by Michael Bütter¹

(2002) Oxford U Comparative L Forum 3 at ouclf.law.ox.ac.uk | How to cite this article

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. Unlike all other European Conventions or statutes the Regulations combines international civil procedure rules and conflict of laws rules in one Act. As regards jurisdiction, recognition and enforcement of judgments the Regulation fills a gap left by the Brussels Convention on the Recognition and Enforcement of Judgments in Civil Proceedings.²¹³ The conflict of laws rules, filling the gap left by the Rome Convention, have the effect of harmonising, to a limited extent and in cases where the Regulation applies, the rules and procedures applicable in insolvency proceedings in Member States. It does not assimilate the grounds on which insolvency proceedings may be opened in the Member States or seek to change or harmonise comprehensively national insolvency rules and procedures.
The Regulation applies to collective insolvency proceedings which involve the partial or total divestment of a debtor and the appointment of a liquidator (Article 1).²¹⁴ ‘Divestment’ is a term of art which denotes any restrictions on the debtor or its management in the administration of its business and in the right to dispose of assets. ‘Partial divestment’ denotes systems where the debtor remains essentially in possession but requires the consent or co-signature of a liquidator for certain transactions (typical of most European composition proceedings).²¹⁵ ‘Liquidator’ is widely defined as any person or body whose function is to administer or liquidate assets of which the debtor has been divested,²¹⁶ to include (in the case of the UK) an administrator but not an administrative receiver appointed under a floating charge.²¹⁷ An Annex to the Regulation lists, by Member State, the national proceedings covered by the Regulation. The Regulation applies only when the centre of the debtor’s main interest is within a Member State of the EU. Therefore, it cannot be emphasized enough that the different national laws, as described above, will still play an important role. As we will see below,²¹⁸ the scope of the Regulation is even more reduced, as regards to corporate groups which are commonly organised through subsidiaries which means insolvency proceedings have to be commenced against each entity. Moreover, the Regulation does not apply according to Article 1(2) to credit institutions, insurance companies and certain investment undertakings in order to avoid risks to the financial system, insurance and (collective) investment undertakings and credit institutions.²¹⁹ It is believed that the authorities of the state of origin of the entity in question provisionally control the above sufficiently. Additionally, special rules have been adopted for these excluded entities.²²⁰

2. Jurisdiction for proceedings under the Regulation

The Regulation provides for the opening of ‘main proceedings’ in the State in which the ‘centre of a debtor’s main interest’ is situated.²²¹ In the case of companies there is a rebuttable presumption that this is the State where it has its registered office.²²² This reflects the position under English law²²³ and deviates from German law, where the ‘centre of independent economic interest’ is to be determined independently from its place of registration.²²⁴ There can only be one ‘main proceedings’, which must be recognized in all other Member States.²²⁵
The Regulation, however, permits the opening of ‘secondary proceedings’ in States, other than that of the main proceedings, where the debtor has an ‘establishment’.²²⁶ The effects of ‘secondary proceedings’ are restricted to the assets of the debtor situated in the territory of that State.²²⁷ The law applicable is that of the Member State where the secondary proceedings are opened.²²⁸ Therefore, this law decides who is entitled to request the opening of such proceedings.²²⁹ The underlying disassociation of the notion of universality from the ideal of unity and the acceptance of certain local interest leads to a modified, or mitigated, universality.²³⁰
Where secondary proceedings are opened before main proceedings, they are defined as ‘territorial proceedings’. Territorial proceedings are only permitted if main proceedings cannot be opened because of the conditions laid down by the law of the Member State where the centre of the debtor’s main interest is situated, or if the proceedings are requested by a creditor who has its domicile, habitual residence or registered office in the Member State where the establishment is situated.²³¹ The reasoning behind this is to avoid parallel local proceedings from taking place without the co-ordination umbrella of the main proceedings.²³² Territorial proceedings can be either liquidation or rescue/rehabilitation measures. Once main proceedings are opened, territorial proceedings become ‘secondary proceedings’ and rescue/rehabilitation proceedings may, at the instance of the liquidator in the main proceedings, be converted to liquidation proceedings.²³³ Conversely, any kind of closure of the secondary proceedings will not become final without the consent of the liquidator in the main proceedings.²³⁴ For this purpose the liquidator is entitled to demand a stay of liquidation of secondary proceedings.²³⁵ The concept of ‘secondary proceedings’ is equally found under English (so-called ancillary proceedings)²³⁶ and German law,²³⁷ whereby the existence of assets in both countries is sufficient in contrast to the requirement of an ‘establishment’ under the Regulation.²³⁸

3. Recognition and Enforcement of judgments

Any decision of a court in one Member State which opens either main or secondary insolvency proceedings is to be recognized with no further formalities²³⁹ such as exequatur or publication²⁴⁰ in all other Member States²⁴¹ and is to have the same effect in other Member States as it has in that of the opening of proceedings.²⁴² As the Regulation defines the insolvency proceedings falling under its scope and determinates the jurisdiction for the EU in detail, the Regulation provides itself, as opposed to the national laws²⁴³, for the simplification in terms of a mutual recognition. It should be noted, however, that, in line with present national laws, recognition is still almost exclusively²⁴⁴ restricted by different national public policy rules.²⁴⁵ Decisions relating to the conduct and closure of insolvency proceedings must also be recognized. Enforcement of those decisions as well as the recognition and other enforcement of decisions arising from the insolvency proceedings are to be in accordance with Articles 31 to 51, with exception of Article 34(2), of the Brussels Convention.²⁴⁶
As regards the position of the liquidator in the main proceedings, his appointment and powers must be recognized in all Member States. He enjoys in all Member States the powers given to him in the State where the main proceedings are opened,²⁴⁷ and may in particular remove the debtor’s assets from the territory of any Member State in which they are situated,²⁴⁸ except where territorial/secondary proceedings (even if subsequently) have been opened.²⁴⁹ This restriction preserves national creditor interests and has the same roots as the so called ‘controlled universality’ under German law.²⁵⁰ As a result, the local liquidator has exclusive powers over these assets and may recover from other Member States property which has been removed there.²⁵¹ The liquidator in the main proceedings and the liquidators in secondary proceedings are under a duty to co-operate and give each other information²⁵² in order to maximise the benefits for all creditors. This includes the respective lodging and admission of claims,²⁵³ rescue plans, any measures to close proceedings and the sale of essential assets.²⁵⁴ However, there is no explicit duty to provide information amongst different liquidators of secondary proceedings themselves, but then the liquidator of the main proceedings is entitled to pass on information regarding all secondary proceedings upon his own discretion.

4. Conflict of laws rules

The Regulation provides rules in order to harmonise a number of important uniform conflict rules on insolvency related issues. The provisions refer to substantive rules of Member States only, exclusive of a Member State’s set of conflicts rules. In other words, renvoi is excluded. The purpose behind this is not only to achieve legal certainty but also to reduce incentives for forum shopping.²⁵⁵ Conflicts between the laws of third parties and those of a Member State are not covered by the Regulation. This is unfortunate. It was argued in the Brussels negotiation that a full harmonization of the conflicts rules of Member States, including conflicts with laws of third parties, would have been possible, and it certainly would have been desirable to exclude the possibility of a split conflict regime in Member States.²⁵⁶
As regards the opening, conduct and closure of the proceedings – including the rights of creditors after closing or the discharge of the debtor²⁵⁷ – the law of the State in which the proceedings are opened is the applicable law (lex fori concursus).²⁵⁸ To this general rule and non-exhaustive list in Article 4 the Regulation systematically adds in Articles 5-15 several exceptions and conflict of laws rules to address particular cross-border issues which replace existing national rules of private international law.²⁵⁹
These rules deal with third party security rights,²⁶⁰ set-off of claims,²⁶¹ reservation of title,²⁶² contracts relating to immovable property and of employment,²⁶³ rights subject to registration,²⁶⁴ Community patents and trade marks.²⁶⁵ Exceptions are also provided for actions to set aside transactions which took place before the opening of insolvency proceedings, in order to protect third parties to whom the debtor has disposed of specified forms of property after the opening of insolvency proceedings and pending lawsuits.²⁶⁶
Another important rule of substantive law is established by Article 39 of the Regulation, laying down the right of foreign creditors, ie of any creditor who has his habitual residence, domicile or registered office in another Member State, to lodge claims in insolvency proceedings. This provision derogates from the application of national law, pursuant with Article 4(2)(h). Establishing the right of foreign creditors to lodge claims means that their claims cannot be disallowed on the grounds that the creditor is situated abroad or that the claim is governed by foreign public law. According to Article 40 prompt notice of the opening of proceedings must be given to such creditors, as well as information concerning the proceedings. The Regulation stipulates the content of the lodgement of a claim in Article 41. It should be noted that Article 32 allows all creditors to participate in the main or secondary proceedings, as they choose, and even in several proceedings.

B. The Regulation And Important Questions Of Interpretation

1. General rules of interpretation

The Regulation does not contain any provision for its interpretation. Just as in the 1968 Brussels Convention and the 1980 Rome Convention, two principles should be followed – which are likely to be safeguarded by the European Court of Justice (ECJ) exercising its power according to Article 234 of the EU Treaty – when interpreting its provisions. The first is the principle of respect for the international character of the rule and the second the principle of uniformity. The Regulation is a self-contained legal structure, and its concepts cannot simply be assimilated into concepts belonging to the national system into which it is incorporated. The Regulation must retain the same meaning within different national systems. When the substance of a problem is governed by the Regulation, the international character of the Regulation requires an autonomous construction and interpretation of its concept. An autonomous interpretation implies that the meaning of its concepts be determined by reference to the objectives of the rule, the Regulation’s system, and the function of these concepts within this system. At the same time, the general principles which can be inferred from all the national laws of the Member States must be taken into account. Sometimes, the aim and purpose of a provision of the Regulation expressly or implicitly requires that a particular national law is referred to, so that the meaning of a concept can be found there. This is, for example, the case for the question as to whether or not a particular security right exists (ie has been created effectively) under the relevant national law, while on the other hand the question as to whether or not such a security right qualifies as a right in rem, as dealt with in Article 5 of the Regulation, is subject only to the interpretation of the Regulation itself.
Additionally, the Explanatory Report²⁶⁷ of the former Insolvency Convention will provide a commentary and help to explain and clarify the provisions of the Convention. The Report was not, however, given any particular status by or under the Convention but as a document prepared virtually contemporaneously and agreed by all the parties to the Convention it is likely to be regarded as authoritative and to be influential.²⁶⁸ Even though the Convention never entered into force and has already been replaced formally by the Regulation, the Report will also be essential for the interpretation of the Regulation. As the wording is almost identical, it appears that there is no legal impediment which would prevent the ECJ and the national courts from considering the Report for the interpretation of the Regulation.

2. Jurisdiction of the ECJ or the national courts?

According to Article 234 of the EU Treaty, there is a mandatory reference to the ECJ to resolve problems of interpretation within the scope of the Regulation. This is in contrast to Article 44 of the abandoned Insolvency Convention, which provided for no more than a voluntary request by national courts to the ECJ. As a consequence, this leads to the risk of having a two-year stay on any insolvency proceedings while the parties wait for a decision from the ECJ. The only way to prevent this would have been to alter the EU Treaty to allow for the solution envisaged by Article 44 of the Insolvency Convention.
Conversely, this problem will not occur if the national courts have to decide upon certain ambiguous parts of the Regulation. As far as the applicable law of the State of the opening of proceedings is concerned (Article 4, 28 of the Regulation) the national courts have exclusive jurisdiction.
Whether or not the same applies for the international jurisdiction pursuant to Article 3 of the Regulation seems questionable. In order to prevent a delay for the proceedings, an interpretation would be favourable, if it was only to determine by the national courts where the centre of a debtor’s main interests is situated. Otherwise Article 16(1) in connection with Article 25 of the Regulation would not have the desired effect. A non-contentious automatic recognition of other Member States presupposes that an inappropriate delay through a mandatory reference to the ECJ, as it is the problem in other areas, is avoided.
On the other hand, Article 234 of the EU Treaty is designed to avoid different interpretations of European law in favour of the uniformity in the application of law. Certainly, this includes the question whether there are sufficient facts, apart from the registration of the company, to establish the centre of the debtor’s main interests elsewhere. Hence, it is submitted that there is no exclusive responsibility for the national courts to decide this question. It should instead be acknowledged, in order to prevent long mandatory references, that the national courts have a wide discretion as to whether the question where the centre of the main interest is situated needs to be interpreted by the ECJ or not.

3. Limited scope of the Regulation

(a) Secondary proceedings as regards to an ‘establishment’ under Article 3(2)

Secondary proceedings can be conducted by foreign courts where the company has an establishment within the territory of that Member State. The term ‘establishment’ is defined in Article 2(h) and ‘shall mean any place of operations where the debtor carries out a non-transitory economic activity with human means and goods.’ The wording ‘non-transitory’ and ‘human means and goods’ needs to be interpreted. According to the Report²⁶⁹ a broad interpretation should be favoured to reflect the contentious discussion among the Member States. This interpretation is the result of a compromise as some countries were in favour of a far wider jurisdiction simply based on any asset situated in one of the Member States not demanding an ‘establishment’²⁷⁰ while others in opposition to this concept feared a burgeoning number of small bankruptcies concerning real estate or bank accounts in Member States.²⁷¹ In order to achieve a consensus the adoption of the same concept of establishment in the Regulation as that given by the ECJ in its strict interpretation of Article 5(5) of the Brussels Convention²⁷² was ruled out in favour of an autonomous less restricted concept.
In consequence, if secondary proceedings cannot be commenced, because of the absence of an establishment in the Member State, assets (such as insurance claims, book debts, stock in transit) situated in the Member State are likely be subject to seizure by individual local creditors to the disadvantage of creditors as a whole.²⁷³ In other words, the provision of an establishment is preferential for local creditors and protects their interests.

(b) Subsidiaries and the application of the Regulation

Regrettably, the Regulation contains no special rules for dealing with the insolvency of groups. It is a fact that many companies, whether registered in the UK, Germany or elsewhere in the Community, now conduct their business in other Member States through the medium of locally registered subsidiaries rather than through an establishment which is a branch of the parent company.²⁷⁴ A registered subsidiary cannot fulfil the provision of an establishment under Article 3(2). It is in itself a debtor with its own centre of main interest according to Article 3(1), even if it is totally dependent of the parent company due to a control agreement or an agreement to transfer profits.²⁷⁵ The regulation applies for each single entity separately.²⁷⁶ Therefore, cases like Maxwell cannot be dealt with appropriately under the Regulation. Due to the non applicability of the Regulation, especially Articles 27-38, the developed national rules of co-operation remain essential.²⁷⁷ Determining the centre of main interest of a holding company might be particularly difficult.²⁷⁸ As far as the existence of subsidiaries are concerned, the importance of the Regulation will rise with the implementation of multinational companies limited by shares through EU legislation. Sooner or later new European legal structures, in particular the new European joint stock company, will replace the current system of subsidiaries and form legal entities without the necessity of various national registration procedures.²⁷⁹
Due to the system of subsidiaries, it is also possible that within the same group more than one main insolvency proceeding is conducted at the same time. In terms of efficiency this is surely a disadvantage especially if one takes into consideration that rescue proceedings, for example, are far more beneficial if not only one arm of the company is subject to a sale or restructuring measures. In order to decrease the problems it is suggested that the liquidators of the main proceedings are cooperating in the same way as they have occasionally done in the past without any Insolvency Regulation. Additionally, it might be a worthwhile thought whether the ECJ could apply Article 31 analogously in the case of different main proceedings within one group.
Another problem emerges where not only Member States and third States are involved – which hitherto might give rise to considerable practicable difficulties where the different sets of rules conflict – but apart from this also a group or holding containing companies (where each entity is subject to separate insolvency proceedings underthe Regulation), or a bank (which is subject to the separate EU Winding Up Directive)²⁸⁰ is involved. It is not difficult to imagine that this diversity will in practice lead to severe problems with the likely consequence of infringing the par est condicio omnium creditorium rule.
Conversely, the Regulation provides also an advantage, because the Regulation assists a parent company in protecting its interest as a shareholder in a company which is subject of main proceedings in another Member State. For example, if an English holding company has a Spanish subsidiary it may be necessary to enforce the rights as a Spanish shareholder and the fact that it is recognized by the Spanish court as being the owner as liquidator of those shares gives it a good position.

