In April 2023, an English court approved the restructuring plan for companies of the Adler Group (here and here, in more detail also here), however, at least one bondholder already filed a lawsuit against this restructuring before the Frankfurt Regional Court in March 2023 (here). Although the outcome of these proceedings is still open, a look at the so-called “Galapagos” rulings of the ECJ and BGH could provide indications for the continuation of the case.
In October 2014, financial investor Triton acquired Kelvion, a supplier of industrial heat exchangers based in Bochum, Germany (here). It subsequently placed Kelvion and another company into a holding structure called Galapagos and financed it through high-yield bonds worth more than half a billion euros. After the holding company was unable to pay the interest on the bonds in mid-2019 and a sale of the holding company was threatened (here), Triton moved the holding company’s registered office from Luxembourg to England and initiated administration proceedings there on August 22, 2019 (here). Various creditors of Galapagos reacted to these efforts, executed on the shares and replaced the management of the holding company. The new management moved the registered office to Düsseldorf and signed a corresponding lease agreement for separate office premises. In early September 2019, the management then applied for the opening of German insolvency proceedings at the Düsseldorf Local Court, which indeed opened preliminary proceedings and appointed a preliminary insolvency administrator (here). Although the proceedings were initially suspended on appeal by creditors, they were reopened a few days later (still in September 2019) on a new application. One of the Galapagos companies appealed against this decision on the grounds that the administrative headquarters had been moved to England and that the AG Düsseldorf therefore no longer had international jurisdiction. By the end of December 31, 2020, the English court had not ruled on the insolvency petition filed in England (for more details on the facts of the case, see the BGH decision from 2022 below).
The court decisions
The BGH, which was the court of last instance hearing the appeal, submitted a total of three questions to the ECJ for a preliminary ruling in December 2020 on the interpretation of Article 3 of the ECI Regulation in this case. The ECJ took its decent time answering these questions only in March 2022 and the BGH needed a further nine months, until December 2022, to decide.
The ECJ first upheld its case law already established in the so-called “Staubitz-Schreiber“-case (see here), according to which “the court of a Member State seised of a request to open main insolvency proceedings continues to have exclusive jurisdiction to open such proceedings if the center of the debtor’s main interests is transferred to another Member State after the request has been lodged but before the decision on that request.” Going further, the ECJ then held that “as a consequence […] a court of another Member State to which a request with the same purpose is subsequently brought cannot, in principle, assume jurisdiction to open main insolvency proceedings as long as the first court has not ruled and denied its jurisdiction.“
In response to the BGH’s further question in this regard, the ECJ further ruled “that the court of a Member State seized with a [later in time, author’s note] request to open main insolvency proceedings is not required in such circumstances to examine whether the center of the debtor’s main interests lies in that Member State.” (see paras. 41, 42)
Accordingly, the AG Düsseldorf would actually have been blocked with regard to the decision on the second insolvency petition until the English court seized had ruled on the insolvency court before it. Even more so, the court would not have been allowed to examine whether the center of the debtor’s main interests (=COMI) was actually located somewhere else than in England due to the existence of an insolvency petition in England that was filed prior to the insolvency petition. The ECJ hence takes a purely formalistic approach in deciding these facts (and the BGH also recognizes this blocking effect in its decision of 2022, see para. 30).
In the present case, however, the Brexit came to the aid of the AG Düsseldorf, so to speak: For – as also explained by the ECJ (para. 38/39) – it had to be taken into account that Art. 3 EuInsVO according to Art. 67 para. 3 lit. c of the Withdrawal Agreement between the EU and the United Kingdom (here) could only apply in the relationship between the United Kingdom and Member States if and to the extent that the main proceedings were commenced before the expiry of the transitional period provided for in Art. 126 of the Agreement. “Therefore, if it were found in the present case that, by the expiry of that transitional period, that is to say, on 31 December 2020, the High Court had still not ruled on the application for the opening of main insolvency proceedings,” the ECJ continued, “it would follow that a court of a Member State within the territory of which the center of Galapagos’ main interests is situated would no longer be required, under Regulation 2015/848, to refrain, on the basis of that application, from declaring itself competent to open such proceedings.“
As explained, the English court did not decide on the application before it until the end of the transitional period, so that the jurisdiction to decide reverted to the BGH. The BGH then decided that the jurisdiction of the AG Düsseldorf to decide on the insolvency petition was (again) given. Furthermore, the BGH ruled (from para. 21) that the COMI of the holding company had been located in Düsseldorf when the (German) application was filed and therefore the AG Düsseldorf had also been competent to open the (preliminary) insolvency proceedings. Furthermore, the BGH ruled that this result would also apply under the autonomous German international insolvency law (from para. 40; which is indeed the case with regard to the United Kingdom since January 1, 2021). In particular, the opening of insolvency proceedings by a (competent!) German court would take precedence over the opening of foreign insolvency proceedings at a later date, even if the application to open proceedings had been filed with the foreign court earlier and the opening of the foreign insolvency proceedings would be recognizable as such under § 343 InsO. Even if the German courts lacked international jurisdiction at the time the application was filed, it would be sufficient if the international jurisdiction was only established at the time of the decision.
