5 Jul, 2017
In an article first published by LexisPSL, Stefan Ramel examines the various issues raised in Vinyls Italia v Mediterranea di Navigazione and looks at how the European Court of Justice interpreted Article 13 of the EC Regulation on Insolvency.
Interviewed by Robert Matthews:
The European Court of Justice gave a preliminary ruling that a payment made by an insolvent company before it went into liquidation could not be set aside if, under Article 13 of Regulation (EC) 1346/2000 (the EC Regulation on Insolvency), a person benefiting from the payment could show that the payment was subject to the law of a Member State other than where the insolvency proceedings had opened and, where that law made it possible to challenge the payment, the conditions to be met in order for the challenge to be upheld had not actually been fulfilled.
What was the background to the case and how did the issue arise?
Under Article 4(1) of the EC Regulation on Insolvency, the law applicable to insolvency proceedings will normally be that of the Member State where those proceedings have been opened. Article 4(2)(m) of the EC Regulation on Insolvency provides that the law of that state will determine the rules relating to the voidness, nullity, voidability or unenforceability of legal acts detrimental to all the creditors.
However, Article 13 of the EC Regulation on Insolvency disapplies Article 4(2)(m) where the person who benefited from an act detrimental to all the creditors provides proof that the act is subject to the law of a different Member State and under that law the act cannot be challenged.
In the main proceedings, Vinyls Italia SpA and Mediterranea di Navigazione SpA were Italian companies which, on 11 March 2008, concluded in Italy a ship charter contract for the transport of chemical substances by vessels flying the Italian flag. The contract contained an English choice of law clause and conferred jurisdiction on the London Maritime Arbitrators Association.
Pursuant to the terms of the contract, which had been extended on 9 December 2009, Vinyls made two payments to Mediterranea, totalling together €447,740.27.
In due course, Vinyls went into liquidation in Italy. The liquidator sought to clawback the two payments by using an Italian law transaction avoidance provision (Article 67(2) of the legge fallimentare). The liquidator argued that the payments were made at a time when Mediterranea knew that Vinyls was insolvent. The liquidator also alleged that the payments were made after the contractual deadlines.
In riposte, Mediterranea wished to allege that because the contract was governed by the law of England and Wales, the effect of Article 13 of the EC Regulation on Insolvency was that the law of England and Wales governed the payments, and that under that law, namely section 239 of the Insolvency Act 1986 (IA 1986), the payments could not be set aside. (Vinyls took a procedural point arising from Italian civil procedure law—the Article 13 defence had been raised by Mediterranea out of time. The Court of Justice had no difficulty in concluding that Italian procedural law applies in the same way to Italian law-specific defences, as well as to Article 13 of the EC Regulation on Insolvency.)
What were the main legal arguments?
The Italian court referred a number of substantive questions to the Court of Justice. One question concerned the correct interpretation of Article 13 of the EC Regulation on Insolvency. The remaining substantive questions concerned the interplay of the EC Regulation on Insolvency with the Rome Convention and Regulation (EC) 593/2008 (Rome I Regulation).
The dispute concerning Article 13 of the EC Regulation on Insolvency concerned what a litigant needs to establish to show that the law of the Member State which was not the Member State where the insolvency proceedings had been opened ‘does not allow any means of challenging that act in the relevant case’. The two competing interpretations put forward by the Italian court were either:
The other area of dispute in the case concerned the interplay of Article 13 of the EC Regulation on Insolvency with the Rome Convention and the Rome I Regulation. It is not difficult to see why, in this case, the Italian court was concerned about this aspect of the case. Vinyls and Mediterranea are Italian companies, based in Italy, that concluded a contract in Italy for goods to be transported by an Italian flag vessel. It might quite reasonably be thought that the expectations of both contracting parties would be that if insolvency of one of them were to ensue, that the insolvency would take place in Italy, based on Italian insolvency law. The effect of the choice of law in the contract however was seemingly to apply English Insolvency law on the question of whether the payments of €447,740.27 could be set aside. The Italian court was effectively saying 'that can't be right'. The relevant provision which the Italian court pointed to was Article 3(3) of the Rome I Regulation:
'Where all other elements relevant to the situation at the time of the choice are located in a country other than the country whose law has been chosen, the choice of the parties shall not prejudice the application of provisions of the law of that other country which cannot be derogated from by agreement.'
What did the Court of Justice decide?
