Real seat by any other name would smell as sweet?

The Kornhaas judgment: insolvency law as a safe harbour for Real Seat provisions?

In its judgment of 10 December 2015 (C‑594/14, Kornhaas), the European Court of Justice (CJEU) addressed two issues which are at the heart of the debate on the intra-Union mobility of companies: (1) whether, for purposes of private international law, a certain rule forms part of company law (lex societatis) or of insolvency law (lex concursus); and (2) to what extent the freedom of establishment (Article 49 and 54 TFEU) allows national Member States to impose requirements on foreign European Union companies in the interest of third parties.

The legal provision under scrutiny was a German ‘wrongful trading’ provision pursuant to which managing directors that fail to file for insolvency where the company has become insolvent or over-indebted are required to reimburse any payments made after that moment. The Court first held that such a wrongful trading provision forms part of insolvency law. Consequently, pursuant to the European Insolvency Regulation, that provision applies to all companies having their ‘centre of main interests’ (COMI) in Germany. The COMI is the place where the company conducts the administration of its interests on a regular basis. The company’s registered office is presumed to be its COMI, but this presumption can be rebutted. The concept of COMI in insolvency law is similar to that of the ‘real seat’ in company law. Real seat jurisdictions, such as Belgium, essentially prohibit companies that are active within their territory from opting for a company law which has no substantial link with the situs (the ‘real seat’) of the company.

The CJEU then turned to the question whether the application of the provision to companies having their COMI in Germany but incorporated in another EU Member State infringes the freedom of establishment. In the past, the CJEU has indeed held that the application of national provisions to companies incorporated in another Member State may constitute an unjustified restriction on their freedom of establishment. As a result, the question has arisen whether the real seat concept (which is, as mentioned, similar to COMI) is still compatible with the freedom of establishment. However, in this case, the CJEU held that the application of the wrongful trading provision to foreign companies does not affect the freedom of establishment. The Court argued that, unlike the legal provisions under scrutiny in precedents where it did find a violation (in particular Überseering and Inspire Art), the wrongful trading provision in Kornhaas only applies once the company has been formed, namely from the time when it must be considered to be insolvent or over-indebted. This distinction is debatable: one could argue that the mere fact that a basis for liability does not formally relate to a company’s establishment does not mean that it at no time restricts that company’s freedom of establishment.

Member States wishing to impose national requirements on non-domestic EU companies should make sure that these requirements are designed as rules of insolvency law

The key point of all this for Member States wishing to impose national requirements on non-domestic EU companies seems to be that they should make sure that these requirements are designed as rules of insolvency law which show no direct link with the company’s incorporation. In that case, the applicable connecting factor will be the company’s COMI. Moreover, as such rules take effect only after the company has been formed, they are likely to escape scrutiny under the freedom of establishment.

Seen from that perspective, the CJEU has in Kornhaas endorsed a kind of a real seat theory in insolvency law, the very theory it has unsettled in company law.

This post is based on G. Lindemans, “The Walls Have Fallen, Run for the Keep: Insolvency Law as the New Company Law for Third Parties”, ERPL 2016, vol. 5, 15 pp.

Gillis Lindemans

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