Edited by Jürgen Basedow, Giesela Rühl, Franco Ferrari and Pedro de Miguel Asensio
Chapter I.7: Insolvency, applicable law
I. The close connection between jurisdiction and applicable law
Under most national laws, cross-border insolvency proceedings and their effects are governed by the →lex fori (lex concursus), which covers both procedural and substantive aspects of the insolvency. In other words, national laws generally endorse a private international law rule whereby determination of jurisdiction entails determination of the applicable law.
This approach has been justified by legal scholars on various grounds. Some scholars have stressed that insolvency proceedings involve procedural issues, which as such fall under the lex fori, following a well-established unilateral choice-of-law rule whereby proceedings should be governed by the law of the state in which they take place. Others have emphasized the functional relationship between law and proceedings, which implies that, if insolvency proceedings have been commenced in a state to reach certain goals, then the court should apply the lex fori. This is because such goals are defined by the lex fori and may be better achieved through the interplay between the respective roles ascribed to national authorities (court and liquidator or other insolvency practitioners) and to national substantive rules. Other scholars have classified the domestic provisions governing insolvency as overriding mandatory rules which restrain the application of foreign law. Such a view rests mainly on the role played by public interests in insolvency proceedings, that deeply affect a country’s economy and welfare.
Finally, in the context of the Insolvency Regulation (Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings,  OJ L 160/1) and with certain adaptations, the so-called ‘jurisdictional approach’ as a private international law method has been evoked, intended to coordinate national laws by moving away from traditional criteria based on →territoriality. In particular, this method highlights that the rights and interests to be created, modified or terminated within the proceedings are ‘territorially’ confined to the state in which proceedings have been commenced.
However, each of these theories posits that, whenever acts, rights and obligations to be assessed in the course of insolvency proceedings p. 932neither arise within the proceedings nor stem from insolvency law, notwithstanding that their impact on the debtor’s assets has to be appraised under such law, then the court should instead apply the ordinary bilateral conflict-of-laws rules applicable to such acts, rights or obligations.
II. Insolvency Regulation regime
1. General overview
The Insolvency Regulation has followed the same approach also shared by the Member States, and in arts 4 and 28 has established a rule according to which the law of the Member State where the insolvency proceedings are opened governs the proceedings, both main and secondary, and their effects. This also means that ‘determination of the court with jurisdiction entails determination of the law which is to apply’ (see Case C-341/04 Eurofood IFSC Ltd  ECR I-3813, para 33; Case C-444/07 MG Probud  ECR I-0417, para 25; Case C-191/10 Rastelli Davide e C. Snc v Jean-Charles Hidoux, in his capacity as liquidator appointed by the court for the company Médiasucre international  OJ C 39/3, para 16; Case C-527/10 ERSTE Bank Hungary Nyrt v Magyar Állam, BCL Trading GmbH, ERSTE Befektetési Zrt  OJ C 287/4, para 38).
However, since the Insolvency Regulation aims at protecting third party/creditor legitimate expectations and the legal certainty of transactions entered into in a Member State (or under the law of a Member State) other than that in which the proceedings are opened, the application of the lex concursus is subject to certain exceptions which are mainly set out in arts 5–15 (Case C-527/10 ERSTE Bank Hungary Nyrt v Magyar Állam, BCL Trading GmbH, ERSTE Befektetési Zrt  OJ C 287/4, para 39; Case C-557/13 Hermann Lutz v Elke Bäuerle (16 April 2015), paras 34–5, which stress that the exceptions must be interpreted strictly, ie without going beyond what is necessary to protect legitimate expectations and the certainty of transactions; Case C-195/15 SCI Senior Home, in administration, v Gemeinde Wedemark, Hannoversche Volksbank eG (26 October 2016), para 28). In this regard, the Insolvency Regulation makes use of different techniques to determine the applicable law. It sets up a conflict-of-laws rule (for instance, as to the effects on contracts relating to immoveable property), or impliedly makes use of the relevant national, international or European conflict-of-laws rules the court has to comply with (for instance, as to the effects on transactions concluded in payments systems), or finally provides for uniform substantive rules (for instance, as to the determination of whether debtor’s assets must be regarded as situated within the territory of a Member State at the time of the proceedings’ opening – see Case C-649/13 Comité d’entreprise de Nortel Networks SA and others v Cosme Rogeau (11 June 2015), paras 50–1 – and to the obligations honoured after the opening).
