Harmonisation of avoidance rules in European Union insolvencies: the critical elements in formulating a scheme

Professor Andrew Keay 

In recent years the European Commission (EC) has considered whether or not to harmonise certain areas of insolvency law. The European Union (EU) already has a regulation, the EU Regulation on Insolvency Proceedings, introduced in 2002 and recast in 2015 (and applying from 26 June 2017) (2015/848), but this only seeks to deal with proceedings and procedure. It lays down, where there is an EU element to an insolvency, that the law of the member state where insolvency proceedings were opened will apply. This resolves which law will apply to how the insolvency procedure is conducted. One of the leading candidates for harmonisation of substantiveinsolvency law seems to be the transactional avoidance rules. These rules govern what transactions entered into before the advent of insolvency proceedings can be set aside. This is done to enable the person who administers the insolvency proceedings, the insolvency practitioner, to recover assets and funds for the good of all creditors of the insolvent person or company. I have already discussed the benefits and disadvantages of doing this (A Keay, ‘The Harmonization of the Avoidance Rules in European Union Insolvencies’ (2017) 66 International and Comparative Law Quarterly79). In my recent article in the Northern Ireland Legal Quarterly, I aim to do two things. The first is to identify and analyse those primary matters that are contained in the legislative regimes of member states and that need to be considered and addressed by the EC in the formulation of any harmonised scheme for avoidance provisions in the EU. The second thing I aim to do is to ascertain the problems that these matters may cause in the construction of a legislative scheme on transactional avoidance rules for the EU. I overview that article in this short piece.

While there are commonalities between the different statutory regimes which apply to avoidance of transactions in the EU, there are also significant differences in approach and detail. All jurisdictions essentially include two types of provisions. First, one which prevents the granting of preferences to creditors, that is those transactions that involve paying only one or several creditors (but not all) before insolvency proceedings eventuate. Second, provisions which are designed to prohibit transactions at an undervalue. These are transactions, entered into before insolvency proceedings were commenced, where the insolvent provided some benefit to a third party, usually someone associated with the insolvent, and that enriches the third party to the detriment of the debtor and eventually the insolvent’s creditors. Two other kinds of transactions are addressed by a solid majority of member states. These are those where a transaction is entered into in order to put assets out of the reach of creditors, and those transactions that create security in favour of an existing unsecured creditor.

At the heart of any scheme is the idea that it is only possible to successfully impugn a transaction if it does in fact cause a detriment to the creditors as a whole. This must be the basis behind avoidance. As such, if a transaction occurs on the eve of a company’s liquidation because of insolvency, but involves the debtor receiving fair value from another for what it has purchased or sold, there is no ground for avoidance. This is because neither the debtor company nor its creditors have suffered a loss.

Some of the critical issues that the EC will need to consider (more are discussed in the article) are as follows. First, the law of most EU member states provides a condition that before a transaction can be set aside the debtor/insolvent has to be shown to be insolvent at the time of entering into the transaction. How insolvency is expressed in the legislation of individual member states differs and this would need to be made more uniform. Second, an important matter that is provided for in avoidance provisions, and it often tends to be a highly controversial issue, is whether the elements that have to be proved in order for a court to order the avoidance of a transaction are subjective or objective. Consideration will have to be given by the EC on whether a solely subjective or objective rule ought to be included in proposals for future EU legislation on transactional avoidance rules, or perhaps a rule that includes a mixture of subjective and objective conditions. Clearly, there are benefits and disadvantages of both subjective and objective conditions and the article discusses these in more detail. Third, legislation in many member states specifies that some presumptions will be applied in certain circumstances. The existence of presumptions is an implicit acknowledgment by legislators that insolvency practitioners would find it exceedingly difficult to prove some conditions that are contained in avoidance rules if they were not helped by presumptions. A decision will need to be made as to whether presumptions will be employed in any future harmonised EU legislation and in relation to which avoidance rules.

Fourth, for the most part avoidance provisions specify a period of time in which a transaction must have been entered into in order for it to be subject to successful challenge in subsequent insolvency proceedings. This is to ensure a degree of certainty and to protect contract finality. Periods presently vary across jurisdictions and across avoidance rules. Fifth, some avoidance laws only apply where the insolvent and the person or company with whom he, she or it makes the transaction are connected in some way. Alternatively, avoidance rules might apply equally to parties connected and unconnected to the insolvent, but the time in which the rule applies might be somewhat different. All but three member states make some sort of provision in this regard. It will have to be decided who is to be included within the category of connected person, and whether a broad or narrow definition of connected party will be utilised. There are examples of both across the EU. For example, a broad approach is taken in the Netherlands where foster children of a director of the company are included, whereas in Italy only spouses of directors are covered. 

Sixth, there is provision in the legislation of most, if not all, EU member states providing that, as far as most avoidance rules are concerned, proceedings in the courts for an order of avoidance or a related order must be commenced within a specified time period or else the right to bring proceedings at all is lost. In weighing up the inclusion of a limitation period in harmonised rules, the EC would have to give considerable thought to whether it is feasible to include a limitation period at all, and if so whether it should be a shorter or longer period. Each alternative has its advantages and drawbacks. Certainly, the periods employed across the EU vary significantly, as does the point from which the period begins.

Overall, what the article seeks to do is to identify those factors that are important parts of avoidance rules across the EU, and which will need to be considered by the EC in any attempt to harmonise. Some hard decisions will have to be made and not all of them might be seen as producing fairness. Unfortunately, not all aspects of insolvency law and practice will lead to fairness. The fact is that the advent of insolvency is such that some, if not all, will be disadvantaged to some extent. That is the nature of the insolvency event.