COMMISSION OPINION of 10 December 1981 on the draft Convention on bankruptcy, winding-up, arrangements, compositions and similar proceedings (81/1068/EEC)

I

1. Following an agreement between the Council and the Commission, the draft Convention on bankruptcy, winding-up, arrangements, compositions and similar proceedings was drawn up by a Working Party composed of experts from the Member States and the Commission of the European Communities. It is supplementary to the Convention signed in Brussels on 27 September 1968 on jurisdiction and the enforcement of judgments in civil and commercial matters, known as the "General Convention"(1), and to the Convention dated 9 October 1978 whereby Denmark, Ireland and the United Kingdom of Great Britain and Northern Ireland acceded to the General Convention (2).

2. Like the General Convention, which expressly excludes bankruptcy, winding-up, arrangements, compositions and analogous proceedings from its own scope of application (Article 1, point 2 of the second paragraph), the draft Convention is also based on Article 220 of the EEC Treaty. A first version of the draft was prepared as long ago as 1970 and was forwarded to the Governments of the Member States for their opinion. Since then three new Member States have acceeded to the Community. The Working Party was enlarged and work began again. The present draft is the result of these labours. The "draft Bankruptcy Convention", as it is called, was transmitted to the President of the Council on 23 June 1980. The Governments of the Member States and the Commission are now required to give their opinion on it.

3. The draft Bankruptcy Convention applies not only to bankruptcy and winding-up proceedings properly so called which lead to cessation of the debtor's trading activities and to distribution of realized assets among the creditors, but also to proceedings whose object is to avoid a declaration of bankruptcy or winding-up and permit the debtor to be rehabilitated. The purpose of the draft is to improve the position of the creditor in the common market. To achieve this objective it provides that a decision taken in a Contracting State to open any of the proceedings to which the text applies has effect ipso jure in the other Contracting States. Thus all the debtor's property in the European Communities is immediately attached and he no longer has power of disposal over it. The bankruptcy takes effect vis-à-vis third parties from the eighth day following publication of the Decision in the Official Journal of the European Communities. Also, in Contracting States other than that in which the bankruptcy has been opened, no other bankruptcy, winding-up, arangement, composition or similar proceedings may be commenced. Similarly, individual proceedings against the debtor can no longer be commenced and those already begun must be suspended.

4. In order to apply the principles of unity and universality of the bankruptcy - in the present opinion the word "bankruptcy" covers all the proceedings to which the draft Convention applies - and avoid duplication of proceedings, it is necessary to lay down, inter alia, uniform rules to regulate the international jurisdiction of the courts. The draft stipulates that the only courts which have jurisdiction to open a bankruptcy are those of the Contracting State in which the debtor's centre of administration is situated. Where the centre of administration is situated outside the Community the only courts which have jurisdiction are those of the Contracting States in which the debtor has an establishment. The internal law of the State in which the bankruptcy has been opened determines the procedure to be followed and, as a rule, the effects of the bankruptcy, including especially its effects as against third parties. The basic rule that the lex fori applies is subject to certain exceptions which are provided for in special rules of conflict of laws set out in the draft. Prominent among such rules are those determining the effects of the bankruptcy on property which is subject to registration, on rights which are subject to registration, on contracts of employment and on contracts for the sale of immovable property. Other conflict rules in the draft deal with the subject-matter, extent and ranking of secured rights and of special rights of preference.

5. The draft Bankruptcy Convention contains provisions covering its interpretation by the Court of Justice. It also contains final provisions which are similar to those in the General Convention. It will not enter into force until it has been ratified by all the Contracting States and will then take its place alongside the other Community conventions. It will supplement the General Convention, as mentioned above, and will in turn be supplemented, where it fails to resolve certain problems relating to the (1) OJ No 304, 30.10.1978, pp. 77 et seq. (2) OJ No L 304, 30.10.1978, pp. 1 et seq. applicable law, by the Convention of 19 June 1980 on the law applicable to contractual obligations (1).

II

6. The draft excludes from its scope the bankruptcy and winding-up of insurance undertakings until such time as the Directive harmonizing national laws on the subject has entered into force and in so far as that Directive does not provide otherwise (Article 1 (3)). Direct insurance undertakings (indemnity insurance and life assurance) are excluded for the time being because, if authorization is withdrawn on grounds of insolvency, special proceedings must be instituted which are rather of an administrative nature or are designed to avoid bankruptcy, primarily with a view to affording uniform protection for insurance creditors. The Commission hopes to be able to submit the relevant proposal for a Directive to the Council in the near future in order that the two instruments may be coordinated to best advantage.