C. Consequences Of The New Regulation

This section provides a brief comparison between the current national laws and the new Regulation pointing out certain benefits or disadvantages of the Regulation.

1. Loss of Jurisdiction

It has already been said that, unfortunately, the Regulation is inapplicable to subsidiaries of parent companies and in extra-Community cases. On the other hand, the Regulation results in a wide restriction of the ability of the UK courts to open main insolvency proceedings based on assets in the UK or simply a sufficient connection to the UK as regards a company whose centre of main interests was situated in another Member State.²⁸¹ German law, on the contrary, remains unchanged in that respect as the wording of § 3(1) sent. 2 of the InsO (‘centre of independent economic interest’) is almost identical with Article 3(1) of the Regulation (‘centre of the debtor’s main interests’). The UK was, therefore, even more interested in maintaining at least its traditional insolvency jurisdiction based on assets as regards extra-Community cases, ie where the debtor’s centre of main interest is outside the EU.²⁸²
Both English and German law lose part of their jurisdiction in terms of secondary proceedings, as the Regulation demands in Article 3(2) and (4) an establishment rather than the pure existence of an asset.²⁸³ Local influence and creditor protection is, therefore, limited to the level of an establishment and has been sacrificed in order to overcome the resistance of some Member States against the Regulation as a whole.

2. Implications for rescue proceedings

An important advantage is the implication of the Regulation for rescue proceedings. While all European States have structurally similar liquidation proceedings, their approach to enterprise rehabilitation and reorganisation varies greatly.²⁸⁴ Which rescue proceedings fall within the scope of the Regulation is therefore the result of numerous compromises and concessions among the Member States listed in Annex A of the Regulation. The Regulation does not recognize the procedure of administrative receivership as a collective insolvency proceeding according to Article 1(1) of the Regulation. It does, however, recognize other forms of UK rescue procedures, in particular the administration procedure and company voluntary arrangements. As a matter of fact, the success of the liquidator in the main proceedings in persuading an office holder in secondary proceedings to support a rescue programme is likely to depend on the attitude and approach of the office holder in the secondary proceedings. In addition, it seems unrealistic to have a rescue procedure which deals with a branch of the company concerned in the UK, whilst leaving the remainder or part of the company situated in another Member State the subject of some other form of winding up and perhaps liquidation and dissolution. It seems unusual to launch a rescue process which only covers part of a business, or part of a company’s existence.²⁸⁵
As the administrative receivership is not a collective insolvency proceeding according to Article 1(1) of the Regulation, the Regulation provides no automatic recognition of receivership proceedings in other Member States. It should be considered establishing that debentures, under which the administrative receivers are appointed, are to be recognized amongst the rights in rem.²⁸⁶ Under the Regulation they are a form of security which is recognized and with that, therefore, goes the right to enforce security within the jurisdiction in which they are recognized. That leaves open all the scope for administration receivers to be appointed under UK debentures in relation to UK businesses and, indeed, to go further to take steps to seek to save the business or dispose of viable parts.

3. Recognition and enforcement of foreign tax and social security claims

It has been a long established precedent that the English public policy rule forbids the direct or indirect enforcement of foreign penal or revenue claims.²⁸⁷ With respect to Article 39 of the Regulation, it seems that this cannot be upheld in the future as far as tax and social security claims are concerned, as the Regulation takes precedent over English national law. Article 39 acknowledges iure conventionis the admissibility of public law claims of the Member State. This Article expressly stipulates the right of the tax and social security authorities of any Member State to submit their claims in insolvency proceedings opened pursuant to the Regulation.²⁸⁸ What implication Article 39 of the Regulation has regarding other public claims lodged by the member state’s authorities remains unclear.

D. Unsolved Conflict Of Laws Problems

1. English security rights

(a) Implications of Article 5 and Article 26 on English security rights

One of the major problems in cross-border insolvency proceedings relates to the recognition of foreign security rights in domestic insolvency proceedings. The matter becomes even more complicated if the particular foreign security right in question is not known in the country where the insolvency proceedings take place. This is, for example, the case if a German liquidator has to deal with an English charge, in particular a floating charge.
European laws take quite different approaches to the treatment of secured creditors in insolvency proceedings. Some procedures, such as the French redressement judiciaire, tend to substantially interfere with the general civil law rights of security holders and inflict considerable losses on secured creditors for the benefit of the debtor and its rehabilitation. Other insolvency laws leave secured creditors largely unaffected. This is true of all those systems, for example in Germany and the UK, that adhere to the composition paradigm of enterprise rescue which aims at a rescheduling of unsecured and non priority debt only.
Article 5 of the Regulation provides that security interests (rights in rem) of third parties in assets of the debtor which are situated in a Member State other than the opening State at the time of opening of proceedings (foreign situated collateral) will not be affected by the proceedings.
As a consequence, the holder of a security interest in assets situated abroad may proceed as if there were no insolvency of the debtor. The secured party may, for example, dispose of the secured assets, foreclose a mortgage under the conditions set out by the general law of the situs or demand surrender of the assets from anyone who keeps them in possession. With regard to secured book debts, the creditor is still exclusively entitled to have a claim met. These creditors are not affected by a stay issued in connection with foreign insolvency proceedings, and they may not be impaired by a plan. If, as may be the case, a main liquidator wants to benefit from the insolvency law of the situs of assets situated abroad, he or she may file for secondary proceedings if the debtor keeps an establishment in the State of the situs.²⁸⁹ The law of the secondary forum may, for instance, include secured creditors in the automatic stay or otherwise subject secured creditors to insolvency specific restraints.²⁹⁰
In general, Article 5 seems to provide a reliable protection of a security interest. It should be noted, however, that Article 26 of the Regulation allows exceptions to this rule if the right in rem leads to a decision by a court that would be contrary to the public policy of a Member State. Article 26 states that a Member State may refuse to recognize or to enforce a court decision where the effects would infringe the public policy rule of that Member State, in particular its fundamental principles or the constitutional rights and liberties of the individual.
If, therefore, an English court or liquidator recognizes a fixed charge or a floating charge under English law, assuming the security qualifies as a right in rem, a German liquidator or insolvency court could still refuse to enforce this decision if the recognition of the security infringes the German public policy rule.²⁹¹ As a result, it is – in spite of Article 5 of the Regulation – still questionable if an English liquidator is entitled to enforce his right according to Article 18 of the Regulation to remove the debtor’s assets situated in Germany because they are secured by an English security right which had been recognized in the English insolvency proceedings.²⁹²
The same problem arises when an English creditor, according to Article 39 of the Regulation, lodges a claim eg based on a floating charge in a main or secondary insolvency proceeding opened in Germany with regard to assets located in Germany. Article 26 applies a maiore ad minus even if this situation – because no prior court decision has been delivered by an English authority – is not expressly regulated. In this case the German liquidator has to decide whether or not the English security is to be recognized in the insolvency proceeding. The German liquidator has to consider whether the recognition as a right in rem and the effects resulting from this decision are compliant with the fundamental principles of German law.
Hence, it is insufficient for the creditor to look simply to the scope of Article 5 of the Regulation in the belief that the only issue involved is whether or not a security qualifies as a right in rem. This is only one side of the coin, and legal certainty will only be achieved if the relevant public policy rule is taken into account as well.

(b) Fixed and floating charge under English law

The following discussion will focus on the recognition of English fixed and floating charge from the perspective of German insolvency proceedings. Apart from mortgages of freehold or leasehold interests in land, fixed and floating charges are the most common securities granted to English creditor banks. Before focusing on the scope of Article 26 and the key question whether an English charge is contrary to fundamental principles of German law, the character of fixed (1) and floating charges (2) will be briefly described and compared to securities known in the German jurisdiction (3).

(1) Fixed charge

Generally speaking, a charge is an interest in company property created in favour of a creditor to secure the amount owing to the creditor.²⁹³
A ‘fixed charge’ is usually attached to present assets such as land (if this is not secured by a mortgage), machinery, furniture, vehicles, the company’s intellectual property and goodwill, rights to insurances etc, but it can also cover circulating assets such as book debts. The company is not allowed to dispose of any property secured by a fixed charge without prior consent of the creditor bank. The right to deal with the secured assets is also the crucial criterion for distinguishing between a fixed and a floating charge, not the question whether assets secured by the charge are fixed or circulating.²⁹⁴ However, a charge over fixed assets is presumptively intended to be a fixed charge, whereas a charge over circulating assets implies the intention to create a floating charge.²⁹⁵ Unlike a mortgage, the creation of a fixed charge does not involve a transfer of the assets which are subject-matter of the security.²⁹⁶ Rather, the bank holding a fixed charge is entitled to take the contractually defined property into its possession and turn it into cash if the debtor company is in default with payment of the secured loan or other contractually agreed events occur, eg the appointment of an administrative receiver by a third party.

(2) Floating charge

The fixed charge will often be less suited as security for assets which are likely to be changing in the course of the company’s business, eg raw materials, stocks in trade etc. For such assets the ‘floating charge’ is the more appropriate instrument. Floating charges are common in England and Ireland, and, albeit to a lesser extent, in Sweden and Finland.²⁹⁷
While the fixed charge is attached to a specific item or a number of specific items of the company’s property, the floating charge covers present and future assets which are generally defined in the agreement between the creditor bank and the debtor company.²⁹⁸ In contrast to the situation under a fixed charge, the debtor company is allowed to dispose of such assets in the ordinary course of the business.²⁹⁹ This right to deal with the assets terminates upon certain contractually defined events which cause the floating charge to ‘crystallise’ into a fixed charge. As Lord Justice Buckley perceptively described it:

A floating charge is not a future security; it is a present security, which presently affects all the assets of the company expressed to be included in it … A floating security is not a specific mortgage of the assets, plus a licence to the mortgagor to dispose of them in the course of his business, but is a floating mortgage applying to every item comprised in the security but not specifically affecting any item until some event occurs or some act on the part of the mortgagee is done which causes it to crystallise into a fixed security.³⁰⁰

Accordingly, the floating charge can be compared to a net situated fairly high above the contractually defined assets of the company, waiting to fall down to cover and secure such assets for the benefit of the debenture holder. The character as a present security becomes apparent in the relation to other charges. Basically, a floating charge has priority over any subsequent charge taken with notice of a negative pledge clause in the floating charge instrument. However, in the absence of such a provision in the agreement between the company and the creditor bank, the company’s right to deal with the assets in the ordinary course of the business also implies the right to grant subsequent fixed charges ranking in priority to the floating charge.³⁰¹ A subsequent charge has also priority when the other encumbrancer has no notice of such a restriction and therefore acts in good faith. The same applies to a bona fide purchaser of the property secured by a charge. It is also argued that the floating charge is a present security because it even gives rise to an interest amounting to an equitable interest even before crystallisation.³⁰² This aspect, resulting in the debenture holder of an uncrystallised floating charge having an interest in the secured property which can be recognized in an insolvency proceeding, is still debated.³⁰³
Typically, a floating charge is taken over circulating assets, such as stocks in trade, raw materials, book debts and other receivables, while a fixed charge – often granted in the same contract together with the floating charge – covers the fixed assets of the company. Nonetheless, a floating charge could also cover any other kind of property, including interest in real estate.
‘Crystallisation’ of the floating charge occurs upon a variety of events usually agreed in the contract between the debtor company and the creditor bank. Firstly, the bank is often contractually entitled to turn the floating charge into a fixed security at any time upon written notice to the company. This right might be restricted to be executed only after serving a demand for payment of outstanding amounts or only if the bank has reason to believe that the secured assets are in jeopardy. Secondly, the floating charge automatically crystallises into a fixed charge without the need of the bank’s notice upon certain events defined in the floating charge instrument. Because a floating charge presupposes the continuance of the company’s business it crystallises when the company ceases to carry on its business or a substantial part thereof whether this happens voluntarily or in response to a winding-up petition.³⁰⁴ In this case there is even no need for a separate contractual provision to cause crystallisation because it happens de facto as the company has no longer a ‘business’ in which ordinary course it would be allowed to sell the secured assets.³⁰⁵ The limits of the company’s ordinary business could be, of course, doubtful if the company has not completely ceased to carry out its business. Automatic crystallisation is a function of the terms of the charge³⁰⁶ and can be caused when the company stops making payments to its creditors or gives notice that it intends to stop payment. Further, when the creditor bank itself appoints an administrative receiver or when the management of the company passes a resolution for a voluntary winding-up of the company. Understandably, there is tendency to expand crystallisation clauses in order to protect the bank’s interests in the secured assets. The earlier automatic crystallisation occurs the less the risk that assets are disposed of by the company.³⁰⁷ Therefore, other events can be agreed in the contract between the creditor bank and the company.
When crystallisation has taken place the floating charge turns into a fixed charge. Therefore, the floating charge is deemed to be created as a fixed charge at the time of crystallisation. The company looses its authority to deal with the assets in the ordinary course of its business. The creditor bank is entitled to appoint an administrative receiver who has all powers to turn the secured assets into cash to the benefit of the bank.³⁰⁸ This includes to take possession of the assets and to sell, to license, to grant leases, to apply for foreclosure or dispose otherwise of them.³⁰⁹ Until such actions has taken place, a third party dealing with the debtor company may be unable to discover whether or not a floating charge has automatically crystallised. Hence, there is still a risk of a bona fide disposition of the assets.

