The recast European Insolvency Regulation – impact on distressed debt investors
In 2002, the European Insolvency Regulation (EIR) introduced a regime governing the administration of insolvent corporates or individuals which operate in more than one member state of the European Union (EU). A "recast EIR" will apply to insolvency proceedings commenced on or after 26 June 2017.
Why are the EIRs important?
The EIRs ensure recognition, without further formality, of insolvency proceedings throughout the EU (except Denmark) and determine the law applicable to such proceedings. They apply only where the debtor's centre of main interests (COMI) is situated in a member state (other than Denmark) and do not apply to insolvency proceedings on foot in other jurisdictions. The EIRs are only binding on participating member states and so will be of limited practical use where assets are situated outside the EU. The EIRs envisage there being one set of main insolvency proceedings, with the possibility of multiple territorial (or secondary) insolvency proceedings.
Consultation of stakeholders and legal and empirical studies had identified various shortcomings with the EIR. The recast EIR was designed to address these shortcomings and includes many helpful changes. In particular:
- The recast EIR places a greater emphasis on rescue and rehabilitation, and is extended to proceedings which provide for restructuring of a debtor at a stage where there is only a likelihood of insolvency, proceedings which leave the debtor fully or partially in control of its assets and affairs, and proceedings providing for a debt discharge or a debt adjustment.
- The recast EIR includes new rules providing for coordination and cooperation between courts and insolvency practitioners, and the new possibility of synthetic (or virtual) secondary insolvency proceedings. A requirement in the EIR whereby territorial / secondary insolvency proceedings had to be liquidation proceedings has been removed.
- In the recast EIR the presumption that a debtor's COMI is in the place of its registered office will not apply if the registered office has shifted in the preceding three months – a measure designed to curb abusive forum shopping.
It is hoped that the recast EIR will encourage greater investment (including distressed investment) in Europe, due to its greater emphasis on rescue and rehabilitation, by imposing mandatory obligations of cooperation and coordination between office-holders and courts and by facilitating group insolvency processes. The creation of interconnected insolvency registers in 2018-19 will ensure all stakeholders have access to reliable information about ongoing insolvency proceedings in the EU.
Uncertainties introduced by Brexit
The exit model and the legislative changes that will result from "Brexit" remain wholly unclear. The formalities for the UK to leave the EU are unlikely to be completed before 2019 at the earliest. In the event of a "hard Brexit", the recast EIR (being an EU "regulation") would cease to apply automatically between the UK and the remaining EU (rEU) member states.
It is hoped, given the success of the EIR, that there will be a collective desire, both in the UK and in the rEU member states, to retain the effects of the recast EIR regime as far as possible, whether as part of a withdrawal treaty or via a series of bilateral agreements between the UK and multiple rEU member states. Bilateral arrangements could, however, result in inconsistent and unpredictable outcomes for pan European insolvencies. A less attractive outcome still is that the UK is forced to rely on the vagaries of private international law in each rEU member state. Any such 'halfway' solutions to the gap left by the EIRs would increase the risk of competing insolvency proceedings between the UK and individual rEU member states, due to the removal of the rule requiring automatic recognition of insolvency proceedings. There could also be increased uncertainty for UK insolvency practitioners seeking the assistance of rEU courts (and vice versa).
What distressed debt investors need to know about the recast EIR
Many investor claims in the context of distressed debt investing may either fall outside the scope of the recast EIR or fall to be determined by a law other than the law of the main insolvency proceedings. This is because distressed claims will take many forms, and the correct categorisation of the claim will determine whether the recast EIR is relevant.
James Bell and Douglas Hawthorn from Travers Smith LLP contributed the chapter on the recast EU Insolvency Regulation and distressed debt (with Jeremy Walsh) in the new Globe Law and Business title, Investing in Distressed Debt in Europe, co-published with TMA Europe. Go to http://www.globelawandbusiness.com/IDD/ for further details and to place your order.