By Claudia Brosche and Peter Jark
Caution when examining the applicable law of cross-border claims
In its judgment of 8 February 2018 (file number IX ZR 103/17) the Federal Supreme Court (“BGH”) clarified that the insolvency-law prerequisites and effects of a set-off with an international dimension as well as the contestability of a set-off situation are in principle subject to the general insolvency law status (lex fori concursus), i.e. the law of the state where the insolvency proceedings are opened. Only in exceptional cases can another law be applied (lex causae).
A company based in Switzerland (“debtor”) owned properties in Berlin and Potsdam. Due to financial difficulties, forced sale proceedings and forced administration had been ordered for the properties. Due to the financial difficulties, the debtor sold some of its properties on 11 January 2012 to a company based in Germany (defendant 3) for 4.9 million Euros. The shares in defendant 3 were held mainly by K-AG at the time of the purchase agreement. In the purchase agreement between the debtor and the defendant 3, the parties agreed that K-AG would assign a claim in the amount of 1.4 million Euros to the defendant 3. With this claim, the defendant declared the set-off against the debtor, who acknowledged the set-off declaration which set the remaining purchase price at 3.5 million Euros. Shortly afterwards, on 23 January 2012, insolvency proceedings were opened in Switzerland against the debtor. The plaintiff is a Swiss bank with substantial claims against the debtor. It is authorized to assert legal claims with foreign implications from the assets and opposes the set-off of 1.4 million Euros by the defendant with the objection that this is not effective. Consequently, the defendant 3 would still have to pay an amount of 1.4 million Euros.
Legal question to be clarified
In the case under consideration, the BGH had to clarify the law according to which the case was to be assessed. On the one hand, the insolvency proceedings are executed in Switzerland. On the other hand, the debtor sold properties in Germany to a company based in Germany, which had partially offset the purchase price.
Results at a glance
In the first instance, the Regional Court had granted the claim for payment of 1.4 million Euros. The appeal had been dismissed by the Court of Appeal. The BGH reversed the decision of the Court of Appeal and referred the matter back to the Court of Appeal with the following fundamental indications:
In the case of cross-border claims in insolvency proceedings, the law according to which the decision is to be made is generally the law of the country in which the insolvency proceedings are opened (lex fori concursus). Therefore, the insolvency law requirements and effects of a set-off as well as the contestability of the set-off situation also depend on the law of the state where the insolvency proceedings were opened. Due to the opening of insolvency proceedings against the debtor in Switzerland, Swiss law is accordingly to be applied to the set-off in dispute and its contestability under insolvency law. An exception to this may apply if the law of the country in which the insolvency proceedings were opened does not allow offsetting for other reasons (e.g. unconscionability of the offsetting). Thus, if there is another connecting factor in the law of another state – in the present case in Germany – (lex causae), the validity of the set-off and its contestability may also depend on it. In the case under consideration, one makes a connection on the basis of Art. 17 in conjunction with Art. 4 (3). Art. 4 para. 1 lit c Rome I Regulation is linked to German law according to §§ 338, 339 InsO. The properties located in Germany were sold to the defendant 3 based in Germany, who in turn partially offset the purchase price. It must be examined whether the set-off asserted by the defendant 3 would be effective under German law (BGB and right of rescission). It is important to note, that the court has pointed out that the alternative legal connection does not have to be taken into account ex officio by the court, but that the examination is only conducted with regard to the express objection of the party. If the opposing party raises this type of objection, it bears the burden of proof that the challenged legal act is in no way contestable under the applicable law of the other state.
If cross-border claims exist, a first step is to seek advice. The main focus should be on the issue deciding in which country and under which law the claim should be enforced in the best possible way. Since the principle of the lex fori concursus always applies, it must first be assumed that a decision is to be made in accordance with the law of the country where the insolvency proceedings have been opened and that the claim must also be enforced according to that country’s laws. However, it should not be disregarded that the law of another state may apply via conflict-of-law rules. To this end, it must be carefully examined whether the law of another state does not allow defences to be raised in favour of or at the expense of one’s own party. In order to avoid this balancing act even before the start of cross-border business relations, it is advisable to lay down contractual provisions in advance, in which, for example, a unanimous choice of law is made (cf. Art. 4 (1) Rome I Regulation).