On 7 February 2019, my article entitled “No deal Brexit – impact on insolvency” was published on Lexology. That article was published shortly after the Insolvency (Amendment) (EU Exit) Regulations 2019 (the “2019 Regulations”) were made. At the time of writing this article (25 April 2019), the agreed extension until 31 October 2019 (subject to a number of caveats, in particular the holding of EU Parliament elections in May) is in place to finalise the UK’s withdrawal arrangements from the EU either by passing the Withdrawal Agreement negotiated by the UK Government (which has yet to be approved by Parliament) or leave with no deal (which could take place even earlier if EU Parliament elections are not held in May).
This article will consider the following:
1. A review of the 2019 Regulations, in particular a review of the amendments to the Insolvency Act 1986 (the “1986 Act”) set out in Part 2 of the Schedule to the 2019 Regulations insofar as they relate to England and Wales;
2. Briefly consider the EU Directive on Insolvency, Restructuring and Second Chance (the “Directive”) and its potential impact on UK insolvency law; and
3. Briefly consider what to take into account now when dealing with potential cross-border insolvency.
This article will also briefly comment on amendments made to the Insolvency (England and Wales) Rules 2016 (the “2016 Rules”) by the 2019 Regulations but will not discuss them in detail.
The 2019 Regulations
The 2019 Regulations were made on 30 January 2019 and include various amendments to legislation relating to the insolvency regimes in the UK jurisdictions. The majority of the provisions of the 2019 Regulations will only come into force in accordance with section 20(1) of the European Union (Withdrawal) Act 2018.
Under the 2019 Regulations there are numerous amendments to the 1986 Act, the 2016 Rules and other related legislation relating to ‘Member State’, ‘EEA State’ and other similar wording. Save for the previous comments, this article will not comment on each amendment individually but will highlight some of the more practical amendments made to the 1986 Act:
a. Sections 106(4A) and 106(4B): the removal of the requirement of a liquidator to deliver a statement to the Registrar of Companies in respect of any EU insolvency proceedings commenced against the same company in an EU Member State;
b. Section 117(7): the removal of the caveat on the extent of the jurisdiction of the High Court and County Court provided for by Article 3 of Regulation (EU) 2015/848 (the “Recast Regulation”);
c. Section 124(1): the removal of the ability of a Member State Liquidator or a temporary administrator to bring a winding up petition against a company in England and Wales;
d. Sections 146(6), 146(7) and 146A: removal of the requirement of a liquidator (or Official Receiver) to deliver a statement along with the final account (or notice that the winding up is complete) to the Registrar of Companies and the court (as applicable) in respect of any EU insolvency proceedings commenced against the same company in an EU Member State;
e. Sections 202(2A), 202(2B), 205(2A) and 205(2B): removal of the requirement of a liquidator to provide a statement to the Registrar of Companies where the liquidator applies for dissolution of a company (in accordance with section 202(2) or section 205(1)). Further consequential amendments to section 202 are made by virtue of the removal of sections 202(2A) and 202(2B) and the same for section 205 by virtue of the removal of sections 205(2A) and 205(2B);
f. Section 225(2): the removal of the reference to the Recast Regulation;
g. Sections 240(3)(d), 387(3)(aa) and 387(3)(ab): the removal of the reference to Article 51 of the Recast Regulation relating to the computation of the ‘relevant time’ for the purposes of, in respect of section 240(3)(d), sections 238 and 239 of the 1986 Act and for the purposes of, in respect of section 387(3), section 387 and Schedule 6 of the 1986 Act;
h. Sections 263I(1) and 265: amending the jurisdiction to allow an adjudicator to determine a bankruptcy application even where the bankrupt’s centre of main interests (COMI) is in an EU Member State (other than Denmark) but the bankrupt has an establishment in England and Wales;
i. Sections 264(1)(ba) and 264(1)(bb): the removal of the ability of a temporary administrator (as defined in Article 52 of the Recast Regulation) or an insolvency practitioner appointed pursuant to Article 3(1) of the Recast Regulation to present a bankruptcy petition against an individual in England and Wales;
j. Section 330(6): the removal of the requirement to transfer any surplus arising from a bankruptcy estate which are secondary proceedings (within the meaning of the Recast Regulation) to the main proceedings (within the meaning of the Recast Regulation);
k. Sections 411(2B), 412(2B), 420(1B) and 421(1B): the insertion of the term “a new relevant offence” which is to be defined under section 422A of the 1986 Act;
l. Schedule B1, paragraphs 84(1A) and 84(1B): the removal of the requirement for an administrator, where they consider that a company has no property to permit a distribution to creditors and wish to proceed to dissolve the company, to provide a notice to the Registrar of Companies where the administrator is aware that there are EU insolvency proceedings open against the relevant company in one or more EU Member State(s); and
m. Schedule B1, paragraphs 84(6A) and 84(6B): the removal of the requirement for an administrator to obtain consent from the or each, if there is more than one, Member State liquidator to the dissolution of a company.
With regards to points a, d, e, l and m, above, these amendments may be welcome changes to the legislation as they remove an additional administrative element for liquidators and administrators thus saving both time and cost.
With regards to points b and f, above, whilst the presumption of COMI is where a company has its registered office, the removal of the caveat set out in Article 3 of the Recast Regulation (in respect of point b) or the Recast Regulation in its entirety (in respect of point f) is likely to lead to a ‘conflict of laws’ scenario where the courts of England and Wales and the courts of another EU Member State (such as France or in the case of a federal EU Member State, such as Germany, the relevant court(s) for the particular state) both claim to have jurisdiction over the same company. Indeed, even with the Recast Regulation (or predecessor legislation) in place, there have been instances where a company involved in an insolvency process in England and Wales has been dissolved in another country with which it is linked. This has resulted in the courts of England and Wales deferring to the decision of the courts in the other jurisdiction (see the Judgment in Re Eurodis Electron plc [2011] EWHC 1025 (Ch.)) For more on ascertaining COMI, in a company context, and asserting that England and Wales is the correct COMI please see my related article Establishing The Centre Of Main Interests (COMI) (also available on Lexology).
