Brexit implications on cross-border insolvency
By Kunal Gadhvi - Partner and Nazmul Miah - Solicitor, Restructuring and Insolvency
As of 11pm on 31 January 2020 the UK ceased to be a Member State of the EU. Having entered into the Withdrawal Agreement via the European Union (Withdrawal Agreement) Act 2020, there was a period of 12 months in which EU legislation, directly applicable to the UK, remained in place up until 11pm on 31 December 2020. This was known as the ‘Transition or Implementation Period (“IP”)’.
As of 11pm on 31 December 2020, or ‘IP Completion Day’, the Recast Regulation (Regulation (EU) 2015/848 on insolvency proceedings) is no longer applicable to new UK insolvency proceedings, in the absence of any further arrangement with the EU (noting that the Trade and Cooperation Agreement is silent on the issue).
This article discusses the options available to office holders dealing with cross-border restructurings and insolvencies, and recognition of insolvency processes within the EU, following Brexit.
Pre-Brexit
Under the Recast Regulation, the national courts of the member state in which a debtor’s Centre of Main Interests (“COMI”) is located had exclusive jurisdiction to open ‘main’ insolvency proceedings in respect of that debtor. The courts of other member states had to automatically recognise insolvency proceedings opened in that state, and only had jurisdiction to open insolvency proceedings in relation to that debtor if it had an ‘establishment’ in that member state; the effects of such proceedings (referred to as ‘secondary’ proceedings) were restricted to the assets situated in that member state.
Post-Brexit
As the Recast Regulation is no longer applicable to new UK insolvency proceedings, there is no guarantee that such proceedings in the UK will be recognised elsewhere in the EU and the basis for recognition may depend upon a combination of the private international laws of each member state.
Model Law
Given the uncertainty and the risk of competing insolvency processes, Insolvency Practitioners may seek to rely more prevalently upon the UNCITRAL Model Law on Cross-Border Insolvency (the ‘Model Law’). The Model Law seeks to provide co-operation between the courts of the home state and foreign courts in states involved in cross-border insolvency and aims to reinforce the idea that foreign creditors have the same rights as local creditors. Proceedings under the Model Law will be either foreign main or foreign non-main proceedings - foreign main proceedings are defined as taking place in a state where the debtor has its COMI and foreign non-main proceedings are defined as taking place in a state where the debtor has an establishment. Recognition under the Model Law is not automatic and will require an application to the foreign court. The scope of powers under the Model Law is also limited and only allows procedural relief such as a stay of execution on assets belonging to a debtor.
However, only a few EU member states have actually implemented the Model Law into their domestic legislation (Greece, Poland, Romania and Slovenia), and in circumstances where a member state has not implemented the Model Law, an office holder may have to obtain recognition of their domestic appointment in the member state under its local laws.
Lugano Convention
On 8 April 2020, the UK Government applied to re-join the Lugano Convention as an independent contracting state. It now awaits the other contracting states (the EU, Iceland, Norway and Switzerland) to decide unanimously whether to agree to the UK joining the Convention.
Whilst not identical to the Recast Regulation, accession to the Lugano Convention would allow the UK and EU (and Iceland, Norway and Switzerland) to retain the benefits of mutual recognition and enforcement of judgments and also provide for a smoother and less costly route to cross-border insolvency.
As it stands however, there is a serious risk of the UK’s application to accede to Lugano being rejected with an April 2020 FT report outlining reasons for which the EU may reject the UK’s accession, one being that it would be a clear financial benefit to Britain’s legal sector. The contracting parties have until April 2021 to make their decision. In any event, there would be a three-month lag between agreement and the applicability of the Lugano Convention.
Hague Convention
The UK is a signatory of the 2005 Hague Convention on Choice of Court Agreements in its own right (after being given the force of law in domestic law on 1 January 2021), together with the EU and Singapore. The Hague Convention provides for a mechanism for the allocation of a jurisdiction in cases where parties have agreed to an exclusive jurisdiction and all signatories to the Convention are obliged to recognise and enforce any judgments flowing from such an agreement.
The Hague Convention is limited in scope and excludes a number of subject matters including ‘insolvency, composition and analogous matters.’ Schemes of arrangement and restructuring plans are likely however to fall within the scope of the Convention as they are seen as contracts rather than insolvency processes, although the attractiveness of an exclusive jurisdiction clause remains to be seen.
Rome I and Rome II
Rome I and Rome II Regulations will continue to apply after IP Completion Day. These EU instruments determine the law governing contractual and non-contractual obligations and therefore may be particularly useful in achieving recognition within the EU in respect of schemes of arrangement and restructuring plans.
Rome I provides for parties to choose the law applicable to their contract and holds that the contract can only be varied or discharged by the applicable law (as confirmed by Anthony Gibbs & Sons v La Societe Industrielle et Commercial des Metaux). The chosen law does not need to be the law of an EU Member State and if English law has been chosen then it should be recognised across the EU, and can only be varied or discharged in accordance with the laws of England and Wales.
It should be noted however, that some jurisdictions may not view schemes of arrangement or restructuring plans as part of contract law and therefore the basis of recognition in these jurisdictions may be more uncertain, particularly if the company proposing the scheme or the plan is in fact insolvent.
Member State proceedings in the UK
Whilst EU member state insolvency proceedings will no longer have the effect of automatic recognition in the UK, foreign office holders will be able to apply for recognition of their local insolvency proceedings in England and Wales, pursuant to the Cross Border Insolvency Regulations 2006 (“CBIR”), which is the UK’s implemented version of the Model Law, albeit with minor amendments. Upon recognition, the foreign office holder will have standing to make an application for a number of anti-avoidance provisions under the Insolvency Act 1986, such as preferences (under sections 239 and 340), transactions at an undervalue (under sections 238 and 339) and transactions defrauding creditors (under section 423) .
Further, office holders in the Republic of Ireland could rely upon section 426 of the Insolvency Act 1986 which allows for certain (mainly Commonwealth) countries to apply to the UK courts for assistance in insolvency proceedings. If the court agrees to grant assistance, section 426 provides the flexibility to choose whether to apply English insolvency law or the insolvency law of the requesting state.
Foreign office holders can also bring an application under the common law concept of comity of insolvency proceedings, this is often bought in conjunction with an application under CBIR.
Conclusion
Notwithstanding a legal co-operation agreement with the EU, the current landscape of UK/EU cross-border insolvency remains uncertain for practitioners with the recognition of English insolvency proceedings being assessed on a country-by-country basis.
The current framework provides a somewhat unsatisfactory alternative to the automatic recognition principles under the Recast Regulation and will likely lead to increased costs and an uncompetitive insolvency market in comparison to our EU neighbours. The timing implications may also be significant, for example where insolvency proceedings are simply being used to facilitate a restructuring (such as a pre-pack administration), it is likely that recognition will not be obtained in the short time frame required to complete such transactions.
New restructuring tools such as the restructuring plan under CIGA 2020, together with the English scheme of arrangement will still allow cross-border restructurings to take place outside of the formal insolvency process under the Rome I Regulations, which will recognise such processes as contracts, although it is yet to be seen whether restructuring plans will be deemed to be insolvency procedures in member states.
If the UK were to accede to the Lugano Convention and/or all EU Member States implement the Model Law, this would alleviate many of the concerns raised as a result of the revocation of the Recast Regulation, and would provide more clarity for insolvency professionals. Such decisions however remain in the hands of politicians, with the EU ultimately having the final say.
