the company was not incorporated in England. The consequence is that by virtue of the request the court can exercise a jurisdiction which neither court possesses alone.⁹⁵

These ‘ambidextrous powers’ of English courts were subsequently applied in Re Bank of Credit and Commerce International SA (No. 9)⁹⁶ where the court made orders under sections 212, 213, 214 and 238 of the Insolvency Act which would have been authorised (in the case of an English company) under its own law, and relied upon the letter of request of the court of the Cayman Islands to overcome the English limitation of purely domestic jurisdiction to companies incorporated in England. A remarkable effect of section 426 is that it exposes directors of a foreign company to potential liabilities under English law for activities which are perfectly lawful under the law of the company’s incorporation.⁹⁷

Additionally, the question arose - due to the absence of rules governing wrongful and fraudulent trading on the Cayman Islands - as to whether s 426 entitled the English courts only to invoke procedural rules of UK insolvency law (such as appointing an administrator) or whether it extended the application of substantive rules of English insolvency law to foreign companies where such application had been requested by the appropriate foreign court. Rattee J decided that substantive provisions such as those relating to wrongful and fraudulent trading, misfeasance or the avoidance of transactions at an undervalue may all be invoked if the foreign court seeks assistance.⁹⁸

As regards to the extent and the limitations of the assistance the Court of Appeal interpreted s 426(5) in the leading case of Hughes v Hannover.⁹⁹ That case involved a company which had been re-domesticated from the US to Bermuda and which had then gone into liquidation in that new jurisdiction. A request for assistance from the Bermudan liquidators, which took the form of a request to debar a German claimant from suing the company in the UK or in any other jurisdiction, was rejected by the English courts.

The judgment delivered by Morritt L J confirmed that the English court is not limited to granting relief in the exercise of its insolvency jurisdiction, and may also grant relief in the exercise of its general jurisdiction, such as a Mareva injunction. Section 426(10) defines ‘insolvency law’, but the only reference to insolvency law contained in section 426 is within ss (1), where it serves to identify the court authorised to provide assistance (any court in any part of the UK exercising jurisdiction in relation to insolvency law), not to identify the source of the jurisdiction it may exercise.¹⁰⁰ Generally, s 426(5) extends the ordinary jurisdiction of English courts in two ways: first, an English court may apply its own law or the law of the requesting court; and, secondly, an English court may assume that the matter specified in the request fall within its own jurisdiction if ‘comparable matters’ would do so.¹⁰¹

Moreover, Morritt L J also considered the nature of the discretion which s 426 confers on the court. He rejected both extreme views, the first being that the section is mandatory, so that if it is possible to give the assistance sought the court must do so.¹⁰² But he also rejected the equally extreme view that the only obligation imposed on an English court in this context is to entertain the application for assistance, everything else being a matter of complete and unfettered discretion. He held that the true position is that in principle the assistance should be given if, in accordance with the law to be applied, the relief sought can properly be given¹⁰³. Turning back to the facts of the case, the Court of Appeal concluded that the joint liquidators, based in Bermuda, were resorting to tactical use of the section 426 facility for the purpose of seeking a worldwide Mareva injunction against a party not amenable to the jurisdiction of the Bermudan courts. The court held that these circumstances were such that it would be inappropriate to grant an injunction of that kind, and discretion was accordingly exercised to refuse the assistance requested.¹⁰⁴ The court thereby took the view that the discretion of the court should be exercised in the way that ‘the particular assistance requested should be given unless there is some good reason for not doing so’¹⁰⁵ or ‘unless there is some compelling reason why that should not be done’.¹⁰⁶

This remaining degree of discretion expressed by Morritt L J has recently been contested in Re Southern Equities Corp Ltd.¹⁰⁷ In 1994, the liquidator of Southern Equities Holdings Limited (SEH) commenced proceedings in the Supreme Court of South Australia against Arthur Andersen seeking damages for negligence and breach of contractual, statutory and fiduciary duties in the conduct of the audit of SEH’s 1998 accounts. During the course of these proceedings, the liquidator requested that the Supreme Court of South Australia issue a Letter of Request to the Companies Court in London seeking the oral examination of Mr. Brian Smith – the Practice Managing Partner - under the provisions of section 426 of the UK Insolvency Act 1986. It was acknowledged by the Court of Appeal that the South Australian Court, in accordance with Australian law, would be likely to exercise its own existing discretion under section 596B of the Corporations Law to make an order for the oral examination to take place. The Court of Appeal granted the order notwithstanding the fact that a similar application under s 236 of the UK Insolvency Act would fail because there was potential for oppression of the witness.¹⁰⁸ It held that there is no discretion where the foreign court would clearly have made an order to facilitate the foreign liquidation. Instead the UK court has no option but to make a similar order to assist the process in the UK.¹⁰⁹

After Re Southern Equities Corp Ltd English law remains ambiguous in respect of whether or not there is a discretion under s 426(4) of the Insolvency Act.¹¹⁰ The wording ‘shall’ supports the recent ruling in Re Southern Equities Corp Ltd. Furthermore, the interpretation that the courts always retain some residual discretion is not supported by any discussions held in Parliament when the Bill was being debated, nor by any recommendations in the Cork Report, the precursor to the UK Insolvency Act.¹¹¹ It is hoped that the House of Lords will, at some stage, have the opportunity to clarify the position.

