State immunity in clawback claims?

Introduction

The equal treatment of creditors is the fundamental principle of German insolvency law, as set out in sec. 1 of the German Insolvency Code (Insolvenzordnung; InsO). To uphold this principle, German law allows the insolvency administrator to challenge legal acts carried out before the opening of insolvency proceedings that disadvantage insolvency creditors, by asserting a clawback claim. In such cases, the defendant must return to the insolvency estate anything removed from the debtor's assets through the voidable act.

But how is a clawback claim affected when the defendant is a state? Under international law, the principle of state immunity prevents sovereign acts from review by foreign courts. Therefore, states can invoke state immunity to avoid clawback claims in foreign courts, unless they have waived that immunity.

The Federal Court of Justice (Bundesgerichtshof; BGH) has asked the European Court of Justice (ECJ) for a preliminary ruling on the question whether Article 6(1) of the Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (Insolvency Regulation) entails such an (implicit) waiver of state immunity with regard to the recognition of foreign insolvency proceedings (order dated 16 January 2025 – IX ZR 60/24).

 

What triggered the case

The claimant, the insolvency administrator of a debtor based in Germany, seeks repayment of VAT payments made to Polish tax authorities. The debtor had made these payments in December 2021, after filing for insolvency in Germany and notifying the Polish tax authorities thereof in November 2021. Poland, however, invokes its state immunity, arguing that tax collection constitutes a sovereign act not subject to German jurisdiction. Both the Regional Court Offenburg (judgment dated 31 July 2023 – 2 O 343/22) and the Higher Regional Court Karlsruhe (judgment dated 15 April 2024 – 3 U 43/23) agreed, dismissing the claim in its entirety.

 

The legal backdrop: insolvency rules vs. sovereign immunity

Under Article 7(2) Point (m) of the Insolvency Regulation, the law of the state where the insolvency proceedings are opened determines whether a legal act that disadvantages all creditors can be challenged. Under German law, clawback claims under sections 129 et seq. of the German Insolvency Code allow the insolvency administrator to challenge certain acts that unfairly disadvantage creditors, aiming to ensure equal treatment by recovering assets transferred or benefits granted within specified timeframes.

In contrast, the principle of the sovereign equality of states gives rise to the principle of state immunity, under which a state’s sovereign acts aren’t subject to the jurisdiction of another state’s courts. This grants protection from the authority of another state’s court which however doesn’t include non-sovereign acts.

This principle is grounded in the idea that a national court’s judgment on a clawback claim ordering the repayment of taxes could significantly interfere with that state’s tax collection and, by extension, the state’s sovereign functions. Such sovereign acts are, protected by the principle of state immunity. Accordingly, German courts don’t have jurisdiction over claims brought by the insolvency administrator against the Polish tax authorities.

But a state may wave its immunity, even implicitly. Article 6(1) of the Insolvency Regulation grants jurisdiction to the courts of the Member State opening the insolvency proceedings for all actions arising from or closely related to the insolvency proceedings, such as clawback claims. This can be interpreted as an implicit waiver of state immunity by the Member States with respect to the recognition of foreign insolvency proceedings.

Whether the Polish tax authorities can invoke their state immunity, and whether the clawback claim is successful, consequently depends on the interpretation of Article 6(1) of the Insolvency Regulation.

 

The BGH’s question to the ECJ

With its court order dated 16 January 2025, the BGH suspended the proceedings and referred the following question to the ECJ for a preliminary ruling pursuant to Article 267(1) and (3) of the Treaty on the Functioning of the European Union:

Is Article 6(1) Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings to be interpreted, in view of the recognition of foreign insolvency proceedings, as containing an implicit waiver by the Member States of the European Union of the principle of state immunity for actions brought by the insolvency administrator under the applicable insolvency law claiming that legal acts are voidable vis-à-vis the Member State because they disadvantage the creditors as a whole? (non-official translation)

