In its “I.G.I.” decision of 30.1.2020 (C-394/18), the Court of Justice of the European Union (CJEU) held that the European creditor protection rules for divisions do not prevent creditors of the company being divided from filing an actio pauliana[1] in accordance with national law. We think this decision is not correct.
The I.G.I. decision involved the partial division of an Italian limited liability company, which had transferred all of its significant assets to another Italian limited liability company set up in the context of the division. However, the creditors of the company being divided did not receive a new debtor but were stuck with a company with virtually no assets. No wonder, then, that they complained. They found salvation in an actio pauliana in accordance with Italian law which, in effect, helped them to set aside the transaction.
In its decision, the Court interprets Articles 12 and 19 Directive 82/891/EEC on national divisions of limited liability companies (now Articles 146 and 153 Directive 2017/1132/EU). Article 146 mandates Member States provide an adequate system of protection for the creditors of companies participating in a national division. Such a system must cover any claims arising before the draft terms of division were published in the business register, where such claims had not become due at the time of the publication. To this end, Member States must provide that these creditors are entitled to receive adequate safeguards when the financial position of the company being divided requires such protection, if they do not already have such safeguards.
Article 153 provides that a national division can be declared invalid only for the specific reasons described therein. None of these conditions were met in the present case. However, the Court held that these provisions do not prevent creditors of the company being divided from filing an actio pauliana in accordance with Italian law, once the division is complete, against both the divided and the recipient company.
In our article “Creditor protection and divisions – Did the CJEU get it right?” we agree with the Court that the requirement for adequate safeguards for creditors provided in the Directive, as a general rule, is an example of minimum harmonization. However, that is not true as far as ex post protective measures are concerned. We argue that such measures are explicitly provided in the Directive, and that the corresponding sections of Article 146 contain maximum harmonization rules. Therefore, national legislators may choose either to introduce joint and several liability of all recipient companies or foresee that the recipient companies, to which the obligation was not transferred, shall become liable if the creditors do not obtain satisfaction (with a further option to restrict the liability of the recipient companies to which the obligation was not transferred up to the net assets transferred to it).
In our understanding, creditors cannot invoke other protective mechanisms provided in their national law, such as an actio pauliana, especially since such an action has a similar effect to nullity, which the Directive allows only in the limited cases described in Article 153.
But the main problem is more fundamental: the Court’s decision focuses on the protection of creditors whose claims antedate the publication of the draft terms (“old creditors”) and fails to take into consideration the position of those who become creditors of the recipient company after the completion of the division (“new creditors”). It favours the first group at the expense of the second without justification. And although Article 146 paragraph 5 expressly allows the different treatment of old creditors of the company being divided and those of the recipient company by reference to Article 99 paragraph 3 of the Directive, it does not address the case of the new creditors. They relied on the assets the recipient company received in the division – with these assets then being used to satisfy another group of creditors. This results in the division being “void” as far as these assets and the new creditors are concerned, and may result in the recipient company being without any assets. While full and joint liability according to Article 146 results in these two groups of creditors having equal access to the recipient company’s assets, the actio pauliana gives priority to old creditors – a concept which, in our reading, is incompatible with Directive 2017/1132/EU.
Additionally, the reason for the actio pauliana in civil law is not apparent in divisions, as creditors are sufficiently protected by the provisions of the Directive. First, creditors are in a position to acquire knowledge of the intended transaction from the published draft terms before it takes place. Second, they then have the right to request adequate safeguards (which the creditors in I.G.I. apparently did not do). And third, the recipient company acquiring assets is subject to a subsidiary liability for the debts of the company being divided, at least up to the net (if not full) value of the transferred assets. We do not think that this leaves room for national legislators to permit an actio pauliana.
This is of some importance, as national legislators will have to introduce rules on cross-border divisions under the Mobility Directive (2019/2121/EU, “MD”) in 2022. Similarly, Article 160j MD, which contains equivalent measures for the protection of creditors to Article 146 Directive 2017/1132, is a measure of minimum harmonization. We suggest that under a correct reading of Article 146, national legislators may not allow ex post protective mechanisms such as an actio pauliana. In any case, they should resist this temptation as such rules undermine the purpose of the MD and create legal uncertainty.
Antigoni Alexandropoulou is an Associate Professor at European University Cyprus
Martin Winner is a Professor at Vienna University of Economics and Business
This post is adapted from their paper, “Creditor Protection and Divisions – Did the CJEU Get it Right?”, European Company and Financial Law Review, vol. 18, no. 4, 2021, pp. 588-607 https://doi.org/10.1515/ecfr-2021-0021, available also on SSRN.
The views expressed in this post are those of the author(s) and do not represent the views of the Global Financial Markets Center or Duke Law.
[1] The Actio Pauliana is an action intended to protect creditors from fraudulent legal transactions, specifically transactions intended to reduce a debtor’s estate by transfers to third parties in bad faith
