Reconciling legal certainty in corporate divisions with respect for civil law remedies: Case C-394/18 I.G.I. Srl v. Maria Grazia Cicenia

1. Introduction

On 30 January 2020, the CJEU delivered its judgment in the Case C 394/18 I.G.I. Srl v. Maria Grazia Cicenia et al., ¹ where it interpreted for the first time Articles 12 and 19 of the Sixth Council Directive 82/891/EEC on the Division of Limited Liability Companies (‘Sixth Directive’). ² The case opens an interesting chapter in the delicate relationship between EU Company Law and domestic Private Law. On one hand, harmonizing Company Law’s basic elements is seen as a key step towards achieving the Single Market. This means achieving a common position and understanding over the right balance between the interests of the different constituencies within a company. Directors, shareholders and creditors have different interests, and tensions and conflicts are bound to happen. If different Member States’ laws resolve the matter differently, this can give rise to legal uncertainty and hinder cross-border activity. One alternative would be to let each Member State regulate the internal affairs of the companies registered in their territory, and force all other Member States to uphold such arrangements, even if the company has its ‘real seat’ within their territory, and the Court of Justice has developed a famous case law on this, based on the companies’ freedom of establishment. ³ Yet, freedom of establishment and regulatory competition do not seem acceptable as the only ground for a Single Market in companies, hence EU efforts to harmonize Company Law, and enhance legal certainty over corporate transactions. Put together, like the recent (partial) codification of European Company Law did, ⁴ shows how impressive the level of harmonization is: matters ranging from incorporation and nullity to mergers and divisions, and including the regime on capital, or disclosure of third-country branches are regulated by EU-level rules. ⁵ Gradual codification enhances the sense of unity and ensemble of what were originally separate initiatives, which responded to different projects and policy priorities into the framework of the ‘General Programme for the abolition of restrictions on freedom of establishment within the European Economic Community’, ⁶ and helps courts seek a coherent interpretation.

This appearance of unity, however, can be deceiving. EU rules harmonize the solution to many practical problems, but do not decisively tackle the basic tenets lying at the core of Company Law theory: the meaning of legal personality and limited liability, a company’s ‘interest’, the nature of corporate representation, the functioning of a company’s organs, standards like ‘equal treatment’ of shareholders, ⁷ the solution to the many conflicts of interest or directors’ duties are left for Member States’ legislatures to legislate, domestic courts to interpret, and academics to theorize about. Although comparative analysis has shown many functional similarities, ⁸ and helped further the cause of harmonization (when differences were not based on explicit, well-grounded choices) divergences remain, not only at the level of the specific rules that regulate an issue, but also at the level of the interpretative principles.

This gives rise to a basic conundrum, which the case analysed here exemplifies, where through the analysis of the compatibility of actio pauliana with the actions for annulment regulated in the Sixth Directive (that is, what would be the solution to the practical problem) the Court theorises about the limits of the principle of primacy of the EU Law when this conflicts not only with the different domestic legal systems but also with the different national doctrines.

Whenever an issue is not explicitly regulated by harmonized EU rules, (i) should we simply apply the interpretative logic of domestic law doctrines, (ii) should we look at the EU texts to distil the logic that pervades the specific rules, and deploy that logic in the specific case, or (iii) should we combine both? Each option has pros (anchor in domestic traditions for the first, greater harmonization for the second, legal ‘syncretism’ for the third) and cons (fragmentation and inward-looking-ness, ‘technocratic imperialism’ and ossification by lack of experimentation, and legal uncertainty if the balance between EU Law and domestic law is unclear). In this case, the CJEU chose the third option, combining a desire to seek consistency within the EU scheme regulating corporate divisions, while being conscious of domestic legal traditions, and relying on domestic courts to make sense of them. At this general level, we would argue that the CJEU’s instinct was correct, and is the safer option to adopt by default, that is to say, absent other information.

What complicates the matter, however, is that, unlike the bodies that propose and adopt statutory laws, a court, like the CJEU, cannot choose one of the above options as a matter of policy, that is, having in mind an agenda about the goals that should be pursued, and the regulatory steps that should be completed to accomplish those goals. This brings to the table important considerations on two additional levels, which provide the context to better assess the CJEU decision in this case.

A first-level consideration is that to choose one of the above options a court (the CJEU in this case) needs to make an explicit judgment call over what are the ‘natural’ conceptual boundaries of EU rules, leaving the rest to domestic legal doctrines. Arguably, in this case the CJEU sought to strengthen consistency in a case analogous to those not expressly covered by the rules (that is, interpreting EU rules applicable to corporate divisions of private limited liability companies, where the company being divided survived) while choosing to read EU Law in a non-exclusionary manner (that is, holding that the creditor remedies enshrined in EU rules on corporate divisions should not be considered the only protection creditors could rely upon, to the exclusion of Civil Code remedies, such as actio pauliana). On this level, regardless of what one may think in policy terms about the efficiency of the resulting combination of remedies, the CJEU’s choice is not objectionable as a matter of principle: it considered that, absent a more explicit indication, EU rules did not pre-empt State laws.