All these techniques and their rationales deserve the utmost attention in order to appraise whether they bar the application of the lex concursus altogether or render it subject to certain conditions.
2. The effects of insolvency proceedings on the debtor, the creditors and third parties
According to art 4, the lex concursus governs the condition for commencing the proceedings, their conduct and their closure (see Case C-594/14 Simona Kornhaas v Thomas Dithmar, acting as liquidator of the assets of Kornhaas Montage und Dienstleistung Ltd (10 December 2015), para 19: ‘[i]n order to ensure the effectiveness of that provision, it must be interpreted as meaning that, first, the preconditions for the opening of insolvency proceedings, second, the rules which designate the persons who are obliged to request the opening of those proceedings and, third, the consequences of an infringement of that obligation fall within its scope’). Besides, it determines the effects of the proceedings on persons and assets involved in the insolvency.
Given that multiple proceedings may be opened against the same debtor, the effects could vary between proceedings according to the lex concursus governing them. Nevertheless, since main and secondary/territorial proceedings differ from each other in terms of extraterritoriality, only the effects determined by the centre of main interests’ (COMIs’) lex concursus are in principle recognized abroad (see extensively →Insolvency, cooperation and recognition).
The effects on the debtor concern primarily the extent of its divestment and residual powers. Accordingly, the lex concursus sets forth the liquidator’s powers, essentially with the view to handling the debtor’s assets to the creditors’ satisfaction.
As regards the effects of the insolvency proceedings on creditors and third parties, according to art 4 the lex concursus determines the conditions under which set-offs (→set-off) may p. 933be invoked (sub-paragraph d); the effects of the proceedings on creditors’ individual actions (sub-paragraph f); the claims to be lodged and the treatment of those arising after the proceedings opening (sub-paragraph g); the rules governing the lodging verification and admission of claims (sub-paragraph h); distribution of the proceeds from the realization of assets, the ranking of claims and the right of creditors who have obtained partial satisfaction after the opening of the proceedings by means of secured rights or set-off (sub-paragraph i); creditor rights after the closure of the proceedings (sub-paragraph k).
However, as indicated above, the Insolvency Regulation aims to safeguard the legitimate expectations and certainty of commercial transactions. In particular, the Insolvency Regulation protects the interest of creditors and third parties to rely on the law which governed the transactions before the opening of insolvency proceedings, provided that this law is different from the lex concursus. Moreover, it may be that persons who rely on the applicability of this different law, even in the case of insolvency proceedings, are assessed as more inclined to grant credit (Recitals (11) and (25); Case C-527/10 ERSTE Bank Hungary Nyrt v Magyar Állam, BCL Trading GmbH, ERSTE Befektetési Zrt  OJ C 287/4, para 41, as for secured creditors with rights in rem; see also Case C-195/15 SCI Senior Home, in administration, v Gemeinde Wedemark, Hannoversche Volksbank eG (26 October 2016), para 29).
3. Set-off within insolvency proceedings
Set-off consists of a means to extinguish reciprocally two or more claims, albeit at times only in part. Within insolvency proceedings, one creditor may seek to set-off its claim against a reciprocal credit of the insolvent debtor. In doing so, set-off deprives the estate and alters the pari passu principle, which at least covers the unsecured or same-ranking creditors’ position in the proceedings. It may be that the law applicable to the debtor’s claim, the law of the creditor’s claim and the lex concursus differently govern the right to set-off and even its admissibility.
