Impact of Brexit on insolvency proceedings

EU Backdrop

Foreword

Understanding and mastering cross-border insolvency requires a thorough knowledge of the different domestic insolvency regimes, all of which have distinctive procedures and rules on jurisdiction and recognition of foreign proceedings. Creditors and debtors to look for the most favourable system: in this framework, the UK insolvency system is usually considered “creditor-focused”.

In the UK the rules governing jurisdiction and recognition of insolvency proceedings across different jurisdictions are set out in EC Regulation No. 1346/2000 and the UNCITRAL Model Law (“Model Law”), which in the UK has been implemented by way of the Cross Border Insolvency Regulations 2006 (“CBIR 2006”).

EU and International Sources on Insolvency Proceedings

The main feature of Regulation No. 1346/2000 is that it provides for EU-wide effects of the main insolvency proceeding opened in one of the Member States (namely where the debtor’s Centre Of Main Interest or “COMI”, as defined by the Regulation, is located), while secondary procedures which can be opened in another Member State (where the debtor has an establishment) according to domestic rules.

The new EU Regulation No. 2015/848 is a sort of “restyling” of Regulation No. 1346/2000 and will apply to insolvency proceedings opened since 26 June 2017. It introduces, amongst other things, several changes in jurisdiction and forum shopping, secondary procedures, publicity to insolvency procedures and rules for group insolvencies.

The Model Law – such as the EU Regulations, which do not differ in this respect from the Model Law – is not aimed at harmonising the substantive insolvency laws of different countries, but rather to encourage recognition of foreign proceedings and cooperation between jurisdictions. One of its key purposes is to provide for simplified procedures for recognition and for the appointment of a representative of foreign proceedings.

The principal effect of such recognition is the assistance – necessary for the orderly and fair conduct of cross-border insolvencies – to the foreign procedure: according to the Model Law, domestic Courts should cooperate “to the maximum extent possible” with foreign Courts and representatives. Currently, legislation based on the Model Law has been enacted in 20 countries, including the United States, UK, Canada, Japan and Australia.

Both (Regulation No. 1346/2000 and the Model law as enacted by CIBR 2006) have pros and cons: the former grants an automatic recognition, but it is limited to the EU countries (but what if the UK exits from the EU…?), the latter is much more limited as per the effects of automatic recognition but it is not limited to EU countries.

The consequences of Brexit: General Overview

Very little will change in the short term, pending the application of Article 50 of the Lisbon Treaty and the process that will be triggered to allow the UK to exit the EU.

In the medium / long term, when this is completed, the consequences of Brexit will mostly depend on the terms of the exit agreement. However, we can foresee that:

• lacking a specific provision, Regulation No. 1346/2000 no longer will be applicable to the UK (which means, in short, that UK and EU Member States insolvency proceedings would no longer benefit from mutual automatic recognition in the UK and across the EU);
• Uncitral Model Law will continue to apply (where enacted);
• insolvency procedures not falling within the scope of Regulation No. 1346/2000 would remain available in the UK to a foreign company as long as it has “sufficient connection” to the UK – for instance this is the case of the schemes of arrangement provided by the UK Companies Act 2006.

No automatic recognition of UK insolvency proceedings

As Regulation No. 1346/2000 will no longer apply – unless bilateral treaties will be agreed upon with each EU Member State (or with the EU as a whole) – UK insolvency procedures will not receive automatic recognition in the EU.

From a practical point of view, this means that UK insolvency receivers will need to rely on domestic law of the Member State in which recognition is sought, whose outcome would be different according to the specific jurisdictions. Moreover, this could also apply to cross-border insolvency cases pending in the UK, based on Regulation No. 1346/2000.

Everything will depend on the contents of the transitional arrangements (if any) which could be reached between the UK and the EU. In this respect, two main different scenarios may be outlined:

• the UK and the EU could agree that the EU Regulation continues to apply;
• the UK enters into bilateral treaties with as many EU Member States as possible.

No automatic recognition of foreign insolvency proceedings

On the other hand, it seems that the UK would not be bound to automatically recognise EU Member State insolvency procedures, and the UK Courts could exercise their discretion to commence insolvency procedures in relation to companies incorporated outside the UK and having no COMI in the UK.

In this respect, CIBR 2006 could help a foreign insolvency receiver seeking recognition and assistance by the UK Courts. The problem here is that only a few EU Member States have adopted the UNCITRAL Model Law (namely, Greece, Poland, Romania and Slovenia).

No assistance could be offered by the Insolvency Act 1914 (amended in 1986), as none of the current EU countries could be considered a “relevant country or territory” according to Section 426, at least in the meaning of the old times when such definition was referred to countries closely associated with the British Empire.

Schemes of arrangement

A “tool” available for both domestic and foreign companies, which is unlikely to be affected by Brexit is the schemes of arrangements, as it falls outside the scope of both Regulation No. 1346/2000 and new Regulation No. 2015/848. The UK Courts – as far as a “sufficient connection” with the UK has been recognised – have been open to approve schemes of arrangements affecting foreign companies (which was quite broadly construed), when the Courts are satisfied that the scheme is capable of being enforced in the jurisdiction in which the debtor company’s assets are located: in this respect, the effects of Brexit on other EU regulations on recognition of judgments and on choice of law will also have to be considered.

Conclusion

Currently, the way by which Brexit will be achieved and the real impact that it will have on cross-border insolvency procedures falling within the scope of Regulation No. 1346/2000, are not foreseeable.

The benefits that the Regulation provides both in terms of reduction of uncertainty, complexity, costs and outcomes for creditors is well known: such benefits were ensured both in terms of the UK’s jurisdiction to open certain insolvency procedures and in terms of recognition of the same across the EU.

Without an alternative mechanism to preserve all this, it is likely that – except maybe for schemes of arrangements – the UK’s international reputation as an attractive “creditor-focused” system for cross-border insolvencies and restructurings would be affected.