On the substantive question concerning the interpretation of Article 13 of the EC Regulation on Insolvency, the court ruled that, following its earlier decision in Nike European Operations Netherlands BV v Sportland Oy Case C-310/14,  All ER (D) 151 (Oct), the provision had to be interpreted narrowly. It was not sufficient to show that, in the abstract, the act could not be challenged according to the law applied by Article 13. The beneficiary of the relevant act bore the burden of proving that the conditions supplied by, in this case, IA 1986, s 239 were not met on the facts of the case. That is not remotely ground breaking and simply applies the court’s decision in Nike.
It is then necessary to consider the court’s conclusions on the interplay of the EC Regulation on Insolvency with the Rome Convention and the Rome I Regulation. The first (and obvious) point made by the court was that, having regard to the dates of the contract and its extension, the Rome I Regulation did not apply - the governing instrument was therefore the Rome Convention. The second (and equally obvious) point made by the court was that, by reason of Article 2 of the First Protocol to the Rome Convention, the Italian court had not had jurisdiction to refer questions on the Rome Convention to it. That ought to have meant that the Court of Justice was somewhat in limbo in answering the Italian court's remaining questions. The Court of Justice got around that by stating that it would refer, rather than to the provisions of the Rome Convention, to the mirror provisions in the Rome I Regulation, but only 'in so far as such a reference makes it possible to clarify the scope of Article 13'.
The court concluded that Article 13 of the EC Regulation on Insolvency was to be interpreted without any reference to Article 3(3) of the Rome I Regulation (or, the mirror provision in the Rome Convention, which was also Article 3(3)) of the Rome I Regulation. The court reached that conclusion because, at the time that the EC Regulation on Insolvency came into force, Article 3(3) of the Rome Convention was in force - yet no provision had been made in the EC Regulation on Insolvency to cater for the scenario where two companies based in a single Member State expressly chose to subject their contract to the laws of another Member State. Absent an express exclusion governing that scenario being included in the EC Regulation on Insolvency, it was perfectly open for these two companies to subject the contract to English law, even if that then meant that Article 13 of the EC Regulation on Insolvency was engaged on Vinyls' insolvency.
However, in an unusual postscript, the Court of Justice went on to discuss the principle that EU law cannot be relied on for abusive or fraudulent ends. The court referred to its own case law. In Kratzer v R+V Allgemeine Versicherung AG, Case C-423/15,  1 CMLR 813, the court had held that to demonstrate that EU law was being relied on for abusive or fraudulent ends, it was necessary to show an objective and a subjective element. The objective element consisted of showing that despite the fact that provisions of EU law were being formally adhered to, the underlying purpose of the relevant EU law was not being achieved. The subjective element was demonstrated by showing that, in a case such as Vinyls, the parties had artificially chosen to subject the contract to English law, for the purposes of later being able to avoid the application of Italian law in an insolvency scenario. The court then took the step of reminding the referring court that it is for referring courts to check that EU law was not being used abusively. It is not clear whether, on the evidence in Vinyls, either party had opted for an English choice of law clause in the contract for abusive reasons.
What are the practical implications for insolvency practitioners relying on antecedent transaction provisions in cross-border insolvencies?
Following Vinyls, there are two practical points of which practitioners should be aware. Firstly, practitioners considering bringing a transaction avoidance claim will need to satisfy themselves that the law which governs the material transaction is the law of England and Wales. Secondly, if the law which applies to the transaction is not the law of England and Wales, the practitionershould then go on to investigate whether the choice of law has been made abusively within the meaning of Kratzer. Indeed, it is not difficult to envisage a scenario whereby parties to a transaction could, in advance of entering into the transaction, choose to subject the transaction to the law of a country which has insolvency transaction avoidance provisions which would not be met, or at any rate would be difficult to meet in the given circumstances. (In some ways, this would be a form of insolvency tourism). If the parties have made a tactical choice of law, following Vinyls, it would be open for a practitioner to take steps to unravel the relevant choice of law.
What guidance did the Court of Justice give on the Article 13 exception?
The court repeated its previous guidance from Nike. Article 13 of the EC Regulation on Insolvency is to be interpreted restrictively. The beneficiary of the relevant transaction bears the burden of proving that, on the facts of the case, the law which governs the act does not allow a challenge to the act. So, in this case, Mediterranea has the burden of proving that IA 1986, s 239 does not enable a liquidator to set aside the two payments of €447,740.27.