Chapter 2: German Law

The fundamental differences between a common law country such as England and a non- common law country such as Germany do not alter the fact that German cross-border insolvency law has to deal with comparable legal questions and problems, which will be discussed in this chapter.

German insolvency law is governed by the Insolvenzordnung, (Insolvency Act 1999) hereinafter referred to as InsO, and the Einführungsgesetz zur Insolvenzordnung (Introductory Act of the Insolvency Act 1999) hereinafter referred to as EGInsO. These statutes replaced a more complicated previous insolvency law system, which consisted of the Konkursordnung (former Insolvency Act) hereinafter referred to as KO, the Vergleichsordnung, VerglO (Law on Composition Proceedings) and the Gesamtvollstreckungsordnung (Collective Enforcement Act 1991 for the former parts of the German Democratic Republic) hereinafter referred to as GesO. Appendices to this article contains an English translation of the most relevant parts of German legislation.

As far as private international insolvency law is concerned, German law never had a differentiated, codified set of rules. Under the former KO, only § 237 and § 238 explicitly dealt with questions regarding cross-border insolvency issues. The GesO addressed this matter in § 22 of the GesO.

Although a sophisticated government draft which provided a specific chapter¹¹² for a new private international insolvency law (§§ 379-399 of the Regierungsentwurf InsO)¹¹³ was proposed as part of the InsO, this was not implemented due to expected conflicts with the draft European Convention. Rather than adopting the whole chapter, the legislator chose to limit its conflicts provisions to Article 102 of the EGInsO. Surprisingly, the current statute law of cross-border insolvency law in Germany is therefore confined to this single Article. As a result, the current German statute law has remained vague and limited in scope.¹¹⁴ Taking into account that the rules of the government draft failed to come into force, it is not possible for German courts to take advantage of the draft for guidance on how to develop or interpret the current law.¹¹⁵ This would disregard the legislative intention, which merely was to regulate a framework of core rules with Article 102 of the EGInsO in connection with the existing court authorities. The planned European Convention on Insolvency Proceedings was selected to determine all the details with effect for Germany and, moreover, it was intended to extend the Convention by means of national German law to all non-contracting states in the course of the ratification procedure.¹¹⁶ As a result of the failure to enact the European Convention, that extension never occurred, and it is unclear whether the new Regulation leads to such an extension. Even if the introduction of such rules to German law is feasible, it would presumably lack the necessary reciprocity and recognition in extra-Community cases and would therefore be ineffective.¹¹⁷ Obviously, Article 102 of the EGInsO itself is by no means sufficient to deal with extra-Community cases.¹¹⁸ As a matter of fact it cannot provide the necessary rules for all cases and need to be amended either by statute or developed by the courts.

A. Jurisdiction Of German Courts In Cross-Border Insolvencies

1. Jurisdiction for main proceedings

As we saw in chapter 1 A the factor of registration is sufficient under English law for the purposes of founding jurisdiction under Part IV of the Insolvency Act, even if all or most of its functional operations, including its central control and management, are located abroad. As far as foreign companies are concerned a genuine sufficient connection with England is required whereby, however, no assets have to be located in England.

Whether or not German insolvency courts have international jurisdiction in cross-border cases for opening main proceedings is subject to § 3 of the InsO. The wording of that section deals only with rules of local jurisdiction over insolvent German debtors (individuals and companies). However, under the principles of German international civil procedure law, local jurisdiction rules are extended by analogy to rules of international jurisdiction over non German debtors.¹¹⁹ Section 3 of the InsO contains two exclusive ways to establish the jurisdiction of German insolvency courts, whereby the second rule is invoked only if the primary rule does not apply.

The primary rule in § 3(1) sent. 2 is in contrast to the English rule of registration and provides that the court has jurisdiction at the place where the company has its ‘centre of independent economic interest’. The legislator thereby intentionally avoided the term ‘commercial establishment’ in order to cover the case where a company has more than one establishment. Assuming this scenario there can only be one ‘centre of the independent economic interest’ which is situated at the main establishment of the company. Where this main establishment is located is a factual question to be determined in each individual case.¹²⁰ This rule causes a complex problem as there is no definition or guidance as regards the meaning of the ‘centre of independent economic interest’. Therefore, it has to be decided by the courts what facts (eg business according to the balance sheet, turnover, number of employees etc) are appropriate to be considered, and how these factors will be evaluated in order to form the ‘centre of independent economic interest’.

