ERA Forum (2015) 16:255–259

DOI 10.1007/s12027-015-0400-5
A RT I C L E

Applicable law and carve outs: cross-border security

and rights in rem

Tom Smith1

Published online: 21 August 2015

© ERA 2015

Abstract One of the key issues for a creditor in the cross-border context is his ability
to rely on his security rights where insolvency proceedings have been opened in re-
spect of the debtor. In general, the Regulation upholds such rights where the creditor
holds security over assets located in a Member State other than the Member State
where the insolvency proceedings were opened. However, under the previous version
of the Regulation there were a number of questions as to the scope of this protec-
tion. A number of these issues have been clarified and resolved in the new Regulation
providing welcome clarity for lenders and other creditors. However, other issues still
remain to be resolved.

Keywords Brussels Ia Regulation · Article 8 · Rights in rem

1 Introduction
In practice, when faced with an insolvency of a counterparty, the essential issues to
be confronted by any creditor will typically include:
• his ability to enforce his security and to obtain payment notwithstanding the insol-
vency;
• his ability to withstand challenges to security under the law of the insolvency pro-
ceedings provided the security is valid as a matter of its governing law and/or lex
situs.

This article is based on a presentation given at the ERA conference “Cross-border insolvency
proceedings” on 19–20 March 2015 which was organised in cooperation with INSOL Europe
Academic Forum.
B T. Smith, QC
tomsmith@southsquare.com
1 South Square, Gray’s Inn, London WC1R 5HP, UK
256 T. Smith

Moreover, in the cross-border context, a creditor is likely to be concerned about its

ability to rely on its security given in one jurisdiction where the insolvency proceed-
ings are taking place in another jurisdiction. Indeed, a principal concern, for example,
of a bank or other lender will be its ability to enforce its security in one jurisdiction
where a borrower is in insolvency proceedings in another jurisdiction.
Under the Insolvency Regulation, the basic principle in Article 7 is that the law
of the place where the proceedings are opened governs (inter alia), the assets which
form part of the insolvency estate; the effect of the insolvency on current contracts;
the effects of the insolvency on proceedings brought by creditors; and rules relating
to voidness, voidability of legal acts detrimental to the general body of creditors. Fur-
ther, a judgement opening insolvency proceedings will have the same effects (without
further formality) in other Member States as under law of the State of the opening of
the proceedings (Article 20). So, for example, a stay on creditor action imposed under
the law of the State of the opening of the proceedings will have automatic effect in
all other Member States.
In the case of security rights, these basic principles are, however, subject to the
carve-out in Article 8.1:
“The opening of insolvency proceedings shall not affect the rights in rem of
creditors or third parties in respect of tangible or intangible, movable or im-
movable assets—both specific assets and collections of indefinite assets as a
whole which change from time to time—belonging to the debtor which are situ-
ated within the territory of another Member State at the time of the opening of
proceedings.”
The underlying policy behind this carve-out is to protect trade in the Member State
where the assets are located and legal certainty with regard to rights over those as-
sets.1 As the Virgos-Schmit report states: “Rights in rem have a very important func-
tion with regard to credit and the mobilisation of wealth”.

2 Rights in rem
The first question which immediately arises is as to scope of the carve out in Article
8: in particular, what is meant by “rights in rem” for these purposes? In the text of the
Regulation, such rights are said to include in particular:2
• a 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 mortgage
• an exclusive right to have a claim met, in particular a right guaranteed by a lien in
respect of the claim or by assignment of the claim by way of guarantee
• a right to demand assets from and/or to require restitution by anyone having pos-
session or use of them contrary to the person entitled; and
• a right in rem to the beneficial use of assets.

1 Virgos-Schmit Report on the Convention on Insolvency Proceedings, Council of the European Union,
Brussels, 3 May 1996, 6500/96, para. 97.
2 Article 8.2.
Applicable law and carve outs: cross-border security and rights in rem 257

Based on this, certain initial observations can be made. First, rights in rem are ca-
pable of extending to rights in respect of specific assets and collections of indefinite
assets, so can include, for example, a floating charge under English law. Secondly,
rights in rem encompass a right of a secured creditor to appoint a receiver (or similar)
to dispose of assets (“the right to dispose of assets or have them disposed of . . . ”).
Thirdly, rights in rem include both security rights but also other rights in rem such
as the rights of a beneficiary under a trust (“a right in rem to the beneficial use of
assets”).
But, aside from this, there is no definition of a “right in rem”. This was a deliberate
decision in order to allow the law of the state where the relevant assets are located to
decide.3 Accordingly, the question of characterisation (i.e. of how a particular right
held by a creditor is to be characterised) must be decided under the national law
which applies under normal conflict of law rules—normally the lex rei sitae.