(3) Equivalents in the German jurisdiction

Although there is a number of security instruments under German law, there are no real equivalents to the fixed or the floating charge in the German jurisdiction. German law focuses on the different types of property in which security rights are taken.³¹⁰ Accordingly, there is not only one instrument, such as a charge, which is suitable for all kinds of assets but a variety of different instruments that are subject to different regulations.³¹¹ Notwithstanding the fact that it is also feasible to create security rights in all kinds of property under German law, those securities are not subject to the same contract. Rather, German banks usually have to enter into a number of security agreements with the debtor company.³¹²
The German chattel mortgage (Sicherungsübereignung) might come close to a charge as far as movables are concerned. It is also possible to extend a chattel mortgage in movables owned by the debtor company to movables to be acquired in future (Sicherungsübereignung von Sachgesamtheiten mit wechselndem Bestand).³¹³ Similar to a party of a floating charge, the debtor company is also entitled to deal with the goods in the course of its ordinary business but has to make sure that a certain value of goods always remains secured by the security rights of the creditor bank.³¹⁴ But unlike in a floating charge instrument, all movables which are to be covered by the chattel mortgage in present or in future have to be described very clearly and specifically at the time the parties enter into the contract (Bestimmtheitsgrundsatz).³¹⁵ General descriptions of future assets in the contract are not sufficient to transfer property in future movables effectively under German law.³¹⁶ In any case of non-determinability the creditor bank has no rights in the assets at all.
With regard to book debts German banks are able to take assignment of all present and future claims of the debtor company against its own customers to secure loans provided to companies (Globalzession).³¹⁷ The requirements for assigning future debts are not as strict as for movables but the debts also have to be defined clearly so that at the time they arise (in future) there is no doubt whether they are secured by the assignment or not (Bestimmbarkeitsgrundsatz).³¹⁸ However, because of the problems which creditor banks usually encounter when enforcing claims against the numerous debtors of the company, this type of security is taken only as a second or third choice to mortgages in real estate (Grundschulden) and chattel mortgages respectively.

2. Recognition of English security rights in Germany

(a) English security rights as a right in rem under Article 5 of the Regulation?

As there is no equivalent to an English charge under German law, the question arises whether such a security can be recognized as a right in rem in German insolvency proceedings. Article 5(2) of the Regulation contains a rather elaborate typological explanation and not a precise definition of what is meant by a right in rem. Suffice it to say that liens, mortgages and pledges would all be considered to be rights in rem.
It is crucial to point out that whether the security right exists (has been created effectively) or not is a question only of national law. A renvoi is excluded as Article 4 to Article 15 of the Regulation provide for a self-containing set of conflict of laws rules. In other words, a German court has to apply English domestic law to determine whether or not an English security has been created.

(1) Fixed charge

The English fixed charge is undoubtedly within the definition of Article 5(2)(a), as the wording makes clear that any type of fixed charge will be considered as a right in rem according to the Regulation.

(2) Floating charge

Whether the floating charge is a right in rem according to Article 5 of the Regulation is not expressly stated in the Regulation. An earlier version of the Report mentioned only that a crystallised floating charge ‘may qualify’ as a right in rem³¹⁹ but nonetheless the better arguments fundamentally speak in favour of the floating charge as a right in rem. Throughout the discussions of the Convention it was emphasized by the UK delegation that this is of vital interest for English creditors. This is reflected by the final version of the Report which explicitly states that

‘security rights such as the floating charge recognized in United Kingdom and Irish law can, therefore, be characterised as a right in rem for the purposes of the Convention.’³²⁰

Even if the floating charge, therefore, generally has to be recognized as a right in rem it still remains doubtful whether this also applies for the time before crystallisation has occurred.³²¹ This is likely to become a question for a preliminary ruling of the European Court of Justice under Article 234 of the EU Treaty. However, it is difficult to see how a floating charge can, before crystallisation, be a right in rem according to the criteria set out in the Report.³²² This describes the features of such a right thus:

‘it has a direct immediate relationship with the asset it covers;

its creation involves an absolute alienation to the acquirer of the right, which enables the holder to resist the alienation of the asset to which it relates to a third party; and to resist individual enforcement by third parties.’

A floating charge does not have these properties before crystallisation occurs. It is difficult to accept that it creates a ‘direct and immediate relationship’ with the asset which it covers; and it is of the essence of a floating charge that it does not, of itself, prevent the alienation of those assets to third parties. Therefore, the floating charge should become a right in rem on crystallisation. Even then, however, it seems doubtful whether it can be said with confidence that a ‘direct and immediate relationship’ arises between the charge and the assets secured.³²³ Furthermore, the Regulation does not recognize a right in rem which did not exist ‘at the time of the opening of proceedings’.³²⁴ The crystallisation of a floating charge may well not occur before insolvency proceedings are opened elsewhere. Even though the opening of proceedings elsewhere cause the charge to crystallise, it seems likely that the crystallisation would be regarded as occurring after the opening of the proceedings, however short the space of time before this effect occurs. Alternatively, it might be argued that crystallisation is contemporaneous with the opening. But even then, it could not be said that the right already existed at the time of the opening. It is therefore suggested that Article 5(1) of the Regulation recognizes a floating charge as a right in rem only if the crystallisation has already been taken place before the opening of insolvency proceedings.

(b) Infringement of the German public policy rule?

(1) Scope of Article 26

Even if English security rights eventually qualify as a right in rem, there is a further impediment to overcome in the form of Article 26 of the Regulation. Article 26 provides that a foreign security is not enforceable if it infringes the public policy rule of the Member State in which the insolvency proceedings take place. Whether or not the public policy rule is violated is a question of the respective national law only. The Regulation does not attribute a more restrictive content to the concept of public policy than that of the Member State.³²⁵
The German public policy rule prevents foreign court decisions or claims by a foreign liquidator from being enforced if this would infringe fundamental principles of German law and in particular § 138 of the Bürgerliches Gesetzbuch (BGB, Civil Code [see the GLA website for the full text of BGB – ed]) containing the contra bonos mores principle (Verstoß gegen die guten Sitten), under which transactions are void if they offend good morals. The contra bonos mores principle is a well established case of an public policy infringement under Article 6 of the German EGBGB (Introductory Law of the Civil Code which contains the international German conflict of laws rules, including those established by the Rome Convention) and § 328 of the ZPO (German Code of Civil Proceedings), with both provisions having the same wording as Article 26 of the Regulation.³²⁶ In order to apply the contra bonos mores principle it is possible to revert to the court decisions developed under § 138 and § 826 of the BGB.³²⁷ This is of particular importance as thereby all cases of creditor discrimination which violate § 138 of the BGB and therefore the public policy rule in general³²⁸ form a violation of the public policy rule under Article 26 of the Regulation as well.

(2) Violation of German law

In this section it is analysed whether an English charge in Germany is compliant with Article 26 of the Regulation ie with fundamental principles of German law and does not in particular infringe § 138 of the BGB containing the contra bonos mores principle. This is questionable in different respects.

(α) Security rights in German real estate

First, the most obvious inconsistency with German law occurs if a fixed or floating charge extends to real estate owned by the debtor company in Germany. It is a fundamental principle of German property law (§§ 854 – 1296 of the BGB) that rights in land and in movables have to be made obvious to third parties (Offenkundigkeitsprinzip³²⁹). Therefore, according to § 873(1) of the BGB, in order to create any right in land in Germany it is an indispensable requirement that such right is registered in the Grundbuch (land registry). Insofar English creditors are restricted to the German security rights, such as Grundschuld (similar to mortgage). Hence, there is no way to create a security right in German land by registering an English fixed or floating charge instrument, as the German BGB at present does not allow for such rights in real estate. Therefore, any English security right covering land in Germany is contrary to fundamental principles of the German property law and has to be regarded as void as long as it is not possible to register such rights in the German Grundbuch. This is a necessary consequence in order to protect creditors who rely on the registry and act in good faith according to the German property law (§ 892 of the BGB).

(β)Security rights in movables situated in Germany

With regard to security rights in movables in Germany, the main problem with respect to Article 26 of the Regulation relates to the determinability of the assets attached to a floating charge. As already mentioned above, German law is very strict as far as the transfer of property or the creation of security rights in property is concerned. Therefore, it is a fundamental principle of German property law that assets to be used as a security instrument have to be described in a very specific way so that they can be undoubtedly identified by the provisions of the security agreement (Bestimmtheitsgrundsatz),³³⁰ for instance by including machine numbers,³³¹ or by enclosing a ground plan to the contract describing where the relevant assets are stored,³³² or by using so called ‘catch-all-clauses’ in order to avoid cases of doubt.³³³
English creditors usually work with ‘catch-all-clauses’ in their fixed and floating charge instruments in order to cover all kind of property and rights, for example:

‘The Company, with full title guarantee, hereby charges to the Bank as a continuing security for the payment or discharge of the Secured Amounts:

…

by way of first floating charge the undertaking of the Company and all its property, assets and rights, whatsoever and wheresoever, both present and future (including all stock in trade and including all freehold and leasehold property) …’³³⁴

However, it is rather doubtful whether such general descriptions can be recognised under German property law aspects. General descriptions such as ‘the undertaking’ are definitely not appropriate to create an effective security right in movable property under German law. From a strictly German law perspective it is absolutely unclear which assets are supposed to be secured by the term ‘the undertaking’. On the other hand, a catch-all-clause relating to ‘all its property, assets and rights’ could be sufficient to fulfil the required standard of determinability under German law as well.³³⁵ However, this has to be decided on a case to case basis and thus a German court could also take into account the fact that the security agreement was written with English rather than German law in mind and needs to be interpreted accordingly. At any rate, it is crucial that the terminology used to describe the secured assets is absolutely clear and sufficient to specify the secured assets undoubtedly. In any case of ambiguity the security right will not be created effectively according to consistent practice of the German courts.³³⁶ For a sufficient determinability it is vital that a third party would be able to decide undoubtedly whether an asset is secured by the charge or not with the help of no other documents but the contract itself. Catch-all-clauses only fulfil this requirement if there is no doubt about the meaning of the used wording. For instance, the term ‘all inventory’ or ‘all raw material’ is only sufficient if there is no doubt what belongs to the ‘inventory’ or the ‘raw material’ respectively. Given that there are many differences in meaning and interpretation of the same words in England and in Germany, this aspect is most problematic. Additionally, the uncertainties which are necessarily caused by any translation of the words can make the situation even worse. Furthermore, any restriction of a catch-all-clause will inevitably result in the security being void under German law because of non-determinability. Eg ‘all assets except those which do not belong to the debtor company or which are subject to rights of a third party’, ‘75 % of the assets’, ‘assets worth … Pounds Sterling in total’ or similar language is definitely not sufficient under German law.³³⁷
Hence, because of the strict requirement of determinability under German law, the extent of which is unknown to the English jurisdiction, it is probably very doubtful for the majority of cases whether the English terms in fixed and floating charge instruments are sufficient to specify the secured assets from a German law perspective. Whenever this is not the case, the security agreement infringes fundamental principles of the German property law. Consequently, the public policy rule according to Article 26 of the Regulation is violated when an English creditor bank lodges a claim based on such a security instrument. Therefore, even if German law has to recognize the fixed or floating charge as a right in rem, perhaps supported by a broad interpretation through the ECJ, it is unlikely that it has any legal effect and serves as a useful security for English creditors in Germany. A German liquidator or court will not decide in favour of an English bank requesting to take the assets in possession on the basis of a floating charge instrument if such assets cannot be undoubtedly specified according to German law standards.

(γ) Security rights in book debts

Another problem will arise with regard to security rights in book debts. Under English law book debts can be secured by both fixed and floating charges. As explained above, under German law security rights in book debts are taken by assignment of all present and future claims against the debtor company’s customers. According to a consistent practice of the German Bundesgerichtshof, such an assignment is void if it undermines the security rights of other creditors (Gläubigergefährdung).³³⁸ This is the case if the assignment does not contain an automatic release of claims which are secured by an extended retention of title as regards the debtor’s proceeds of sales held by suppliers of the debtor company (verlängerter Eigentumsvorbehalt).³³⁹ It is consistent practice in Germany that contracts between the supplier and the purchaser of goods contain a retention of title so that the property in the sold goods remains with the seller until full payment is made to its benefit. Notwithstanding this title of retention, the debtor company will usually have a contractual right to sell the goods in the ordinary course of its business. In this case the claim, in other words the proceeds, arising from such a contract between the debtor company and its customer is automatically assigned to the supplier. Frequently, there is a collision between security rights of the supplier and a creditor bank which has taken assignment of all present and future claims of the debtor company against its own customers. According to German law the earlier assignment basically has priority over the later on a first come – first served basis (Prioritätsprinzip – principle of priority).³⁴⁰ Banks usually secure their loans at a very early time when the company commences its business and has to provide securities for the bank loans. Consequently, the principle of priority leads to the problem that the debtor company would constantly breach its contracts with suppliers whereby it is also obliged to assign certain book debts which had already been assigned to the creditor bank. Therefore, the German Bundesgerichtshof held in consistent practice that an assignment of book debts, i.e. claims which the debtor company has against its own customers taken by a creditor bank is void as inducing a breach of contract (Verleitung zum Vertragsbruch) according to § 138(1) of the BGB if it does not contain an automatic release of such claims which are usually secured by security rights of suppliers.³⁴¹ The same must apply to an English fixed or floating charge instrument. As the current standard forms of fixed and floating charges do not contain a release of such book debts they are void according to § 138(1) of the BGB and have to be regarded as an infringement of the public policy rule of Article 26 of the Regulation as far as security rights in book debts are concerned.

(δ) Over security at the cost of other creditors and debtor company

Another potential issue with regard to the recognition of English fixed and floating charge instruments is the risk of over security. Over security occurs if there is a considerable and not only temporary discrepancy between the value of the securities and the sum of the secured loans.³⁴² German law distinguishes between initial and subsequent over security. Initial over security occurs if there is such a considerable discrepancy at the time the parties enter into the contracts and it appears certain at that time that such a discrepancy will also exist at the time when the bank takes the securities into its possession in the event of an insolvency of the debtor company. Initial over security renders the security contract void according to § 138(1) BGB.³⁴³
In contrast, subsequent over security usually occurs because the debtor company has paid off substantial parts of the loans while the value of the securities is still at a similar level like it was at the time when the parties entered into the contracts. As the value of the securities at that time was adequate, subsequent over security results only in the obligation of the creditor bank to release a part of its security rights.³⁴⁴
As English creditor banks usually take fixed and floating charges in all present and future assets of the debtor company by using catch-all-clauses there is always a serious risk of initial over security involved. It is difficult to describe in general terms to what extent the value of the securities has to exceed the sum of secured loans to cause initial over security. This is because the value of possible securities can change in different ways until the debtor company goes into insolvency. Therefore, an initial over security could be justified to a certain extent if the securities in question are prone to losing rapidly their future value. Naturally, this depends on the type of security, and has to be decided on a case to case basis. However, for any over security amounting to more than 100% at the time when the parties enter into the security contract, the possibility of initial over security must at least be taken into consideration. While there is presently no judgment which would indicate the amount with any more precision, there is a judgment by the Bundesgerichtshof according to which the debtor company can claim release of securities due to a subsequent over security when the value of the securities exceeds the sum of the secured loans by more than 50%.³⁴⁵ However, it would be wrong to apply the same figure as a limit for an initial over security as the consequences of initial and later over security are completely different.³⁴⁶ The discrepancy must be higher for an initial over security, as this will render the contract void.. The exact percentage required for initial over security is still under discussion and it is contentious if this is a sufficient criterion at all.³⁴⁷ This makes it likely that courts will continue to take a case to case approach. At any rate, if the value of the assets covered by the charge exceeds the secured loans to such a considerable extent which is likely to occur in the case of the use of catch-all-clauses, the security can be void pursuant to § 138(1) of the BGB and therefore lead to the application of the public policy clause in Article 26 of the Regulation. Even if the charge instrument contains a clause whereby the creditor bank is obliged to release securities if the security value exceeds the sum of loans to a certain extent, the charge can be void for initial over security. The reason for this is that it is extremely unlikely that the debtor company would claim the release of securities which were just given to the bank.³⁴⁸ Of course, whether there is a case of initial over security or not has to be decided carefully on a case to case basis and there is no automatism with regard to a certain percentage of over security. But there is always a serious risk of an initial over security involved in a floating charge instrument covering all present and future assets because the value of such assets is completely out of control of the creditor bank and therefore could easily exceed the secured loans to an unforeseeable extent.

