Utilization of the “veto clause” in the European Regulation on insolvency: Does the election of a foreign law make it possible to “elude” application of the national insolvency legislation

Two recent judgments - one dated June 8, 2017 (the “Vinyls” case) handed down by the ECJ and another dated October 17, 2017 handed down by the Palma de Mallorca Provincial Court (the “Orizonia” case) - have confirmed the increasing importance attached to European insolvency legislation.  Both analyze the veto rule in the European Regulation on insolvency, which enables the defendant to “elude” an action for recovery if it can demonstrate that the act or contract being challenged was made subject by the parties to a law which is not that of the State in which the insolvency proceedings are taking place, and that under the law elected by the parties, the act or contract in question cannot be challenged. In this way, the law elected by the parties acts as a “veto”, blocking the application of the national insolvency legislation.

This veto rule is particularly relevant in the case of contracts which, despite having links to just one State, have been “internationalized” by the parties by electing for the contract to be regulated by the laws of a different State. The practice of choosing a different law, which is very common in certain commercial sectors (aircraft, shipping or professional services), is possible provided that the decision that the contract should be regulated by a foreign law is not abusive in the sense that the sole intention behind it is to obtain a more favorable treatment in the event of an insolvency proceeding being initiated. The ECJ’s judgment in the “Vinyls” case reflects the difficulties involved in determining when the election of the law of another State constitutes a standard and legitimate practice (aimed at applying the most appropriate legislation for the regulation of the contract) and when it should be prohibited (when aimed at influencing national insolvency rules in the event of one of the parties subsequently becoming insolvent).

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