The second rule applies only if the court cannot ascertain a ‘centre of independent economic interest’, and because of the broad wording ‘centre of independent economic interest’, there is hardly any scope for the second rule, in § 3(1) sent. 1 of the InsO, which provides jurisdiction at the place where the debtor is situated. According to § 17(1) sent. 2 of the Zivilprozessordnung (Civil Procedure Code),¹²¹ this is the seat of the company, which is in case of doubt again not the company’s registered office but the place where the company’s decisions are made and where the administration occurs. This is usually the place where the company’s head office is located. In practice, but not necessarily under German law, the head office and the company’s registered office are located at the same place. Consequently, considering § 3(1) sent. 2 of the InsO as the decisive test, German insolvency courts have to decline jurisdiction for opening main proceedings (but not necessarily for secondary proceedings) if a company has its ‘centre of independent economic interest’ abroad even if it has both its registered office and its head office in Germany. This implies that both local jurisdiction rules are fully extended by analogy to international jurisdiction rule in order to promote legal consistency and certainty. If only the first of these rules was extended to international jurisdiction, this would disregard the legislator’s intent to conduct the main proceedings where the centre of independent economic interest is located. In the aforementioned event German insolvency courts therefore have to decline jurisdiction in favour of the foreign court where the company has its ‘centre of independent economic interest’. Provided the provisions for opening secondary proceedings are fulfilled (see below) the court may interpret the application for opening main insolvency proceedings as an application to open secondary proceedings. This point has not been decided by the courts but it is suggested that this is not a violation of § 4 of the InsO in conjunction with § 308(1) of the ZPO – (i.e. the rule which limits courts to those decisions for which at least one part has applied) - because the application for opening main proceedings implicitly includes also the opening of secondary proceedings as a less wide application.

2. Jurisdiction for secondary proceedings

(a) Ordinary secondary proceedings

As regards to jurisdiction for secondary proceedings, German law underwent a substantial change with the enactment of the new insolvency law in 1999. Secondary proceedings within the meaning of Article 102(3) of the EGInsO are basically independent proceedings intitated after foreign main insolvency proceedings have been opened. Secondary proceedings have in principle no effect on main proceedings in a different jurisdiction and vice versa. Secondary proceedings are strictly confined to assets located in Germany. Article 102(3) of the EGInsO facilitates the opening of secondary proceedings by waiving the burden of proof required by §§ 17-19 of the InsO as regards to the illiquidity or impending illiquidity of the debtor (Zahlungsunfähigkeit or drohende Zahlungsunfähigkeit) or its overindebtedness (Überschuldung) in order to open insolvency proceedings in Germany.¹²² The opening of foreign main insolvency proceedings leads to an irrefutable presumption of facts regarding these necessary provisions to open insolvency proceedings under German law.¹²³ Surprisingly, Article 102 of the EGInsO does not contain any rule how the secondary proceedings should be conducted in practice,¹²⁴ and there has not been any authority as regards to the procedure yet. However, it can be expected that the insolvency courts will draw cautious analogies to Articles 27-38 of the EU-Regulation notwithstanding the fact that it is formally inapplicable to extra-Community cases.

It has been argued that § 3(1) of the InsO cannot provide international jurisdiction for secondary proceedings in Germany because the debtor is necessarily situated in a foreign country.¹²⁵ According to the wording of § 3(1) of the InsO this is certainly true, but it is essential to take into account that the international jurisdiction can be derived directly from Article 102(3) of the EGInsO itself. Article 102(3) implicitly assumes the international jurisdiction for secondary proceedings in Germany, for otherwise the provision would be totally ineffective and would not fulfil its intended purpose.

Under the previous law, § 238(1) of the KO gave German insolvency courts jurisdiction only if the debtor company, which did not have its principal place of business in Germany, had an establishment or managed a property in Germany as owner, user or lessee. This provision is currently also implemented in Article 3(2) of the Regulation to open secondary proceedings in intra-Community insolvency cases.¹²⁶ Conversely, outside the scope of the Regulation, pursuant to Article 102(3) of the EGInsO any assets within Germany suffice since 1 January 1999 to open secondary proceedings in Germany.

On the contrary, there is a restrictive interpretation as regards to § 14 InsO. In essence any application for opening insolvency proceedings is admissible only if the creditor has a ‘legal interest’ for opening the proceedings. Moreover, secondary proceedings demand a ‘special legal interest’ if main proceedings have already been opened.¹²⁷ What ‘special legal interest’ means is not defined in the InsO but it has correctly been suggested that the application of a creditor is admissible only if there is at least a reasonable probability that it would be disadvantageous for the creditor with respect to the foreign main proceedings if domestic secondary proceedings in Germany were not opened.¹²⁸ In other words, any benefit for the creditor such as reduced legal costs or a faster realisation of assets is sufficient to open secondary proceedings. On the other hand, it is has been argued, with which I agree, that there is no need to show additionally a ‘close connection’ to the German forum.¹²⁹

(b) Independent territorial proceedings

This leads to the question whether German courts can open so-called independent territorial insolvency proceedings (Partikularinsolvenzverfahren). Independent territorial insolvency proceedings are also defined as local insolvency proceedings confined to German assets only which are initiated without or prior to the opening of main insolvency proceedings elsewhere.¹³⁰

Article 102 of the EGInsO does not answer that question. The better arguments speak in favour of allowing independent territorial proceedings, for otherwise every German creditor would be forced to apply for the opening of main proceedings in a foreign country first.¹³¹ Apart from the fact that German law cannot expect their citizens to seek legal protection in a foreign jurisdiction as a requirement for opening national proceedings, Article 102 of the EGInsO has been developed on the basis of § 22 of the GesO which provided for independent territorial proceedings. The same is true for the EU-Regulation where this is explicitly dealt with according to Article 3(4). At any rate, it should be noted that, other than for ordinary secondary proceedings, proof is necessary as regards to the insolvency of the debtor, §§ 17-19 of the InsO.