Conclusion

As we have seen, English and German cross-border insolvency law differ in various aspects. For some areas, the new EU-Regulation harmonises the national laws but essential problems remain unsolved.

1. Jurisdiction

As far as English jurisdiction for insolvency proceedings is concerned, the factor of registration is sufficient in order to wind up English companies doing business abroad, even if all or most of its assets, functional operations, including its central control and management, are located abroad. With respect to the winding up of foreign companies in England, English courts have such jurisdiction even in respect of a foreign company which has no assets in the jurisdiction, provided there is a sufficient connection with England and a reasonable possibility that benefits will accrue to the company’s creditors from the winding up.
The primary rule in s 3(1) sent. 2 of the German InsO to open main insolvency proceedings is, in contrast to the English rule of registration, that the court has international jurisdiction where the company has its ‘centre of independent economic interest’. Only the second rule in § 3(1) sent. 1 of the InsO provides jurisdiction at the place where the debtor is situated. According to § 17(1) sent. 2 of the Zivilprozessordnung (Civil Procedure Code), that place is located at the seat of the company, which is in case of doubt not the company’s registered office but where the company’s decisions are made and where the administration takes place (i.e., usually at the company’s head office).
As regards jurisdiction for secondary proceedings, German law has changed 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 opened after foreign main insolvency proceedings. 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. Furthermore, regardless of the wording of Article 102(3) of the EGInsO, independent territorial insolvency proceedings (Partikularinsolvenzverfahren) can also be carried out. Independent territorial insolvency proceedings are also defined as local insolvency proceedings confined to German assets only. However, in contrast to secondary proceedings, independent territorial proceedings are opened without or prior to the opening of main insolvency proceedings elsewhere.

2. Substantive law

The question whether insolvency proceedings are subject to the jurisdiction of English or German courts is generally speaking also decisive for the application of procedural as well as substantive law. However, both English and German law recognize exceptions from the lex fori rule.
A unique and important exception can be found in Article 102(2) of the EGInsO which includes special conflict rules governing the setting aside of antecedent transactions. 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 the conflict of laws rules, is applicable for the transaction in question (lex causae) are cumulatively fulfilled (Kumulationslösung).
In contrast to English conflicts law, under which the lex fori exclusively governs avoidance, there is a higher degree of uncertainty for the insolvency practitioner under German law concerning the applicable law, 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 Ltd³⁴⁹ 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.

3. International effects of a winding up order

Under both English and German law, a winding up order is considered to have universal effect. In opposition to the principle of universality, it is also acknowledged that the enforcement of domestic decisions is dependent upon the acceptance by any foreign country in which property of the company happens to be situated. Whatever English or German law may presume to say about the consequences of an insolvency adjudication that takes place locally, these cannot immediately enter into force somewhere else in the world. Therefore, it is ultimately the private international law of the situs, , which decides whether or not a decision taken within English or German insolvency proceedings has extraterritorial effects. This is particularly important with respect to the question whether an interim insolvency administrator is entitled to take possession of the debtor’s assets situated in a foreign country. In all intra-Community cases, pursuant to Article 38 of the Regulation, a temporary administrator will be empowered to do so in order to secure the debtor’s assets. Taking the scope of the Regulation into account, the law of the situs will in future be relevant for extra-Community cases only.

4. Recognition of foreign liquidations

Winding up proceedings that have commenced in the country under the laws of which the company was originally incorporated will be recognised in England. This is even true in cases where the company’s central management and control are shown to be located in some other jurisdiction. Notwithstanding the fact that 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. The court has discretion to order a stay of English proceedings where there is a foreign liquidation or other insolvency process and will order such a stay only where it considers it appropriate to do so.
According to Article 102(1) EGInsO, foreign insolvency orders are automatically recognisable in Germany without the need of further formalities subject to certain restrictions (limited principle of universality). The foreign order has to fulfil 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. Third, under the law governing the insolvency the order must have effect on all the debtor’s assets, wherever situated.
Additionally, 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. Furthermore, the foreign insolvency court must have jurisdiction over the debtor under the rules of German international insolvency law. Ultimately, Article 102(1) sent. 2 protects the German public as recognition is granted only if the recognition does not contradict German principles of public policy. Unlike under English law, the foreign order has, therefore, subject to limitations direct and automatic consequences and enables a foreign liquidator to take action in respect of all assets situated in Germany. 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.
As far as the recognition of foreign orders of discharge and the recognition of foreign rescue and composition proceedings including the discharge of the debtor are concerned, the public policy rule of Article 102(1) sent. 2 EGInsO requires in addition that according to the law of the situs the 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 for this purpose. 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.
As follows from the general recognition of foreign insolvency proceedings, their opening leads, under § 240 ZPO, to an automatic stay of pending civil proceedings (but not of insolvency proceedings) in Germany which are related to the insolvent’s estate.

5. Concurrent Liquidations

Under English law, 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, and that any other courts are to act as ancillary, as far as they can, to the principal liquidation.
As far as German law is concerned, it is important to keep in mind that, as regards assets located in Germany, the effects of secondary proceedings in Germany prevail against those of any foreign proceedings, even if these were opened prior to the German secondary proceedings. This so-called principle of ‘controlled universality’ is, therefore, another important source of limitation as regards the recognition of foreign insolvency proceedings. Provided a German court has international jurisdiction and opens main or secondary insolvency proceedings, this guarantees that only German law is applicable for assets located in Germany, and that deviating foreign orders are not recognised.

6. International Cooperation

A foreign office holder has a right to apply for any order in German main or secondary insolvency proceedings. However, once German secondary insolvency proceedings are opened, pre-Regulation German law 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. German insolvency law has no explicit rules on international cooperation. Unlike English courts, German courts cannot make use of ‘Protocols’ in order to coordinate its procedure with foreign courts. German law does not provide for the judicial discretion which is necessary for such cooperation.
With s 426(4)-(5) of the Insolvency Act 1986 English law provides a unique rule in order to assist in foreign liquidations. English courts may not only invoke procedural rules of UK insolvency law (such as those relating to the appointment of an administrator) but also apply substantive rules of UK insolvency law to foreign companies where such application had been requested by the appropriate foreign court. According to the recent decision in Re Southern Equities Corp Ltd³⁵⁰ there is, however, no discretion for the English court to apply English law where the foreign court would clearly have made the same order to facilitate the foreign liquidation.

7. The new EU-Regulation

With the EU-Regulation on Insolvency Proceedings having come into force on 31 May 2002 one has to be aware of even more diversified international cross-border insolvency rules. The Regulation aims to simplify formalities governing the reciprocal recognition and enforcement of court decisions and tribunals in insolvency proceedings, which have an intra-Community dimension. The Regulation is, therefore, 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). Vis-à-vis non EU Member States, the Regulation does not impair the freedom of Member States to adopt the rules they desire. Quite generally, for all companies which are registered outside the European Union the current private international insolvency laws of the Member States will continue to play an important role. The scope of the Regulation is furthermore reduced as regards corporate groups, which are commonly organised through subsidiaries, as separate insolvency proceedings have to be commenced against each entity
In addition to main proceedings, the Regulation permits the opening of ‘secondary proceedings’ in States where the debtor has an ‘establishment’. The effects of ‘secondary proceedings’ are restricted to the assets of the debtor which are situated in the territory of that State. Where secondary proceedings are opened before main proceedings, they are defined as ‘territorial proceedings’, a type of proceedings already known under German law as independent territorial insolvency proceedings, and also in English law (so-called ancillary proceedings). But whereas under English and German law, the existence of assets is sufficient to create such jurisdiction, the Regulation requires an ‘establishment’ of the debtor. Therefore, England and Germany lose part of their jurisdiction in terms of secondary proceedings.
Any judgment by a court of a Member State which opens either main or secondary insolvency proceedings is recognized in principle with no further formalities in all other Member States. The only restriction arises from the different national public policy rules. The Regulation is applicable to various national rescue proceedings but does not recognize the English administrative receivership.
With respect to Article 39 of the Regulation, the English public policy rule which prohibits the direct or indirect enforcement of foreign penal or revenue claims can no longer be maintained. As far as tax and social security claims are concerned, the Regulation takes precedence over that aspect of English law.
The Regulation harmonises a number of important uniform conflict rules on insolvency related issues, but stops short of solving all conflict of laws problems relating to insolvency. An important example is the protection of rights in rem, which is afforded under Article 5. However, Article 26 of the Regulation allows exceptions of this rule if the right in rem leads to a court decision that would be contrary to the public policy of a Member State.
English fixed charges will be considered a right in rem. In contrast, it is submitted that the Regulation recognizes a floating charge as a right in rem only if the crystallisation has already been taken place before the opening of insolvency proceedings. If the floating charge crystallises with the opening of insolvency proceedings, it will not qualify as a right in rem, because that right does not exist ‘at the time of the opening of proceedings’ according to Article 5(1) of the Regulation.
Although there is a number of different security instruments under German law, there are no real equivalents to the fixed or the floating charge. Instead, German law requires securities to be taken out individually depending on the different types of property in which security rights are taken.
English security rights are in various aspects not in compliance with German public policy in the sense of Article 26 of the Regulation with the consequence that they are not enforceable in Germany.
Any English security right covering land in Germany is contrary to fundamental principles of the German property law and has to be regarded as void for as long as it is not possible to register such rights in the German Grundbuch.
Due to the much stricter requirement of determinability concerning security rights in movables under German law, it is probably very doubtful for the majority of cases whether English terms in fixed and in particular floating charge instruments will be sufficient to specify the secured assets from a German law perspective, with the likely consequence that effects of such charges over German movables will be denied on the ground of public policy under Article 26 of the Regulation.
As regards book debts, an assignment of book debts, i.e. claims which the debtor company has against its own customers, taken by a creditor bank is void under German law as inducing a breach of contract according to § 138(1) of the BGB if it does not contain an automatic release of such claims which are usually also used for security rights of suppliers. The same applies to an English fixed or floating charge instrument. Considerations under § 138 BGB form part of German public policy and are thus to be considered under the public policy exemption. As the current standard forms of fixed and floating charges do not contain a release of such book debts, i.e. claims of the debtor company against its customers, they have to be regarded as an infringement of the public policy rule of Article 26 of the Regulation as far as security rights in book debts are concerned.
English creditors should be aware of the German concept of initial and subsequent over security. There is always a serious risk of an initial over security involved in a floating charge instrument covering all present and future assets because the value of such assets is completely beyond the control of the creditor bank and therefore could easily exceed the secured loans to an unforeseeable extent. This will almost inevitably occur in the event of catch-all-clauses. Consequently, this leads again to an infringement of Article 26 of the Regulation, as considerations under § 138 BGB form part of German public policy .
This shows that the EU-Regulation is not designed to solve problems in terms of security rights in Europe. All creditors have always to consider the different national laws, in order to minimize the risk of a non enforceable security agreement. With respect to these risks it is advisable for creditors to use more restricted security clauses, and for solicitors to use limited liability clauses when dealing with German assets in security agreements.

Appendices: Translation of relevant German Statutes

Appendix A: Introductory Act of the Insolvency Act 1999 [Einführungsgesetz zur Insolvenzordnung, EGInsO]

Article 102

International Insolvency Law

(1) A foreign insolvency proceeding shall also include the domestic assets of the debtor. The foregoing shall not apply,

1. if pursuant to domestic law, the courts where the proceeding was commenced do not have jurisdiction;
2. to the extent that recognition of the foreign proceeding would lead to a result that is obviously incompatible with significant principles of German law, including but not limited to, incompatibility with basic rights.

(2) A transaction for the effects of which domestic law is determinative may only be avoided by a foreign insolvency administrator, if the transaction either can also be avoided pursuant to domestic law or is ineffective for other reasons.
(3) The recognition of a foreign proceeding shall not prevent the commencement of a separate domestic insolvency proceeding that only includes the domestic assets of the debtor. In the event that a foreign insolvency proceeding is commenced against the debtor, proof of illiquidity or overindebtedness shall not be required for the commencement of a domestic insolvency proceeding.
(4)…

Appendix B: Insolvency Act 1999 [Insolvenzordnung, InsO]

§ 3 Local Jurisdiction

(1) That insolvency court in which the debtor is generally amenable to suit shall have exclusive local jurisdiction. If the centre of an independent business activity of the debtor is located in another place, that insolvency court shall have exclusive jurisdiction in the district of which such place is located.
(2) In the event that more than one court shall have jurisdiction, the court at which the petition for commencement of the insolvency was filed shall have exclusive jurisdiction vis-à-vis the others.

§ 14 Petition by a Creditor

(1) A petition by a creditor is permissible if the creditor has a legal interest in the commencement of the insolvency proceeding and makes a credible showing of his claim and the reason for the commencement.
(2) If the petition is permissible, the insolvency court shall hear the debtor.

§ 16 Reason for Commencement

A reason for commencement is a requirement for the commencement of the insolvency proceedings.

§ 17 Illiquidity

(1) Illiquidity is a general reason for commencement.
(2) The debtor is illiquid, if it is unable to honour payment obligations when due. Illiquidity shall be deemed generally in the event that the debtor has ceased making payments.

§ 18 Impending Illiquidity

(1) In the event that the debtor shall petition for the commencement of the insolvency proceeding, impending illiquidity shall also be a reason for commencement.
(2) Impending illiquidity shall be deemed with respect to the debtor, if it will presumably not be able to honour existing payment obligations when they become due.
(3) If, with respect to a legal person or a company without legal personality, the petition is not made by all members of the representative body, all general partners or all liquidators, Subsection (1) shall only apply in the event that the moving party or parties are authorised to represent the legal person or the company.

§ 19 Overindebtedness

(1) Overindebtedness is a reason for commencement with respect to a legal person.
(2) Overindebtedness exists when the debtor’s assets no longer cover existing liabilities. A valuation of the debtor’s assets shall, however, be based upon a going concern, if such is probable under the circumstances.
(3) If no general partner of a company without legal personality is a natural person, then Subsections (1) and (2) shall apply analogously. The foregoing shall not apply in the event that, of such partners, there is another company of which a general partner is a natural person.

§ 21 Protective Orders

(1) The insolvency court shall implement all measures that appear necessary to protect against any change adverse to the creditors in the debtor’s assets until the decision with respect to the petition.
(2) Without limiting the generality of the foregoing, the court may

1. appoint an interim insolvency administrator, for whom Sections 56 and 58 through 66 shall apply analogously;
2. generally enjoin the debtor from transferring assets or order that transfers shall only be effective with the consent of the interim insolvency administrator;
3. prohibit or temporarily enjoin any acts of execution on the debtor’s assets, to the extent that immovables are not affected.

