The Applicable Law Of Set-Off And Cross-Border Insolvency Proceedings: The Advocate General's 30 April 2019 Opinion In CeDe Group AB

Today, Advocate General Bobek has delivered his opinion in Case C-198/18 CeDe Group AB v KAN Sp. z.o.o. (in insolvency) (see here), a  case which relates to the vitally important question in EU private international law of what is the applicable law of set-off when a company is insolvent.

Outline facts

On 9 June 2010, PPUB, a company established in Poland, entered into an agreement for the delivery of goods with CeDe, a Swedish company. The contract provided that Swedish law shall apply to any disputes concerning its interpretation.

At the end of January 2011, insolvency proceedings were opened against PPUB in Poland. In July of the same year, the Polish liquidator lodged an application for a European order for payment against CeDe with the Kronofogdemyndigheten (Enforcement Authority, Sweden) on the grounds that CeDe owed 1,532, 489 Swedish kronor, together with interest, for goods delivered by PPUB under their agreement.

The case was subsequently transferred to the Malmö tingsrätt (District Court, Malmö, Sweden).

CeDe disputed PPUB's claim by invoking a set-off for an amount exceeding the amount claimed by PPUB. CeDe claimed that that debt corresponds to compensation in respect of unfulfilled deliveries and defects in goods delivered by PPUB. CeDe also contended that the right of set-off had arisen before insolvency proceedings were opened against PPUB.

The liquidator of PPUB refused to allow the set-off claimed by CeDe in the context of the insolvency proceedings in Poland.

Before the Malmö District Court, the liquidator claimed that the right of set-off should be determined under Polish law on the basis of Article 4(1) of the Insolvency Regulation (1346 /2000). Entitled "Law Applicable", Article 4 (now Article 7 of the Recast Insolvency Regulation) contained the general rules regarding for determining the law applicable to "insolvency proceedings and their effects":   

1. Save as otherwise provided in this Regulation, the law applicable to insolvency proceedings and their effects shall be that of the Member State within the territory of which such proceedings are opened, hereafter referred to as the "State of the opening of proceedings".
2. The law of the State of the opening of proceedings shall determine the conditions for the opening of those proceedings, their conduct and their closure. It shall determine in particular:

…

(d)      the conditions under which set-offs may be invoked;

According to that provision, save as otherwise provided, the law applicable to insolvency proceedings and their effects is to be that of the Member State within the territory of which such proceedings are opened (the law of the State of the opening of proceedings or lex concursus).

According to the liquidator, it followed from Article 4(2)(d) of the Insolvency Regulation that the lex concursus is to determine, in any event, the conditions under which set-offs may be invoked. The reason for this is that Article 6(1) of that regulation, which provides that insolvency proceedings shall not affect the right of set-off as long as such right is permitted under the law applicable to the debtor's claim, only applies if set-off is not permitted under the law of the State of the opening of proceedings. Article 6 of the Insolvency Regulation, entitled "Set-off" provides that:

1. The opening of insolvency proceedings shall not affect the right of creditors to demand the set-off of their claims against the claims of the debtor, where such a set-off is permitted by the law applicable to the insolvent debtor's claim.
2. Paragraph 1 shall not preclude actions for voidness, voidability or unenforceability as referred to in Article 4(2)(m).'

Therefore, in the liquidator's view, this provision does not apply to the case in the main proceedings, because Polish law does permit set-off.

CeDe argued however that the set-off should be examined under Swedish law. It submitted, first, that the liquidator's action concerns a claim stemming from the agreement between CeDe and PPUB, which contains a choice‑of-law clause according to which Swedish law shall apply to any disputes regarding its interpretation. This means that Swedish law is applicable by virtue of Article 3(1) of the Rome I Regulation. Furthermore, CeDe submitted that, if the parties did not agree on the right of set-off, that issue would be governed by the law applicable to the claim against which set-off is sought under Article 17 of the Rome I Regulation which declares that:

"Where the right to set-off is not agreed by the parties, set-off shall be governed by the law applicable to the claim against which the right to set-off is asserted"

(See chapter 20, "Set-off" in Michael McParland, "The Rome I Regulation on the Law Applicable to Contractual Obligations" (see here))

CeDe contended, secondly, that Article 6(1) of the Insolvency Regulation means that insolvency proceedings do not affect the right of set-off, if set-off is permitted under the law applicable to the debtor's claim. Since, in the view of CeDe, Swedish law applies to the liquidator's claim, the question of set-off should also be examined under Swedish law.

The Malmö District Court, Malmö found that, in accordance with the general rule in Article 4 of the Insolvency Regulation, Polish law could not be regarded as limiting or prohibiting set-off. As a result, it found that the exception provided for in Article 6(1) of that regulation was not applicable and that Polish law should apply in the case in the main proceedings.

That judgment was confirmed on appeal by the Hovrätten över SkÃ¥ne och Blekinge (Court of Appeal, Scania and Blekinge, Sweden) on the basis that, inter alia, there were no grounds for departing from the general rule of the lex concursus in Article 4(1) of the Insolvency Regulation. The fact that the liquidator did not accept CeDe's claim for a set-off did not alter that finding.

During the proceedings before the Court of Appeal, the liquidator of PPUB transferred the main claim to KAN, a company established in Poland, which entered the proceedings in the place of the liquidator.

CeDe appealed against the judgment of the Court of Appeal, before the Högsta domstolen (Supreme Court). It claimed that Swedish law should apply to the set-off claim. KAN contended that the judgment of the Court of Appeal should not be varied.

During the proceedings before the Supreme Court, KAN became insolvent.

The liquidator in those insolvency proceedings declared that the insolvent estate was not taking over the debtor's claim against CeDe. Thus, it is now KAN in insolvency, and not the insolvent estate, which is a party to the proceedings.

Under those circumstances, the Högsta domstolen (Supreme Court) decided to stay the proceedings and refer questions to the Court of Justice for a preliminary ruling.

AG Bobek's Opinion

In Case C-198/18 CeDe Group AB, AG Bobek noted that the wording of Article 4(2)(d) of the Insolvency Regulation (1346/2000) "is far from clear". Some linguistic versions (like e.g. the English, Spanish 'las condiciones de oponibilidad de una compensación , German 'die Voraussetzungen für die Wirksamkeit einer Aufrechnung' )  seem to imply that what is governed by that provision are the conditions under which set-offs may "invoked" (like e.g. the Swedish  'förutsättningarna för kvittning', and the Czech ( 'podmínky, za kterých může dojít k započtení pohledávek' ) suggesting therefore the possibility of invoking them in insolvency proceedings, whereas other linguistic versions merely refer to the conditions for set-off, which could be understood as comprising the substantive conditions for set-off as well.

While noting the debate over this question, A-G Bobek recommends that the Court of Justice does not get involved in trying to resolve this thorny question on the facts of this case.

But what is the relationship between the applicable law determined under the Rome I Regulation and the lex fori concursus under the Insolvency Regulation?

In AG Bobek advises that the Court of Justice should rule that Article 4 of Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings must be interpreted in the sense that it does not apply to the determination of the law applicable to a claim which is the subject of an action brought before the courts of a Member State by the liquidator of a company subject to insolvency proceedings in another Member State, where that action seeks payment from another company on the basis of contractual obligations entered into before that insolvency.

The Court's judgment in Case C-198/18 CeDe Group AB will be worth looking out for.