B. Substantive Law In A German Winding Up

In principle, only German law is applicable to German insolvency proceedings. This is not only true as far as the procedural law is concerned but also in all matters of substance. From this rule there are exceptions, for instance, regarding the existence of a contractual claim as opposed to its treatment in winding up proceedings. As for English law, this conflicts question is governed by the Rome Convention on the Law Applicable to Contractual Obligations.¹³²

Another important exception can be found in Article 102(2) of the EGInsO which includes special conflict rules on the law which governs setting aside antecedent transactions. However, the wording of Article 102(2) covers no more than the actio pauliana, thus leaving the development of any further exceptions to the courts.

Transactions pursuant to Article 102(2) are avoidable only if the provisions of the avoidance rules of both the opening state of the insolvency proceedings (lex concursus) and of the state whose law, according to German conflict of laws rules, is applicable for the transaction in question (lex causae) are fulfilled.¹³³ Assuming, for instance, an insolvent German debtor conveys its property or an interest in land which is located in England at an undervalue in order to prefer a creditor, the right of the liquidator¹³⁴ to avoid the fraudulent transfer of property will cumulatively depend upon the avoidance rules of Germany as the opening state of the insolvency proceedings and of the provisions under English law as the applicable law of the situs (Kumulationslösung). The transaction will be declared as a voidable transaction at an undervalue only if both legal systems share this view.

Originally, the reform discussions and the legislative project merely intended to increase the protection of security of transactions as regards to acquisitions in good faith of rights to land.¹³⁵ In order to correspond to an initial draft of the European Convention on Insolvency Proceedings the German legislator eventually explicitly extended the cumulative concept to all transactions.¹³⁶ This leads inevitably to unnecessary and severe difficulties for all office holders as far as the avoidance of international transactions is concerned. In contrast to English conflicts law under which avoidance is governed by the lex fori only,¹³⁷ there is a higher degree of uncertainty under German law concerning the applicable law for the insolvency practitioner and room for fraudulent transactions due to dissimilarities resulting from foreign avoidance laws which are less strict than German law. The advantage of English law is best displayed in Re Paramount Airways Ltd¹³⁸ where the phrase ‘any person’, as used in s 238(2) of the Insolvency Act 1986 in relation to transactions entered into by a company, is not subject to any implied limitation as to its territorial effect and therefore applies to any person wherever resident.

By extending the cumulative concept to all transactions in Article 102(2) of the EGInsO, the German legislator jumped to conclusions. The anticipated conflicting European rule was never adopted, and neither the unratified European Convention nor the Regulation support such a cumulative approach. Article 4(2)(m) of the Regulation provides for the lex concursus, unless the party disputing avoidance provides proof in accordance with Article 13 of the Regulation to the contrary. In order to do so, proof is required 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 the former law does not allow any means of challenging the transaction in question.¹³⁹ Additionally, both scholarly writing¹⁴⁰ and the Bundesgerichtshof¹⁴¹ (Federal Court of Justice) have always been in favour of the lex concursus rule to determine the applicable law. Therefore, it is submitted that the current law in Article 102(2) of the EGInsO will be aligned as soon as possible to the aforementioned European provision in order to achieve the initially intended purpose of legal unity and to establish legal certainty as regards international avoidance law.

C. International Effects Of A German Winding Up Order

Just as under English law, German courts have consistently held that the opening of insolvency proceedings has universal effect. The Reichsgericht¹⁴² (Supreme Court of the German Reich) and nowadays the Bundesgerichtshof¹⁴³ have always emphasized that if insolvency proceedings have been instituted against the assets of a company the effects of the court orders are not limited to German territory. As a result, all assets of the company in foreign countries are part of the estate provided the assets are subject to the enforcement law under the law of the situs.¹⁴⁴ These principles are now expressly mentioned in §§ 35, 36 of the InsO.

Consequently, the opening of the proceedings¹⁴⁵ lead to a restraint of alienation (Veräußerungsverbot) affecting not only the domestic assets but also all foreign assets according to § 80(1) of the InsO.¹⁴⁶ For the purpose of German insolvency law, this remains effective whether or not the foreign law recognizes the transfer of property after the opening of proceedings.¹⁴⁷ In order to secure the debtor’s assets the court regularly appoints an interim or temporary insolvency administrator (vorläufigen Insolvenzverwalter) according to §§ 21, 22 of the InsO before proceedings are opened. According to the Bundesgerichtshof the restraint of alienation of foreign assets does not affect the sovereignty of the foreign state because it is ultimately the foreign state which can decide whether or not to recognize this effect.¹⁴⁸

Thus, similar to English law¹⁴⁹ and in opposition to the principle of universality, it is acknowledged under German law that any international effects depend upon extraterritorial acceptance within any foreign country in which property of the company happens to be situated.¹⁵⁰ Consequently, it is determined by the law of the situs, and therefore governed by the rules of private international law that are operative in that country,¹⁵¹ whether or not it is possible to enforce eventually a court decision outside the German territory.