(3) If other measures are not sufficient, the court may compel the debtor to appear in court and, following a hearing, cause the debtor to be confined. If the debtor is not a natural person, the foregoing shall apply to its corporate representatives. Section 98 (3) shall apply analogously to an order of confinement.

§ 22 Legal Position of the Interim Insolvency Administrator

(1) If a interim insolvency administrator is appointed and the debtor generally enjoined from transferring assets, the debtor’s rights to manage and transfer its assets shall be transferred to the interim insolvency administrator. In such event, the interim insolvency administrator shall:

1. secure and maintain the debtor’s assets;
2. continue, until the decision with respect to the commencement of the insolvency proceeding, any business operated by the debtor, unless the insolvency court consents to a cessation of operations in order to avoid a material reduction of the assets;
3. determine whether the debtor’s assets will cover the costs of the proceeding; the court may also order him to determine, in the capacity of an expert, whether a reason for commencement exists and the likelihood of continuing the debtor’s business.

(2) If an interim insolvency administrator is appointed and the debtor not generally enjoined from transferring assets, the court shall determine the duties of the interim insolvency administrator. Such duties shall not exceed the duties pursuant to Subsection (1) sent. 2.
(3) The interim insolvency administrator has the right to enter the debtor’s commercial premises and to undertake searches there. The debtor shall permit the interim insolvency administrator to examine its books and records. It shall provide him with all necessary information; Sections 97, 98, 101(1) sent. 1 and 2 and (2) shall apply analogously.

§ 58 Supervision by the Insolvency Court

(1) The insolvency administrator shall be under the supervision of the insolvency court. The court may demand at any time specific information or a report on the status of the matter and the administration.
(2) In the event that the insolvency administrator does not fulfil his duties, the court may; following prior notice, assess coercive penalties against him. The amount of the coercive penalty in any individual case may not exceed DM fifty thousand. The administrator shall have the right of immediate appeal against the order.
(3) Subsection (2) shall apply analogously to the enforcement of the duty of a terminated administrator to return assets.

§ 60 Liability of the Insolvency Administrator

(1) The insolvency administrator shall be liable for damages to all parties for wrongful violation of his statutory duties. He is obligated to act with the care of a prudent and conscientious insolvency administrator.
(2) To the extent that the administrator must, for the performance of his duties. Rely on employees of the debtor within the context of their past activities, and such persons are not obviously unqualified, the administrator shall not be liable, pursuant to § 278 of the Civil Code, for the fault of such persons, but he is responsible for supervising them and for significant decisions.

§ 80 Transfer of the Rights of Management and Disposition

(1) As a result of the commencement of the insolvency proceeding, the right of the debtor to manage and transfer assets that constitute part of the insolvency estate shall pass to the insolvency administrator.
(2) Any prohibition on transfer affecting the debtor which has as its purpose the protection of specific persons (§§ 135 and 136 of the Civil Code) shall have no effect in the proceeding. The provisions with respect to the effects of an attachment or seizure in the course of execution shall remain unaffected.

Appendix C: Civil Code [Bürgerliches Gesetzbuch, BGB]

[see the GLA website for the full text of BGB – ed]

§ 138 Legal transaction against public policy; usury

(1) A legal transaction which is against public policy is void.
(2) A legal transaction by which a person exploiting the need, inexperience, lack of sound judgment or substantial lack of will power of another, causes to be promised or granted to himself or to a third party in exchange for a performance, pecuniary advantages which are in obvious disproportion to the performance is also void.

§ 826 Wilful damage contrary to public policy

A person who wilfully causes damage to another in a manner contrary to public policy is bound to compensate the other for the damage.

§ 873 Acquisition by way of agreement and registration

(1) The conveyance of the ownership in a piece of land, the encumbrance of a piece of land with a right, as well as the transfer or encumbrance of such a right requires, to the extent that the law does not otherwise provide, the agreement of the person entitled and of the other party with regard to the occurrence of the change of title and the registration of the change of title in the Land Register.
(2)…

Appendix D: Stock Corporation Law [Aktiengesetz, AktG]

§ 291 Contract of domination, Contract to transfer profits

(1) Enterprise contracts are contracts by which a stock corporation or an association limited by shares subjects the direction of its association to another enterprise (contract of domination) or by which it obligates itself to transfer all its profits to another enterprise (contract to transfer profits). A contract by which a stock corporation or an association limited by shares undertakes to conduct its enterprise for the account of another enterprise is also considered as a contract to transfer all of the profit.
(2) If enterprises which are not dependent on each other submit themselves by contract to a uniform direction, without having one of them become therewith dependent on another of the contracting enterprises, then this contract does not constitute a contract of domination.
(3) …

§ 292 Other enterprise contracts

(1) In addition enterprise contracts are contracts by which a stock corporation or an association limited by shares

1. obligates itself to pool its profits or the profit of one or more of its establishments wholly or partly with the profit of other enterprises or of one or more establishments of other enterprises for the purpose of dividing a joint profit (profit pool),
2. obligates itself to transfer a part of its profits or the profit of one or more of its establishments wholly or partly to another (contract to transfer profits in part),
3. leases or otherwise leaves the business of its enterprises to another (shop leasing contract, business transfer contract)

(2) A contract for profit sharing with members of the board of management and of the supervisory board or with individual employees of the association as well as a stipulation of profit sharing in current business contracts or in license contracts does not constitute a contract to transfer profits in part.
(3) A shop leasing contract or a business transfer contract and the resolution by which the shareholders’ meeting has consented to the contract are not void for the reason that the contract violates §§ 57, 58 and 60. Sentence 1 does not exclude the contesting of the resolution for this violation.

Footnotes

1 Dr. jur. (Hamburg), M. St. (Oxon); Rechtsanwalt, CMS Hasche Sigle (Hamburg). I am grateful to Professor Dan Prentice and David A Griffiths for their fruitful support.

2 The problems arising from the insolvency of individuals are dealt with in IF Fletcher Insolvency in Private International Law (Clarendon Press Oxford 1999) chapter 2, 21-114.

3 See, for example, P Smart Cross-Border Insolvency (2nd edn Butterworths London 1998) 2.

4 Re Paramount Airways Ltd [1992] BCLC 710; Re Paramount Airways Ltd (in adminstration) [1993] Ch 223, 239. Similar Browne-Wilkinson V-C in Re Bank of Credit and Commerce International SA [1992] BCLC 570, 577.

5 Re Brierley (1992) 145 BR 151 (Bankr SDNY).

6 Draft Model Legislative Provisions on Cross-Border Insolvency, adopted on 30 May 1997 by the United Nations Commission on international Trade Law (UNCITRAL) (United Nations General Assembly Official Record, 12-30 May 1997; 52nd Session; Supplement No 17 (A/52/17). For the contents of the draft see IF Fletcher ‘Bridges To The Future ­– Building Tomorrow’s Solutions For International Insolvency Problems’ –[2000] CFILR 161; ­M Prior ‘The UNCITRAL Model Law on cross-border insolvency’ (1998) 14 ILP 215; IF Fletcher Insolvency in Private International Law (Clarendon Press Oxford 1999) chapter 8, ­­323-363. The text is printed in Insolvency in Private International Law (this note) Appendix IV, 323-441.

7 In this respect the Convention Regarding Bankruptcy (The Nordic Bankruptcy Convention) (Copenhagen, 7 November 1933; No 3574 (1935) is an successful example. For its contents see M Bogdan ‘The Nordic Bankruptcy Convention’ in JS Ziegel (ed) Current Developments in International and Comparative Corporate Insolvency Law (Clarendon Press Oxford 1994) Chapter 31; IF Fletcher Insolvency in Private International Law (Clarendon Press Oxford 1999) 237-245. The text is printed in Insolvency in Private International Law (this note) Appendix VI, 449-453.

8 Council Regulation (EC) on insolvency proceedings No 1346/2000 of 29 May 2000 [2000] OJ L160/1.

9 For the text see IF Fletcher Insolvency in Private International Law (Clarendon Press Oxford 1999) Appendix II 387-408. The European Convention on Certain International Aspects of Bankruptcy (Istanbul Convention) (Istanbul, 5 June 1990; ETS No 136 (1990), the ancestor of the International European Convention on Insolvency Proceedings, has also never entered into force.

10 P Smart Cross-Border Insolvency (2nd edn Butterworths London 1998) 9.

11 IF Fletcher Insolvency in Private International Law (Clarendon Press Oxford 1999) 298-300.

12 P Smart Cross-Border Insolvency (2nd edn Butterworths London 1998) 10.

13 RM Goode Principles of Corporate Insolvency Law (2nd edn Sweet & Maxwell London 1997) 495.

14 For arguments regarding the different principles see IF Fletcher Insolvency in Private International Law (Clarendon Press Oxford 1999) 10-12.

15 IF Fletcher Insolvency in Private International Law (Clarendon Press Oxford 1999) 11.

16 Council Reg 1346/2000, Art 4.

17 Council Reg 1346/2000, Art 3.

18 [1989] QB 360.

19 [1992] BCC 757.

20 See this chapter F.

21 See chapter 3.

22 For references see footnote 5.

23 D Archer ‘Insolvency update’ (2000) Solicitors Journal 753, 754.

24 M Prior ‘The international implications of the recent Insolvency Bill 2000’ (2000) 16 ILP 108.

25 Convention on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters 1968 (the Brussels Convention) (Brussels, 27 September 1968); [1972] OJ L299/32-42.

26 RM Goode Principles of Corporate Insolvency Law (2nd edn Sweet & Maxwell London 1997) 499.

27 Reuss v Bos (1871) LR 5 (HL) 176; Re Tumacacori Mining Co (1874) LR 17 Eq 534; IF Fletcher Insolvency in Private International Law (Clarendon Press Oxford 1999) 125.

28 Re BCCI SA v BCCI (Overseas) Ltd (1993) BCC 787; Devon v Somerset Farmers Ltd [1993] BCC 140; N Cooper and R Jarvis Recognition and Enforcement of Cross-Border Insolvency (INSOL International 1996) 31-32.

29 Re Commercial Bank of India (1868) LR 6 Eq 517; Re Matheson Brothers Ltd (1884) 27 ChD 225; Re Mercantile Bank of Australia [1892] 2 Ch 204.

30 IF Fletcher Insolvency in Private International Law (Clarendon Press Oxford 1999) 135-139 and 143-145. The virtue of flexibility that is inherent in the ‘just and equitable’ ground for winding up can be especially valuable in cases where the activities in this country of a foreign-formed company are such to constitute a menace to the public interest, as it was recognised in Re Vanilla Service BV & ors The Times 24 February 1998 (Rattee J).

31 Banque des Marchands de Moscou v Kindersley [1952] 1 Ch 112, 127.

32 [1954] 1 Ch 315.

33 [1973] 1 Ch 75.

34 Re Compania Merabello San Nicholas SA was used as a precedent in subsequent cases, see Inland Revenue v Highland Engineering Ltd [1975] SLT 203; Re Allobrogia Steamship Corp [1978] 3 All ER 423; Re Eloc Electro-Optieck and Communicatie BV [1982] Ch 43.

35 [1988] Ch 210.

36 This proposition was also a basis of the earlier decision of Nourse J in Re Eloc Electro-Optieck and Communicatie BV [1982] Ch 43.

37 RM Goode Principles of Corporate Insolvency Law (2nd edn Sweet & Maxwell London 1997) 500.

38 Eg if social welfare claims of employees are met after a winding-up, see Re Eloc Electro-Optieck and Communicatie BV [1982] Ch 43.

39 Re Azoff-Don Commercial Bank [1954] Ch 315; RM Goode Principles of Corporate Insolvency Law (2nd edn Sweet & Maxwell London 1997) 501.

40 Re Real Estate Development Co [1991] BCLC 210.

41 Re International Tin Council [1989] Ch 309 (CA); Re Witney Town Football and Social Club [1993] BCC 874.

42 Re International Tin Council [1989] Ch 309 (CA); Re Witney Town Football and Social Club [1993] BCC 874.

43 International Westminster Bank plc v Okeanos Maritime Corporation [1988] Ch 210, 226-227; Re Harrods (Buenos Aires) Ltd [1992] Ch 72 (CA).

44 RM Goode Principles of Corporate Insolvency Law (2nd edn Sweet & Maxwell London 1997) 501.

45 Pardo v Bingham (1868) LR 6 Eq 485; Thurnburn v Steward (1871) LR 3 PC 478 (PC); Re Kloebe (1884) 28 ChD 175; IF Fletcher Insolvency in Private International Law (Clarendon Press Oxford 1999) 72.

46 Re Doetsch [1896] 2 Ch 836.

47 Ex p Melbourn (1870) LR 6 Ch App 64, 67-70.

48 IF Fletcher Insolvency in Private International Law (Clarendon Press Oxford 1999) 73.

49 [1992] 3 All ER 1 (CA).

50 IF Fletcher Insolvency in Private International Law (Clarendon Press Oxford 1999) 153.

51 Re English, Scottish and Australian Chartered Bank [1893] 3 Ch 385, 394; Re Suidair International Airways Ltd [1951] Ch 165, 173-174.

52 [1996] 4 All ER 796, 814-822.

53 (the Rome Convention) (Rome, 19 June 1980; signed by the UK on 7 December 1981). In force in the UK with effect from 1 April 1991, by virtue of the Contracts (Applicable Law) Act 1990.

54 Gibbs & Son v La Société Industrielle et Commerciale des Métaux (1890) 25 QBD 399 (CA).

55 Royal Exchange v The Liquidator [1952] 1 All ER 1269; Re Banque des Marchands de Moscou (Koupetschesky) (No 2) [1954] 1 WLR 1108 ; National Bank of Greece and Athens SA n Metliss [1958] AC 509 (HL); Adams v National Bank of Greece SA [1961] AC 255 (HL).

56 IF Fletcher Insolvency in Private International Law (Clarendon Press Oxford 1999) 80. Furthermore, it may be necessary (in the case of security over movables) to refer to the law of any country to which the property has subsequently been moved, see Winkworth v Christie, Manson & Woods Ltd [1980] Ch 496.

57 Skyline Associates v Small (1974) 50 DLR 217; IF Fletcher Insolvency in Private International Law (Clarendon Press Oxford 1999) 154.

58 Re Banque des Marchands de Moscou (Koupetschesky) [1958] Ch 182.

59 Banco de Bilbao v Sancha [1938] 2 KB 176 (CA).

60 Re International Tin Council [1987] Ch 419, 446.

61 RM Goode Principles of Corporate Insolvency Law (2nd edn Sweet & Maxwell London 1997) 501.

62 For an important example as regards English security rights under the new EU Regulation see chapter 3 D.

63 Re Blithman (1866) LR 2 Eq 23; Re Hayward [1897] 1 Ch 905.

64 Lazard Bros v Midland Bank Ltd [1933] AC 289, 297 (HL); Adams v National Bank of Greece SA [1961] AC 255 (HL); Carl Zeiss Stiftung v Rayner & Keeler Ltd [1967] AC 853 (HL).