Yet, a second-level consideration is that the CJEU’s choice of one of the above options also entails an even more important implied judgment call over whether the issue has an ‘interstitial’ or ‘fundamental’ importance. If the issue is interstitial, where the specific demarcation line is drawn is a matter of detail and predominantly fact-based. If, however, the issue is fundamental, a seeming matter of detail can undermine a regulatory scheme. It is on this deeper level that the doubts about the CJEU’s approach persist. Granted, courts can decide on an issue one dispute at a time, and future cases will help the CJEU clarify its position. However, the CJEU’s answer is sure to open a greater number of questions, at the core of the meaning and significance of the creditor protection regime for corporate transactions. Far from the end of the question, this looks like the beginning of a saga.

2. Back to basics

Before going into the case study, we should make take a moment to consider the basics of the legal figures that CJEU uses as an excuse to analyse the European pre-emption principle.

3. Relevant facts

In 16 September 2009, Costruzioni Ing. G. Iandolo Srl used a specific subtype of corporate division named a spin-off to transfer a part of its assets to I.G.I., a company established for that purpose. Ms Cicenia, Mr Di Pierro, Mr de Vito and Mr Raffaele brought an action against I.G.I. and Costruzioni Ing. G. Iandolo before the Tribunale di Avellino (Italy). They were creditors of Costruzioni Ing. G. Iandolo, which, they claimed, had lost a large part of its assets as a result of the spin-off, and been left only with land plots of low value. They brought an actio pauliana, under Article 2901 of the Italian Civil Code, to have the instrument of division (a notarized instrument) declared without effect vis-à-vis themselves (and, alternatively, seeking a declaration of joint and several liability of Costruzioni Ing. G. Iandolo and I.G.I. for the debts of Costruzioni Ing. G. Iandolo, under to Article 2506 quater of the Italian Civil Code).

The Tribunale di Avellino (District Court of Avellino) allowed the main claim, holding that the asset transfer resulting from the spin-off was without effect vis-à-vis the plaintiffs. The assets still in the possession of I.G.I. would thus be subject to the action of the acting creditors. The firms subject to restructuring (I.G.I. and Costruzioni Ing. G. Iandolo) appealed before the Court of Appeal of Naples, arguing that: (i) the actio pauliana was inadmissible because in case of a division, creditors’ only remedy was the ‘creditors’ objection’ regulated under Article 2503 of the Italian Civil Code, and that, since no such objection had been made, the effects of the division were definitive vis-à-vis those creditors; and (ii) Article 2504 quater of the Italian Civil Code precludes situations in which an instrument of division is declared invalid after the acts for the formal publication of the act have been complied with.

Articles 2503 and 2504 quater, as well as Articles 2506 ter and 2506 quater of the Italian Civil Code, transposed Articles 12 and 19 of the Sixth Directive. The system resulting from implementing the Directive provisions (i) permitted creditors whose rights antedated the division to file an objection to the division, and (ii) provided that each beneficiary company would be jointly and severally liable up to the effective value of the net assets transferred to it or remaining with it, for the debts of the company that is being divided and are not satisfied by the company that was the original debtor, but (iii) stipulated that the instrument of division could not be declared invalid once it was registered with the Company Register.

In light of this, and with regard to the actio pauliana, the Court explained that there are two opposing lines of case law.

One line holds the action is admissible despite both the objection provided for in Article 2503 of Italian Civil Code and the action to set aside provided for in Article 2901 of Italian Civil Code are aimed at safeguarding the creditors’ security, because those actions are not comparable, since both differ about the persons who can rely on them, time limits, finality and effects. ¹⁹

A second line of case law considers the actio pauliana to be also barred because the Sixth Directive’s goal to render the division definitive and irrevocable vis-à-vis creditors in order to safeguard the interests of the parties in the transaction (other than creditors) would be jeopardized if a creditor protection action were permitted after the division has produced its effects. ²⁰

According to the Court, the concept of ‘nullity’ referred to in Article 19 of the Sixth Directive should encompass all actions that result in the instrument of division being rendered without effect, whether absolute or relative, and irrespective of the validity of the instrument of division, but it also pointed that the Directive’s Article 12 did not preclude any subsequent action intended to safeguard creditors’ security over the debtor’s assets, and that, under national law, there are a number of differences between ‘nullification’ proceedings and an actio pauliana.

These considerations set the stage for the preliminary reference to the Court of Justice of the European Union, where the Naples court asked:

1. Can the creditors of the company being divided, whose credit interests antedate the division, who have not taken advantage of the remedy of lodging an objection under Article 2503 of the Civil Code (and therefore of the protection tool introduced in implementation of Article 12 of [the Sixth Directive]), use an action to set aside under Article 2901 of the Civil Code after the division has been implemented, in order to obtain a declaration that the division in question has no effect against them and, therefore, to take precedence in enforcement over the creditors of the recipient company or companies and to be placed in a preferential position before the shareholders of those companies?

2. Does the notion of nullity, provided for by Article 19 of [the Sixth Directive], refer only to actions affecting the validity of the instrument of division or also to actions which, despite not affecting its validity, result in its relative lack of effect or unenforceability?