With the view to safeguarding claims arising prior to the opening of insolvency proceedings, the Insolvency Regulation establishes in arts 4(2)(d) and 6 a comparison between the lex concursus and the law applicable to the debtor’s claim, according to which creditors may demand set-off under the latter law even though the lex concursus prohibits it or imposes more restrictive conditions. In other words, arts 4(2)(d) and 6 shape a set-off-friendly regime under which the creditor may rely on the law applicable to the claims of the insolvent debtor even when the lex concursus does not allow for set-off. The law applicable to the insolvent debtor’s claim will be determined under the Rome I Regulation (Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I),  OJ L 177/6; →Rome Convention and Rome I Regulation (contractual obligations)) or the →Rome II Regulation (non-contractual obligations) (Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations (Rome II),  OJ L 199/40), depending respectively on whether the claim is contractual or non-contractual. It is worth noting that, as regards set-off invoked out of insolvency proceedings, the Rome I Regulation draws inspiration from the Insolvency Regulation when stating the application of the law governing the claim against which the right to set-off is asserted whenever the right itself is not agreed by the parties (art 17).
Finally, although foreign laws may determine the right to set-off, the lex concursus should nevertheless continue to govern the procedural issues related to the set-off, such as the formalities and procedural time-limits to demand it.
4. The effects of insolvency proceedings on individual actions and lawsuits pending
It is well known that insolvency proceedings impinge on the creditor’s right to bring individual actions against the debtor. As already noted, the issue falls within the scope of the lex concursus according to art 4.
Given that an individual action may jeopardize the purposes of insolvency proceedings and above all unity of the estate and collective satisfaction, the law of the Member State where such proceedings are commenced determines whether and to what extent a creditor retains such right. However, art 4 provides for an exception to this rule in the case of lawsuits pending at the time when insolvency proceedings are opened. The extent of this exception is stated at art 15, according to which the effects of insolvency proceedings on a pending lawsuit concerning debtor’s assets or rights subject to the divestment must be governed by the law of the Member State where the lawsuit is pending (→lex fori).
p. 934In other words, the lex concursus governs the effects of the insolvency proceedings on enforcement actions, irrespective of where brought and whether commenced prior to or after the opening of insolvency proceedings, while the lex fori governs those effects as regards the lawsuits pending (see Case C‑212/15 ENEFI Energiahatékonysági Nyrt v Direcția Generală Regională a Finanțelor Publice Brașov (DGRFP) (9 November 2016), paras 31–6). In this case the lex fori and lex concursus will ‘coincide’ if lawsuits are pending in the Member State of the insolvency proceedings.
5. The ranking of claims: conflict and coordination between leges concursus
Priorities and other secured rights adversely affect the par condicio creditorum. As a general rule, the ranking of claims is determined by the lex concursus.
Given that the Insolvency Regulation allows for the opening of main and secondary proceedings against the same debtor in different Member States, it may happen that the ranking determined by the law of the Member State of the COMI differs from that determined by the law of the Member State of the establishment. Since creditors may lodge their claims in all the proceedings, the same claim could have different ranking positions depending on the law governing each proceedings.
Should the claims have the same ranking and multiple lodging occur, the ‘hotchpot rule’ of art 20(2) provides that the creditor who obtains a dividend on his claim will share in distributions made in other proceedings only where creditors of the same ranking and category have obtained an equivalent dividend thereby. Moreover, local creditors, that is those with domicile or habitual residence (→Domicile, habitual residence and establishment) in the Member State of the establishment or whose claims arise from activities the debtor carried out from the establishment, may rely on the ranking established by the local lex concursus to the extent that they apply for the opening of secondary proceedings rather than lodging their claims in the main proceedings. This is particularly when the debtor has assets or exercises its activity solely in the state of the establishment.
