The Pitfalls of International Insolvency and State Interventionism in Slovenia

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Written by Dr. Jorg Sladic, Attorney in Ljubljana and Assistant Professor in Maribor (Slovenia)

The most interesting development in European private international law and European insolvency law seems the Croatian AGROKOR case. Rulings of English courts have been reported (see e.g. Prof. Van Calster’s blog, Agrokor DD – Recognition of Croatian proceedings shows the impact of Insolvency Regulation’s Annex A.)[1] However, a new and contrary development seems to be an order by the Slovenian Supreme Court in case Cpg 2/2018 of 14 March 2018.[2]

The Slovenian forum refused to grant exequatur to Croatian extraordinary administration as a way of divestiture of insolvent debtor.  Large parts of the order do read as a manual of non-contentious proceedings and deal in assessment of interest in bringing an appeal. However, the part dealing with private international law and European civil procedure has to presented. It will have a wider international effect. It is also interesting that the Slovenian forum refused to contemplate any assessment done by the High Court of Justice of England & Wales in case In the matter of Agrokor dd and in the matter of the Cross-border insolvency regulations 2006 ([2017] Ewhc 2791 (Ch)).

Facts:

AGROKOR is a huge agro-industrial enterprises in South-Eastern Europe (Croatia, Slovenia, Romania, Serbia and also perhaps some other European jurisdictions) employing more than 50 000 employees. It is also the biggest owner of agricultural lands in that part of Europe. The impacts of Agrokor were discussed by Hogan & Lovell on their website.[3] Agrokor was owned and operated by a local oligarch and is apparently implied in not all to transparent business operations. As a consequence it became insolvent.

Due to huge debts that would actually require a collective insolvency proceedings Croatia adopted the Law on Extraordinary Administration Proceeding in Commercial Companies of Systemic Importance for the Republic of Croatia.[4] The essence of that legislation is summarized in English by the High Court of Justice of England & Wales in case In the matter of Agrokor dd and in the matter of the Cross-border insolvency regulations 2006 ([2017] Ewhc 2791 (Ch)). The essence of Croatian legislation is the (temporary) suspension of par condicio creditorum in and pari passu clauses in insolvency law. AGROKOR was passed under extraordinary administration suspending the rights of owners and of the board of directors.

The Croatian extraordinary administrator requested the recognition of extraordinary administration under Croatian law also for the assets and subsidiaries in Slovenia in 2017. Upon opposition of creditors (banks as creditors ex iure crediti) the recognition order was vacated. After remedies the case came before the Supreme Court and ended with an unanimous refusal of recognition.

Reasoning:

In this report only points of private international law will be reported. Questions of standing and of interest in bringing proceedings will not be discussed.

Inapplicability of EU private international law

Even though Slovenia and Croatia are nowadays Member States of the EU, the Regulations 1346/200 and 848/2015 are not to be applied, as the Croatian proceedings are not mentioned in the Annex A. Slovenian national international collective insolvency law (Art. 445 – 488 Financial Operations, Insolvency Proceedings and Compulsory Winding-up Act) and the Bilateral Legal Assistance Treaty Between Slovenia and Croatia of 1994 are to be applied (par. 6).

The lis pendens plea

Agrokor argued that an arbitration case is pending in London and that some of the parties in the Slovenian case declared their claims in Croatian proceedings for extraordinary administration. The Slovenian Supreme court dismissed such a plea. The effects of lis pendens on the arbitration in the UK are a matter for UK courts (par. 23). As a consequence the recognition of Croatian extraordinary administration in the UK by the judgement of the High Court of Justice Nr. CR-2017-005571 of 9 November 2017 is of no importance for Slovenian proceedings. However, even if UK law incorporated the UNCITRAL guidelines the High court (judge Paul Matthews) based its argumentation on common law and precedents based on that law. The Slovenian forum completely cut the discussion by a laconic statement according to which understanding and application of devices of insolvency law under [English] common law is quite different from Slovenian civil law legal order (par. 24).

However, lis pendens could be given effect due to parallel pending proceedings in Slovenia and Croatia. The Slovenian Court did not apply the Regulation Brussels Ia (1215/2012) but referred to national Slovenian law. The Slovenian forum explained that the Regulation Brussels Ia is not t be applied by virtue of its exception for bankruptcy, proceedings relating to the winding-up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous proceedings (Art. 1(b) Regulation 1215/2012). National Slovenian private international law deals with the exception of lis pendens in Art. 88 Private International Law and Proceedings Act of 1999.[5] The essence of Slovenian international lis pendens is the request to suspend proceedings before a Slovenian forum. Where Slovenian private international law applies, a Slovenian forum will not suspend the proceedings ox officio. In concreto, however, none of the parties in Slovenian set of proceedings requested suspension.