4. The Court’s decision

The first problem was whether the Sixth Directive was applicable, and thus whether the Court had jurisdiction since the corporate division transaction did not directly fall within the scope of the Sixth Directive.

While the Sixth Directive applies to a complete split-up transaction of ‘public limited companies’, such as Italian società per azioni, where all the assets and liabilities of the divided company after being wounded up without going into liquidation are transferred to more than one newly created companies, the corporate division under discussion revolve around a ‘private limited liability company’ where only a part of the assets of Costruzioni was transferred to one company, I.G.I. As, in the case analysed, the divided company would not be wound up, it would fit into another subtype of corporate division called a spin-off.

Based on its case law, ²¹ the CJEU considered itself competent to decide on an issue where ‘in regulating purely internal situations, domestic legislation seeks to adopt the same solutions as those adopted in EU law in order’, ²² to enhance uniformity in interpretation. It also states that it has become evident that, in transposing Articles 12 and 19 of the Sixth Directive, the Italian legislature unconditionally wished to apply the solutions provided for by EU law to cases of corporate divisions other than those expressly covered by the Sixth Directive.

That way, several Member States have already extended the application of EU rules to both the corporate division of private limited companies and to the rest of corporate divisions’ subtypes (namely, split-up, spin-off and hive-down), as happened in the case.

The second problem was the relationship of actio pauliana with the Sixth Directive, and specifically with the creditor protection mechanisms of Article 12 of the Directive. These consist of (i) a right to obtain safeguards from the companies after the division is completed, and (ii) a right of a creditor of the beneficiary company (that is, the company to which the obligation has been transferred) to hold all the beneficiary companies liable.

In this regard, it is important to highlight that Article 12 of the Sixth Directive provides a minimum system of protection for the interests of creditors of the companies involved in a corporate division and therefore does not prevent Member States from providing for tools for protecting the interests of the creditors in the framework of a corporate division transaction.

Furthermore, it is not apparent from regulation that the non-use of one of the protection mechanisms of the Sixth Directive prevents the creditors from making use of other national protection tools (namely tort liability, mortgage resolution action, civil annulment action, insolvency annulment action, corporate sham or actio pauliana itself) provided that the effects of such an action must not run counter the purpose of the provision.

In this regard, the CJEU found that the actio pauliana was not excluded, since its purpose did not contravene the aim of the provision.

Additionally, the CJEU clarifies in para. 72 that Article 12 of the Sixth Directive does not require the creditor protection system of the companies involved in the transaction to be equivalent. ²³ This allows the creditors of the beneficiary company to be treated differently from the creditors of the company being divided, thus admitting that priority could be given to the latter’s protection.

This point is important specifically with regard to actio pauliana. If it is brought by the creditors of the company being divided, it can result in their position taking precedence in the enforcement over the position of the creditors of the beneficiary company, and to be put in a preferential position to the shareholders of those companies. ²⁴

The consequence, in the CJEU’s view, was that Article 12 of the Sixth Directive must be interpreted as not precluding the creditors of the company being divided from bringing an actio pauliana after the division has been executed.

Finally, the CJEU analysed the compatibility of actio pauliana with the Sixth Directive Article 19’s rules on nullity, which try to protect legal certainty, by severely limiting the possibility to undo the transaction.

Despite the concept of ‘nullity’ not being defined in the Sixth Directive, the Court relied on its previous case law, ²⁵ where it has stated that, to determine the meaning and scope of a term that is not defined, one must consider (i) its usual meaning (textual and practical approach), (ii) the context in which it is used (contextual approach), and (iii) the purpose of the rules (finalistic or teleological approach). In this sense, ‘nullity’ refers to actions seeking the elimination of an act, with an erga omnes effect. ²⁶

With this background, the CJEU emphasized that unlike the erga omnes effects of the nullity action over the validity of the corporate division, the actio pauliana only renders the transaction unenforceable against the plaintiff. ²⁷ The court also noted that while nullity proceedings seek to penalize failure to comply with basic requirements that ensure the coming into being of the instrument of division, the actio pauliana has the sole aim of protecting creditors harmed by the corporate division. ²⁸ Therefore, as the purpose and the effects of actio pauliana and nullity are different, the former cannot be covered by the latter and therefore both actions could be enforceable against the creditors.

5. Comments: EU (corporate) law and domestic (private) law, and the nuances of (inter-court) dialogue

To summarize the previous section, the CJEU was asked whether a domestic court could apply national Civil Code remedies that may interfere with the ‘neat’ EU rules on corporate divisions. The CJEU answered this question with a clear ‘yes’, while leaving other questions open. To reach this answer the Court tried to draw a roadmap for the relationship between EU Directives and civil law remedies with particular emphasis on the following guiding principles:

The CJEU is competent to decide over internal situations governed by national legislation that seek to adopt the same solutions than in those adopted by the UE.

