THE AVOIDANCE OF SECURITY RIGHTS, THE EUROPEAN REGULATION ON INSOLVENCY PROCEEDINGS AND THE HARMONISATION OF AVOIDANCE RULES Professor Andrew Keay University of Leeds Barrister (Kings Chambers) 

The examination of transactions by liquidators Professor Andrew Keay 03/09/2019 INTRODUCTION The examination of transactions by liquidators Avoidance – twilight zone, suspect period Many types all around the EU providing different approaches

Professor Andrew Keay 03/09/2019 Considers the avoidance of security transactions prior to opening of insolvency proceedings When transactions are protected by Articles 5 and 13 of the European Regulation on Insolvency Proceedings. Investigates the possible harmonisation of the law of Member States in relation to the avoidance of transactions in general and the avoidance of security interests in particular in insolvencies covered by the Regulation

Professor Andrew Keay 03/09/2019 SECURITY no exhaustive definition of security (rights in rem) in the Regulation could conflict with the definition of the term in jurisdictions where assets are located. also reflects the fact that there is no universal definition of security rights (Report on the Convention of Insolvency Proceedings (the Virgos-Schmit Report) at para 100.

ESSENCE OF SECURITY Grants proprietary interest to lender/creditor Professor Andrew Keay 03/09/2019 ESSENCE OF SECURITY Grants proprietary interest to lender/creditor Enables creditor to enforce debt against property Insulates security holders from the worst risks of the insolvency of a debtor and the interference of third parties Seen as critical to granting of credit Rights survive insolvency usually

Professor Andrew Keay 03/09/2019 AVOIDANCE Long lineage employed retrospectively with consequence that acts permitted when done, could be regarded as invalid following the subsequent entry of a debtor into insolvency proceedings

UNDERLYING POLICIES To ensure fair and rateable distribution Professor Andrew Keay 03/09/2019 UNDERLYING POLICIES To ensure fair and rateable distribution prevent the dismemberment of the insolvent’s estate for a loss of assets from the debtor might reduce the chances of the insolvent being able to continue doing business efficiently or at all, and reduces the possibility of the insolvent being able to be restructured effectively, or at all

focus on security transactions Professor Andrew Keay 03/09/2019 focus on security transactions An example of a case where security is often sought to be avoided is where the security was granted in order to secure a pre-existing debt or obligation owed to the creditor who is granted the security. Giving of security is sometimes seen as unfair – bargaining power

APPROACH OF THE REGULATION TO AVOIDANCE Professor Andrew Keay 03/09/2019 APPROACH OF THE REGULATION TO AVOIDANCE Starting point : Article 4(2)(m) provides that the law of the place where insolvency proceedings are opened will determine the voidness of legal acts that are detrimental to all of the creditors. This is included because the basic rule of the Regulation is that the law of the Member State where proceedings are opened governs the administration of the insolvency avoidance actions referred to in Article 4(2)(m) are not limited to those commenced in court. (Lutz v Bauerle C-557/13, [2015] EUECJ C-557/13 at [30]).

Professor Andrew Keay 03/09/2019 EXCEPTIONS Exceptions are included in order to protect legitimate expectations and certainty of transactions in other Member States. See Recital 25 Articles 5 & 13

Professor Andrew Keay 03/09/2019 ARTICLE 5 Para 5(1) - the opening of insolvency proceedings is not to affect rights in rem (created before the opening of insolvency proceedings) of creditors or third parties in relation to assets of the debtor and situated within another Member State at the time of the opening of proceedings. Para (4) provides that what is said in para (1) can be overridden as far as avoidance actions referred to in Article 4(2)(m) are concerned

Professor Andrew Keay 03/09/2019 ARTICLE 13 “Article 4(2)(m) shall not apply where the person who benefited from an act detrimental to all the creditors provides proof 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 law does not allow any means of challenging that act in the relevant case.”

Professor Andrew Keay 03/09/2019 Effectively provides a defence for secured creditor against an avoidance action So if a creditor entered into a transaction involving the granting of security to a debtor and the law of a particular country has been nominated as the one that governs the transaction, it can be expected that this law will apply even if the debtor enters insolvency proceedings. relates to both the main proceedings and any secondary proceedings commenced

Lutz v Bauerle First case under Article 13 Professor Andrew Keay 03/09/2019 Lutz v Bauerle First case under Article 13 Security created in Austria – insolvency proceedings opened in Germany Issue : did the law of Germany apply (allowed avoidance) or that of Austria (did not). Applying Article 13 it was Austrian law that was determinative

Professor Andrew Keay 03/09/2019 the Article makes no distinction between substantive and procedural provisions, and it applies to limitation periods or other time-bars relating to actions to set aside transactions pursuant to the law governing the transactions. Lutz v Bauerle C-557/13, [2015] EUECJ C-557/13 at [47], [53].