This is particularly important with respect to the question whether the German interim insolvency administrator is entitled to take possession of the debtor’s assets situated in a foreign country.¹⁵² According to national German law, § 22(1) of the InsO, and more importantly in all intra-Community cases pursuant to Article 38 of the Regulation¹⁵³, an interim insolvency administrator is empowered to take possession in order to secure the debtor’s assets.¹⁵⁴ Taking the scope of the Regulation into account, the law of the situs is now relevant for extra-Community cases only.

Another question which arises in this context is whether the liquidator is entitled to take measures which are either not dealt with or even prohibited under German law, but to which the liquidator is entitled under a foreign situs law. According to the OLG Saarbrücken¹⁵⁵ German insolvency law cannot have wider effects in cases with foreign elements than in purely domestic cases. Nevertheless, this does not answer the question whether the liquidator can conversely take advantage of the preferable foreign law itself.¹⁵⁶ As German law refers to the principle of universality in order to increase the assets it would be anomalous for German law to prevent the liquidator from filing an action in a foreign country which would not be permissible in Germany. It would also appear wrong to hold the liquidator liable¹⁵⁷ for taking measures in accordance with a foreign situs law, even if the measures taken are not dealt with or explicitly prohibited under German law. It is suggested that this is subject to one limitation, namely that German office holders are bound to respect German rules on exemption of property from execution even where the property is situated abroad, and regardless of whether the foreign law does not recognize a similar exemption.¹⁵⁸ This should be the only restriction for the German office holder as regards foreign law where it is applicable. As a result, German liquidators can, for instance, apply for a Mareva injunction¹⁵⁹ in order to take immediate possession of the debtor’s assets, regardless of the fact that there is no true equivalent under German law.

D. Recognition Of Foreign Liquidations And Their Effects Under German Law

1. Legal situation until 1985

Until a landmark decision which the Bundesgerichtshof handed down on 11 July of 1985¹⁶⁰, although German insolvency proceedings were regarded as having universal effect, foreign insolvency proceedings were regarded as having only territorial effect.¹⁶¹ Therefore, foreign insolvency orders were not recognised in Germany at all.¹⁶² The foreign liquidator was recognised as the legal representative of the debtor, but his actions on the basis of the foreign insolvency order were not recognised in Germany.

. Legal situation from 1985 onwards

The basic facts of the aforementioned ruling by the Bundesgerichtshof were as follows: a company ran a beverage business in Belgium and Germany. The headquarters was located in Germany in the form of a German registered limited commercial partnership with a limited liability company as general partner (GmbH & Co KG). The Belgium subsidiary dealt with the production of fruit juices. The German parent company registered a SPRL (Société de personnes à responsabilité limitée) in Belgium, which was later subject to winding up proceedings. Apart from receivables against the German parent company which resulted from fruit juice sales, the SPRL had no assets outside the Belgium territory. The key question for the Bundesgerichtshof was whether the Belgium liquidator was entitled to take advantage of the receivables which were legally situated in Germany, as the debtor was a German registered company.¹⁶³

Turning to the reasons for the judgment, the Bundesgerichtshof held that the Belgium liquidator was entitled to take advantage of the receivables against the German parent company and thereby extended the principle of universality to foreign insolvency proceedings. The foreign insolvency order was recognised subject to certain restrictions. In principle, the foreign decision is automatically recognisable without the need of further formalities, as opposed to other foreign decisions by a court for which according to § 328 and §§ 722, 723 of the ZPO a court decision for enforcement (Vollstreckungsurteil) is required. A foreign insolvency order will have the same effect in Germany as under the law of the state in which the order was made. The same rule also applies for a compulsory composition.¹⁶⁴ In other words, the legal consequences of foreign insolvency orders are in general solely determined by the foreign insolvency law.¹⁶⁵ Unlike under English law¹⁶⁶ the foreign order has, therefore, direct and automatic consequences and enables a foreign liquidator to take action in respect of all assets situated in Germany.¹⁶⁷ Consequently, the foreign liquidator is entitled to claim all the debtor’s German assets in order to increase the assets provided there are no insolvency proceedings pending in Germany.¹⁶⁸ Whether or not the debtor is entitled to set-off against claims of the foreign liquidator is only subject to the foreign law under which the order was made.¹⁶⁹

The reason behind the new direction of the Bundesgerichtshof was a very obvious one. The court argued that the basic principle which supported universality was to avoid any kind of creditor discrimination in the course of insolvency proceedings, and that this was not only valid for Germany itself but also internationally for cross-border cases.¹⁷⁰ If German law claims worldwide recognition for all national insolvency orders it is only just to recognise all foreign insolvency orders to be able to treat all creditors of the debtor in an equal way.¹⁷¹

As regards to the current law under Article 102(1) of the EGInsO, the general principles of the ruling by the Bundesgerichtshof¹⁷² were adopted as far as the boundaries of recognition are concerned (see section (b) below). According to the ruling of the Bundesgerichtshof a foreign insolvency decision can be recognised only if it keeps within these boundaries of recognition but also fulfils three additional aspects itself (see section (a) below). Due to the restrictions which are clarified below, it appears more appropriate to speak of a limited principle of universality¹⁷³ rather than speaking of a pure universal approach.