There is no issue more important for the EU architecture than the relationship between EU Law and domestic law. Van Gend & Loos ²⁹ helped to establish EU Law as an autonomous legal order, different from the law of Member States in international law. This set the stage to formulate the doctrines of direct effect ³⁰ and of primacy (or supremacy), ³¹ which continue to be as important as they are controversial. The basic assumption is that in the event of a contradiction between domestic and EU rules, the former must be set aside, unless the contradiction is not obvious, and the conflict can be saved through the interpretation of domestic law in accordance with EU Law.

This is an issue where the CJEU has shown varying sensitivities. The ‘big cases’ have focused on the relationship between domestic constitutional rules (and doctrines) and EU Law, where the CJEU and domestic courts have navigated troubled waters. Sometimes the CJEU has had no qualms in disregarding domestic constitutional doctrines when they were incompatible with EU Law, ³² sometimes it has shown a more deferential attitude, ³³ even to the extent of revising its own doctrine. ³⁴ Likewise, some Member States have shown the necessary flexibility and revised their views, ³⁵ while others have sent warnings that there are domestic limits that cannot be crossed. ³⁶

Focusing on the landmark cases and their high stakes, however, can lead some to overlook a basic fact: Member States and their lawyers tend to be fond of legal institutions that, despite their importance (in terms of number of cases or place in the legal hierarchy) are seen as a venerable part of the system. Saying that a new statutory rule, or court interpretation falls on the wrong side of EU Law, is not the same as saying that an ancient piece of Roman law, or common law, has to be discarded for the benefit of a newer, untested, and seemingly technocratic solution, enshrined in EU rules.

Apart from the risk of appearing insensitive, the CJEU incurs the parallel risk of appearing clueless. Even worse than the impression that the Court tramples over cherished, quirky doctrines is the perception that it simply ‘does not get it’, i.e. that it does not understand the basic tenets of a domestic doctrine. This risk is high, when the subject-matter of analysis are doctrines that have evolved over the centuries. This requires making an intelligent use of the preliminary reference procedure envisaged in Article 267 TFEU, but also of the spirit of inter-court dialogue enshrined in that provision, as well as in Article 19.3 TFEU. Being conscious of this spirit helps the courts to work in a coordinated manner, so that the CJEU clarifies not only the meaning, but also the goals and priorities of EU Law provisions, and the red lines that must not be crossed, while domestic courts find interpretative ways to accommodate those goals and priorities within domestic law.

This has the (substantive) benefit of avoiding the wreck associated to disregarding a domestic rule, and the (formal) one of allocating responsibilities between courts in a way that makes the courts accountable to their respective constituencies. Surely the court of a Member State can be more creative in finding ways to ensure that the goals enshrined in EU provisions are assimilated not by ‘domestic rules’, but within the legal acquis formed by jurisprudence and legal interpretation, in a seamless way that convinces one that those elements had ‘always been there’, as part of the domestic legal doctrine, and what EU rules do is merely clarify their application for a certain group of cases.

This division of responsibilities at a court level is the one more in line with the spirit of a ‘Directive’, ³⁷ which is the instrument of choice in matters involving Private Law. In areas such as consumer law the CJEU has a long experience in leaving domestic courts to grapple with domestic remedies when it comes to the consequences of the breach of consumer protection standards, while warning them that such remedies must respect the principles of ‘equivalence’ and ‘effectiveness’. ³⁸ The elegance of the solution lies in the breadth of the principles, which can justify different levels of control, while purportedly maintaining the same balance between EU ends and domestic means. To stick to the consumer law example, domestic courts can confirm that, even if the principles ‘had always been there’ (because a large part of the case law is based on Directive 93/13/EC on Unfair Consumer Terms), the CJEU is narrowing their interpretative leeway with an increasingly assertive (and stern) stance, while still leaving them a ‘potato’ that becomes hotter and hotter, due to the more exacting demands of EU standards. ³⁹

Although this pattern may be more clearly evidenced in other areas of the law, Company Law also offers some examples. For example, (i) the CJEU has made short shrift of the nuances of national law when the EU goal at stake enjoyed constitutional importance, such as freedom of establishment, ⁴⁰ or free movement of capital. ⁴¹ Absent this, the evidence is more mixed. The CJEU has tended to show (ii) a stern approach when the objectives of an EU Directive were impaired by a domestic administrative provision, e.g. a nationalisation law that eliminated or restricted shareholders’ pre-emption rights, ⁴² (iii) a very malleable approach when the same domestic law that restricted rights contemplated in EU provisions also furthered objectives enshrined in EU Law, as when the burden-sharing involved in a bail-in (writing-off of bank equity and conversion of bank debt) impaired the exercise of those same pre-emption rights ⁴³ (since the tension between EU and domestic law merely reflected a tension inside EU Law), (iv) a cautious approach, when the principle enshrined in EU Law provisions (the equal treatment principle envisaged in Directive 2004/25/EC) applied only within the scope of the specific rules (which meant that, beyond that scope, the principle could have unintended consequences for domestic law) and thus the Court was loath to extend it, ⁴⁴ and (v) a mixed approach when domestic law regulated an EU Law-based right (pre-emption right) in a way that gave companies flexibility to shape its exercise (deferential approach) but also extended it to non-shareholders (holders of convertible bonds) on equal level with shareholders (more rigid, uncompromising approach). ⁴⁵