Professor Andrew Keay 03/09/2019 CONCERNS OVER ARTICLE 13 parties to the transaction that is detrimental to the general body of creditors are able to succeed in protecting it from being impugned by including in the contract a choice-of-law clause in favour of a legal system that would not allow any challenge some doubt as to whether ambit of the Article only covers specific means or remedies relating to avoidance based on insolvency law, or whether it covers all cases of avoidance including those based on general private law, e. g. in case of illegality, immorality or mistake

Professor Andrew Keay 03/09/2019 creates great uncertainty among liquidators concerning which Member State law applies overly protects secured creditors because it permits the security holder to obtain more protection than it would have had under the lex situs – creditor can still enforce security despite moratorium provided by the place where proceedings are opened

It is against fairness between creditors Professor Andrew Keay 03/09/2019 ARGUMENTS AGAINST It weakens the universalist underpinning of the Regulation – law of place of opening is not paramount The avoidance conditions in the law of two places have to be fulfilled – burdensome to the point of being unlikely to be achieved. It is against fairness between creditors

Article is drafted imprecisely, and is in fact ambiguous. Professor Andrew Keay 03/09/2019 A secured creditor might take action to enforce the security against the insolvent, which might force the insolvent into premature liquidation. Article is drafted imprecisely, and is in fact ambiguous. parties could evade any possible invalidation by including a choice of law clause in the loan/credit contract and choose a law where there are onerous conditions that have to be fulfilled for avoidance actions to be successful

All could be fitted within harmonisation: Professor Andrew Keay 03/09/2019 OPTIONS All could be fitted within harmonisation: state that lex concursus applies – omit Article 13 State that lex situs applies New rules – apply across the EU

Professor Andrew Keay 03/09/2019 liquidators will still have to contend with a significant number of different rules across the EU as the lex concursus (or lex situs) could be that of any of 27 States. uncertainty for secured creditors in that they can never know for sure what law will apply as far as possible avoidance as the COMI cannot always be predicted or, at least, predicted accurately.

HARMONISATION Same avoidance rules apply across the EU Professor Andrew Keay 03/09/2019 HARMONISATION Same avoidance rules apply across the EU Indications in various documents that suggest it is a possibility, at least in relation to some issues INSOL Europe, “Harmonisation of Insolvency Law at EU Level” April 2010 European Parliament resolution of 15 November 2011

Professor Andrew Keay 03/09/2019 “it is arguable that some kind of harmonization of the avoidance remedies, at least in the context of business insolvency, might be advantageous to further integration and development of European common market” (J. Alexander, “Avoid the Choice or Choose to Avoid? The European Framework for Choice of Avoidance Law and the Quest to Make it Sensible” 2009). The difficulty though is in drafting rules that will work, that are generally agreed to, and are fair and reasonable.

Could foster equal treatment of creditors Introduce greater certainty Professor Andrew Keay 03/09/2019 ADVANTAGES Stop dodging application of the law of the place where proceedings are opened Could foster equal treatment of creditors Introduce greater certainty Make job of liquidators easier

POSSIBLE OBSTACLES OR ISSUES Professor Andrew Keay 03/09/2019 POSSIBLE OBSTACLES OR ISSUES Different regimes applied across the EU covering different transactions and different approaches with many provisions. For example how do you address subjective and objective tests? Some States have both as part of some avoidance rules and others have one or the other Even where there is one test applied there can be differences, e.g preferences in German and England

Professor Andrew Keay 03/09/2019 Variety of conditions required in relation to individual avoidance actions need to be a common understanding about the goals of these rules and therefore a European debate on bankruptcy theory

Professor Andrew Keay 03/09/2019 Should harmonised rules only apply to insolvencies that are covered by the Regulation and Member States retain their own avoidance rules for domestic insolvencies? Concern might be that it would mean that liquidators would have to be conversant with at least two sets of rules. Concern that there might be claims that creditors in domestic insolvencies were being discriminated against as they are subject to different rules from creditors in the same Member State who might have claims in an insolvency that is subject to the Regulation.

Professor Andrew Keay 03/09/2019 CONCLUSION Avoidance rules of lex concursus apply in insolvencies - Article 4 Limited by Articles 5 and 13. Article 13 causes particular problems How do we address these? Harmonisation?