Such tactics and situations may harm the objectives of the main proceedings which the liquidator (or other insolvency practitioner) determines and seeks (see →Insolvency, cooperation and recognition also for remarks on the practice of the ‘synthetic/virtual secondary proceedings’ endorsed by the Insolvency Regulation (recast)).
6. Safeguarding rights in rem and reservation of title
Creditor and third party rights in rem on assets belonging to a debtor which are located in a Member State other than that of the insolvency proceedings at the time of opening are subject to a rule aiming to protect legitimate expectations and legal certainty. Article 5 states that the opening of insolvency proceedings does not affect those rights.
The concept of ‘right in rem’ is as wide as the nature of assets involved (see Case C-195/15 SCI Senior Home, in administration, v Gemeinde Wedemark, Hannoversche Volksbank eG (26 October 2016), para 21). For instance, art 5 refers (i) to the right to dispose of assets or have them disposed of and to obtain satisfaction from the proceeds of or income from those assets, in particular by virtue of a lien or a mortgage, (ii) to the exclusive right to have a claim met, in particular a right guaranteed by a lien or by assignment by way of a guarantee, or (iii) to the right to demand the assets from anyone with possession or use of them.
As for the res at stake, art 5 encompasses tangible or intangible, moveable or immoveable assets, both specific assets and collections of indefinite assets as a whole which change from time to time. Article 5 must be applied in conjunction with art 2(g), which includes the definition of ‘Member State in which assets are situated’. For instance, in case of claims, that is ‘the Member State within the territory of which the third party required to meet them has the centre of his main interests, as determined in art 3(1)’ (art 2(g)).
So conceived, the rule enshrined in art 5 derogates from the rule on applicability of the lex concursus. In particular, it safeguards the rights in rem following the principle affirmed in Recital (25) that ‘the basis, validity and extent of [such rights] should . . . normally be determined according to the lex situs and not be affected by the opening of insolvency proceedings’. Therefore, the rights deserve protection insofar as they have been regularly created as rights in rem under the lex rei sitae, ie the law of the Member State on whose territory the asset concerned is situated, irrespective of whether they may be claimed according to the lex concursus (see Case C-527/10 ERSTE Bank Hungary Nyrt v Magyar Állam, BCL Trading GmbH, ERSTE Befektetési Zrt  OJ C 287/4, paras 40–2; Case C-557/13 p. 935Hermann Lutz v Elke Bäuerle (16 April 2015) concerning the right resulting from the attachment of a bank account; Case C-195/15 SCI Senior Home, in administration, v Gemeinde Wedemark, Hannoversche Volksbank eG (26 October 2016), para 18).
However, in this case the Insolvency Regulation adopts a technique that does not provide for a conflict-of-laws rule requiring application of the lex rei sitae to the effects of insolvency proceedings. This contrasts with the approach in other cases that derogate art 4, for example with regard to contracts relating to immoveable property (see below). In fact, art 5 provides a substantive safeguard clause which preserves the rights validly created under the lex rei sitae against the effects of the insolvency on such rights as determined by the lex concursus.
That being said, if it is true that a right in rem deserves protection insofar as the res is placed outside the state of the opening of the proceedings and that the lex rei sitae grants such right notwithstanding the opening of insolvency proceedings, it is also true that, if the res lies in the Member State of the proceedings, art 5 does not apply, and the right will be preserved only if the lex concursus so provides.
It should finally be noted that the transfer of assets from the state where insolvency proceedings have been requested may veil abuse where it is aimed at later invoking art 5 in order to hinder the application of the lex concursus.
Against these and similar tactics, the Insolvency Regulation first provides that the safeguard clause may not preclude avoidance actions as referred to in art 4(2)(m), ie the application of the suspect period rules of lex concursus on detrimental acts (art 5(4)). Second, it should be borne in mind that art 5 is inapplicable whenever insolvency proceeding are opened in the state where the res is located.