The above considerations help to put the Cicenia case in context, by highlighting the following ideas: (i) the CJEU sensitivity towards the relative importance of domestic standards vis-à-vis the equal application of EU Law across the Union shows a great deal of ad hoc-ery; (ii) the CJEU is less likely to tread on domestic law when it can be perceived as detached or uninformed, a risk that increases with the complexity and depth (often associated to the age) of the legal doctrine involved; (iii) as the Court feels more confident in understanding the terrain, it does not hesitate to adopt a more assertive stance to uphold the goals enshrined in EU legislation, while leaving domestic courts to put together an increasingly complicated puzzle.

Under these elements, Cicenia illustrates the second idea, i.e. the Court shows a clearly deferential attitude, which, we surmise, can be partly explained by the fact that the case involves the venerable actio pauliana. The Court did not wish to close the door to the action because it could not properly assess the unintended consequences of such view, especially in a situation where the action seemed to be used as a last-resort protection against creditor fraud. This, however, is not the last word on the issue.

With the previous considerations in mind, a second look at the case of Maria Grazia Cicenia et al. suggests that ‘framing’ is important in the dialogue with the Court of Justice. To illustrate this idea, consider for comparison purposes, the much earlier Marleasing case. ⁴⁶ In that case, the Court held that a domestic court hearing a case on the use of the action of nullity under the (Spanish) Civil Code

is required to interpret its national law in the light of the wording and the purpose of that directive in order to preclude a declaration of nullity of a public limited company on a ground other than those listed in Article 11 of the directive. ⁴⁷

Yet, what was the Marleasing problem truly about? According to the facts of the case, Marleasing was a plaintiff in a case against several defendants, which included La Comercial de Alimentación SA (a Sociedad Anónima – public limited company) seeking ‘a declaration that the founders’ contract establishing La Comercial is void on the ground that the establishment of the company lacked cause, was a sham transaction and was carried out in order to defraud the creditors of Barviesa SA, a co-founder of the defendant company’ ⁵⁴

Thus, at least arguably, this was an action where a creditor of one of the partners-founders was asking the courts to disregard the legal personality of the newly created company; that is, a veil piercing-sort of action, not an action of nullity of those envisaged in the First Directive, which resulted in the liquidation of the company. Quite possibly, this is why the plaintiff resorted to the Articles of the Spanish Civil Code, which, like similar provisions on the action for nullity, have as their ‘remedy’ treating the transaction as if it had never existed, and why it used references to a ‘sham’ or ‘creditor fraud’.

Had the court asked the CJEU whether ‘an action of veil piercing’ against a company or an action ‘to disregard the legal personality’ of such company was compatible with the First Directive, the CJEU would have, almost certainly, obliged, by saying that of course such actions are compatible. It might have even appreciated the opportunity to clarify that the First Council Directive, as much as it wishes to enhance legal certainty, is not intended to exclude the actions that operate, as a sort of safety valve, against transactions intended to defraud creditors, which are a matter for the laws of Member States. Yet this is not how the issue was presented, and this, in our view, explains a great deal of Marleasing’s remarkable holding.

Now, contrast this with the framing of the issue by the Italian court, which (i) went to great lengths to reassure the CJEU that, of course, the preservation of certainty required actions of ‘nullity’ other than those under the Directive be excluded ⁵⁵ (thus establishing its ‘hawkish’ credentials), but (ii) nonetheless argued that this concept did not encompass actions such as actio pauliana, which was clearly different. ⁵⁶ The Italian court thus presented the action as a sort of safety valve, to ensure that the crisp (and stern) system of the Directive was not used to condone cases of creditor fraud.

In this way, as a matter of principle the court focused the analysis on the deceptively simple question of whether ‘nullity’ is the same as the ‘actio pauliana’ (to which the answer is a clear ‘no’) and, as a matter of policy, on the also-simple question of whether the Directive provides a system of maximum, or minimum harmonization (to which the answer is clearly ‘minimum’). In a very elegant way, the domestic court did not raise the thornier issue of whether a remedy like the actio pauliana can, if used in a widespread manner, endanger the objectives sought by the Directive on Corporate Divisions, and thus the CJEU did not address the issue.

6. Actio Pauliana in company law: safety valve or Trojan horse?

The previous section shows the importance of nuance and framing in inter-court dialogue. The referring court carried out a very crafty exercise to present the actio pauliana as a safety valve ⁵⁷ for those cases that could slip through the net of the creditor protection provisions of the Directive in Corporate Divisions, rather than as a Trojan horse, which, used widely, could undermine the objectives of the Directive.

