Set‐off under the European insolvency regulation (and English law)

• DOI: http://doi.org/10.1002/iir.1373
• Date: 01 May 2020
• Author: Gerard McCormack
• Published date: 01 May 2020

RESEARCH ARTICLE

Set-off under the European insolvency

regulation (and English law)

Gerard McCormack

Professor of International Business Law,

School of Law, University of Leeds,

Leeds, UK*

Correspondence

Gerard McCormack, Professor of

International Business Law, School of

Law, University of Leeds, Leeds, UK.

Email: g.mccormack@leeds.ac.uk

This paper addresses critically the meaning and effect of the

set-off provisions in the European Insolvency Regulation.

The Regulation sets out the authority of EU Member States

to open insolvency proceedings and provides that, subject to

exceptions, the law of the State that opens insolvency pro-

ceedings shall apply to those proceedings. Setoff is one such

exception for the opening of insolvency proceedings does

notaffecttherightsofcreditorstodemandtheset-offoftheir

claims against the insolvent debtor. Set-off is intended to

perform a guarantee type function for creditor claims. Nev-

ertheless, the Regulation does not define what is meant by

set-off nor clarify whether set-off rights under the law of a

third country (such as English law) may be relied upon. The

paper provides valuable clarification and critical analysis.

1|INTRODUCTION

This paper will address critically the meaning and effect of the set-off provisions in the European

Insolvency Regulation (Insolvency Regulation or Regulation).

1

Theseprovisionshaveremainedthe

same between the original and recast versions of the Regulation and moreover, the Virgos-Schmit

Report,

2

which preceded the original Regulation remainsrelevantasaninterpretativeaid.

3

The

expression “set-off”is not defined in the Insolvency Regulation but it may be described broadly

however, as the offsetting or balancing of reciprocal rights and obligations between two parties so

that only a net balance becomes payable from one party to the other.

4

After this introductory part, the second (substantive) section of the paper address the

general structure of the Insolvency Regulation and the role of set-off within that structure;

*Also Visiting Professor, University of Vaasa, Finland.

[Correction added on 11 May 2020 after first online publication: An additional author affiliation has been added.]

Received: 19 March 2020 Revised: 31 March 2020 Accepted: 4 April 2020

DOI: 10.1002/iir.1373

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and

reproduction in any medium, provided the original work is properly cited.

© 2020 INSOL International and John Wiley & Sons Ltd

100 Int Insolv Rev. 2020;29:100–117.wileyonlinelibrary.com/journal/iir

the third section addresses what is meant by set-off and whether set-off in the context of

insolvency should be construed in a different way than set-off in a noninsolvency setting.

In this connection, it concentrates its analysis on English law. The fourth section considers

the interaction between set-off provisions in different national laws and the Insolvency

Regulation. It focuses in particular, on the opinion of the Advocate General and the judg-

mentoftheCourtofJusticeinCaseC-198/18CeDe Group AB.

5

The fifth section examines

the protection of set-off rights under Article 9 of the Regulation including the possible rele-

vance of the laws of third countries as distinct from the laws of Member States. Now that

the UK is no longer an EU Member State this issue has particular resonance. The final

section concludes.

2|INSOLVENCY REGULATION AND SET-OFF

The European Insolvency Regulation, in both its original and recast versions, sets out what

State or States may open insolvency proceedings in respect of a debtor. Main insolvency pro-

ceedings may be opened where the debtor has its “center of main interests”(COMI) and sec-

ondary insolvency proceedings may be opened where the debtor has an “establishment.”Main

insolvency proceedings have a quasi-universal effect applying in principle to all assets of the

debtor wherever they are located throughout the world.

6

Secondary insolvency proceedings, on

the other hand, have a strictly territorial effect. Their effect is limited to the territory of the State

where the debtor has assets.

7

The Insolvency Regulation has not only jurisdictional rules but also conflict of law rules.

Article 7 contains the general rules for determining the law applicable to “insolvency proceed-

ings and their effects.”It is provided in Article 7(2) that the law applicable to insolvency pro-

ceedings and their effects shall be that of the State where such proceedings are opened. It goes

on to stipulate that:

“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 deter-

mine in particular…(d) the conditions under which set-offs may be invoked.”

This law, however, the so-called lex concursus, is subject to a number of exceptions stated

in Articles 8–18. Article 9, entitled “set-off,”provides that the opening of insolvency proceed-

ings 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 insol-

vent debtor's claim.”

It is added, however, that this provision shall not preclude actions for voidness, voidability,

or unenforceability.

According to the Virgos-Schmit Report, the substantive effects referred to the law of the

State that opens insolvency proceedings are typical of insolvency law and effects, which are nec-

essary for the insolvency proceedings to fulfil its aims.

8

Therefore, subject to the Articles 8–18

exceptions, the law of the opening State may displace the law normally applicable to the act

concerned, under the common pre-insolvency conflict of laws rules.

9

To facilitate the

MCCORMACK 101