On the application of Art. 14 Insolvency Regulation in Greece

The Thessaloniki CoA issued last year a highly interesting judgment on the application of Art. 14 Insolvency Regulation. This is the first decision applying the rule in Greece (unreported). 

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The facts: In 2006, a Greek entrepreneur living in Bitburg, Germany, filed an application for bankruptcy before the Bitburg Insolvency Court. The court appointed a receiver on April 2006. End June the court opened insolvency proceedings and declared the Greek applicant insolvent.  A copy of the decision was served to the applicant shortly after. According to §§ 38 & 174 of the German Insolvency Code (Insolvenzordnung), the creditors declared their claims to the receiver in September 2006. Mid February 2007 the applicant travelled to Greece, where he transferred a piece of land to a leasing company. December 2008 the latest, the German trustee in bankruptcy became aware of the transaction. He then filed an action before the Yiannitsa 1^st Instance Court against the bankrupt, the leasing company, and a Greek S.A., to which the leasing company leased the property. Among other things, the receiver asked for the sale to be declared null and void, because it constitutes part of the assets for distribution to the creditors since the opening of bankruptcy proceedings in Germany. The Yiannitsa 1^st Instance court dismissed the claim with regard to the bankrupt and the leaseholder: The former lacked a standing to be sued, because he was declared insolvent in Germany. The foreign decision was recognized by the Greek court automatically, pursuant to the rule stipulated under Art. 16 of the Regulation. As for the latter, the claimant did not pay the judicial stamp duty, a failure which leads to an immediate dismissal of the action pursuant to Greek law. With regard to the leasing company, the court admitted the claim, and declared the contract null and void. The company appealed before the Thessaloniki CoA. 

The ruling: The appellate court referred to Articles 8, 14, 16.1, 17, 21, 22 and 24.1 Insolvency Regulation. It underlined the rule under Art. 14, namely that the validity of the act in question is to be governed by the law of the State within the territory of which the immoveable asset is situated. It then applied domestic law, which deprives the bankrupt of his right to administer his property from the opening of insolvency proceedings. This rule applies ipso iure, regardless if the buyer is in good faith or not. In the case at hand, the court acknowledged that the leasing company was in good faith, since no registration of the foreign opening of insolvency proceedings had taken place at the time of the conveyance. Still, even in this case, the rule applies in favor of the creditors and to the detriment of the purchaser. Furthermore, Art. 21 & 22 do not hinder the application of Art. 16.

The appellant challenged the 1^st instance ruling in the following terms: 

a) The trustee in bankruptcy filed a request for a freezing order July 2006, i.e. before the time the fraudulent conveyance occurred, without later entering into the merits upon agreement with the bankrupt; 

b) The receiver omitted to file an application for preservation measures pursuant to Art. 38 Insolvency Regulation, although he was aware of the existence of this piece of land.

c) The receiver knew that, under German law, the nullity of the contract is possible only if the opening of proceedings had been registered in the land registry prior to the transaction.

d) The receiver was aware of the intention of the bankrupt to sell the property in order to reimburse his creditors, and he agreed on those terms. 

The Thessaloniki CoA dismissed the points of the appellant: Neither the receiver’s failure to initiate preservation measures according to Art. 38 Insolvency Regulation, nor his deemed knowledge of the property belonging to the bankrupt, are sufficient grounds for depriving him of his right to request the contract’s voidance.

Comments: The arguments put forward by the Greek leasing company do not hold water. Art. 14 Insolvency Regulation unambiguously passes the torch to national jurisdictions. The rule in Greece is crystal clear, supported both by case law and legal scholars. The buyer loses the property, but he becomes part of the creditors in bankruptcy, and has the chance to be reimbursed for the sum paid at the stage of distribution. However, lacking interconnectivity of insolvency registers causes unpleasant results, and jeopardizes immovable transactions. The fact that in the case at hand the buyer was proven to be in good faith, triggers legitimate skepticism: Is it possible for a potential buyer to engage in a research on 27 jurisdictions, in order to proceed safely to the purchase? I think that the time is ripe to enter into the next stage of judicial cooperation in the field. The proposed amendments [new Art. 20a – 20d & 21-22] to the Regulation should come into force ASAP.

Your comments / contributions on the issue from your jurisdiction’s point of view, are more than welcome!