7. On the other hand, the draft Convention does not exclude from its scope the bankruptcy of credit institutions, which are also subject to control by public authorities via an authorization procedure. While, however, the withdrawal of authorization does not in all cases entail the institution of proceedings similar to those of bankruptcy, the public authorities in all Member States take measures to safeguard the interests of depositors. The same objective is pursued by the proposal for a Directive currently being prepared by the Commission, which seeks to coordinate the role played by bank supervisory authorities and the detailed rules for cooperation between them in applying those measures. In these circumstances, and in view of the similarities between the two sectors, a solution similar to that adopted for insurance undertakings should be adopted for credit institutions, and Article 1 should be expanded by the insertion of a fourth paragraph as follows:

"4. The Convention shall not apply to credit institutions until the Directive to coordinate the role of bank supervisory authorities in the proceedings referred to in Article I (a) and (b) of the Protocol and cooperation between them in implementing measures to safeguard the interests of the creditors of credit institutions has taken effect."

In matters relating to the winding-up of credit institutions, as in other areas, the Commission's freedom to take action in the future must be preserved. For this reason, as in Article 20 of the Convention of 19 June 1980 on the law applicable to contractual obligations, the following provision should be adopted:

"This Convention shall not affect the application of provisions which are or will be contained in acts of the institutions of the European Communities or in national laws harmonized in implementation of such acts."

8. The draft Bankruptcy Convention includes in its scope the compulsory winding-up proceedings which are available in Ireland and in the United Kingdom. A problem arises here in connection with the General Convention. The English language text of the consolidated version dated 9 October 1978 excludes from its scope "proceedings relating to the winding-up of insolvent companies or other legal persons" only. The General Convention thus continues to apply to compulsory winding-up proceedings in the rare cases where it is instituted not on grounds of insolvency but for other reasons. The present version of the draft Bankruptcy Convention (Protocol to the draft, Article I (a)) does not differentiate between the various circumstances in which proceedings may be opened, but includes all of them. Article I of the Protocol should therefore be amended in order to prevent any misunderstanding that might arise on account of the existence of two conflicting provisions. Article I should specify that in the case of Ireland and the United Kingdom the compulsory winding-up proceedings referred to are limited to cases of insolvency. This is all the more essential since Article 57 of the General Convention provides that "This Convention shall not affect any conventions to which the Contracting States are or will be parties and which, in relation to particular matters, govern jurisdiction or the recognition or enforcement of judgments". The bankruptcy Convention could in the light of that provision be regarded as a lex specialis vis-à-vis the General Convention and thus apply to all forms of compulsory winding-up.

9. Whilst in the interests of centralization the exclusive jurisdiction of the courts of the State in which a bankruptcy is opened is extended so that their jurisdiction applies, inter alia, to actions concerning the liability incurred in consequence of their direction or management by persons who have directed or managed the affairs of a firm, company or legal person which has been declared bankrupt (Article 11 (a)), judgments delivered in such matters will not be recognized and enforced in the other Contracting States under the arrangements applicable to judgments in bankruptcy, that is to say "without any special procedure being required" (Article 56). (1) OJ No L 266, 9.10.1980, p. 1.

Article 67 provides that they are to be recognized and enforced in accordance with the rules of the General Convention, thus removing any doubt as to the Convention that is to apply to the recognition and enforcement of judgments which have been delivered as a result of an action to make good a deficiency (action en comblement de passif), provided for in Article 99 of the French Law of 13 July 1967. There was some questioning as to whether these actions constitute one of the "analogous proceedings" excluded by Article 1, second paragraph, point 2, from the scope of the General Convention. The Commission takes the view that judgments given in such cases are not covered by bankruptcy law within the meaning of the draft Convention, since they arise from actions whose primary aim is to establish whether the person who directed or managed the affairs of the firm or company is liable, and what damage was suffered. Such actions are not applications for the opening of a bankruptcy or winding-up, or for an arrangement, composition or analogous proceeding with a view to satisfying creditors collectively. The fact that these actions are filed in a court which has jurisdiction to adjudicate on the bankruptcy of a firm or company is understandable from the point of view of procedure, but it does not alter the legal nature of the application, even if the burden of proof is reversed (1).

10. Advertisement of the bankruptcy throughout the Community is the responsibility of the liquidator, who undertakes publication, in the Official Journal of the European Communities, of the judgment opening the bankruptcy and of certain other Decisions (Article 26). The draft Convention does not specify who is to pay the costs of printing and translating advertisements. Since the Decisions in question affect the general body of creditors, the costs incurred must be borne by them.

11. More than one liquidator is permitted only if the law of the State in which the bankruptcy has been opened so permits (Article 29 (3)). The Convention should state that the law of each Contracting State is to provide for the possibility of having more than one liquidator. A liquidator who is obliged to realise assets in more than one Contracting State and distribute the proceeds among the preferential creditors in accordance with Section VI of Title IV will only be able to comply with the many different regulations in the States concerned if he can call upon colleagues who have experience of the various national regulations. In order to avoid any misunderstanding the draft Convention should also state that the liquidator is empowered to act in third countries in cases where the debtor has assets situated there, provided, of course, that the law of those States permits him to operate in their territory.

