This update explains the key changes in cross-border insolvency proceedings if the UK leaves the EU without a deal on 31 October 2019 (or at a later date). Importantly, a no-deal exit will impact how and where such insolvency proceedings can be raised in a post-Brexit future.
A bit of background
While the UK is still an EU Member State, EU Regulations provide a clear framework for conducting cross-border insolvency proceedings. The EU Insolvency Regulations (the 2000 Insolvency Regulation and the 2015 Recast Insolvency Regulation) include provisions which:
• govern jurisdiction to open insolvency proceedings;
• govern the law applicable to insolvency proceedings;
• provide for the automatic recognition of insolvency proceedings opened in one Member State in all other Member States; and
• co-ordinate insolvency proceedings which relate to the same debtor or, since the 2015 Recast Insolvency Regulation came into force, to several members of the same group of companies.
The EU Insolvency Regulations facilitate cross-border cooperation and reduce the time, costs and uncertainty involved in cross-border insolvencies within the EU.
The EU Insolvency Regulations after Brexit
If the UK leaves the EU without a deal, EU law as it currently applies in and to the UK will be ‘copied’ into the UK rulebook to avoid a legal ‘cliff edge’. The European Union (Withdrawal) Act 2018 (EUWA), amongst other things:
• converts directly applicable EU law as it stands at the moment the UK exits the EU into UK domestic law (‘retained EU law’); and
• empowers Ministers and devolved authorities to make changes to such ‘retained EU law’.
Changes to ‘retained EU law’ are being made by secondary legislation (styled ‘EU Exit’ Regulations) to address any operating failures, and any other ‘deficiencies’ arising out of Brexit in ‘retained EU law’.
One such deficiency is when any ‘retained EU law’ makes provision for reciprocal arrangements which no longer exist or are no longer appropriate after Brexit. The 2015 Recast Insolvency Regulation falls into this category.
It would not be appropriate for the UK to continue to apply the 2015 Recast Insolvency Regulation unilaterally in respect of EU insolvency proceedings when it will not be applied to UK insolvency proceedings by the Member States (the UK will become a ‘third country’ after Brexit).
The relevant ‘EU Exit’ Regulations made under the powers contained in the EUWA are the Insolvency (Amendment)(EU Exit) Regulations 2019 (to be amended by the draft Insolvency (Amendment)(EU Exit)(No. 2) Regulations 2019); and the Insolvency (EU Exit)(Scotland)(Amendment) Regulations 2019.
Together, these ‘EU Exit’ Regulations:
(1) amend the 2015 Recast Insolvency Regulation as it has effect in the UK (and Scotland) from exit day; and
(2) make consequential changes to relevant domestic legislation, such as the Insolvency Act 1986, the Insolvency (England and Wales) Rules 2016, the Bankruptcy (Scotland) Act 2016, the Bankruptcy and Diligence etc. (Scotland) Act 2007, the Insolvency (Scotland) (Receivership and Winding Up) Rules 2018, the Insolvency (Scotland) (Company Voluntary Arrangements and Administration) Rules 2018 and the Cross Border Insolvency Regulations 2006.
What will the law look like after a Brexit?
With effect as of exit day, large parts of the 2015 Recast Insolvency Regulation are deleted and the provisions dealing with jurisdiction are amended. The ‘EU Exit’ Regulations provide grounds for jurisdiction to open insolvency proceedings in the UK where:
• the debtor's centre of main interests (COMI) is in the UK; or
• the debtor's COMI is in a Member State and there is an establishment in the UK,
in addition to any existing grounds for jurisdiction to open such proceedings which apply in the laws of any part of the UK.
The restrictions on jurisdiction contained in the 2015 Recast Insolvency Regulation regarding the opening of main and secondary/territorial proceedings will no longer apply.
Consequently, the jurisdiction of the courts to wind up companies registered in Great Britain (contained in sections 117 and 120 of the Insolvency Act 1986) is no longer subject to the 2015 Recast Insolvency Regulation and it will no longer be necessary to read the jurisdiction to open administration proceedings or to propose a CVA (contained, respectively, in paragraph 111(1A) of Schedule B1 to, and section 1 of, the Insolvency Act 1986) subject to the 2015 Recast Insolvency Regulation.
However, the amendments to the 2015 Recast Insolvency Regulation:
• do not affect the application of the 2000 Insolvency Regulation to insolvency proceedings opened under that Regulation before 26 June 2017; and
• do not apply to
(1) main proceedings opened under the 2015 Recast Insolvency Regulation before exit day;
(2) secondary proceedings where main proceedings were opened under the 2015 Recast Insolvency Regulation before exit day in respect of the same debtor; or
(3) any proceedings falling within Article 6 of the 2015 Recast Insolvency Regulation (which deals with jurisdiction for actions deriving directly from insolvency proceedings and closely linked with them),
subject to provisions which make sure that a UK court can always apply any other relevant UK law (including the Cross Border Insolvency Regulations 2006) or make any other order that it thinks fit rather than applying the 2000 Insolvency Regulation or the 2015 Recast Insolvency Regulation (as applicable).
Recognition of Insolvency Proceedings and Co-operation post Brexit
From one Member State to another, recognition of insolvency proceedings under the 2015 Recast Insolvency Regulation is automatic. After exit day, it will be necessary to apply for recognition of UK proceedings under relevant domestic European laws on a case by case basis.
There are already provisions in place in the UK which deal with the recognition of insolvency proceedings and co-operation between courts exercising jurisdiction in relation to insolvency.
• The 1997 UNCITRAL Model Law on Cross-Border Insolvency (Model Law) is designed to provide uniform legislative provisions to deal with the recognition of foreign insolvency proceedings and the coordination of concurrent proceedings. It was implemented in Great Britain by the Cross Border Insolvency Regulations 2006 (CBIR). However, although the Model Law and the CBIR provide a recognised path for foreign representatives administering relevant foreign insolvency proceedings to apply to the British courts for recognition of such proceedings, it will be of limited assistance to insolvency practitioners and their solicitors in Scotland or England and Wales who need to seek recognition of insolvency proceedings in the EU after exit day. The Model Law has been implemented in only 4 other EU Member States – Greece, Poland, Romania and Slovenia. Except in those countries, it will be necessary to seek recognition under local law on a case by case basis.
• In addition, the Insolvency Act 1986 provides that the courts having jurisdiction in relation to insolvency law in any part of the UK shall assist the courts having the corresponding jurisdiction in any other part of the UK or any relevant country or territory. The list of relevant countries and territories does not include any EU Member States. However, that is something which may change in the future, presumably on the basis of reciprocity.
Reliance can also be placed on common law, with one of the leading authorities on the law of corporate insolvency in Scotland suggesting that there is no limit in principle to the type of help which may be requested in the UK to aid a foreign court and vice versa.
• Those working in the insolvency profession should familiarise themselves with the changes which the 'EU Exit' Regulations referred to above will bring into force on exit day and consider what changes may require to be made to standard documentation as a result thereof.
• It may also be worth checking what EU contacts your organisation has or what networks it is a member of. It will be more important than ever to have good contacts in the EU who can be called upon to assist in insolvency proceedings with cross border elements.