65 Baden and others v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie SA [1992] 4 All ER 161, 229-230 ; Bank of Ethiopia v National Bank of Egypt [1937] Ch 513.

66 Companies Act 1985 ss 652, 652a.

67 IF Fletcher Insolvency in Private International Law (Clarendon Press Oxford 1999) 169.

68 Neale v Cottingham (1770) Wallis 54, 75; Araya v Coghill (1921) SC 462.

69 P Smart Cross-Border Insolvency (2nd edn Butterworths London 1998) 222; Waite v Bingley (1882) 21 ChD 674; Re Levy’s Trusts (1885) 30 ChD 119; Australian Mutual Provident Society v Gregory (1908) 5 CLR 615.

70 Galbraith v Grimshaw [1910] AC 508 (HL). For criticism of this ruling see AE Anton Private International Law (2nd edn W Green Edinburgh 1990) 734.

71 Re Vocalion (Foreign) Ltd [1932] 2 Ch 196.

72 Felixstowe Dock and Railway Co v US Lines Inc [1989] QB 360.

73 Minna Craig Steamship Co v Chartered Mercantile Bank of India, London and China [1897] 1 QB 460.

74 Re Oriental Inland Steam Co (1874) LR 9 Ch App 557.

75 Re Maxwell Communications Corporation plc [1992] BCC 757.

76 Government of India v Taylor [1955] AC 491 (HL); Schlemmer v Property Resources Ltd [1974] 3 All ER 451; Peter Buchanan Ltd v Mc Vey [1954] IR 89.

77 Re P MacFadyen & Co [1908] 1 KB 675; Re Bank of Credit and Commerce International SA (No 3) [1993] BCLC 106, 111; Re Bank of Credit and Commerce International SA (No 10) [1996] 4 All ER 796.

78 RM Goode Principles of Corporate Insolvency Law (2nd edn Sweet & Maxwell London 1997) 507.

79 Re English, Scottish and Australian Chartered Bank [1893] 3 Ch 385, 394; Re Commercial Bank of South Australia (1886) 33 ChD 174, 178; Re Hibernian Merchants Ltd [1958] 1 Ch 76; Re Bank of Credit and Commerce International SA (No 10) [1996] 4 All ER 796, 814-822.

80 Re Commercial Bank of South Australia (1886) 33 ChD 174, 178.

81 Re Matheson Brothers Ltd (1884) 27 ChD 225.

82 Fletcher Insolvency in Private International Law (Clarendon Press Oxford 1999) 178-181.

83 Felixstowe Dock and Railway Co v US Lines Inc [1989] QB 360; Re Maxwell Communications Corporation plc [1992] BCC 757; Fletcher Insolvency in Private International Law (Clarendon Press Oxford 1999) 182-183.

84 [1989] QB 360; see in detail Millett L J ‘Cross-Border Insolvency: The Judicial Approach’ (1997) 6 IIR 99, 107-108.

85 EA Sellers and HA Zimmermann ‘Co-ordinating cross-border restructurings and insolvencies: the Starcom and Dow Corning Decisions –US/Canadian universality achieved’ [2000] Insolvency Law and Practice 100, 104; JL Westbrook ‘The lessons of Maxwell Communication’ (1996) 64 Fordham L Rev 2531.

86 Lord Hoffmann ‘Cross-border insolvency: a British perspective’ (1996) 64 Fordham L Rev 2507, 2515.

87 See the references in EA Sellers and HA Zimmermann ‘Co-ordinating cross-border restructurings and insolvencies: the Starcom and Dow Corning Decisions –US/Canadian universality achieved’ [2000] Insolvency Law and Practice 100, 105.

88 Farley J ‘A judicial perspective on international cooperation in insolvency cases’ (1998) Abl Jnl LEXIS 59 (March 1998) 2.

89 Farley J ‘A judicial perspective on international cooperation in insolvency cases’ (1998) Abl Jnl LEXIS 59 (March 1998) 4.

90 Farley J ‘A judicial perspective on international cooperation in insolvency cases’ (1998) Abl Jnl LEXIS 59 (March 1998) 6.

91 [1989] QB 360.

92 Assistance purely on a ‘court-to-court’ basis, it does not cover requests from a foreign office holder. IF Fletcher Insolvency in Private International Law (Clarendon Press Oxford 1999) 188; RM Goode Principles of Corporate Insolvency Law (2nd edn Sweet & Maxwell London 1997) 504.

93 The jurisdictions whose courts may request such assistance are specified in s 426(11) and (12) and in the Cooperation of Insolvency Courts (Designation of Relevant Countries and Territories) Order 1986 (S I 1986 No 2123) as extended by (S I 1989 No 2409, S I 1996 No 253 and S I 1998 No 2766).

94 [1992] BCC 394.

95 Millett L J ‘Cross-Border Insolvency: The Judicial Approach’ (1997) 6 IIR 99, 104.

96 [1994] 3 All ER 764.

97 RM Goode Principles of Corporate Insolvency Law (2nd edn Sweet & Maxwell London 1997) 505.

98 Re Bank of Credit and Commerce International S.A. (No.9) [1994] 3 All ER 764, 785.

99 [1997] 1 BCLC 497.

100 Millett L J ‘Cross-Border Insolvency: The Judicial Approach’ (1997) 6 IIR 99, 104.

101 Millett L J ‘Cross-Border Insolvency: The Judicial Approach’ (1997) 6 IIR 99, 104.

102 In Re Dallhold Estates (UK) Pty Ltd [1992] BCC 394 Chadwick J held that this was the effect of the subsection.

103 IF Fletcher Insolvency in Private International Law (Clarendon Press Oxford 1999) 201.

104 Hughes v Hannover [1997] 1 BCLC 497, 519-524 (CA). An order was also declined in Re Focus Insurance Co Ltd [1997] 1 BCLC 219.

105 Re Bank of Credit and Commerce International S.A. (No.9) [1994] 3 All ER 764, 785; Hughes v Hannover [1997] 1 BCLC 497, 513-514 (CA); A Borrowdale ‘Developments in transnational insolvencies’ (1998) 14 ILP 161.

106 Re Dallhold Estates (UK) Pty Ltd [1992] BCC 394; Re JN Taylor Finance Pty Ltd, England v Purves [1998] BPIR 347; Fletcher Insolvency in Private International Law (Clarendon Press Oxford 1999) 192-201.

107 [2000] 1 BCLC 21; J Goldring and J Perry ‘Mutual co-operation in multinational insolvencies – approach of the English courts’ (2000) 16 ILP 110.

108 Re Southern Equities Corp Ltd. [2000] 1 BCLC 21; J Goldring and J Perry ‘Mutual co-operation in multinational insolvencies – approach of the English courts’ (2000) 16 ILP 111.

109 Re Southern Equities Corp Ltd [2000] 1 BCLC 21.

110 L Kosmin ‘Obtaining information in support of a foreign liquidation: the impact of the Insolvency Act 1986, s 426’ [2000] CFILR 209, 216 supports the view that when a request is made under s 426 the courts will start from the position that the assistance should be given.

111 J Goldring and J Perry ‘Mutual co-operation in multinational insolvencies – approach of the English courts’ (2000) 16 ILP 110.

112 BT-Drucks. (Report of the German Bundestag) 12/2443 (15.4.1992) chapter 9, §§ 379-399.

113 E Braun and R Riggert and T Kind Die Neuregelungen der Insolvenzordnung in der Praxis (Richard Boorberg Verlag 1999) 259.

114 S Smid ‘Das Deutsche Internationale Insolvenzrecht und das Europäische Insolvenz-Übereinkommen’ [1998] DZWir 432; H Prütting ‘Aktuelle Entwicklungen des internationalen Insolvenzrechts’ [1996] ZIP 1277, 1279.

115 S Smid ‘Das Deutsche Internationale Insolvenzrecht und das Europäische Insolvenz-Übereinkommen’ [1998] DZWir 432, 433; dissenting opinion A Flessner ‘Internationales Insolvenzrecht in Deutschland nach der Reform’ [1997] IPRax 1, 3.

116 Report of the committee on legal affairs, BT-Drucks. (Report of the German Bundestag) 12/7303 (1992) 117; M Balz ‘Das neue Europäische Insolvenzübereinkommen’ [1996] ZIP 948, 955.

117 Doubts also expressed by A Flessner ‘Das künftige Internationale Insolvenzrecht im Verhältnis zum Europäischen Insolvenzübereinkommen’ in H Stoll (ed) Vorschläge und Gutachten zur Umsetzung des EU-Übereinkommens über Insolvenzverfahren im deutschen Recht (J C B Mohr Tübingen 1997) 219; G Paulus ‘Protokolle – ein anderer Zugang zur Abwicklung grenzüberschreitender Insolvenzen’ [1998] ZIP 977, 979.

118 U Ehricke ‘Die Wirkungen einer ausländischen Restschuldbefreiung im Inland nach deutschem Recht’ [1998] RabelZ Bd. 62, 712, 714.

119 A Flessner ‘Internationales Insolvenzrecht in Deutschland nach der Reform’ [1997] IPRax 1, 2; E Braun and R Riggert and T Kind Die Neuregelungen der Insolvenzordnung in der Praxis (Richard Boorberg Verlag 1999) 261-262; H Hess InsO Kommentar zur Insolvenzordnung mit EGInsO (C F Müller Verlag Heidelberg 1999) Art 102 EGInsO 105.

120 BT-Drucks. (Report of the German Bundestag) 12/2443 (15.4.1992) reasons give for § 3 InsO.

121 Hereinafter referred to as ZPO.

122 D Leipold ‘Miniatur oder Bagatelle: das internationale Insolvenzrecht im deutschen Reformwerk 1994’ in W Gerhardt, U Diederichsen, B Rimmelspacher and J Costede (edd) Festschrift für Wolfram Henckel (Walter de Gruyter Berlin 1995) 533, 540.

123 E Braun R Riggert and T Kind Die Neuregelungen der Insolvenzordnung in der Praxis (Richard Boorberg Verlag 1999) 262.

124 BM Kübler and H Prütting (ed) InsO Kommentar zur Insolvenzordnung (Vol 1 RWS Verlag Köln February 2000) Introduction 104.

125 S Smid ‘Das Deutsche Internationale Insolvenzrecht und das Europäische Insolvenz-Übereinkommen’ [1998] DZWir 432, 434.

126 See chapter 3 B 3 (a).

127 U Weinbörner ‘Die neue Insolvenzordnung und das EU-Übereinkommen über Insolvenzverfahren’ [1996] Rpfleger 494, 498.

128 D Leipold ‘Miniatur oder Bagatelle: das internationale Insolvenzrecht im deutschen Reformwerk 1994’ in W Gerhardt, U Diederichsen, B Rimmelspacher and J Costede (edd) Festschrift für Wolfram Henckel (Walter de Gruyter Berlin 1995) 533, 541.

129 A Flessner ‘Internationales Insolvenzrecht in Deutschland nach der Reform’ [1997] IPRax 1, 3.

130 S Smid ‘Das Deutsche Internationale Insolvenzrecht und das Europäische Insolvenz-Übereinkommen’ [1998] DZWir 432, 438.

131 D Leipold ‘Miniatur oder Bagatelle: das internationale Insolvenzrecht im deutschen Reformwerk 1994’ in W Gerhardt, U Diederichsen, B Rimmelspacher and J Costede (edd) Festschrift für Wolfram Henckel (Walter de Gruyter Berlin 1995) 533, 540.

132 (the Rome Convention) (Rome, 19 June 1980). Transferred into German law as Art 27-38 of the Einführungsgesetz zum Bürgerlichen Gesetzbuch (Introductory Act of the Civil Code).

133 A Flessner ‘Internationales Insolvenzrecht in Deutschland nach der Reform’ [1997] IPRax 1, 9; E Braun and R Riggert and T Kind Die Neuregelungen der Insolvenzordnung in der Praxis (Richard Boorberg Verlag 1999) 263; imprecise S Smid ‘Das Deutsche Internationale Insolvenzrecht und das Europäische Insolvenz-Übereinkommen’ [1998] DZWir 432, 433.

134 See § 129(1) InsO. The rules to set aside antecedent transactions in Germany are governed by §§ 129-147 of the InsO. Pursuant to § 146(1) of the InsO, an application to set aside an antecedent transaction can only be brought within two years of the date of the opening of insolvency proceedings.

135 A Flessner ‘Internationales Insolvenzrecht in Deutschland nach der Reform’ [1997] IPRax 1, 9.

136 BT-Drucks. (Report of the German Bundestag) 12/2443 (15.4.1992) reasons given for § 382.

137 See chapter 1 B.

138 [1992] 3 All ER 1 (CA).

139 M Balz ‘Das neue Europäische Insolvenzübereinkommen’ [1996] ZIP 948, 951.

140 A Flessner ‘Internationales Insolvenzrecht in Deutschland nach der Reform’ [1997] IPRax 1, 9; BGH [1997] JZ 568, 570 with further references. See also the comment of D Leipold [1997] IPRax 571.

141 BGHZ 118, 151, 168. Admittedly, in BGH [1997] JZ 568, 570 the Bundesgerichtshof held in favour of the cumulative approach but only to respect the legislator’s decision which is binding for it after it comes into force.

142 RGZ 54, 193; 100, 242.

143 BGHZ 95, 256, 264.

144 BGHZ 88, 147, 150; BGH [1992] ZIP 781, 783.

145 Or even, pursuant to § 22(1) sent. 1 InsO, at an earlier stage in case the court orders a restraint of alienation as a measure of protecting assets.

146 BGH [1992] ZIP 781, 783.

147 H Prütting ‘Aktuelle Entwicklungen des internationalen Insolvenzrechts’ [1996] ZIP 1277, 1279; H Haarmeyer and W Wutzke and K Förster Handbuch zur Insolvenzordnung InsO/EGInsO (2nd edn CH Beck München 1998) 744; BGHZ 118, 151 = BGH [1992] ZIP 781, 784.

148 BGHZ 95, 256, 264; BGH [1992] ZIP 781, 784.

149 See chapter 1 C.

150 H Haarmeyer and W Wutzke and K Förster Handbuch zur Insolvenzordnung InsO/EGInsO (2nd edn CH Beck München 1998) 745.

151 H Hess InsO Kommentar zur Insolvenzordnung mit EGInsO (C F Müller Verlag Heidelberg 1999) Art 102 EGInsO 126.

152 H Haarmeyer and W Wutzke and K Förster Handbuch zur Insolvenzordnung InsO/EGInsO (2nd edn CH Beck München 1998) 744.

153 Council Reg 1346/20008; M Balz ‘Das neue Europäische Insolvenzübereinkommen’ [1996] ZIP 948, 954.

154 H Prütting ‘Aktuelle Entwicklungen des internationalen Insolvenzrechts’ [1996] ZIP 1277, 1280.

155 [1994] ZIP 1609, 1610 (Court of Appeal).

156 H Prütting ‘Aktuelle Entwicklungen des internationalen Insolvenzrechts’ [1996] ZIP 1277, 1281.

157 See § 60(1) InsO.

158 §§ 35, 36 InsO.

159 Under the new CPR now called freezing injunction (order), see Part 25.1(1)(f) CPR.

160 BGHZ 95, 256 overruling its own holding in BGH [1960] NJW 774 and referring to BGHZ 88, 147, 150; upheld in BGHZ 122, 373.