A similar provision applies to rights based on reservation of title, where the relevant goods are situated in a Member State other than that of the proceedings at the opening time. Article 7, which applies to both the seller’s and the purchaser’s insolvency, protects the reservation of title, while at the same time preserving application of the lex concursus as to avoidance actions concerning the acts causing the reservation.
7. The effects of insolvency proceedings on ongoing contracts
The lex concursus determines the effects of insolvency proceedings on the contracts entered into by the debtor (art 4(2)(e)). As that law governs the extent to which the debtor is divested or alternatively remains in possession, it also determines whether the contracts may be terminated or continued, and if continued, whether the derived →contractual obligations are to be performed by the debtor or liquidator.
Even in this regard, the Insolvency Regulation allows for exceptions to the direct applicability of the lex concursus, which provide that the effects of the opening of the insolvency on certain contracts are governed by the law applicable to them to be determined by other conflict-of-laws rules. These exceptions consist of (i) contracts relating to immoveable property, to be governed by the lex rei sitae under art 8, (ii) rights and obligations arising out of a payment system or a financial market, to be governed by the law applicable to the system or the market under art 9 and (iii) contracts of employment, to be governed by the lex contractus under art 10.
The techniques are quite different from one another. In the case of immoveable property, the Insolvency Regulation establishes a specific conflict-of-laws rule adopting the situs rei as connecting factor, while in the other cases the Insolvency Regulation refers to the conflict-of-laws rules provided in the private international law system of the court conducting the insolvency proceedings.
Be that as it may, the law of the state of the proceedings will eventually govern the effects in question as law designated by these conflict-of-laws rules rather than as law applicable as lex concursus.
Apart from the dissimilar techniques, such provisions aim to ensure legal certainty to contracts in rem, which are secured by their own law against the opening of the proceedings, or contracts entered into in self-governed systems, such as the payment systems and financial markets. As for employment contracts, protection of the employees, that inspires the ordinary conflict-of-laws rules, underlies the legislative choice not to provide for a different regime in case of insolvency of the employer. However, it is worth noting that the lex contractus will govern only the effects of the opening of the insolvency on such contracts, while other profiles such as the ranking of the employee claims pertain to the lex concursus.
8. The treatment of the detrimental acts
As noted above, the validity and efficacy of contracts and other acts which may diminish the p. 936debtor’s assets are subject to the lex concursus, irrespective of whether they give rise to rights which are not affected per se by the opening of the insolvency proceedings, such as rights in rem (art 5), the right to set-off (art 6) and the rights based on a reservation of title (art 7). The competence of the lex concursus clearly stems from art 4(2)(m), which refers to the ‘rules relating to the voidness, voidability and unenforceability of legal acts detrimental to all the creditors’.
Generally speaking, ‘avoidance rules’ (and related proceedings) amount to both substantive and procedural devices serving the insolvency proceedings’ objectives, particularly creditor satisfaction, by means of measures preserving the debtor’s assets. Many legal systems provide for rules on the so-called suspect period that may affect certain claims, and on set aside actions aimed at returning assets to the estate.
However, the scope of the lex concursus is restrained by two provisions. The first, set out in art 9(2), subjects ‘avoidance actions’ concerning payments and financial markets transactions to the law governing the system or the market concerned. The second, set out in art 13, excludes the application of art 4(2)(m) whenever the person who benefited from an act detrimental to all the creditors provides evidence both that the act is governed by the law of a Member State other than the law of the proceedings and that such law ‘does not allow any means of challenging that act in the relevant case’.
While the specific rule in matters of payment and financial markets transaction is self-evident regarding the specificity of the system under which the detrimental act arises, art 13 attracts major attention as it amounts to a general exception to the applicability of the lex concursus. Article 13 aims to preserve the legitimate expectations of third parties who had dealings with the debtor in Member States (and under laws) other than those in which the proceedings have subsequently been opened, to rely on the validity and efficacy of the act according to its applicable law. The Insolvency Regulation does not determine such law, since its scope is confined to insolvency issues. Instead it provides third parties with a means to demonstrate that the act detrimental to collective creditors was, and still is valid and effective according to its applicable law, even though their counterparty has been declared insolvent.