With regards to point h, above, there is an interesting further amendment to section 263I(5) of the 1986 Act in that it incorporates into it the definition of ‘establishment’ as set out in Article 2(10) of the Recast Regulation. With this in mind, it suggests that the jurisprudence flowing from Article 2(10) would still apply to cases in England and Wales however, there is a question as to whether the jurisprudence of the European Court of Justice in this area would be binding on UK courts or would be considered to be persuasive only.
With regards to point j, above, the removal of this automatic transfer provision could (where the courts of England and Wales and another EU Member State both claim to be the correct forum for the bankruptcy proceedings) lead to further litigation as the Trustee in Bankruptcy and the equivalent in the respective EU Member State compete for ownership of any surplus. Indeed, there is a possible risk that if the surplus is transferred to the bankrupt by the Trustee in Bankruptcy under section 330(5) of the 1986 Act then the bankrupt could be exposed to litigation for payment of the surplus from the equivalent office-holder in an EU Member State.
With regards to point k, above, ‘relevant offence’ is to be defined by a new section 422A of the 1986 Act. This new section incorporates a large part of the definition of ‘new criminal offence’ under paragraph 1(1)(d) of Schedule 2 of the European Communities Act 1972 (which is to be repealed).
To briefly consider the amendments made to the 2016 Rules, two of the key changes are:
1. the removal of the reference to ‘main, secondary and territorial proceedings’ and their replacement with ‘COMI proceedings, establishment proceedings or proceedings to which the Recast Regulation has effect’. This changes the focus of any statements to be made to the court when dealing with insolvency applications and insolvency procedures which are run through the court (for example notices of intention and notices of appointment of administrators) and, for example in respect of CVAs, there are explicit requirements for reasons to be given for the relevant proceedings type (see amendment to Rule 2.3(1)(q) of the 2016 Rules under paragraph 50 of the Schedule to the 2019 Regulations); and
2. the removal of the ability of any EU Member State liquidator in main proceedings to appear in proceedings in England and Wales (such as an administration application – see amendment to Rule 3.12(1)(g) of the 2016 Rules under paragraph 58 of the Schedule to the 2019 Regulations).
The removal of the locus standi referred to in paragraphs c and 2 above hint at a possible statutory intention to give any insolvency proceedings in England and Wales primacy over insolvency proceedings in an EU Member State however I doubt that the courts would be so willing to wholly disregard the insolvency proceedings in an EU Member State – I refer again to the position adopted in the Eurodis case above.
The Directive
Whilst the Directive has been adopted by the European Parliament it remains to be adopted by the European Council. The position on the Directive is complicated by Brexit in that whilst it has been adopted by the European Parliament (and the writer anticipates that it will be adopted by the European Council), the implementation period extends beyond the anticipated date of the UK’s exit from the EU. The question therefore is: how far will the UK go with implementing or incorporating the Directive into the UK insolvency regimes. Given the response from the UK Government to its recent consultation on insolvency reform published last year, it appears that the UK Government is keen to press forward with changes to the insolvency and corporate governance regimes as proposed in the Directive.
The Directive looks, in some areas, to the American model known as ‘Chapter 11’. Two features of note that the Directive looks to bring in are:
i. a new moratorium procedure for solvent companies facing ‘prospective insolvency’. This would allow the directors of the company to apply for a moratorium, so that they can remain in office whilst they take action to either place the company into an insolvency process or to restructure the company. This process would keep the directors in control rather than handing the process to an administrator or liquidator. The reason(s) for such a moratorium are likely to come under a lot of judicial scrutiny to ensure that the process is not being abused or being invoked where there is already an insolvency situation; and
ii. a prohibition on ipso facto clauses (i.e. that a contract can be terminated purely on the basis of a party being insolvent or entering an insolvency process). These clauses are a key feature of many contracts and the removal of these clauses appears to work to increase the obligations on the solvent party to continue to supply the relevant goods or service to the insolvent party despite the fact that the solvent party may receive little or no payment from the insolvent party. Contracting parties will need to be careful when considering termination clauses and the extent of what is a ‘terminating event’ or ‘event of default’.
Going Forward
As alluded to in my previous article, I highlighted that there were a number of potential issues that may arise as a result of the repeal of the Recast Regulation and considerations to be given now before the UK exits the EU including:
- damage to reputation of UK as a destination of choice for cross-border insolvencies;
- increase in time, cost and delay for insolvency proceedings or appointments;
- is cross-border recognition of English proceedings necessary or beneficial?
- can restructuring be commenced quickly and any recognition granted prior to the repeal of the Recast Regulation?
The 2019 Regulations do not remove these issues or remove the need for consideration to be given now as to what to do in respect of an existing or potential insolvency. The 2019 Regulations do is an attempt to keep the current insolvency regime under the 1986 Act and the 2016 Rules as closely aligned to the system that already exists but does hint at a statutory preference for primacy for UK insolvency over that of another EU Member State but it is likely that the courts will, in time, grapple with this issue.
Conclusion
With the Directive having been adopted and the UK Government appearing, from their reform proposals published last year, to be considering a wide-ranging review of the UK insolvency regimes the 2019 Regulations may be a ‘stop gap’ measure until a new Insolvency Act and new Insolvency Rules are brought forward.
As with anything concerning Brexit, and with a no deal still being a possibility, it is a case of watch this space.