(a) Aspects in terms of the foreign order

The foreign insolvency order must comply with the following conditions: first, the order must have been made in accordance with the foreign law governing the insolvency. Second, the foreign liquidator must be authorised under the law governing the insolvent company to administer and dispose of foreign assets, and, finally under the law governing the insolvency the order must have effect on all the debtor’s assets, wherever situated.

(b) Boundaries of recognition

To be recognised in Germany pursuant to Article 102(1) of the EGInsO, three additional conditions have to be complied with.¹⁷⁴ First, the foreign proceedings must qualify as ‘insolvency proceedings’ in accordance with German law. Generally, the proceedings must provide some form of collective procedure usually, but not exclusively, by way of liquidation and distribution of assets.¹⁷⁵ Second, the foreign insolvency court must have jurisdiction over the debtor under the rules of German international insolvency law.¹⁷⁶ Third, Article 102(1) sent. 2 protects the German public as recognition is only granted if the recognition does not contradict German principles of public policy.¹⁷⁷ On the other hand, and in contrast to the recognition of other foreign decisions under the general provision of § 328(1) sub-para 5 of the ZPO, recognition of foreign insolvency orders does not depend upon reciprocity.¹⁷⁸

Turning to the public policy rule in detail, it has to be pointed out that the Bundesgerichtshof did not stay within the limits of the ordinary public policy rule. Ordinarily, the recognition of the foreign law complies with the German public policy rule if the effects are not repugnant to the main principles of German law, which include in particular constitutional human rights. The Bundesgerichtshof expanded the public policy requirements for the automatic recognition of foreign insolvency orders to include such orders which do not comply with the overall structure of German insolvency law.¹⁷⁹ However, this additional public policy requirement cannot be found in Article 102(1) sent. 2 EGInsO, which was enacted subsequently (1/1/99) to the above-mentioned judgment. The new law clearly adopts the general public policy rule, i.e. without reference to structure of German insolvency law. As a result, the Bundesgerichtshof is bound by Article 102(1) sent. 2 and cannot in an undifferentiated way consider the whole German insolvency law as part of the public policy rule, or read a similar unwritten provision into Art. 102.

3. Recognition of foreign orders of discharge

As far as the recognition of foreign orders of discharge¹⁸⁰ and the recognition of foreign rescue and composition proceedings including the discharge of the debtor¹⁸¹ are concerned, these follows basically the aforementioned rules. The discharge has primarily to comply with the requirements of the public policy rule of Article 102(1) sent. 2 EGInsO.¹⁸² As a part of this, recognition is, additionally, dependent upon whether according to the law of the situs foreign creditors have the right to participate in local proceedings. The fact that their rights are not protected if they do not prove is irrelevant.¹⁸³ Provided all conditions are fulfilled the debtor can in future, according to the Bundesgerichtshof¹⁸⁴, rely on the discharge even if he moves from the discharging country to another jurisdiction.¹⁸⁵ It is likewise irrelevant whether the law applicable to the obligation in question (Schuldstatut) accepts the discharge, because the latter is, in order to treat all creditors equal, immaterial for the recognition of the discharge.¹⁸⁶ In contrast, Article 17(2) sent. 2 of the Regulation grants recognition for a discharge in secondary proceedings (Article 3(2) of the Regulation) only in the case of those creditors who have given their consent to any restriction of creditors’ rights.¹⁸⁷

4. Recognition of foreign insolvency proceedings and its effects on pending lawsuits

With the principal recognition of foreign insolvency proceedings the question emerges whether the opening of insolvency proceedings (eg in England) lead to a stay of pending civil proceedings (not insolvency proceedings) in Germany which are related to the insolvent’s estate. According to § 240 of the ZPO related civil proceedings are stayed until the (local) insolvency proceedings are terminated. This has the effect that any assets which are part of the insolvent’s estate cannot be subject to an execution by a single creditor. It is essential to realise that in the international context, this question is - despite the recognition of the foreign insolvency proceedings –to be determined by German law alone.¹⁸⁸ The extent as regards the effects of the recognition are generally still governed by the lex fori rule¹⁸⁹, whereas § 240 of the ZPO, according to recent court authorities, has to be interpreted that it has the same effect (stay of civil proceedings) independently of whether local or foreign insolvency proceedings are opened.¹⁹⁰ As we have seen, English law takes the opposite view in order to protect English creditor interests.¹⁹¹

The German rulings are in line with the 1985 judgment,¹⁹² which thus lead the Bundesgerichtshof to distance itself from previous judgments which denied any effect of the opening of foreign insolvency proceedings on locally pending civil proceedings.¹⁹³ Article 15 of the new Regulation is based on the lex fori rule as well which is why the ruling of the Bundesgerichtshof and the opposing position under English law is in the future not only relevant in extra-Community cases but also in intra-Community cases when applying Article 15 of the Regulation.