This scheme certainly entails that third parties will take advantage of the lex concursus where more favourable than the lex causae.
Accordingly, art 13 should not be conceived as a special choice-of-law rule in matters of detrimental acts, which substitutes the general rule of art 4, but rather as a rule providing an exception to the application of the lex concursus where this would affect acts protected by the lex causae (see Case C-557/13 Hermann Lutz v Elke Bäuerle (16 April 2015), para 31). Third parties bear the burden of establishing the content of the lex causae ‘in the relevant case’ (see Case C-557/13 Hermann Lutz v Elke Bäuerle (16 April 2015), paras 44–56, in which the Court, aiming to safeguard the uniform application of the Insolvency Regulation, held that art 13 also covers limitation periods or other time-bars as well as both substantive and procedural requirements for the exercise of an action to set a transaction aside). It is disputed among scholars whether third parties may invoke only the provisions on insolvency of the lex causae to prevent the liquidator from challenging the act or may provide evidence that the act is unchallengeable according to the law governing it. However, the ECJ upheld the latter view, stating that ‘a person benefiting from a detrimental act must prove that the act at issue cannot be challenged either on the basis of the insolvency provisions of the lex causae or on the basis of the lex causae, taken as a whole’ (Case C-310/14 Nike European Operations Netherlands BV v Sportland Oy (15 October 2015), para 34).
9. Uniform rules on the protection of specific legal situations arising after the opening of insolvency proceedings
In the interests of third party expectations concerning the validity of certain acts disposed after the opening of proceedings, the Insolvency Regulation provides for other rules derogating the direct application of the lex concursus.
The validity of the debtor’s disposal of immoveable assets, registered ships and aircraft, as well as registered securities is governed respectively by the lex rei sitae and by the law of the authority under which the register is kept (art 14).
Article 24 in turn sets forth a substantive rule concerning obligations honoured for the benefit of the insolvent debtor (Case C-251/12 Christian Van Buggenhout and Ilse Van de Mierop, acting as liquidators in the insolvency of Grontimmo SA v Banque Internationale à Luxembourg SA  OJ C 344/29, para 30 ff), stating that honouring such obligations discharges only persons who were unaware of the opening of the insolvency proceedings in another Member State. In this regard, art 24(2) establishes a iuris p. 937tantum presumption whereby being unaware or aware of the insolvency proceedings depends on having honoured the obligation before or after the judgment opening the proceedings has been published according to art 21.
The different techniques, whereby art 14 provides for a choice-of-law rule while art 24 for a substantive rule, nevertheless share the aim of protecting third parties who enter in contact with an insolvent debtor and who, as frequently happens in cross-border situations, in good faith may be unaware of the opening of insolvency proceedings.
While art 14 protects the legitimate expectations of third parties to see the validity of their purchase governed by the proper and known law, art 24 directly derives the debt-discharging effect from the excusable ignorance as to both the opening of insolvency proceedings and the subsequent divestment of the debtor.
10. Remarks on certain issues not solved by the Insolvency Regulation
The Insolvency Regulation expressly addresses neither the issue of renvoi nor whether the application of a law other than the lex concursus should be confined to insolvency provisions.
As far as renvoi is concerned, given that the Insolvency Regulation provides for a uniform conflict-of-laws regime in matters of cross-border insolvency, there should be no place for national conflict-of-laws rules in order to preserve uniformity in designating the applicable law. However, it should be remembered that, for certain categories of acts and effects, the Insolvency Regulation refers to conflict-of-laws rules as provided by a Member State or EU Regulations. At least in this regard, the issue of admitting or excluding the renvoi will depend on the relevant choice such rules make.