12. In civil and commercial matters, creditors in respect of debts which arose before the opening of the bankruptcy - in particular employees - are entitled, in relation to assets situated in each Contracting State, to the rights of preference or where appropriate, the rights against the general body of creditors which the law of that State attaches to those debts. On the other hand, public authorities, government departments and other public agencies are entitled only in their own State to a right of preference for debts which arose before the opening of the bankruptcy, particularly in matters of taxation and social security.

13. The draft Convention leaves unresolved the question whether tax and similar debts arising after the bankruptcy may, like other debts of the general body of creditors, be satisfied out of assets situated in each of the Contracting States or only out of assets situated in their own State (Article 44 (1) and (3)).

It would be consistent to treat them in the same way as the other debts of the general body of creditors since they are incurred with a view to continuing the business of the debtor, which will benefit the general body of creditors.

14. In proceedings for avoiding bankruptcy, to which the draft Convention also applies, extensions of time for payment or compounding of debts are granted to the debtor. Article 54 provides that in Contracting States, other than that in which the proceeding has been opened, such measures are invalid as against the creditors in respect of debts incurred on behalf of the general body of creditors and also as against preferential creditors and creditors whose debts are secured by a charge over property. This provision constitutes an exception to the principles of unity and universality of the bankruptcy, on the one hand, and of equality of creditors, on the other. The argument that the proceedings in this case are not bankruptcy proceedings stricto sensu but preventive proceedings does not justify this exception. On the contrary, that argument tends in favour of applying both those principles, for this would contribute to avoiding bankruptcy proceedings and thus operate for the benefit of all the creditors. Article 54 should therefore be deleted. (1) For a contrary view see the Court of Justice's judgment of 22 February 1979 in Case 133/78, H. Gourdain/F. Nadler. [1979] ECR 733.

15. Articles 70 to 74 of the draft Convention make provision for it to be interpreted by the Court of Justice of the European Communities. In contrast to the position under the General Convention, the jurisdiction of the Court is provided for in the text of the draft Convention itself and not in a separate protocol. The draft Convention contains provisions similar to those in the Protocol of 3 June 1971 (1), notably regarding references for preliminary rulings and references in order to clarify the law. The procedure for referring questions for a preliminary ruling is derived from Article 177 of the Treaty but differs from it in some respects : thus the courts which are empowered to refer questions to the Court are expressly designated, courts of first instance being excluded, and Supreme Courts are required to refer matters only if they consider that a preliminary ruling on a question of interpretation is necessary.

The Commission regrets the lack of alignment with Article 177 of the EEC Treaty. It must be accepted, however, that the arguments put forward in support of the exceptions contained in the Protocol of 3 June 1971, namely preventing the Court of Justice from becoming overburdened with references and avoiding an increase in the number of proceedings instituted merely to gain time, are also to a certain extent valid in the case of the draft Bankruptcy Convention (2). It may happen that in the course of bankruptcy proceedings there will be questions of interpretation touching the Bankruptcy Convention and also the General Convention. This will be the case especially in relation to actions arising out of the bankruptcy, where the problem of jurisdiction is resolved by reference to the Bankruptcy Convention and the problems concerning recognition and enforcement are resolved by the General Convention. For these reasons, the two Conventions should be interpreted on the basis of identical provisions.

16. Annex I to the draft Bankruptcy Convention contains uniform rules dealing with proof of the spouse's claim to property (Article 1), set-off (Article 2) and the question whether clauses containing a reservation of title are valid as against the creditors of the buyer (Article 3 of the Uniform Law in conjunction with Article 41 of the draft). These Articles should be embodied in the draft Convention itself, like other provisions designed to standardize national laws which already appear there (for example, Article 62). Article 81 would then be superfluous in so far as it requires States to incorporate the Uniform Law in their legislation.

17. The draft Convention contains a number of variants of the provision on the recognition of simple reservation of title clauses in the event of the bankruptcy of the buyer (Article 41 in conjunction with Article 3 of the Uniform Law, Annex I). Reservation of title in its various forms is one of the most important legal instruments for ensuring that the seller receives payment. The circumstances in which reservation of title is also to be effective vis-à-vis the creditors of the buyer in intra-Community trade should be specified for all cases and not only for the case where the buyer is declared bankrupt. For this reason a Directive containing more extensive rules than those in Article 41 would be preferable. The draft Convention could confine itself to requiring Contracting States to recognize simple reservation of title clauses in relation to the object sold, and guaranteeing payment of the price in the event of bankruptcy of the buyer, provided the clauses are stipulated before delivery.