3 Location of assets
This in turn then raises the question of how the location of an asset which is the sub-
ject of a security right is to be determined. Moreover, Article 8 applies only where the
asset is situated within the territory of an MS other than the one where the insolvency
proceedings are commenced.
As to this, Article 2(g) of the previous version of the Regulation provided that:
• tangible property was located in the Member State where the property was situated;
• registered rights and property were located in the Member State under whose au-
thority the register was kept; and
• claims were located in the Member State where the third party required to meet the
claim has its centre of main interests (COMI).
This, however, raised a number of questions as to the position in respect of other
types of assets—for example, as to shares in a company or cash in a bank account,
particularly where the bank account was held with a branch located in one Member
State of a bank which had its COMI in a different Member State.
The revisions to the Regulation have now addressed a number of these points.
Accordingly, the new Article 2(9) introduces further definitions of where assets are
located for:
• registered shares in companies (located in the Member State within the territory of
which the company having issued the shares has its registered office);
• book-entry securities (located in the Member State in which the register or account
in which the entries are made is maintained);
• cash held in bank accounts (the Member State indicated in the account’s IBAN, or,
for cash held in accounts with a credit institution which does not have an IBAN,
the Member State in which the credit institution holding the account has its central
administration or, where the account is held with a branch, agency or other estab-
lishment, the Member State in which the branch, agency or other establishment is
located); and

3 Virgos-Schmit report para. 100.

258 T. Smith

• patents, copyright and related rights (the Member State within the territory of
which the owner of such rights has its habitual residence or registered office).

There are, however, some remaining issues which are unresolved. For example, are
the definitions in Article 2(9) exhaustive? And what happens if an asset falls within
more than one definition?
To illustrate with an example: assume Company A has its COMI in England and
assets including shares in and receivables owed by French and German subsidiaries. It
has granted Lender B full (fixed and floating) English law security over all its assets.
Company A becomes insolvent and goes into administration as main proceedings in
England. Lender B wishes to enforce its security by appointing a receiver over the
shares and receivables for the purposes of concluding a sale.
Lender B could enforce its security in England, but only after lifting the statutory
stay on enforcement. The statutory stay would also automatically apply in France
and Germany; therefore any ability to enforce would depend on Article 8 applying.
In this context, the question of whether there is an Article 8 right in rem probably
depends on the characterisation of the relevant right under law where the asset is
located (lex situs). In the case of shares, they are located in the Member State where
company which issued shares has its registered office (Article 2(9)(i)); and in the case
of receivables, they are located where the third party required to meet the claim has
its COMI (Article 2(9)(viii)).
Therefore, the question of whether the security confers an Article 8 right in rem
is probably determined by French and German law. If it does, then Article 8 should
allow Lender B to enforce such rights as it has under its security. The question of
the nature and extent of the rights of the lender are then determined by the lex situs.
Moreover, since the appointment of a receiver does not fall under the Regulation, its
recognition in France and Germany is determined by normal rules of private interna-
tional law.
A different example would be where Company A has its COMI in France and
assets in France, England and New York. Lender B has security over the New York
assets pursuant to New York law security and security over the English assets pur-
suant to English law security. Company A goes into main proceedings in France.
Lender B wishes to enforce its security in New York and England.
In this scenario, Article 8 will not apply to the security in New York as the In-
solvency Regulation only binds Member States. Enforcement in New York will be a
matter of New York law, and may depend on whether the French insolvency is recog-
nised there (e.g. under Chap. 15 of the Bankruptcy Code). If the French insolvency is
recognised, and a stay therefore arises, Article 8 will not assist Lender B.
On the other hand, Lender B should be able to enforce his security in England
provided that: the rights conferred over the assets are rights in rem for the purposes
of Article 5 as a matter of English law as the lex situs; the security is valid as a matter
of English law; and the proposed method of enforcement is allowed under English
law. The answer would, however, obviously be different if secondary proceedings
were commenced in England.
Applicable law and carve outs: cross-border security and rights in rem 259

4 “Shall not affect”

A further question raised by Article 8 concerns the meaning of “shall not affect”. In
other words, what is meant when it said that the “opening of insolvency proceedings
shall not affect the rights in rem of creditors or third parties”.
The expression “shall not affect” is not defined in the Regulation. However, it
seems clear that it at least means that the ability to enforce a right in rem should not
affected by an insolvency in another Member State. In addition, the basis, validity
and extent of the right should normally be determined by the lex situs.4 On the other
hand, Article 8 will not prevent the vesting of title to asset over which security is held
in the insolvency officeholder.5 Perhaps the most difficult question is whether Article
8 also protects the underlying secured debt as well as the security right itself.
Take an example, where Company A, which is incorporated in the Netherlands,
is a borrower under an English law syndicated facility agreement. The agreement is
secured by English law and Luxembourg law security over assets in Luxembourg.
Company A concludes a scheme of arrangement in England in respect of the facility
agreement which is supported by 75 % of lenders, but there are dissentient creditors.
A scheme of arrangement is not an insolvency proceeding for the purposes of the
Regulation, so its effect on the Luxembourg assets would be a matter of normal Lux-
embourg law. But what if Company A went into administration in England (as main
proceedings) before concluding a scheme?
In that case, the scheme should be recognised in other Member States under the
Regulation (Article 32: “compositions approved by that court shall also be recog-
nised with no further formality”). What about the effect of Article 8? The Luxem-
bourg security rights would prima facie appear to be preserved by Article 8. But the
scheme may have been effective, as a matter of English law, to vary the underlying
English law debt. Would Article 8 also protect the underlying debt right which is the
subject of the security? This is one of a number of questions which will no doubt
have to be worked out as the revised Regulation is put into practice.

4 See Recital (25).

5 German Federal Court of Justice, 3 February 2011, V ZB 54/10.