European Court of Justice rules on law applicable to avoidance actions

We summarise the background and outcomes of Case C-73/20 – Oeltrans, an important ruling for liquidators faced with the avoidance of a third party payment and a conflict of laws.

The facts

German company Oeltrans made a payment to a Dutch company to perform a contract between the Dutch company and a German company which belonged to the same group as Oeltrans. It was accepted that Dutch law governed the contract, however, the liquidator of Oeltrans subsequently sought to challenge the payment as voidable under German insolvency law. The Dutch company argued that the payment is not voidable under Dutch law.

The BGH's findings

In general, the law applicable to avoidance actions in insolvency proceedings within the European Union is the law of the Member State in which such proceedings are opened, as outlined in Art. 7(2)(m) Regulation (EU) 2015/848 on Insolvency Proceedings (EuInsRe). However, this does not apply where the party that benefited from the act to the detriment of the creditors can prove that the act is subject to the law of another Member State, and the act cannot be challenged under that Member State's law (Art. 16 (formerly Art. 13) ) EuInsRE). 

That said, German legal literature argues that the law of the underlying contract does not necessarily apply to sole acts of performance (Verfügungen), such as payments. In the case of a payment by a third party, the applicable law will be assessed according to the law to which the payment itself is subject. Because of this, the German Federal Court of Justice (BGH) asked the European Court of Justice to decide.

The European Court of Justice's decision

On 22 April 2021, in Case C-73/20 – Oeltrans, the European Court of Justice ruled that in case of a payment by a third party, a party opposing avoidance may invoke the law applicable under the underlying contract under Art. 13 (today Art. 16) EuInsRE. The aim of Art. 13 EuInsRE is to protect the legitimate expectations of the party who contracted with the insolvent debtor. 

Find out more

To discuss any of the issues raised in this article in more detail, please reach out to a member of our Restructuring & Insolvency team.