In order to answer the question of whether the law to be applied should be confined to insolvency provisions, it is necessary to examine the scope of the relevant Insolvency Regulation provisions. In particular, rules devoted expressly to govern the ‘effect of the insolvency’ on certain acts, rights or obligations (arts 8, 9, 10 and 11) seem to seek the application of the provisions of insolvency law, as the law intended to govern such effects.
For other cases, applying the sole insolvency law proves to fit all the situations in which the Insolvency Regulation allows putting aside the insolvency provisions of the lex concursus.
Thus, for instance, appraising the right to demand the set-off according to art 6 seems to require an assessment on the provisions of the law applicable to the debtor’s claim in the case of set-off demanded within an insolvency proceeding, so that only the insolvency provisions of the law applicable to the debtor’s claim should thereby come into consideration. On the contrary, in matters of debtor’s disposal of immoveable assets, registered ships and aircraft, as well as registered securities, since art 14 generically refers to the ‘validity of the act’, the law applicable should primarily determine the validity under civil and commercial provisions.
As for the detrimental acts regime, third parties may rely on insolvency or civil/commercial provisions of the law governing the act depending on the legal basis under which the liquidator ‘in the relevant case’ brings an action against them (but see the aforementioned views of the ECJ in Case C- 310/14 Nike European Operations Netherlands BV v Sportland Oy (15 October 2015), para 34).
Finally, since arts 6 and 14 do not explicitly refer to Member State law, the question of whether they also allow for applying non-Member States law arises.
An affirmative answer finds logical reasons for both of them. As far as set-off is concerned, the relevant law should be frequently determined according to the Rome I Regulation, whose universal scope may lead to the application of non-Member States law. As for art 14, it also addresses the protection of persons unaware of the insolvency opening, ie a condition more likely to be realistic when the asset disposed of is located outside the EU, also taking into account that the publication regime concerning the notice of the judgments opening the proceedings is limited to Member States.
11. Should public policy and overriding mandatory provisions be disregarded?
Unlike the recognition and enforcement of judgments (see →Insolvency, cooperation and recognition), the →public policy (ordre public) exception does not work within the Insolvency Regulation in relation to the applicable law.
However, the →lex fori (as lex concursus) is so widely entitled to govern substantive and procedural issues of the proceedings that one may wonder how a foreign law infringing its fundamental principles should anyway be applied by the court.
Having regard to the wide role awarded to the lex fori, it seems the Insolvency Regulation p. 938impliedly remits to that law all the insolvency profiles not covered by itself, including the treatment of the public policy exception and its consequences.
Moreover, as already noted the Insolvency Regulation employs choice-of-law rules stemming from other EU private international acts or from national law, with whose provisions the court of the insolvency proceedings has to comply in matters of public policy.
Given that the public policy exception may arise at the recognition and enforcement stage, and that several principles amounting to public policy are shared among the Member States, as they may derive from international and EU law, the court is to conduct the proceedings, and in particular in view of their universal effects the main proceedings, paying attention that its judgments and the proceedings do not offend the public policy of other Member States. This should lead the courts not to apply foreign laws if the final result conflicts with the fundamental principles shared by the home and the requested state.
As noted elsewhere (see →Insolvency, cooperation and recognition), even though not expressly governed by the Insolvency Regulation, the public policy exception would nonetheless operate within the framework of EU private international law. This means in turn that it should operate and be interpreted restrictively, especially where the foreign law in question belongs to a Member State or deals with matters subject to EU harmonization measures.
Finally, as far as →overriding mandatory provisions are concerned, lacking express rules but again having regard to the wide role awarded to the →lex fori, they may come into consideration to prevent the functioning of bilateral choice-of-law rules with a view to protecting national public interests. This may happen, for instance, when mandatory rules govern certain substantive effects of the insolvency on employment contracts.
How and to what extent such exception should operate depends again both on the national private international law system and on the specific rules of other EU Regulations (such as the Rome I Regulation) which may interact with the Insolvency Regulation.