E. Concurrent Liquidations

As far as concurrent liquidations are concerned the judgment of the Bundesgerichtshof¹⁹⁴ does not deal with the question which proceedings prevail. As it was held by the Court, foreign and local insolvency proceedings can have both universal effect. Consequently, there is scope for more than one forum to conduct insolvency proceedings. In the past it has been argued that the moment of the first petition to issue insolvency proceedings decides whether there is scope for any foreign insolvency proceedings apart from German insolvency proceedings.¹⁹⁵ In case German insolvency proceedings had been issued prior to the foreign proceedings the latter were denied any recognition as regards German assets.¹⁹⁶

The fragmentary wording of the new Article 102,(3) of the EGInsO explicitly mentions no more than that the recognition of foreign insolvency proceedings does not prevent secondary German insolvency proceedings which are confined to German assets only. But what is likely to happen if, for instance, German insolvency proceedings are opened and foreign proceedings, for instance in England, are subsequently opened in order to take advantage of assets situated in England? The solution lies in § 3(1) of the InsO and Article 102(3) of the EGInsO which deals with jurisdiction.¹⁹⁷ As we have seen the order to open insolvency proceedings in England will be recognised by German courts only if English courts have jurisdiction for opening either main or secondary (ancillary) proceedings.¹⁹⁸ As a result, foreign main insolvency proceedings are not be recognised if a German court holds that the centre of independent economic interest according to § 3(1) sent. 2 of the InsO was located in Germany. If a German court opens secondary insolvency proceedings, foreign main insolvency proceedings can, in principle, be recognised under German law. Admittedly, this case is not explicitly governed by the wording of Article 102(3) of the EGInsO. Nonetheless, this seems to be the only sensible way to fill this gap by way of analogy, whereby it is essential to take into consideration that in any case the effects of secondary proceedings in Germany prevail against anyforeign proceedings as regards German assets, even if foreign proceedings were opened prior to the German proceedings, as the principle of priority does not apply¹⁹⁹ (so called ‘controlled universality’).²⁰⁰ The principle of ‘controlled universality’ is, therefore, another important source of limitation as regards the recognition of foreign insolvency proceedings.²⁰¹ Provided a German court has international jurisdiction and opens main or secondary insolvency proceedings, this guarantees that only German law is applicable for German assets and that foreign orders are not recognised to the degree that they relate to German assets. In fact, this is a concession in favour of the territorial approach which was made in order to protect local creditor interests. This compromise will also govern all future intra-Community cases according to Articles 27-38 of the Regulation.

If we further assume that an English court opens main insolvency proceedings without having jurisdiction under German jurisdiction rules, it seems possible in practice to interpret these non recognisable main insolvency proceedings as secondary proceedings provided they deal only with assets situated in England. As long as the foreign office holder does not claim assets situated in Germany there is no reason to deny recognition.

F. International Cooperation In Multinational Insolvencies

Past experience shows that multinational cooperation has been particularly difficult in the area of cross-border insolvencies. German insolvency practitioners and courts have not committed themselves to the same degree of cooperation as countries with a common law background. A good example in that respect is the liquidation of Lancer Boss and Steinbeck Boss in 1994.²⁰² Instead of negotiating a joint sale for the two interdependent operations with his English counterpart, the German receiver denied any cooperation and sold the German arm to Jungheinrich. Lancer Boss was subsequently also bought by Jungheinrich, whereas it is believed that the price for a joint sale would have been higher for the benefit of all creditors.²⁰³

1. Cooperation as regards main and secondary insolvency proceedings

With the introduction of main and secondary insolvency proceedings according to Article 102(3) of the EGInsO the situation has certainly improved. Nevertheless, difficulties in terms of cooperation are likely to be expected between main and secondary insolvency proceedings. According to Article 102(3) of the EGInsO no explicit rules exist as regards to cooperation but it seems likely that the courts will draw analogies to Articles 27-38 of the EU-Regulation until it enters into force in 2002 and beyond that point in all extra-Community cases.

Additionally, and to support these analogies, some fundamental principles can be derived from the context of Article 102 of the EGInsO and the InsO itself. The fact that the law regulates secondary proceedings and generally recognises foreign insolvency proceedings inevitably means that a certain degree of cooperation is intended. The absence of clearly defined rules leads to the question what basic cooperation rules will German courts and liquidators have to abide by, and to what extent will these rules develop in practice.

What German courts certainly have to accept is the right of the foreign office holder to apply for any regular order in German main or secondary insolvency proceedings (eg measures to secure and preserve German assets). This right is a logical consequence of the fact that German law recognises foreign insolvency proceedings with universal effect including all German assets, as long as German secondary proceedings have not been opened according to Article 102(3) of the EGInsO.

After the opening of German secondary insolvency proceedings, the current law, unlike the EU-Regulation, does not explicitly grant the foreign office holder substantial rights. Nevertheless, the German liquidator is under a duty, pursuant to § 58(2) of the InsO, to provide the foreign office holder with information regarding German proceedings. Furthermore, he has to consult the foreign liquidator and to consider the situation of foreign proceedings during a period of administration and, more importantly, before the liquidation of important German assets.²⁰⁴This becomes even more important if one takes into account that all the foreign creditors are entitled to participate in the secondary proceedings. If the liquidator does not comply with these duties, he will be liable under § 60(1) of the InsO for damage caused by this failure.

