European Insolvency Regulation
The European Insolvency Regulation (Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (Recast)) (the EIR) is of fundamental importance to cross-border insolvency in the EU. It directly applies to all EU Member States except Denmark. The EIR determines, amongst other matters, the appropriate EU Member State for opening insolvency proceedings; the law applicable to the proceedings and recognition of proceedings in other Member States. Under the EIR, the opening of insolvency proceedings does not affect the security of creditors with regard to debtor assets situated in another Member State, including the right to enforce security. This is a matter of particular importance in cross-border financings.
If and when the UK ceases to be a Member State of the EU (Brexit), the EIR will no longer apply to the UK. Consequently, in the absence of a separate agreement addressing this, insolvency proceedings opened in the UK will no longer be automatically recognised in the EU and parties will need to rely on the local legislation of the relevant Member State.
Equally, insolvency proceedings opened in an EU Member State will need to rely on the UK’s domestic legislation for recognition. Unless the UK recognises those proceedings, secured creditors may not be entitled to enforce their security.
For cross-border restructuring, Brexit will become relevant if formal insolvency proceedings or a formal court decision are required. Consensual deals which allow the parties to stay out of courts and formal proceedings should not be affected by Brexit.
Proceedings opened in the UK
Post-Brexit, and in the absence of a separate (multilateral EU-UK or bilateral Netherlands-UK) agreement, the Netherlands will effectively return to the application of Dutch law. The situation is the same as that which applied to the UK prior to the EIR coming into force in 2002 (and, for completeness, is currently still applicable to the countries which are not members of the EU).
As a result of the principle of territoriality, insolvency proceedings opened outside the EU cannot be directly enforced in the Netherlands.
A UK insolvency administrator could still dispose of assets located in the Netherlands (to the extent that the administrator would be entitled to do so, according to UK insolvency law). However, if an asset has already been seized by a creditor, this would be valid against the insolvency administrator. In other words, Dutch creditors are able to seize assets of the debtor located in the Netherlands.
Proceedings opened in the Netherlands
The extent to which the opening of Dutch insolvency proceedings and their effects will be recognised in the UK with regard to the assets of the debtor located in the UK will of course depend on UK law.
If the UK fully recognises the opening of insolvency proceedings in the Netherlands, and their effects according to Dutch law, the holders of security over UK assets of the debtor, will still, in principle, be entitled to enforce their security on the same conditions as in the Netherlands, i.e. (subject to minor limitations). The Dutch Bankruptcy Act grants the holders of rights in rem such an exemption.
Still, for Dutch companies with assets in the UK, or UK companies with assets in the Netherlands (and their lenders) it is fair to say that the practical outcome of Brexit may result in more uncertainty around the outcome of cross-border insolvency proceedings, more complexity and thus higher costs. This will weaken the lenders’ negotiation position and strengthen that of borrower companies on the pathway to a consensual restructuring deal.