Yet, in our view, this was the real issue at stake, and one that the Court did not solve (mostly as a consequence of the way the question was asked), hence our prognosis that there will probably be sequels, or further chapters, to this story, as domestic courts struggle with the issue of the interpretative compatibility of (domestic) creditor protection actions and the Directive system. From a ‘rule-based’ perspective these actions and the Directive are fully compatible: the Directive provides a system of minimum harmonization, and its focus is the ‘company’ being divided; domestic law actions are expansive in nature (they have to cover all the gaps and situations) and their focus are ‘creditors’. ⁵⁸ Yet, as a matter of policy, a system that seeks to protect the companies and their assets, and actions that seek to protect creditors are bound to clash, and other doubts will arise. We identify several considerations that may give rise to such doubts.

A first consideration is that the system of creditor protection envisaged in the Directive is limited, because the Directive’s scope of application is limited. The Directive requires Member State to protect creditors by (i) entitling them to obtain safeguards from the divided company, (ii) making the beneficiary companies jointly and severally liable, or (iii) combining both systems (in which case liability of the beneficiary companies may be limited to the net assets allocated to each of them. ⁵⁹

This leave a blind spot. According to the wording used by the Sixth Directive a beneficiary company’s creditor can sue the other beneficiary companies, which covers cases where the division is used to create a ‘bad beneficiary company’, with insufficient assets. However, this does not address the case where the beneficiary company receives the ‘good’ assets, while the ‘bad’ assets are left behind in the divided company (by means of a spin-off or a hive-down division). The reason for this is clear: the Directive’s scope only covers ‘split-up divisions’ understood as transactions where ‘after being wound up without going into liquidation, a company transfers to more than one company all its assets and liabilities’ (emphasis added). ⁶⁰ Thus, the Directive does not cover a ‘division’ where the company is ‘not wound up’, but survives, and/or transfers ‘not all’ its assets and liabilities.

A Member State that extends the application of the Directive system to such cases, where the divided company survives (split-up), will have to make a choice about how to protect the creditors of the divided company vis-à-vis the creditors of the beneficiaries, especially if it opts for the joint and several liability of the different companies. The stylized choices are (i) to make all the companies (divided/surviving and beneficiaries) joint and severally, and unlimitedly, liable; (ii) to make all companies joint and severally liable, limited to the net assets and liabilities allocated to them; (iii) to make only some of the companies jointly and severally liable, for instance only the beneficiaries between themselves (horizontal joint and several liability), the divided company for the liabilities allocated to the subsidiaries (upwards vertical joint and several liability), the subsidiaries to the liabilities left behind with the divided company (downwards vertical joint and several liability) or any combination thereof; and (iv) to limit the liability to the net assets and liabilities only for some companies.

It is unclear what would be the ‘authentic’ way to extrapolate the rules of the Sixth Directive to a situation where a new element is incorporated to the equation. ⁶¹

Thus, if a partial corporate division takes place and the jurisdiction of the Member State had decided, in accordance with the Sixth Directive, to apply the same limitations set out in the third and seventh paragraphs of Article 12, the holders of the liability that is transferred to the beneficiary company would have an action against the entire assets of the divided company and an action against the entire assets of the beneficiary company, as well as the other beneficiary companies (up to their net assets). The liability regime laid down in the Sixth Directive would aggravate the situation of the company which has been partially divided (by means of a split-up division) and, consequently, the position of its creditors, since, despite the transfer of part of its assets, the company which has been partially divided continues to be liable for the obligations which make up its liabilities.

This helps to put in context the issue of the CJEU jurisdiction, outlined above, where the Court held that:

When, in regulating purely internal situations, domestic legislation seeks to adopt the same solutions as those adopted in EU law in order, for example, to avoid discrimination against foreign nationals or any distortion of competition or to provide for a single procedure in comparable situations, it is clearly in the interest of the Union that, in order to forestall future differences of interpretation, provisions or concepts taken from EU law should be interpreted uniformly, irrespective of the circumstances in which they are to apply. Thus, an interpretation by the Court of provisions of EU law in purely internal situations is warranted on the ground that they have been made applicable by national law directly and unconditionally, in order to ensure that internal situations and situations governed by EU law are treated in the same way. ⁶²

The case of Italian law is more complicated, since Article 2506 quater makes each company jointly and severally liable (i.e. including the beneficiary companies for the debts of the divided company), but this with the limit of the net equity assigned to it or remaining in it, and provided the debts are not satisfied by the company responsible for them. Thus, a creditor would still need to show that its debtor is unable to pay. This can make the actio pauliana an attractive option, since it is not subject to the constraints of the joint and several liability provision (limit of net assets and need to prove inability to pay) as it does not focus in the value of the assets, but on the efficacy of the assignment and the assets themselves. For the same reason, it raises the question of whether an action like actio pauliana not subject to the limits under Article 2506 quater is compatible with such Article. Yet, the real question is whether such compatibility can be resolved solely by reference to the Directive, which is regulating a different, simpler scenario, by assuming that the solution is ‘the same’ as that in the Directive, and whether this is a question for the CJEU or the Member State’s courts. Can the CJEU even consider this as an issue to be resolved through interpretation and an appeal to the Directive’s principles, (assuming that rules are ‘the same’) when the actual solution (that is, the protection of beneficiary’s creditors vis-à-vis the divided/surviving company’s creditors) involves policy choices by the Member State? Does the CJEU really want to go there?

