German Insolvency Proceedings: when German law governs avoidance actions in France

Imagine: you are a craftsman in Nogent-sur-Seine, and you have supplied materials to a German company that goes bankrupt. The German liquidator suddenly demands repayment of a sum you received a few months before the bankruptcy, on the ground that it was a fictitious profit. You wonder which law applies? French law, because you are in France? German law, because the company is German? This question, which any creditor or debtor may ask, the French Supreme Court answered in a judgment of 2 October 2012. And the answer is not necessarily the one you would expect.

In private international law (the set of rules that determine the applicable law when a situation involves a foreign element), the general rule is that insolvency proceedings (bankruptcy) are governed by the law of the country where they are opened. But what about actions brought by the liquidator to set aside acts performed before the bankruptcy? Are these actions, called avoidance actions (actions aimed at challenging acts deemed detrimental to creditors), governed by the same law?

In this case, the French Supreme Court ruled: yes, the avoidance action brought by the German liquidator against French clients is governed by German insolvency law, not French law. For property owners, tenants or real estate professionals, this decision has concrete implications: if you deal with a foreign company, you must be aware that the insolvency rules of its country may apply to you, even in France.

The facts: a story that happens every day

Mr X, a trader from Sainte-Savine, had received from a German company, Phoenix, payments he believed were legitimate commissions. But Phoenix was placed into insolvency proceedings (bankruptcy) in Germany. The German liquidator, Y..., then brought an avoidance action before the German court, seeking the annulment of those payments, claiming they were fictitious profits paid during the suspect period (the period before bankruptcy when certain acts can be set aside).

The liquidator obtained a judgment in Germany, then sought exequatur (recognition and enforcement in France) of the opening judgment of the insolvency proceedings. Once exequatur was obtained, he sued Mr X before a French court to recover the sums. Mr X contested, arguing that French law should apply because the action was brought in France against a French resident.

The Court of Appeal ruled in favour of the liquidator, applying German law. Mr X appealed to the Supreme Court. The Supreme Court upheld the Court of Appeal's decision, considering that the avoidance action is a consequence of the insolvency proceedings and therefore falls under the law governing those proceedings, in this case German law.

The reasoning of the court — explained

The French Supreme Court relied on general private international law (the general rules that apply in the absence of a specific European regulation). Indeed, Phoenix carried on an activity that did not fall within the scope of Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings. That is why the general law applied.

The reasoning is as follows: the law governing the insolvency proceedings (the lex fori concursus, i.e. the law of the country where the bankruptcy is opened) applies to all actions that are a direct consequence of those proceedings. The avoidance action, which aims to reconstitute the debtor's assets for the benefit of all creditors, is such a consequence. It is therefore governed by the same law as the insolvency proceedings, here German law.

This is not a reversal of precedent, but a confirmation of a classic solution in private international law. The French Supreme Court recalls that the exequatur of the opening judgment does not change the applicable law: the opening judgment is recognised, but the actions deriving from it remain governed by the law of the proceedings.

In practice, this means that the German liquidator can bring proceedings in France based on German law to set aside acts, and the French court will have to apply German law to decide. French parties must therefore defend themselves by invoking German law, which may require the assistance of a specialised lawyer.

What this means for you — in concrete terms

For a landlord in Nogent-sur-Seine who rents premises to a German company, if that company goes bankrupt, the German liquidator could claim rents received during the suspect period if he considers they were excessive. You will then have to prove that those rents were in line with the market, under German law.

For a purchaser who bought real estate from a German company, if the sale took place during the suspect period, the liquidator could seek annulment of the sale. The purchaser must demonstrate that the price was fair and that he was not aware of the state of cessation of payments.

Example with figures: in Sainte-Savine, a client received €50,000 in commissions from a German company. The liquidator demanded repayment of €50,000 plus interest at the German statutory rate (currently 4% per year since 1 January 2023). The client had to repay, as he could not prove that the commissions corresponded to actual services.

If you are in this situation, you must: 1) keep all evidence of the transactions (contracts, invoices, proof of services); 2) check whether the consideration you received was proportionate; 3) consult a lawyer specialised in private international law as soon as you become aware of the insolvency proceedings.

Four tips to avoid this type of dispute

• Check the financial health of your counterparty: before entering into a significant contract with a foreign company, ask for a trade register extract (local Kbis) and annual accounts. A company in difficulty may try to make abnormal payments to you.
• Use a specialised lawyer: if you regularly deal with German companies, have your contracts drafted by a lawyer who masters German insolvency law. A clause specifying the applicable law and the competent court can protect you.
• Keep all evidence: retain proof of your services, invoices, purchase orders, email exchanges. In the event of an avoidance action, you will need to prove that the sums received correspond to actual services and not fictitious advantages.
• React quickly if you receive a formal notice: do not let deadlines pass. Under German law, avoidance actions may be time-barred after three years, but you must act quickly to prepare your defence.

Further reading: related case law and developments

The French Supreme Court had already ruled on similar issues. In a judgment of 16 March 2010 (No. 09-12.187), it held that the law of the insolvency proceedings applies to actions for liability against directors. This decision follows the same logic: actions that directly derive from the bankruptcy are governed by the bankruptcy law.

Since 2012, Regulation (EU) No 2015/848 of 20 May 2015 on insolvency proceedings has replaced the 2000 regulation. It extends the scope to certain preventive proceedings, but the principle remains the same: the law of the opening state applies to avoidance actions. However, this regulation does not apply to insolvency proceedings of companies carrying on an excluded activity (e.g., insurance). For these companies, general law continues to apply, as in the commented decision.

The trend of French courts is therefore constant: to favour the application of the law of the insolvency proceedings to all actions that are a consequence thereof, in order to ensure unity and effectiveness of the bankruptcy. For litigants, this means that vigilance is required when contracting with a foreign company: its bankruptcy may have direct effects in France, governed by a foreign law.

Frequently asked questions

1. What should I do if I receive a claim from a German liquidator? Do not panic, but act quickly. Contact a lawyer specialised in private international law. He or she can analyse the acts and determine whether the action is well-founded under German law. You will need to provide all documents relating to the transaction.
2. Can I challenge the jurisdiction of the French court? Yes, but it depends on the circumstances. In principle, the French court has jurisdiction to hear the avoidance action if the defendant is domiciled in France. But the applicable law remains German law.
3. What are the time limits for bringing an action? Under German law, the avoidance action is subject to a limitation period of three years from the opening of the insolvency proceedings. But there may be variations depending on the type of act. Consult a lawyer without delay.
4. What is the cost of such proceedings? Legal fees can vary, but an avoidance action often involves an accounting expert and translation costs. Expect several thousand euros. A preliminary 30-minute consultation (€45 with Maître Zakine) can help you assess the risks.
5. Can I settle with the liquidator? Yes, it is possible to negotiate a settlement agreement. The liquidator may accept a partial repayment to avoid a lengthy procedure. However, the agreement must be approved by the German court.

Are you in a similar situation? A first 30-minute consultation with Maître Zakine (€45) can save you months of proceedings — and often much more. Book an appointment →