12. Applicable law in the Insolvency Regulation (recast)
The Insolvency Regulation (recast) (Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast)  OJ L 141/19)), which will almost entirely apply from 26 June 2017, slightly addresses the applicable law.
However, arts 11(2) and 13(2) are noteworthy because they manage, in matters of contracts relating to immoveable property and contracts of employment, respectively, the effects of the insolvency laid down by the (local) lex contractus when the insolvency is being handled abroad in the main proceedings. In particular, pursuant to art 13(2), the courts of the Member State where the debtor has an establishment – ie the place where presumptively the employee habitually carries out his work or has been engaged – retain jurisdiction to approve the termination or modification of employment contracts even if no secondary proceedings occur in that state, in case such termination or modification requires approval by a court (see also Recital (72)).
Article 18 extends to pending arbitration proceedings, the afore-mentioned rule whereby the effects of insolvency proceedings on a pending lawsuit concerning assets or rights included in the debtor’s insolvency estate must be governed by the law of the Member State where the lawsuit is pending. In other words, the law of the state where arbitration has its seat will apply (see also Recital (73), which stresses that art 18 ‘should not affect national rules on recognition and enforcement of arbitral awards’).
Finally, in order to reduce uncertainty concerning the localization of the debtor’s assets (see, again, Case C-649/13 Comité d’entreprise de Nortel Networks SA and others v Cosme Rogeau (11 June 2015)), the Insolvency Regulation (recast) provides for a broader and more detailed definition, including among others registered shares in companies, financial instruments, cash held in credit institutions accounts and copyrights (art 2(9)). As a result, all the rules whose functioning depends on the concept ‘Member State in which assets are situated’ should benefit from such a broader and more detailed definition.
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Giulio Cesare Giorgini, Méthodes conflictuelles et règles matérielles dans l’application des ‘nouveaux instruments’ de règlement de la faillite internationale (Dalloz 2006);
Burkhard Hess, Paul Oberhammer and Thomas Pfeiffer (eds), European Insolvency Regulation: Heidelberg–Luxembourg–Vienna Report (Beck-Hart-Nomos 2013);
Antonio Leandro, Il ruolo della lex concursus nel regolamento comunitario sulle procedure di insolvenza (Cacucci 2008);
Antonio Leandro, ‘La legge applicabile alla revocatoria fallimentare nel regolamento (CE) n° 1346/2000’ (2009) 1 CDT 102;
Antonio Leandro, ‘A First Critical Appraisal of The New European Insolvency Regulation’ (2016) Il Diritto dell’Unione Europea 215;
Peter Mankowski, Michael F. Müller and Jessica Schmidt, EuInsVO 2015. Europäische Insolvenzverordnung 2015. Kommentar (Beck 2016);
François Mélin, ‘La loi applicable à la compensation dans les procédures communautaires d’insolvabilité’ (2007) 134 J.Dr.Int’l 515;
Gabriel Moss, Ian Fletcher and Stuart Isaacs (eds), Moss, Fletcher and Isaacs on the EU Regulation on Insolvency Proceedings (3rd edn, OUP 2016);
Klaus Pannen, European Insolvency Regulation (De Gruyter Recht 2007);
Michaël Raimon, Le règlement communautaire 1346/2000 du 29 mai 2000 relatif aux procèdures d’insolvabilité (LGDJ 2007);
Miguel Virgós Soriano and Francisco Garcimartín Alférez, The European Insolvency Regulation: Law and Practice (Kluwer 2004);
Bob Wessels, ‘The Secured Creditor in Cross-border Finance Transactions under the EC Insolvency Regulation’ (2003) 18 J.I.B.L.R. 135;
Bob Wessels, Cross-border Insolvency Law: International Instruments Commentary (Kluwer 2007);
Bob Wessels, International Insolvency Law Part I. Global Perspectives on Cross-border Insolvency Law (4th edn, Wolters Kluwer 2015).