Introduction – the framework
From a UK perspective, the majority of UK/EU cross border insolvencies are currently subject to the Recast Insolvency Regulation (Regulation (EU) 2015/848 of 20 May 2015 on insolvency proceedings (recast)). The Recast Regulation determines in which member state proceedings may be opened and the law which governs those proceedings and provides for the automatic recognition of proceedings between member states1.
If the Transition Period does come to an end on 31 December 2020 without a "deal" in place which encompasses cross border insolvency matters, the UK will lose much of the benefit of the clear structure of the Recast Regulation for new insolvency proceedings opened after the end of the Transition Period. As a result, new UK/EU cross border insolvencies may be less efficient and effective than is currently the case. We discuss the implications of a "no deal" scenario on UK/EU cross border insolvencies in paragraph 3 below.
From a UK perspective, for cross border insolvencies without an EU element, the following cross border regimes will remain relevant, notwithstanding a "no deal" Brexit:
- the UNCITRAL Model Law on Cross Border Insolvency (the "Model Law") (implemented in the UK by the Cross Border Insolvency Regulations 2006 and in the US by Chapter 15 of the US Bankruptcy Code, for example)
- s426 Insolvency Act 1986
- the English common law.
However, we may see more wide spread use of these three regimes in new UK/EU cross border insolvencies, particularly the UNCITRAL Model Law and the common law in the absence of the Recast Regulation in a "no deal" scenario.
The Recast Regulation
By way of background, the Recast Regulation applies to certain specified insolvency proceedings, including an English administration, liquidation or voluntary arrangement. It does not apply to English receiverships, schemes of arrangement under Part 26 Companies Act 2006, moratoria under Part A1 Insolvency Act 1986 and restructuring plans under Part 26A Companies Act 2006.
The Recast Regulation governs:
- The proper jurisdiction of insolvency proceedings (by reference to the debtor's centre of main interests (COMI) or any establishments). If a debtor's COMI is located in one member state, insolvency proceedings can only be opened in another member state if the debtor has an establishment there.
- The applicable law to be used in those proceedings (subject to exceptions, the law of the state of opening of the proceedings).
- The mandatory automatic recognition of those proceedings in other member states.
- Methods by which coordination and cooperation is to be, or may be, achieved within more than one member state and for insolvent groups of companies.
The Recast Regulation does not purport to harmonise domestic insolvency laws across the EU.
The Recast Regulation applies to insolvency proceedings in respect of corporate bodies and individuals, although it does not apply to certain specific types of institution such as:
- Insurance undertakings.
- Credit institutions.
- Investment firms and other firms, institutions and undertakings to the extent that they are covered by the Directive of the European Parliament and of the Council of 4 April 2001 on the reorganisation and winding up of credit institutions (2001/24/EC).
- Collective investment undertakings.
The Recast Regulation applies only if the debtor has its COMI in a member state.
The impact of a "no deal" Brexit on UK/EU cross border insolvencies
Throughout the transition period the Recast Regulation has continued to operate as between the UK and the remaining member states.
The Withdrawal Agreement provides specifically in relation to the Recast Regulation that:
" In the United Kingdom, as well as in the Member States in situations involving the United Kingdom, the following provisions shall apply as follows:
… (c) Regulation (EU) 2015/848 of the European Parliament and of the Council shall apply to insolvency proceedings, and actions referred to in Article 6(1) of that Regulation, provided that the main proceedings were opened before the end of the transition period."
(Article 67(3), Withdrawal Agreement).
Therefore, after the end of the Transition Period, the Recast Regulation will continue to apply where the main proceedings were opened before the end of the Transition Period. However, this is not the case with respect to proceedings opened after the end of the Transition Period (new proceedings).
As regards new proceedings, in the absence of the Recast Regulation, the starting point is that:
- Jurisdiction: The English courts will have a wider jurisdiction to open insolvency proceedings where a debtor's COMI is in another member state than is currently the case and the courts of the remaining member states will no longer be prevented from opening main proceedings in respect of a debtor with its COMI in the UK. This makes it more likely that we will see multiple (parallel) proceedings in relation to a single debtor.
- Recognition: The remaining member states will not be obliged to recognise English insolvency proceedings (which would previously have been the subject of mandatory automatic recognition across the EU) and the UK will not be obliged to recognise proceedings in the remaining member states pursuant to the Recast Regulation. If a remaining member state will not recognise the UK insolvency proceedings,it may be necessary to open parallel insolvency proceedings in that jurisdiction.
- Applicable law: the rules regarding applicable law in the Recast Regulation will fall away.
- Coordination and cooperation: The coordination and cooperation measures in the Recast Regulation will cease to apply between the UK and the remaining member states.
In the absence of the Recast Regulation, it will be necessary to consider the domestic laws in relevant remaining member states as these may address questions of jurisdiction, recognition and coordination and cooperation. UK/EU cross border insolvencies will require careful advance planning. Practical issues will likely include:
- Whether the UK insolvency proceedings will be recognised (without the need for parallel proceedings) in each relevant remaining member state and the scope of any such recognition and associated assistance.
- The costs and logistical requirements of obtaining such recognition (and opening any parallel proceedings, if recognition is not possible) in order to understand whether it is cost effective for the insolvency estate.
- Whether the courts of those member states might open parallel proceedings at the request of local creditors and the implications of those proceedings for the UK proceedings, including asset recoveries in those jurisdictions.
- The law which will govern those proceedings and the inter-relationship between the different sets of proceedings.
The position on the above points is likely to vary significantly between remaining member states.
In paragraph 1 above we noted that we may see more widespread use of three other cross border regimes (the Model Law, s426 Insolvency Act 1986 and the English common law) in the absence of the Recast Regulation following a "no deal" Brexit.
These three cross border regimes are primarily "inward looking" and are a means by which the courts of (or an insolvency officeholder from) a remaining member state might seek recognition and/or assistance from the English courts2.
The "outward looking" assistance referred to above (in which a UK insolvency office holder might seek recognition or assistance from the courts of a remaining members state) will come from the domestic law of that member state (and hence will vary between member states). However, a small number of EU jurisdictions have adopted laws based on the Model Law (Greece, Romania, Slovenia, Poland) pursuant to which there is a mechanism in place by which foreign office holders (including from the UK) may seek recognition and assistance from the courts of those countries.
As at the time of writing it remains possible that a "deal" will be concluded which replicates the Recast Regulation for new insolvency proceedings opened after the end of 2020. However, even if there is no such deal, the difficulties referred to above are not insurmountable with appropriate planning, although there will be timing and cost implications. Some UK/EU restructurings and insolvencies may be more challenging as a result but its seems likely that a body of expertise will soon develop as the courts in the UK and the remaining member states become familiar with the reality of cross border restructurings and insolvencies in a post-Brexit world.