A second consideration is how the Court’s reasoning may relate to other creditor-protection actions that may seek to protect the collectivity of creditors; the clearest example of which would be avoidance actions under insolvency law. In this sense, consider, for example, the case decided by the Spanish Supreme Court in its ruling (STS – Sentencia del Tribunal Supremo) 682/2016, of 21 November, with reference to STS 245/2013, of April 18. In that ruling the court analysed the compatibility with the rules on corporate divisions of the actions of avoidance/rescission (acciones revocatorias) under Spanish insolvency law. Article 47.1 of the Spanish Structural Modifications Act (the legal basis for the annulment action of corporate divisions) provides that: ‘No merger may be challenged after its registration provided that it has been carried out in accordance with the provisions of this Law. The rights of shareholders and third parties to compensation for damages are safeguarded, where applicable’.

According to the Spanish Supreme Court this restriction ruled out not only the general action of annulment, under Article 1.300 of the Spanish Civil Code, but also any action seeking the inefficacy of the structural modification. Insolvency avoidance/rescission actions under Articles 71 to 73 of the Spanish Insolvency Law presuppose that the contested act is valid; that is, none of the validity requirements under Article 1262 of the Spanish Civil Code (consent, object and cause) is vitiated, and thus they are not analogous to ‘nullity’ actions from the perspective of their grounds. However, the consequence of the action being upheld by a court would be to render the conveyance of assets ineffective, since the conveyance effect cannot be dissociated from the corporate division itself. Since the effects would be erga omnes, this would amount to the total inefficacy of the conveyance, and thus the action would be analogous to ‘nullity’ from the perspective of its effects, and incompatible with the regime on corporate divisions.

The decision settled a years-long debate between those who advocated that the conflict between the Insolvency Act (and its avoidance actions) and the Structural Modifications Act (and its constraints on the actions to annul the transaction) should be resolved in favour of the former, and those arguing that it should be settled in favour of the latter. ⁶⁴ Yet, if the issue is brought before the CJEU, the question would arise again, since the CJEU may choose to keep a more open mind about the compatibility of these actions to respect the variety of insolvency actions.

The Spanish Supreme Court further illustrated its approach based on the ‘functional equivalence’ of the actions by offering two examples where the incompatibility with the objectives of the Directive would not be triggered. One would be the case where the act being challenged would be the payment or performance of obligations arising from a synallagmatic contract, since the business could be dissociated from an act of performance of an obligation arising from that business. Another would be the actio pauliana, which, in line with the CJEU’s view, would be appropriate to safeguard ‘the rights of the members and of third parties’ and to seek ‘compensation for the damage caused’ because it is a personal action seeking the inefficacy of the contested act not erga omnes, but only with respect to the acting creditor (relative inefficacy) and to the extent strictly necessary to remedy the damage suffered (partial inefficacy).

Yet, even if both the Spanish Supreme Court and the CJEU consider the actio pauliana compatible with the restrictive regime to challenge mergers and divisions this raises another doubt, which is our third consideration. The actio pauliana provides a partial and relative inefficacy, and this is why it is compatible with the Directive’s system. Yet, at the same time, this partiality provides an advantage to the creditors who exercise the action, who may directly seize the assets of the divided or recipient company, which, in turn, results in a discriminatory treatment for other creditors, including creditors who relied on the effects of the division. In this regard, the Directive’s system relies on the ‘pooling of interests’ in constituencies (shareholders, creditors) to ensure a protection that is comprehensive, but also one that pursues the equal treatment of shareholders. This can be supported not only by a rationale of ‘fairness’, but also by a rationale of avoiding the ‘holdout’ problem, which arises every time a party has to negotiate individually with a multiplicity of parties, each of these will have an incentive to hold up negotiations to extract individually more advantageous terms, which, in turn, may undermine the whole process. ⁶⁵

Most obviously, this is the rationale that supports majority decision-making in mergers/divisions ⁶⁶ (for shareholders) and majority decision-making in restructuring arrangements ⁶⁷ (for creditors). Less obviously, perhaps, it also limits the scope for ‘fraud’ exceptions that may endanger a transaction for the benefit of all. ⁶⁸ Thus, although formally speaking the regime on corporate divisions is not contrary to Private Law remedies that seek to enhance creditor protection (while not resulting in the nullity of the transaction) both a logic of ‘fairness’, and a logic of holdout-avoidance require a deeper reflection over remedies that, while broadly described as ‘creditor protection’ tools, can have the effect of securing a preferential position to a single creditor or class of creditors, to see if they endanger the goals of EU rules.

