The Set-Off of Subordinated Claims in Cross-Border Insolvency: Legal Analysis in Light of the Evolution of the European Insolvency Regulation and Portuguese Law

The Set-Off of Subordinated Claims in Cross-Border Insolvency: Legal Analysis in Light of the Evolution of the European Insolvency Regulation and Portuguese Law

Abstract: This article examines the admissibility of set-off involving subordinated claims in the context of cross-border insolvency proceedings, based on Regulation (EU) 2015/848 and the Portuguese insolvency legal framework. The discussion focuses on a hypothetical case involving a Portuguese commercial company subject to insolvency proceedings and a German commercial company belonging to the same corporate group. The key issue is whether the set-off of reciprocal claims is legally permissible, considering that one of the claims is subordinated under Portuguese law.

1. Factual Background

The scenario involves a Portuguese commercial company, declared insolvent by a competent national court, holding claims against a German commercial company within the same corporate group (as defined under Article 21 of the Portuguese Securities Code). Conversely, the German company also holds a claim against the insolvent Portuguese company and seeks to operate a set-off between the mutual claims.

The legal question is whether such set-off is permissible under the applicable legal framework, taking into account the European insolvency regime and the mandatory provisions of the Portuguese Insolvency and Corporate Recovery Code (CIRE).

2. Framing the Problem in Light of the Evolution of the European Insolvency Regulation

Cross-border insolvency within the European Union has evolved significantly with the replacement of Regulation (EC) No. 1346/2000 by the current Regulation (EU) 2015/848. The new regulation addresses various shortcomings of its predecessor, particularly in the coordination of proceedings, treatment of corporate groups, and clarification of the applicable law in areas such as set-off.

Regulation 2015/848 maintains the principle that the law of the Member State where insolvency proceedings are opened (lex concursus) governs the effects of the insolvency on claims, contracts, and securities. This rule is intended to ensure legal certainty and predictability for creditors by protecting their legitimate expectations in multi-jurisdictional settings. However, the regulation introduces exceptions for pre-insolvency legal situations such as set-off, under Article 6. This provision allows the law governing the creditor’s claim to apply, provided it permits set-off.

The legal development highlights a greater concern for the protection of creditors operating transnationally. However, it also raises debate regarding the scope of such exceptions, especially when they conflict with public policy rules governing insolvency, such as creditor equality and protection of the insolvency estate.

As emphasized by the Abogacía Española, the new regulation marks a significant step toward a more coordinated and efficient management of cross-border insolvency, fostering cooperation mechanisms between courts and insolvency practitioners and enhancing predictability in multi-jurisdictional creditor claims (cf. Abogacía Española, “La reciente entrada en vigor del Reglamento Europeo de Insolvencia”, 2017).

3. The European Legal Framework: Regulation (EU) 2015/848

Under Article 7 of Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015, the law applicable to insolvency proceedings and their effects is that of the Member State where the proceedings are opened. In the present case, since the main proceedings were initiated in Portugal, Portuguese law applies.

Nevertheless, Article 6 provides an exception regarding the right of set-off. Legal scholars have debated whether this provision constitutes an autonomous conflict-of-laws rule or a safeguard clause designed to protect legitimate pre-insolvency expectations in international economic relations:

“This Regulation shall not affect the right of creditors to demand the set-off of their claims against the claims of the debtor, where such a set-off is permitted by the law applicable to the claim of the creditor against the debtor.”

This provision raises the possibility of applying the law governing the creditor’s claim (here, German law). The central issue is whether this rule allows circumvention of the mandatory provisions of the lex concursus.

4. Prohibition of Set-Off of Subordinated Claims under Portuguese Law

Article 99(1) of the Portuguese Insolvency Code (CIRE) clearly provides:

“The set-off of subordinated claims against claims of the insolvency estate is not permitted.”

Subordination is governed by Articles 47 and 48 of CIRE, which explicitly qualify claims between group companies as subordinated (Article 48(g)).

This provision serves the fundamental purpose of preventing entities with privileged access to the debtor from obtaining preferential treatment, thus preserving the principle of pari passu among creditors. It constitutes a mandatory rule essential for safeguarding the integrity and fairness of insolvency proceedings.

5. Systematic Interpretation of Article 6 of the EIR and the Role of Mandatory Rules

Permitting the application of foreign law to a creditor’s claim cannot override the fundamental principles of the insolvency regime, namely the enforcement of mandatory domestic provisions. Scholars such as Menezes Leitão argue that Article 6 must be interpreted restrictively to avoid undermining the substantive rules of insolvency (cf. Menezes Leitão, Direito da Insolvência, 6th ed., p. 312).

The Court of Justice of the European Union, notably in Case C-396/09 (Interedil Srl), reaffirmed that the lex concursus prevails regarding the collective patrimonial effects of insolvency and cannot be circumvented through the invocation of foreign norms.

6. Conclusion

Although set-off is addressed in Article 6 of Regulation (EU) 2015/848, it cannot override mandatory insolvency rules of the State of the opening of proceedings, particularly the prohibition on set-off of subordinated claims under Article 99(1) of CIRE. The invocation of the law governing the creditor’s claim cannot be used to frustrate the effects of national insolvency law.

It follows that, under the scenario examined, the set-off sought by the German commercial company is inadmissible under Portuguese law and in light of the systematic and teleological interpretation of the European insolvency regime.

Bibliographic References:

• Wessels, Bob, International Insolvency Law, Wolters Kluwer, 4th ed., 2020.
• Bork, Reinhard; van Zwieten, Kristin, European Corporate Insolvency Law, Oxford University Press, 2022.
• Menezes Leitão, Direito da Insolvência, Almedina, 6th ed., 2022.
• Paulo Olavo Cunha, Direito Comercial: Sociedades, Almedina, 8th ed., 2020.
• Ana Perestrelo de Oliveira, “Notas sobre a Subordinação de Créditos”, in Estudos de Direito da Insolvência, Almedina, 2015.
• Abogacía Española, “La reciente entrada en vigor del Reglamento Europeo de Insolvencia”, 2017. Available at: https://www.abogacia.es/pt/actualidad/noticias/la-reciente-entrada-en-vigor-del-reglamento-europeo-de-insolvencia/