Cross-border effects of substantive consolidation

One of the pleas in appeal was the erroneous application of substantive consolidation under the UNCITRAL model law. Lower courts considered that the substantive consolidation violated the par condicio creditorum principle, i.e. a basic principle of Slovenian insolvency law. Lower courts assessed the Croatian extraordinary administration and concluded that in essence such an administration is to be considered as a substantive consolidation. Substantive consolidation is a treatment of the assets and liabilities of two or more enterprise group members as if they were part of a single insolvency estate.[6] Slovenian insolvency legislation followed the UNCITRAL model law. The Supreme Court did not have any problem incorporating via its own case-law the UNCITRAL Legislative Guide on Insolvency Law. According to the Slovenian forum the Croatian  Law on Extraordinary Administration Proceeding in Commercial Companies of Systemic Importance for the Republic of Croatia indeed incorporated the substantive consolidation in Croatian law. Art. 43 of the said Croatian law namely provides for a systemic measure of substantive consolidation (paras. 29 – 40, especially par. 36). Substantive cross-border consolidation is contrary so Slovenian international ordre public.

The defence of ordre public (paras 41 – 53)

The essence of Slovenian Supreme Court’s reasoning consists of assessment of the compliance with ordre public condition for granting recognition (see on Slovenian legislation in Italian e.g. in Sladi? La Corte suprema slovena si confronta con i danni punitivi, Danno e responsabilità 1/2014, p. 18 et seq.). The national Slovenian law applies the prerequisite of international ordre public, i.e. only foreign decision that could endanger the legal and moral integrity of Slovenian legal order are not recognised. The ordre public defence is the ultimate refuge. However, recognition of foreign proceedings for divestiture of over-indebted debtors where the condition of equal treatment of creditors (par condicio creditorum) is not complied with would not comply with the requirements of Slovenian international ordre public. Slovenia namely protects on the one hand in national insolvency proceedings the equal treatment of creditors. On the other hand it only grants recognition in international insolvency legislation the powers of foreign administrator to conduct the case for the common representation of all creditors (par. 45). The Croatian Law on Extraordinary Administration Proceeding in Commercial Companies of Systemic Importance for the Republic of Croatia is a form of State’s economic intervention or economic protectionism having the aim of protection of commercial companies of systemic importance. The Croatian law interferes in the fundamental principles of collective insolvency law and gives certain creditors privileges to be paid by priority by an administrator’s discretionary decision without any consent of the board of creditors (par. 47). The extraordinary administration is conditioned by the State’s interest and certainly not by the interest of creditors. Creditors do not get nor the benefit of the par condicio creditorum (no equal treatment of creditors in having the same condition vis-a-vis the debtor) and are not paid in equal shares (no pari passu clause) (par. 48).

The Slovenian Supreme Court refused to engage in any assessment of compatibility of Croatian law with the Croatian ordre public (par. 49). However, it remarked that Courts in successor States of Yugoslavia refused to recognise the effects of judicial decisions based on the Law on Extraordinary Administration Proceeding in Commercial Companies of Systemic Importance for the Republic of Croatia. Courts in Montenegro (Supreme Court of Montenegro), Serbia (Commercial court of Appeal), Bosnia (Supreme Court of Bosnia) all concluded that the Croatian Law on Extraordinary Administration Proceeding in Commercial Companies of Systemic Importance for the Republic of Croatia does not deal in insolvency, it is aimed at the protection of State’s interests. The Croatian law is contrary to ordre public of any of those States. Perhaps the said decisions can also be seen as introducing the government interest analysis in South-Eastern Europe?

In the end the Slovenian Supreme Court stressed the importance of the European ordre public. “In the framework of national ordre public also the European ordre public is to be acknowledged next to regional ordre public. [Comment: The order does not clarify what the difference between the European and regional ordre public is]. A Slovenian forum is not empowered to refuse the recognition of foreign insolvency proceedings even though they might be contrary to national ordre public if such a refusal would not be justified or proportional from a European point of view. Slovenia and Croatia are namely both members of European legal area, i.e. members of the EU. However, each State is empowered to set types and conditions of collective insolvency proceedings on their territories. The effects and closing can then be a subject-matter of recognition (both automatic and according to the rules) in other States and also to set interest to be affected by legal consequences of recognition of foreign insolvency proceedings.” Slovenia decided to protect the creditors’ interests, for their equal treatment, as a consequence the refusal of recognition of the extraordinary administration complies with the Slovenian ordre public.

[1]https://gavclaw.com/2018/03/26/agrokor-dd-recognition-of-croatian-proceedings-shows-the-impact-of-insolvency-regulations-annex-a/#comment-69405

[2]Available in Slovenian at http://www.sodisce.si/sodni_postopki/objave/2018031912582798/

[3]https://www.hlbriworkoutblog.com/2017/12/english-recognition-agrokor-insolvency-not-tick-box-exercise/#page=1

[4]The Croatian version available on the webise of the Croatian Official Journal https://narodne-novine.nn.hr/clanci/sluzbeni/2017_04_32_707.html

[5]The translation in Encyclopedia of Private International Law (Jürgen Basedow, Giesela Rühl, Franco Ferrari and Pedro de Miguel Asensio), 2017, p. 3784–3804 reads as: »A court of the Republic of Slovenia will stay the proceedings at the request of a party if other proceedings on the same matter have been initiated before a foreign court between the same parties:

  • if the suit in the proceedings conducted abroad was served on the defendant before the service of the suit in the proceedings conducted in the Republic of Slovenia; or if a non-contentious procedure abroad started earlier than in the Republic of Slovenia;
  • if it is probable that the foreign decision will be recognized in the Republic of Slovenia, and;
  • if reciprocity exists between the two states.«

[6]http://www.uncitral.org/uncitral/en/uncitral_texts/insolvency/2004Guide.html.