This connection between the equal treatment of creditors and the objectives of the Directive was highlighted in the Opinion of Advocate General Szpunar. This Opinion stated that, since the Directive tries to ensure the equal treatment of creditors, and to avoid that their interests are adversely affected by the division, the actio pauliana compatible with these goals. This would include the need to ensure that the interests of creditors who, say, relied on the effects of the division, are not adversely affected, and that the principles of equality between creditors and legal certainty being respected. Thus, in the AG Opinion, the actio pauliana would be admissible insofar as these goals were not jeopardised, something that was for the domestic court to determine. ⁶⁹

The Court did not decide to follow the AG on this, probably for good reason: if the actio pauliana is compatible with the creditor remedies enshrined in the Sixth Directive only insofar as it does not adversely affect other creditors, the domestic court would be left wondering when exactly the success of the actio pauliana would not endanger the position of other creditors. If the plaintiffs in the case had succeeded, they would have rendered the division ineffective towards them, which means they, as creditors of the company being divided, could have directly seized the assets from the newly created recipient companies, as if the division had never taken place with respect to them. This, in turn, would have harmed the interests of the creditors of those companies, who accepted (and perhaps did not exercise their right of objection) relying on the effectiveness of the corporate division, and the pool of assets of the recipient companies outlined in the corporate division plan.

The Court sidestepped this objection by holding that, the interpretation of the Directive system as a ‘minimum protection’ system (which Member States could opt to enhance) and the joint reading of Articles 12(4) and 2 (3) of the Sixth Directive, and Article 13(3) of the Third Directive did not preclude national laws which gave priority ‘to the protection of the interests of the creditors of the company being divided’. ⁷⁰ Yet this approach begs the question, and the problem is likely to resurface again. For what happens once creditors realize this, and begin using remedies like actio pauliana to leverage their position? Is there no limit to the unequal treatment that may be granted as a result of the exercise of this action? What happens if the widespread use of specific, individual remedies is used to circumvent the Directive’s goal of granting legal certainty? ⁷¹ Should this determination be entirely left to the courts in Member States? The Court did not give an answer to this, and for this reason we surmise that the matter can arise again.

7. Conclusions

Case C 394/18 I.G.I. Srl v. Maria Grazia Cicenia et al. is a short case, with a seemingly simple question (compatibility between Civil code remedies and the creditor protection system of the Sixth Directive on Corporate Divisions) and a relatively succinct analysis, followed by a straightforward answer (yes). Yet, a reflection shows that the issues involved are anything but.

First, the case exposes the importance of the way the dialogue between domestic courts and the Court of Justice is conducted. One factor is that the CJEU does not follow a pre-set script on the approach that it will follow, and it becomes more assertive as it feels more confident in its understanding of the way domestic rules and doctrines operate, and how they fit within the scheme of goals and objectives of the specific EU rules. Another factor is that, although the CJEU has the last word on the matter, domestic courts can greatly influence the outcome by the way they frame their questions. In this case the referring court did its best to present the relationship between actio pauliana and the Sixth Directive in relatively uncomplicated terms: the former resolved a relatively marginal issue and acted as a safety valve for cases of fraud. Thus, the CJEU was inclined to give the domestic action carte blanche.

Yet, and this is the second point highlighted by the case, a more careful analysis raises thorny issues, which show that some of the aspects pertaining to actio pauliana, far from the margins, lie closer to the core of the balance of interests that the Sixth Directive seeks to strike. In that sense, the actio pauliana, and similar anti-fraud remedies, could turn into the proverbial Trojan horse, which undermines the Directive’s system.

In this regard, a first consideration is that the Directive intends to cover only cases where the divided company is wound up, which means that Member States are left to supply the rules in cases where the divided company survives and keeps some of the assets and liabilities. If the Member State’s choice is to extend the Directive’s system of protection to those cases (as it happened in this case), an open question is whether that means that ‘the same’ rules are being applied, since the position of the creditors of the divided-and-surviving company is different, and whether the CJEU is really ‘interpreting’ the Directive’s rules, or instead ruling on the legitimacy of a Member State’s policy choices in cases not covered by the Directive.

A second consideration is that, if we broaden the scope of the question of the compatibility between the Directive and other creditor protection tools this also raises the major issue of the compatibility between the Directive’s system of creditor protection, and the avoidance actions enshrined in domestic insolvency laws. This is a matter that has been resolved by some national courts (such as those in Spain), but one of the remaining questions is whether the CJEU will also confirm the view of the Spanish 2016 ruling, sustaining that an action for transaction avoidance in insolvency was excluded by the Sixth Directive, because its erga omnes effects rendered it equivalent to nullity. That being so, the creditors of the divided company subsequently declared insolvent could only rely on the annulment or opposition regime (according to the language used by each Member State for the transposition of the Sixth Directive) in order to protect its rights in an ex ante scenario and on the actio pauliana, as an ex post protective alternative.

A final consideration is whether the flexible (or lenient) approach of the CJEU has any kind of limits. The major concerns are twofold: one, is that the extension of the Directive’s regime to other cases, coupled with other creditor remedies, such as actio pauliana, may result in a gross inequality between the relative position of creditors. A second one, however, is that the combination between the extension plus the widespread use of individual fraud-based actions may result in a parallel system of creditor protection that has little resemblance to what the European legislator had in mind when it enacted the Directive.

In view of the above, we will have to wait for some additional resolutions from the CJEU to determine the interpretation of these and many other issues raised by the EU rules on structural changes while the domestic courts anticipate the matter. It all indicates that Cicenia will have sequels, or further chapters.