161 RGZ 14, 407; 54, 193; 100, 242;

162 E Braun R Riggert and T Kind Die Neuregelungen der Insolvenzordnung in der Praxis (Richard Boorberg Verlag 1999) 257.

163 The same problem also occurred in BGHZ 125, 196 were a Danish construction company had receivables against its German principal.

164 BGH [1997] IPRax 415, 416; OLG Frankfurt am Main [1995] WM 2079 and [1993] ZIP 1659.

165 A Flessner ‘Internationales Insolvenzrecht in Deutschland nach der Reform’ [1997] IPRax 1, 4.

166 See chapter 1 D 2.

167 BGHZ 95, 256, 263. For details regarding the rights of the foreign liquidator see H Hess InsO Kommentar zur Insolvenzordnung mit EGInsO (C F Müller Verlag Heidelberg 1999) Art 102 EGInsO 113.

168 BGHZ 95, 256, 267. For concurrent proceedings see below section F.

169 BGHZ 95, 256, 273.

170 BGHZ 95, 256, 268.

171 S Smid ‘Das Deutsche Internationale Insolvenzrecht und das Europäische Insolvenz-Übereinkommen’ [1998] DZWir 432, 434.

172 BGHZ 95, 256.

173 E Braun R Riggert and T Kind Die Neuregelungen der Insolvenzordnung in der Praxis (Richard Boorberg Verlag 1999) 258. The principle of ‘controlled universality’ which is another important source of limitation as regards the recognition of foreign insolvency proceedings will be dealt with in section E.

174 Fundamental BGHZ 95, 256, 269. See for another example (Swedish insolvency proceedings) of these restrictions BGH [1997] JZ 568, 569.

175 BGH [1997] ZIP 39, 41.

176 See § 3 InsO and this chapter section A.

177 BGHZ 95, 256, 270.

178 BGH [1997] JZ 568, 569; BGHZ 122, 373, 375; S Smid ‘Das Deutsche Internationale Insolvenzrecht und das Europäische Insolvenz-Übereinkommen’ [1998] DZWir 432, 435.

179 BGH [1993] WM 1388; BGHZ 95, 256, 269; S Smid ‘Das Deutsche Internationale Insolvenzrecht und das Europäische Insolvenz-Übereinkommen’ [1998] DZWir 432, 435.

180 BGHZ 122, 373.

181 OLG Frankfurt/M [1996] InVO 39, 41.

182 H Prütting ‘Aktuelle Entwicklungen des internationalen Insolvenzrechts’ [1996] ZIP 1277, 1283.

183 OLG Frankfurt/M [1996] InVO 39, 41; H Prütting ‘Aktuelle Entwicklungen des internationalen Insolvenzrechts’ [1996] ZIP 1277, 1283.

184 BGHZ 122, 373;

185 C Paulus ‘Anmerkung: Restschuldbefreiung und internationales Insolvenzrecht’ [1994] ZEuP 301, 309.

186 U Ehricke ‘Die Wirkungen einer ausländischen Restschuldbefreiung im Inland nach deutschem Recht’ [1998] RabelZ Bd. 62, 712, 732; BGH [1997] ZIP 39, 42.

187 H Prütting ‘Aktuelle Entwicklungen des internationalen Insolvenzrechts’ [1996] ZIP 1277, 1283; U Ehricke ‘Die Wirkungen einer ausländischen Restschuldbefreiung im Inland nach deutschem Recht’ [1998] RabelZ Bd. 62, 712, 738.

188 Neither German law nor the new EU-Regulation provides an international jurisdiction for all relating civil proceedings where the insolvency proceedings are opened. The so called vis attractiva concursus can be found eg in the US, see EJ Habscheid ‘Das deutsche internationale Insolvenzrecht und die vis attractiva concursus’ [1999] ZIP 1113; E Schollmeyer ‘Die vis attractiva concursus im deutsch-österreichischen Konkursvertrag’ [1998] IPRax 29; E Schollmeyer ‘§ 240 ZPO und Auslandskonkurs’ [1999] IPRax 26.

189 E Schollmeyer ‘§ 240 ZPO und Auslandskonkurs’ [1999] IPRax 26.

190 BGH [1999] IPRax 42; OLG München [1996] ZIP 385; OLG Karlsruhe [1990] ZIP 665; EJ Habscheid ‘Das deutsche internationale Insolvenzrecht und die vis attractiva concursus’ [1999] ZIP 1113, 1114.

191 See chapter 1 D 3.

192 BGHZ 95, 256.

193 BGH [1988] ZIP 247, 248; BGH [1962] NJW 1511. For details see E Schollmeyer ‘§ 240 ZPO und Auslandskonkurs’ [1999] IPRax 26, 27; H Prütting ‘Aktuelle Entwicklungen des internationalen Insolvenzrechts’ [1996] ZIP 1277, 1281.

194 BGHZ 95, 256.

195 H Prütting ‘Aktuelle Entwicklungen des internationalen Insolvenzrechts’ [1996] ZIP 1277, 1282.

196 H Prütting ‘Aktuelle Entwicklungen des internationalen Insolvenzrechts’ [1996] ZIP 1277, 1282.

197 See this chapter A.

198 See this chapter D 2 (b).

199 H Hess InsO Kommentar zur Insolvenzordnung mit EGInsO (C F Müller Verlag Heidelberg 1999) Art 102 EGInsO 110.

200 G Paulus ‘Protokolle – ein anderer Zugang zur Abwicklung grenzüberschreitender Insolvenzen’ [1998] ZIP 977, 978; A Flessner ‘Internationales Insolvenzrecht in Deutschland nach der Reform’ [1997] IPRax 1, 4.

201 See chapter 2 D.

202 Facts reported in [1994] JIBL N-150.

203 Rt Hon The Lord Hoffmann ‘Cross-Border Insolvency’ The 1996 Denning Lecture Bar Association for Commerce, Finance & Industry transcript.

204 A Flessner ‘Internationales Insolvenzrecht in Deutschland nach der Reform’ [1997] IPRax 1, 4.

205 See chapter 1 F.

206 See Re Maxwell Communications Corporation plc [1992] BCC 757; EA Sellers and HA Zimmermann ‘Co-ordinating cross-border restructurings and insolvencies: the Starcom and Dow Corning Decisions –US/Canadian universality achieved’ [2000] Insolvency Law and Practice 100, 104; G Paulus ‘Protokolle – ein anderer Zugang zur Abwicklung grenzüberschreitender Insolvenzen’ [1998] ZIP 977, 979 reports about cases from Israel and Japan which are both non-common law countries where Protocols have successfully been applied.

207 RM Goode Principles of Corporate Insolvency Law (2nd edn Sweet & Maxwell London 1997) 509.

208 As regards the US law see M Balz ‘The European Union Convention on Insolvency Proceedings’ [1996] 70 American Bankruptcy LJ 485, 489, who emphasises that the right of equity is alien to civil law thinking.

209 M Balz ‘The European Union Convention on Insolvency Proceedings’ [1996] 70 American Bankruptcy LJ 485, 489.

210 G Paulus ‘Protokolle – ein anderer Zugang zur Abwicklung grenzüberschreitender Insolvenzen’ [1998] ZIP 977, 981.

211 Re P MacFadyen & Co [1908] 1 KB 675; Re Bank of Credit and Commerce International SA (No 3) [1993] BCLC 106, 111; Re Bank of Credit and Commerce International SA (No 10) [1996] 4 All ER 796.

212 Council Reg 1346/2000, Art. 47.

213 A Strub ‘Das Europäische Konkursübereinkommen’ [1996] EuZW 71.

214 A Strub ‘Das Europäische Konkursübereinkommen’ [1996] EuZW 71, 72.

215 M Balz ‘The European Union Convention on Insolvency Proceedings’ [1996] 70 American Bankruptcy LJ 485, 501.

216 M Balz ‘The European Union Convention on Insolvency Proceedings’ [1996] 70 American Bankruptcy LJ 485, 501.

217 M Balz ‘Das neue Europäische Insolvenzübereinkommen’ [1996] ZIP 948, 949.

218 See 3 B 3 (b).

219For the definition of an ‘insurance undertaking’ see Council Directive EEC/73/279 [1973] OJ L 228/3 and Council Directive EEC/79/267 [1979] OJ L 63/1. ‘Credit institutions’ are defined in Council Directive EEC/77/780 [1977] OJ L 322/30. An ‘investment undertaking’ is defined in Council Directive EEC/93/22 [1993] OJ 141/27 and ‘collective investment undertaking’ are subject to Council Directive EEC/85/611 [1985] OJ L 375/3.

220 Council Directive on settlement finality in payment and securities settlement systems No 98/26/EC of 19 May 1998 [1998] OJ L166/45.

221 Council Reg 1346/2000, Art. 3.

222 U Weinbörner ‘Die neue Insolvenzordnung und das EU-Übereinkommen über Insolvenzverfahren’ [1996] Rpfleger 494, 497.

223 Chapter 1 A 1.

224 Chapter 2 A 1.

225 M Balz ‘Das neue Europäische Insolvenzübereinkommen’ [1996] ZIP 948, 949.

226 See for details this chapter B 3 (a).

227 Council Reg 1346/2000, Art. 27.

228 Council Reg 1346/2000, Art. 28.

229 Council Reg 1346/2000, Art. 29(b). A Strub ‘Das Europäische Konkursübereinkommen’ [1996] EuZW 71, 72.

230 M Balz ‘The European Union Convention on Insolvency Proceedings’ [1996] 70 American Bankruptcy LJ 485, 496.

231 For an example see U Weinbörner ‘Die neue Insolvenzordnung und das EU-Übereinkommen über Insolvenzverfahren’ [1996] Rpfleger 494, 498.

232 M Balz ‘Das neue Europäische Insolvenzübereinkommen’ [1996] ZIP 948, 949.

233 Council Reg 1346/2000, Art. 34 and 37.

234 A Strub ‘Das Europäische Konkursübereinkommen’ [1996] EuZW 71, 73 and Council Reg 1346/2000, Art. 34(2).

235 Council Reg 1346/2000, Art. 33(1).

236 Chapter 1 E.

237 Chapter 2 A 2.

238 M Balz ‘Das neue Europäische Insolvenzübereinkommen’ [1996] ZIP 948, 949.

239 M Balz ‘Das neue Europäische Insolvenzübereinkommen’ [1996] ZIP 948, 951 and Council Reg 1346/2000, Art. 25(1)1.

240 M Balz ‘The European Union Convention on Insolvency Proceedings’ [1996] 70 American Bankruptcy LJ 485, 496.

241 Council Reg 1346/2000, Art. 16.

242 Council Reg 1346/2000, Art. 17. A Strub ‘Das Europäische Konkursübereinkommen’ [1996] EuZW 71, 72.

243 See chapter 1 D and chapter 2 D.

244 The only exception being Article 25(3) Council Reg 1346/2000 as far as limitations of personal freedom or postal secrecy are concerned. See M Balz ‘Das neue Europäische Insolvenzübereinkommen’ [1996] ZIP 948, 953.

245 Council Reg 1346/2000, Art. 26.

246 Council Reg 1346/2000, Art. 25.

247 A Strub ‘Das Europäische Konkursübereinkommen’ [1996] EuZW 71, 72.

248 Council Reg 1346/2000, Art. 18(1)2. M Balz ‘Das neue Europäische Insolvenzübereinkommen’ [1996] ZIP 948, 951.

249 Council Reg 1346/2000, Art. 18(1)1.

250 See chapter 2 E.

251 Council Reg 1346/2000, Art. 18(2).

252 Council Reg 1346/2000, Art. 31.

253 A Strub ‘Das Europäische Konkursübereinkommen’ [1996] EuZW 71, 73.

254 M Balz ‘Das neue Europäische Insolvenzübereinkommen’ [1996] ZIP 948, 954.

255 M Balz ‘The European Union Convention on Insolvency Proceedings’ [1996] 70 American Bankruptcy LJ 485, 507.

256 See M Balz ‘The European Union Convention on Insolvency Proceedings’ [1996] 70 American Bankruptcy LJ 485, 507.

257 Council Reg 1346/2000, Art. 4(2)(k). It has long been argued that the lex contractus, at least cumulatively to the lex concursus, should be applied to the issue of discharge, see M Balz ‘The European Union Convention on Insolvency Proceedings’ [1996] 70 American Bankruptcy LJ 485, 508.

258 Council Reg 1346/2000, Art. 4.

259 M Balz ‘Das neue Europäische Insolvenzübereinkommen’ [1996] ZIP 948, 950.

260 Council Reg 1346/2000, Art. 5.

261 Council Reg 1346/2000, Art. 6.

262 Council Reg 1346/2000, Art. 7.

263 Council Reg 1346/2000, Art. 8 and 10.

264 Council Reg 1346/2000, Art. 11.

265 Council Reg 1346/2000, Art. 12.

266 Council Reg 1346/2000, Art. 13-15.

267 An English version of the Report on the Convention on Insolvency Proceedings (thereinafter referred to as ‘The Report’), prepared by Professor M Virgos and ME Schmitt, bearing the reference coding 11900/1/95 REV 1, was published as an Annex B to a Consultative Document, EC Convention on Insolvency Proceedings, published in February 1996 by the Insolvency Service of the Department of Trade and Industry.

268 HL Select Committee on The European Communities Convention on Insolvency Proceedings 7th Report (HL Paper (1995-96) no 59) 9.

269 The Report para 39, 40.

270 M Balz ‘Das neue Europäische Insolvenzübereinkommen’ [1996] ZIP 948, 949.

271 M Balz ‘The European Union Convention on Insolvency Proceedings’ [1996] 70 American Bankruptcy LJ 485, 505.

272 De Bloss v Bouyer [1976] ECR 1497; Somafer v Saar-Fernglas [1978] ECR 2183; Blanckaert & Willems v Trost [1981] ECR 819; SAR Schotte v Parfums Rothschild [1987] ECR 4905; Lloyd’s v Campenon [1995] ECR 961. For details see J Kropholler Europäisches Zivilprozessrecht (6th ed Verlag Recht und Wirtschaft GmbH Heidelberg 1998) 136-140.

273 HL Select Committee on The European Communities Convention on Insolvency Proceedings 7th Report (HL Paper (1995-96) no 59) 9.

274 P von Wilmowsky ‘Internationales Insolvenzrecht – Plädoyer für eine Neuorientierung – ’ [1997] WM 1461, 1462.

275 See s 291, 292 of the German Stock Corporation Act (Aktiengesetz, AktG).

276 M Balz ‘Das neue Europäische Insolvenzübereinkommen’ [1996] ZIP 948, 949.

277 See chapter 1 E, F (English law) and chapter 2 E, F (German law).

278 HL Select Committee on The European Communities Convention on Insolvency Proceedings 7th Report (HL Paper (1995-96) no 59) 9.

279 In this respect see the draft of the EU Regulation regarding the new European joint stock company, draft Regulation 14717/00 SOC 500 SE8 which is supposed to be enacted in summer 2001.