2. German law and ‘Protocols’

Experience shows that the stipulation of ‘Protocols’²⁰⁵ between the office holders under the supervision of the courts has proven to be extraordinarily effective, and this practice is now are regarded as an highly valuable method of cooperation.²⁰⁶ In essence the ‘Protocol’ is for English courts a way to structure its procedure. However, experience with such ‘Protocols’ is almost exclusively limited to Anglo-American cases, and it is far from obvious how these could be integrated into German insolvency proceedings.

Under English law it may not seem unusual to use ‘private’ agreements like ‘Protocols’ to overcome the lack of international treaties or specific conflict of laws rules, but the same cannot be said for countries without a common law background. While judicial cooperation has worked successfully in a number of cases, judges are generally bound by their national laws and have only limited room for manoeuvre.²⁰⁷

Under German law this form of judicial discretion is not available.²⁰⁸ As far as German law is concerned, Article 20(3) of the Constitution (Grundgesetz) forces the judge to abide by statute law and restricts his powers to develop the law, in the absence of judicial discretion, to exceptions only. Neither the new InsO nor other statute law deal expressly with ‘Protocols’. Judges generally have no discretion to embark upon legally unstructured communications with foreign judges in order to delineate each other’s jurisdiction and relief powers in a ‘Protocol’, as it was practised in the Maxwell case.²⁰⁹ Paulus has recently suggested to allow for such discretion by way of analogies,²¹⁰ but that suggestion should be rejected as one essential requirement for an analogy is lacking, namely the unintentional gap in the current law (planwidrige Regelungslücke). From a methodological point of view such an exception can be permitted only if the existing law is incomplete. In other words, the courts can fill a gap in the law only if the legislator by mistake overlooked the problem or deliberately left it open for the courts. Obviously, that is not the case if, as we have seen, the existing law provides rules to deal with the problem. The fact that the existing law might be insufficient in terms of cooperation cannot justify courts developing a new way of cooperation, or to rely upon a discretion which they do not have as a matter of law. Furthermore, the legislator just enacted a new insolvency law and must have been aware of the inadequate rules, for the German and the Finnish legislator launched the legislative procedure towards the EU-Regulation but nevertheless did not provide cooperation rules which allow for the stipulation of ‘Protocols’. Consequently, the future use of ‘Protocols’ in Germany depends upon an enabling Act of Parliament. It is certainly one disadvantage of a codified law system such as the German that German courts, unlike English courts, cannot simply act upon the maxim that ‘what is not expressly forbidden may, if reasonable (eg efficient), be done’.²¹¹ It is therefore suggested that the German legislator enacts as soon as possible the necessary rules in order to be able to make use of Protocols in all multinational insolvency cases.

Chapter 3: European Council Regulations of 29 May 200 on Insolvency Proceedings

A. Contents Of The Regulation On Insolvency Proceedings

1. Principles and scope of the Regulation

The European Regulation on Insolvency Proceedings came into force on 31 May 2002.²¹² Its aim is to secure the simplification of formalities governing the reciprocal recognition and enforcement of court decisions and tribunals in insolvency proceedings, which have an intra-Community dimension. Un

Oxford University Comparative Law Forum

Cross-Border Insolvency under English and German Law

by Michael Bütter1

Table of content

Introduction

Chapter 1: English Law

A. Jurisdiction Of English Courts In Cross-Border Insolvencies

1. Winding up of English companies doing business abroad

2. Winding up foreign companies in England

B. Substantive Law In An English Winding up

C. International Effects Of An English Winding up

D. Recognition Of Foreign Liquidations And Their Effects Under English Law

1. General recognition

2. Effects on assets situated in England

3. Recognition and stay of English proceedings

E Concurrent Liquidations

F. International Cooperation In Multinational Insolvencies

1. International Cooperation and ‘cross-border Protocols’

(a) The Maxwell ‘Protocol’

(b) Consequences of the Maxwell case

2. International assistance under Section 426(4) and (5) of the Insolvency Act 1986

Chapter 2: German Law

A. Jurisdiction Of German Courts In Cross-Border Insolvencies

1. Jurisdiction for main proceedings

2. Jurisdiction for secondary proceedings

(a) Ordinary secondary proceedings

(b) Independent territorial proceedings

B. Substantive Law In A German Winding Up

C. International Effects Of A German Winding Up Order

D. Recognition Of Foreign Liquidations And Their Effects Under German Law

1. Legal situation until 1985

. Legal situation from 1985 onwards

(a) Aspects in terms of the foreign order

(b) Boundaries of recognition

3. Recognition of foreign orders of discharge

4. Recognition of foreign insolvency proceedings and its effects on pending lawsuits

E. Concurrent Liquidations

F. International Cooperation In Multinational Insolvencies

1. Cooperation as regards main and secondary insolvency proceedings

2. German law and ‘Protocols’

Chapter 3: European Council Regulations of 29 May 200 on Insolvency Proceedings

A. Contents Of The Regulation On Insolvency Proceedings

1. Principles and scope of the Regulation

by Michael Bütter¹