18. Paragraph 2 of the Joint Declaration annexed to the draft Convention refers to the need to remove discrepancies existing between the Bankruptcy Convention and the conventions previously entered into with non-member States. Paragraph 3 of the Declaration stresses the need to organize, in cooperation with the Court of Justice, an exchange of information on judgments given by the courts of Contracting States. The Commission believes that both these steps must be taken if the Convention is to be implemented to best effect. The brackets surrounding the two provisions should therefore be removed.

III

19. The work of unifying bankruptcy proceedings, now begun in the draft Convention, should be supported by the harmonization of certain rules. The requirements for the opening of a bankruptcy should be aligned. Otherwise the question whether a bankruptcy is to be opened or not will depend on whether the centre of administration is situated in this or that Contracting State. The same will apply to the reorganization procedures which have been established in recent years. In this situation (1) Protocol of 3 June 1971 conferring jurisdiction on the Court of Justice for the interpretation of the Convention of 27 September 1968 on jurisdiction and the enforcement of judgments in civil and commercial matters, OJ No L 304, 30.10.1978, p. 97. (2) Report by J. Jenard on the Protocol, OJ No C 59, 5.3. 1979, pp. 68 and 69. creditors, and especially employees, run the risk of being treated differently depending on the State where the procedure is opened.

20. There are also major differences between the laws of the Member States concerning the duration of the suspect period, that is to say the period prior to the opening of the bankruptcy during which the acts of the debtor, if they are to be held void, must have been executed. Under certain legal systems the suspect period commences on the cessation of payments, which is established by the courts in respect of each bankruptcy. Other legal systems fix the suspect period for certain acts of the debtor uniformly, calculating its duration backwards from the date of opening of the bankruptcy. The calculation of the duration of the suspect period and the establishment of acts of the debtor which are void, or may be declared void, affect the amount of assets available for the general body of creditors and, consequently, the amount distributed to each creditor. Article 18 states that the law of the State in which the bankruptcy has been opened determines the procedure to be followed in all Contracting States.

Creditors may be affected financially by the differences between the legal systems. National provisions governing the suspect period should therefore be harmonized to ensure that creditors are treated on an equal footing, that no surprises are sprung on them and that, in cases where the debtor's centre of administration is outside the Community but he has establishments in different Member States, "forum shopping" is eliminated.

IV

On the basis of the foregoing considerations the Commission, having regard to the Treaty establishing the European Economic Community, and in particular the second indent of Article 155 thereof, hereby formulates the following opinion: (a) the Commission considers that in pursuance of the fourth indent of Article 220 of the Treaty establishing the European Economic Community, the Member States should sign and ratify at the earliest opportunity the Convention on bankruptcy, winding-up, arrangements, compositions and similar proceedings. It emphasises that the Convention will permit creditors, and especially employees, to attach by means of a single proceeding all of the debtor's property situated in the different Member States, and that it is desirable that they should be able to do so;

(b) the Commission considers it necessary: - to delete Article 54, which restricts the effects of extensions of time granted for payment or compounding of debts under reorganization procedures (see point 14 hereof),

- to delete the three Articles contained in the Uniform Law and to incorporate the first two in the draft Convention itself and delete that part of Article 81 which provides for those Articles to be incorporated in national legislation (see point 16 hereof),

- to remove the brackets in the Joint Declaration (see point 18 hereof).

The Commission considers that an amendment should be made to: - Article 1 by adding a fourth paragraph suspending application of the Convention to credit institutions until a Council Directive on the role of bank supervisory authorities takes effect (see point 7 hereof),

- Article 29 (3) so that each Contracting State will make provision for more than one liquidator (see point 11 hereof),

- Article I (a) of the attached Protocol by narrowing down the reference to compulsory winding-up proceedings in Ireland and the United Kingdom (see point 8 hereof).

The Commission considers that the following solutions should be adopted concerning the variants contained in the draft Convention: - there should be inserted in Article 41 a provision limited to the recognition of "simple" reservation of title clauses which are stipulated before delivery (see point 17 hereof),

- in Article 44 (1) and (3) provision should be made to the effect that fiscal and similar debts arising after the opening of the bankruptcy may be satisfied out of property situated in each Contracting State (see point 13 hereof).

The Commission considers further: - that judgments relating to the liability of persons who have directed or managed the affairs of a firm or company in respect of which a bankruptcy has been opened, referred to in Article 11, must be recognized and enforced in accordance with the General Convention (see point 9 hereof),

- that the cost of advertisement in the Official Journal of the European Communities, referred to in Article 26, must be borne by the general body of creditors (see point 10 hereof).

Lastly, the Commission considers it desirable to insert a new Article confirming that subsequent Community law will take precedence over the Convention (see point 7 hereof);

(c) this opinion is addressed to the Member States.

Done at Brussels, 10 December 1981.

For the Commission

Karl-Heinz NARJES

Member of the Commission