280 Council Directive (EC) 98/26 on settlement finality in payment and securities settlement systems [1998] OJ L166/45.

281 See chapter 1 A 2.

282 M Balz ‘The European Union Convention on Insolvency Proceedings’ [1996] 70 American Bankruptcy LJ 485, 506.

283 See Article 102(4) EGInsO for German law.

284 See M Balz ‘The European Union Convention on Insolvency Proceedings’ [1996] 70 American Bankruptcy LJ 485, 498, for an overview.

285 For details regarding the problem of restructuring measures in different legal systems see P von Wilmowsky ‘Internationales Insolvenzrecht – Plädoyer für eine Neuorientierung –’ [1997] WM 1461, 1466-1471, who argues against any secondary proceedings with territorial effects and for the principle of universality as far as rescue proceedings of an insolvent enterprise are concerned.

286 HL Select Committee on The European Communities Convention on Insolvency Proceedings 7th Report (HL Paper (1995-96) no 59) 10.

287 Government of India v Taylor [1955] AC 491 (HL); Schlemmer v Property Resources Ltd [1974] 3 All ER 451; Peter Buchanan Ltd v Mc Vey [1954] IR 89.

288 M Balz ‘Das neue Europäische Insolvenzübereinkommen’ [1996] ZIP 948, 955.

289 Council Reg 1346/2000, Art. 29(a).

290 M Balz ‘The European Union Convention on Insolvency Proceedings’ [1996] 70 American Bankruptcy LJ 485, 509-510.

291 The public policy rule is applicable even where the English charge relied upon was taken over movable assets and the lex situs of these movable assets at the time of creation was England. All assets which are situated in Germany at the time of opening the insolvency proceedings are subject to Article 26 of the Regulation, irrespective of the jurisdiction where the security interest has been created.

292 In the House of Lords Report this uncertainty is expressed as follows: ‘It is uncertain, if an English creditor lodges a claim in insolvency proceedings [see Article 39 and 41 of the Regulation] based upon a floating charge, to what extent the floating charge is recognized in other Member States’, HL Select Committee on The European Communities Convention on Insolvency Proceedings 7th Report (HL Paper (1995-96) no 59) 16.

293 E Martin and S Singleton Oxford Dictionary of Law (4th edn Oxford University Press 1997) 68.

294 RM Goode Commercial Law (2nd edn Butterworths London 1995) 735; E Ferran ‘Floating Charges – The Nature of the Security’ [1988] Cambridge Law Journal 47(2), 213, 229.

295 RM Goode Legal Problems of Credit and Security (2nd edn Sweet & Maxwell London 1988) 55-56; Re Cimex Tissues Ltd [1994] BCC 626, per SJ Burnton QC at 635.

296 E Ferran ‘Floating Charges – The Nature of the Security’ [1988] Cambridge Law Journal 47(2), 213.

297 M Balz ‘The European Union Convention on Insolvency Proceedings’ [1996] 70 American Bankruptcy LJ 485, footnote 98.

298 It is necessary to express the intention to cover present and future assets to create a floating charge. Expressions such as ‘the company’s undertaking’ or ‘present and future property’ are sufficient; see RM Goode Commercial Law (2nd edn Butterworths London 1995) 735.

299 ‘Ordinary course of business’ has been generally defined ‘as authorised by the memorandum of association’ or ‘as the object of its incorporation’. This also includes exceptional and unusual transactions such as the sale of part of the company’s business, but not the entire undertaking, see Re Borax Co [1901] 1 Ch 326; Re Vivian & Co Ltd [1900] 2 Ch 654; Re Automatic Bottle Makers Ltd [1926] Ch 412, 421; Hubbuck v Helms (1887) 56 LJ Ch 536. In acting outside the limits of the trading power, the company will be in breach of contract and the debenture holder maybe entitled by the contract to appoint a receiver to ensure that there is no recurrence of such activities or such activity might cause automatic crystallisation, E Ferran ‘Floating Charges – The Nature of the Security’ [1988] Cambridge Law Journal 47(2), 213, 231.

300 Evans v Rival Granite Quarries Ltd [1910] 2 KB 979 at 999.

301 English & Scottish Mercantile Investment & Co Ltd v Brunton [1892] 2 QB 700; Cox v Dublin City Distillers Co [1906] IR 446; Griffiths v Yorkshire Bank Ltd [1994] 1 WLR 1427; WJ Gough Company Charges (2nd edn Butterworths London 1996) 156-157.

302 JH Farrar ‘World Economic Stagnation puts the Floating Charge on Trial’ [1980] 1 Co Lawyer 83. This view is denied by WJ Gough Company Charges in Equity and Commercial Relationship, PD Finn (ed) (Law Book Co North Ryde, NSW 1987) Chapter 9; E Ferran ‘Floating Charges – The Nature of the Security’ [1988] Cambridge Law Journal 47(2), 213.

303 E Ferran ‘Floating Charges – The Nature of the Security’ [1988] Cambridge Law Journal 47(2), 213.

304 Re Woodroffes Musical Instruments Ltd [1986] 2 All ER 908 per Nourse LJ at 913-914; Edward Nelson & Co Ltd v Faber & Co [1903] 2 KB 367 per Joyce J at 376-377; Re Victoria Steamboats Ltd [1897] 1 Ch 158 per Kekewich J.

305 Re Woodroffes Musical Instruments Ltd [1986] Ch 366; E Ferran ‘Floating Charges – The Nature of the Security’ [1988] Cambridge Law Journal 47(2), 213, 229.

306 To what extent the crystallisation clauses can be expanded is still under discussion, see RM Goode Commercial Law (2nd edn Butterworths London 1995) 738.

307 There is of course still a remaining risk as third parties which continue to deal with the company bona fide might not be bound by crystallisation and receive full title in the purchased assets. Eg this should be the case when a purchaser dealt with the company prior to crystallisation and continues to deal with it thereafter without having notice of crystallisation. Such person is entitled to assume the continuance of the authority of the company to deal with its goods unless it receives the information revealing the opposite (or does not have such information due to gross negligence). See also RM Goode Commercial Law (2nd edn Butterworths London 1995) 743; Fire Nymph Products Ltd v The Heating Cente Pty Ltd (1992) ACSR 365.

308 The wide powers of the administrative receiver create a ‘fear factor’ in borrowing as Sir M Grylls MP ‘Insolvency Reform: Does the United Kingdom need to retain the floating charge?’, [1994] Journal of International Banking Law 10, 391, 392, critically puts it, because the directors immediately lose their control over the company upon appointment of a receiver. Grylls also argues for the elimination of the floating charge to create a ‘more robust lending environment in the UK’.

309 RM Goode Commercial Law (2nd edn Butterworths London 1995) 740.

310 Ganter in H Schimansky and H J Bunte and H J Lwowski Bankrechts-Handbuch (C H Beck Verlag München 2001) Vol II, § 90, 60.

311 Ganter in H Schimansky and H J Bunte and H J Lwowski Bankrechts-Handbuch (C H Beck Verlag München 2001) Vol II, § 90, 162.

312 C P Claussen Bank- und Börsenrecht (2nd edn C H Beck Verlag München 2000) 384.

313 BGHZ 73, 253; BGH [1986] NJW 1985; Palandt-Bassenge, Bürgerliches Gesetzbuch, (61st edn Verlag C.H. Beck München 2002), § 930, 6.

314 BGHZ 104, 129, 132; Ganter in H Schimansky and H J Bunte and H J Lwowski Bankrechts-Handbuch (C H Beck Verlag München 2001) Vol II, § 95, 86 pp.

315 H J Lwowski Das Recht der Kreditsicherung (8th edn Erich Schmidt Verlag 2000) 478 pp.

316 For more details see 2 (b) (2) below.

317 BGHZ 138, 291, 303; Ganter in H Schimansky and H J Bunte and H J Lwowski Bankrechts-Handbuch (C H Beck Verlag München 2001) Vol II, § 90, 93.

318 BGH [2000] NJW 276; BGH [1995] NJW 1668; OLG Dresden [1997] NJW-RR 1070; OLG Hamburg [1999] NJW-RR 1316.

319 The Report para 85.

320 The Report para 104; IF Fletcher Insolvency in Private International Law (Clarendon Press Oxford 1999) 272.

321 HL Select Committee on The European Communities Convention on Insolvency Proceedings 7th Report (HL Paper (1995-96) no 59) 48.

322 The Report para 84.

323 In contrast thereto, although the German chattel mortgage allows the debtor company to dispose of the secured assets in the course of its ordinary business as well, the creditor bank receives full title in the assets at the time the parties enter into the agreement. At this time the property right in the assets is already transferred to the bank so that there is an ‘immediate relationship’ with the assets.

324 Council Reg 1346/2000, Art. 5(1).

325 The Report para 191.

326 S Homann System der Anerkennung eines ausländischen Insolvenzverfahrens und die Zulässigkeit der Einzelrechtsverfolgung (Juristische Schriftenreihe Lit Verlag Münster Diss 2000) 100; J Kropholler Europäisches Zivilprozessrecht (6th ed Verlag Recht und Wirtschaft GmbH Heidelberg 1998) 229; Stein/Jonas-Schumann, ZPO (21th edn Verlag J C B Mohr Tübingen 1998) s 328, 123 pp; MüKo-Sonnenberger EGBGB (3rd edn Verlag C H Beck München 1998) Art 6, 63.

327 S Homann System der Anerkennung eines ausländischen Insolvenzverfahrens und die Zulässigkeit der Einzelrechtsverfolgung (Juristische Schriftenreihe Lit Verlag Münster Diss 2000) 100.

328 S Smid ‘Das Deutsche Internationale Insolvenzrecht und das Europäische Insolvenz-Übereinkommen’ [1998] DZWir 432, 435; S Homann System der Anerkennung eines ausländischen Insolvenzverfahrens und die Zulässigkeit der Einzelrechtsverfolgung (Juristische Schriftenreihe Lit Verlag Münster Diss 2000) 100.

329 J Baur and R Stürner, Sachenrecht (17th edn Verlag C.H. Beck München 1999) 31.

330 Palandt-Bassenge, Bürgerliches Gesetzbuch, (61st edn Verlag C.H. Beck München 2002), § 930, 2-5; BGH [2000] NJW 2898; BGH [1992] N JW 1161; BGH [1991] NJW 2144.

331 BGH [1991] NJW 2144.

332 BGH [2000] NJW 2898; BGH [1960] NJW 1223.

333 BGH [2000] NJW 2898; BGH [1994] NJW 1994, 133; BGH [1992] NJW 1161.

334 Example taken from a security agreement commonly used by Freshfields Bruckhaus Deringer.

335 ‘Catch-all-clauses’ can be sufficient to transfer title in movables to create security rights according to BGH [1986] NJW 1985, 1986, see also MüKo-Quack, (3rd edn Verlag C H Beck München 1997) s 929, 83; D Reinicke and K Tiedtke Kreditsicherung (3rd edn Verlag Luchterhand Neuwied 1994) 138; H-J Lwowski Das Recht der Kreditsicherung (8th edn Erich Schmidt Verlag Berlin 2000) 470 pp. However, the use of catch-all-clauses inevitably leads to the problem of over security which can also result in the agreement being void under German law; see (δ) below.

336 See the examples at H-J Lwowski Das Recht der Kreditsicherung (8th edn Erich Schmidt Verlag Berlin 2000) 471.

337 BGH [1989] WM 1904 pp; BGH [1962] WM 740; H-J Lwowski Das Recht der Kreditsicherung (8th edn Erich Schmidt Verlag Berlin 2000) 472.

338 BGHZ 19, 17, 18; BGHZ 20, 50, 52; BGH [1995] NJW 1668; Palandt-Heinrichs, Bürgerliches Gesetzbuch, (61st edn Verlag C.H. Beck München 2002), § 138, 86.

339BGH [1999] NJW 940; BGH [1999] ZIP 997; BGH [1991] NJW 2147; Palandt-Heinrichs, Bürgerliches Gesetzbuch, (61st edn Verlag C.H. Beck München 2002), § 398, 24-25. As regards Article 7 of the Regulation, dealing with retention of title, it is not clear whether the protection given is confined to assets to which title has been retained or whether it also extends to the proceed of sales of those assets (extended retention of title). As Article 7 follows a German proposal it is suggested to apply the German definition of retention of title which includes the extension to the proceed of sales as one variation (‘verlängerter Eigentumsvorbehalt’), see M Balz ‘Das neue Europäische Insolvenzübereinkommen’ [1996] ZIP 948, 950.

340 BGHZ 32, 323; BGHZ 30, 151; Palandt-Heinrichs, Bürgerliches Gesetzbuch, (61st edn Verlag C.H. Beck München 2002), § 398, 24.

341 BGH [1999] WM, 126 pp; BGH [1998] NJW-RR, 123 pp; BGH [1995] WM 939; BGH [1994] WM 104; BGH [1991] WM 1273; BGH [1987] WM 775; BGH [1989] WM 11; BGH [1986] WM 1545; BGH [1983] WM 953.

342 BGH [1994] WM 419, 420; BGH [1998] WM 1037, 1041; BGH [1966] WM 13, 15; H Ganter ‘Die ursprüngliche Übersicherung’ [2001] WM 1.

343 H-J Lwowski Das Recht der Kreditsicherung (8th edn Erich Schmidt Verlag Berlin 2000) 137; see also H Ganter ‘Die ursprüngliche Übersicherung’ [2001] WM 1; H-J Lwowski ‘Die anfängliche Übersicherung als Grund für die Unwirksamkeit von Sicherheitenbestellungen (§ 138 BGB)’ Festschrift für Schimansky (RWS Verlag Köln 1999) 389; G Nobbe ‘Konsequenzen aus dem Beschluss des Großen Senats für Zivilrecht des Bundesgerichtshofes zur Sicherheitenfreigabe’ Festschrift für Schimansky (RWS Verlag Köln 1999) 433.

344 BGHZ 137, 212. In its decision of 27/11/1997 the Bundesgerichtshof expressly gave up its view that a security instrument is void if it does not contain a clause which entitles the debtor company to claim the release of a part of the security rights in the event of later over security.

345 BGH [1998] WM 227, 235.

346 H Ganter ‘Die ursprüngliche Übersicherung’ [2001] WM 1, 4; G Nobbe Bankrecht – Aktuelle höchst- und obergerichtliche Rechtsprechung (RWS Verlag Köln 2000) 248.

347 For details see H Ganter ‘Die ursprüngliche Übersicherung’ [2001] WM 1, 3; H-J Lwowski ‘Die anfängliche Übersicherung als Grund für die Unwirksamkeit von Sicherheitenbestellungen (§ 138 BGB)’, Festschrift für Schimansky (RWS Verlag Köln 1999) 389, 391; G Nobbe ‘Konsequenzen aus dem Beschluss des Großen Senats für Zivilrecht des Bundesgerichtshofes zur Sicherheitenfreigabe’ Festschrift für Schimansky (RWS Verlag Köln 1999) 433, 451 pp. From 100 % up to 300 % discrepancy to cause initial over security almost everything is argued.

348 BGHZ 26, 178, 186; H Ganter ‘Die ursprüngliche Übersicherung’ [2001] WM 1, 4 pp.

349 [1992] 3 All ER 1 (CA).

350 [2000] 1 BCLC 21.

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