Vol 10 (2013) - Issue 1

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ERSTE Bank Hungary (Judicial Cooperation in Civil Matters) [2012] EUECJ C-527/10 (5 July 2012)

Background
Article 4(1) of Council Regulation (EC) No 1346/2000 (the 'Insolvency Regulation') provides as a general rule that insolvency proceedings and their effects are governed by the law of the Member State in which they are opened (i.e. the lex concursus). Article 5(1) of the Insolvency Regulation provides one of the exceptions to this general rule, namely that rights in rem shall not be subject to the effects of the main proceedings arising under the lex concursus. Article 5 has been described as a 'negative conflict' rule, in that its effect is to prevent rights in rem from being governed by the law of a state other than that in which the res is situated (i.e. a law other than the lex rei sitae).

The decision in ERSTE Bank
The European Court of Justice (First Chamber), in its recent TFEU Article 267 preliminary ruling in ERSTE Bank Hungary (Judicial cooperation in civil matters) [2012] EUECJ C-527/10, decided that Article 5(1) of the Insolvency Regulation is applicable even in circumstances where insolvency proceedings had been opened in a Member State (Austria) prior to the accession to the European Union of another Member State (Hungary) in which the debtor’s assets, on which the relevant right in rem was based, were situated. The ECJ’s decision was in contrast to the Opinion of Advocate General Mazák who expressed the view that Article 5(1) was inapplicable in such circumstances since it was a condition of its applicability that an asset of the debtor should be located within the territory of another Member State, i.e. not the territory of a prospective Member State, as at the time of the opening of the insolvency proceedings.
The dispute before the referring national court, the Hungarian court of cassation Legfelsobb Bíróság, was between ERSTE Bank Hungary Nyrt ('ERSTE Bank') and the Hungarian State.
A letter of credit had been issued in 1998 by Postabank és Takarékpénztár Rt ('Postabank'), a Hungarian bank, in favour of BCL Trading GmbH ('BCL Trading'), an Austrian company. BCL Trading subsequently took shares in Postabank which it held as a security deposit so that, in the event that the letter of credit was drawn upon, Postabank would be required to make payment. Insolvency proceedings were opened in Austria in respect of BCL Trading on 5 December 2003, i.e. prior to the accession of Hungary as a Member State of the European Union on 1 May 2004. Subsequently the Hungarian court ordered the Hungarian state, pursuant to an obligation to which it was subject as a matter of Hungarian law, to purchase the shares held by BCL Trading by way of a security deposit. The Hungarian state duly purchased the shares and paid an amount into the Hungarian court representing the value of those shares.