Dr. Stefan Lammel, Fachanwalt für GesellschaftsrechtDr. Ingo Reinke, Gesellschaftsrecht

German Federal Court of Justice Rules on the Recognition of Foreign Insolvency Proceedings

Discharges of residual debt issued in an EU member state cannot be contested in Germany on the grounds that the debtor obtained the jurisdiction of a foreign court fraudulently. The creditor must contest the decisions of the foreign insolvency court within the framework of the foreign insolvency proceedings.

Background

The defendant owed the plaintiff bank 1.4 million euros for a guarantee. In response to the bank’s complaint, the defendant argued that the guarantee debt no longer existed. He claimed to have relocated the center of his main interests to England in the meantime and to have gone through insolvency proceedings there. In fact, insolvency proceedings regarding the defendant’s assets had been opened there in August 2011 and the defendant was issued a discharge of residual debt in August 2012.

The plaintiff claimed that the defendant never moved the center of his main interests to England but had merely pretended to do so. The plaintiff also claimed that the defendant had in fact always lived in Germany and that a discharge of residual debt, fraudulently received in England, was an abuse of the legal system and should not be recognized by a German court.

The BGH’s decision, dated 10/09/2015, case reference: IX ZR 304/13

Contrary to a previous ruling of the Higher Regional Court of Cologne (Oberlandesgericht – “OLG”), the German Federal Court of Justice (Bundesgerichtshof – “BGH”) found that the discharge of residual debt during the English insolvency proceedings was lawful. If the foreign court recognizes the proceedings as being within its jurisdiction, creditors can take the appropriate legal remedies to contest these proceedings within the context of the proceedings. Only in the event that this is not possible, would non-recognition by German courts on the basis of the so-called public order (“ordre public”) exception be possible. Pursuant to Council Regulation (EC) No.1346/2000 of 29 May 2000 on insolvency proceedings (EUCRIP), courts within EU member states must recognize insolvency proceedings in other EU member states.

Even in cases of so-called ‘insolvency tourism’ (i.e., when a debtor moves the center of his or her main interests to a different member state for the sole purpose of acquiring a discharge of residual debt), the local insolvency court must decide whether or not to recognize this procedure.

Furthermore, the BGH clarifies that German courts must even recognize the opening of proceedings by a foreign court if this opening was in fact obtained fraudulently. The use of the public order exception must be restricted to cases in which it is absolutely necessary. Non-recognition is only then strictly necessary if the creditors do not have sufficient legal protection against the opening of proceedings in the foreign state.

Comment

With this decision, the general public order exception of international private law is reined in to its core as an absolute exceptional provision to avoid undue hardships.

Beyond consumer insolvency, the decision is also significant for companies, especially with regard to whether it is permissible for them to relocate their registered office abroad in preparation for insolvency proceedings (so-called ‘forum shopping’). Although the EU regulatory authority already adopted amendments to the EUCRIP as of 26/06/2017 with the intention of restricting forum shopping, forum shopping will at least factually remain possible in many cases. However, as the BGH’s ruling now clarifies, once insolvency proceedings have been opened in a foreign court, the creditor of such a company must contest the proceedings in the state in which they have been opened. Therefore, creditors must assert legal remedies against the decision to open proceedings within the context of the foreign proceedings on the basis that the center of their debtor’s main interests is not within a foreign court’s jurisdiction (i.e., the insolvency court is not responsible pursuant to EUCRIP).

In order to become aware of a debtor’s insolvency proceedings in a foreign country, it would be necessary to set up a European database (similar to Germany’s ‘insolvenzbekanntmachungen.de’) in which all insolvency proceedings are published. Such a database is planned, but has not yet been set up. Currently only a provisional version is available online at the European e-Justice Portal which at least combines the insolvency registers of a few member states into one searchable database.

A remedy against forum shopping of a contractual partner could be the inclusion of a contractual obligation to disclose any relocation of the center of main interests. Including a contractual obligation to refrain from such relocation, however, would hardly be compatible with European law.

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