Consequences for the legal practice
a) Fundamental points
Beyond their respective decision in the Galapagos case – which was influenced by the coincidences of Brexit – the BGH and the ECJ have given valuable guidance to legal practice with cases of so-called “forum shopping”. Thus, according to the ECJ, the filing of an insolvency petition in one EU member state blocks any activities of the insolvency courts in other member states until a decision is made by the court first seized. The court first seized also examines the COMI; decisions of other courts on this are not admissible.
In contrast, in relation to third countries (outside the EU), the BGH takes a much more “national” view: Accordingly, the decision-making jurisdiction of German courts is not blocked by an insolvency petition filed before a court of a third country beforehand, even if the German court’s own jurisdiction (COMI) is only established after the petition has been filed in Germany in the first place. And this is the case even if the foreign court proceedings would have to be recognized in Germany pursuant to Section 343 InsO.
b) Adler Group
If we now transfer these principles to the case of the Adler Group, we must first note that all applications were made after the transition period mentioned above, i.e. after Brexit had been completed. Consequently, the legal issues in connection with this case are to be assessed in accordance with the respective autonomous national law. In the case of Adler, the proceedings have not only been opened, but the restructuring plan has also already been approved by the court (here). Accordingly, “only” the question of the recognition of the decision of the English court in Germany arises in this case – which is governed by § 343 InO. In any case, the decision of the English court would not be recognized if it had not been (locally) competent to open the insolvency proceedings. Assuming that the BGH applies the same standards for determining the debtor’s COMI required for the opening of jurisdiction under § 343 InsO as (determined by the ECJ) under Art. 3 EuInsVO, then an office address in England – recognizable to third parties – would be sufficient for the assumption of a COMI in England. In the Adler case, an English PLC even filed for insolvency, so a COMI of the filing company in England would probably be affirmative. However, the English company had apparently either taken over the debts of the Luxembourg holding company or at least joined them as debtor. Therefore, the question should rather be whether the debt assumption was effective or not. If it was, the COMI could actually be located in England – unless other objections apply – and the English courts would have had (local) jurisdiction for the decisions. The only obstacle to recognition in Germany would then be the so-called “ordre public” proviso under § 343 (1) no. 2 InsO – the result of the English restructuring plan would therefore probably not be compatible with basic principles of German law. However, the standard for this examination is rather high, and the refusal of recognition for this reason does not appear necessarily likely, at least on the basis of the facts known to date.
c) Further considerations
Despite the actual possibility that the restructuring of the Adler Group under English law will be recognized in Germany – and that the action in Frankfurt will thus be dismissed – the route via England after Brexit appears to be arduous and fraught with numerous risks:
A mere relocation of the registered office and the development of minimal activities on site in England are likely to be sufficient only to a limited extent per se in order to be able to design a transfer of the COMI that is even remotely secure in court. The structure established by the Adler Group of an English company taking over the liabilities from the holding company or at least joining them may well have been relevant for the assessment of the COMI from an English perspective. However, if the relevant financing agreements – as claimed by a creditor group – do not permit such an accession or exchange of the debtor, it may be difficult to establish COMI in England.
At the same time, even if a COMI could be established from the perspective of English courts, the sword of Damocles of conflicting decisions by German courts hangs over the outcome of the restructuring. This is because even the order to open insolvency proceedings issued by an English court does not rule out conflicting assumptions of jurisdiction – and corresponding decisions – by German courts under autonomous German international insolvency law. Furthermore, the question remains unresolved whether the BGH, in relation to third countries that are not members of the EU, will continue to apply the criteria set by the ECJ for determining COMI or whether it will revert to its previous case law, which was critical precisely of a transfer of registered office that took place immediately prior to the filing of the petition.
Thus, there is a risk that several courts will assume their respective jurisdiction and, as a result, several insolvency proceedings will compete with each other. Thus, in the Galapagos case, two main insolvency proceedings are facing each other, a German insolvency proceeding in Düsseldorf and an English (insolvent) winding-down proceeding (here). The problems resulting from this constellation do not need to be further elaborated here.
The legal risks are compounded by the length of the proceedings. For example, the reorganization of the automotive supplier Leonie via a StaRUG procedure has become legally binding in the meantime (here) – much faster than the decisions on Galapagos or Adler.
If, in the Adler case, the Frankfurt Regional Court denies the jurisdiction of the the English courts for the restructuring, the managers involved must also ask themselves managers involved must also ask themselves the question of whether, in view of the in view of the case law upheld by the BGH in the Q-Cells case on the consideration of conflicting case law, which is not the court of last instance (!), in restructuring decisions (here) want to continue to adhere to the restructuring attempt in England and then – after several years – possibly facing the accusation of insolvency dragging out.
Against this backdrop, it seems, at least in the overall view questionable whether the migration to England indeed beats the StaRUG (but so still the Finance Magazin, here).