The BGH emphasizes that a judgment by a German court ordering the repayment of funds would interfere with the foreign tax collection, i.e., the sovereign act of another state. This would violate the principle of state immunity, unless Poland had (implicitly) waived its state immunity. The BGH identifies two key arguments supporting the interpretation of Article 6(1) of the Insolvency Regulation as containing such a waiver:

1. Equal treatment of all creditors under the Insolvency Regulation:

The Insolvency Regulation doesn’t grant any general privileges or exemptions to Member States nor their authorities. The BGH bases this conclusion on the following regulations. Recital 63 of the Insolvency Regulation explicitly emphasizes its applicability to tax authorities and social security institutions. The definition of “foreign creditors” also explicitly includes tax authorities and social security institutions (Article 2 No. 12 Insolvency Regulation). Additionally, the Insolvency Regulation contains provisions on restructuring plans. According to the BGH, this may suggest that courts in the Member State opening the insolvency proceedings may take decisions that affect the claims of foreign tax authorities in restructuring plans, and that these decisions must be recognized.

2. Effective legal protection and the functionality of the European Internal Market:

According to the BGH, the requirement of effective legal protection also indicates an (implicit) waiver of state immunity. Without such a waiver, clawback claims couldn’t be enforced against Member States: They would be inadmissible before the courts of the state, in which insolvency proceedings were opened due to state immunity and before the courts of the Member State due to exclusive jurisdiction under Article 6(1) of the Insolvency Regulation.

Moreover, the BGH recognizes the possibility of a secondary insolvency proceeding in line with Article 34 of the Insolvency Regulation but questions the effectiveness of such proceedings. On the one hand it must be expedient for the administrator in terms of procedural economy and on the other hand it must be able to be initiated at all. Article 35 of the Insolvency Regulation states that the regulations for the secondary insolvency proceeding are determined by the place in which it was opened. The claim for annulment couldn’t be enforced if the Insolvency Regulation of the other Member State would not provide any possibility of voidability.

This would, in effect, exempt payments to foreign Member States from insolvency clawback, even though the purpose of state immunity isn’t to prevent any law enforcement against a state.

 

What this means in practice

This case highlights the tension between German and European insolvency law and basic principles of international law. While the question of whether Member States have waived their state immunity under Article 6(1) of the Insolvency Regulation isn’t primarily a matter of insolvency law, the answer could determine the outcome of numerous clawback claims against tax authorities of different Member States.

In cross-border insolvency proceedings within the European Union, Member States are often involved as creditors who could invoke their state immunity to avoid clawback claims. The BGH appears reluctant to endorse this outcome and instead seems to favor an (implicit) waiver of the principle of state immunity under Article 6(1) of the Insolvency Regulation.

Given the importance of the equal creditor treatment under German and European insolvency law, this must be agreed upon. Moreover, if states could evade clawback claims by invoking state immunity, the Insolvency Regulation’s objective of ensuring the uniform and effective enforcement of rights under insolvency law within the European Union would be circumvented.

The European Union’s objective of establishing an internal market would be undermined fundamentally if the outcome of clawback claims in cross-border insolvency proceedings depended on the creditor’s nationality. To ensure that cross-border insolvency proceedings function effectively, an ECJ decision recognizing an (implicit) waiver of state immunity would be in the best interest of a functioning European market.

If, however, the ECJ decides against an implicit waiver of state immunity, the European legislator (i.e. the Member States) may need to take legislative action. To avoid conflicts between the principles of equal treatment of creditors and state immunity in the future, effective cross-border insolvency proceedings would require an expressive waiver of state immunity. Whether a corresponding legislative proposal will be able to gain majority support remains to be seen.

 

What insolvency administrators should do now

Until the ECJ’s ruling, which isn’t expected before 2026, insolvency administrators may:

• consider secondary insolvency proceedings (Article 34 et. seq. Insolvency Regulation) in the relevant Member State. However, this will only be advisable, as the BGH also stated, if the law of that state allows for clawback and if secondary insolvency proceedings are expedient for the administrator in terms of procedural economy.
• request a suspension in ongoing proceedings against tax authorities of other Member States under Section 148(1) of the Code of Civil Procedure while awaiting the ECJ’s decision.