Brexit: No deal for restructuring and insolvency – the end of an (reciprocal) era?
We spent months eagerly awaiting confirmation as to whether a free trade agreement would be entered into between the United Kingdom (UK) and the European Union (EU), or whether the UK would be leaving Europe without a deal. Many had hoped that a deal would be concluded which replicated the 2015 Recast Insolvency Regulations (Recast) for new insolvency proceedings after the transition period ended at 11:00pm GMT on 31 December 2020 (the transition period) but alas, the trade and cooperation agreement (TCA) does not extend to, or even address, cross-border insolvency. It’s effectively a no deal for the restructuring and insolvency area. So what does this all mean for insolvency practitioners (IPs)?
What was the position before Brexit?
Recast applied to the majority of UK / EU insolvencies and governed the proper jurisdiction to open insolvency proceedings as well as the law applicable to those proceedings by reference to the centre of main interests (COMI) of the debtor. Accordingly, if a debtor’s COMI was in England, insolvency proceedings could only be opened in another member state if the debtor had an establishment there.
Recast also provided for the automatic recognition of insolvency proceedings. Once opened in one particular member state, it would be automatically recognised in all other member states (excluding Denmark).
For non-EU insolvencies, a number of cross-border regimes apply under common law, the Insolvency Act 1986 and the UNCITRAL Model Law on Cross-Border Insolvency. These remain unaffected by Brexit.
What was the position during the transition period?
The UK left the EU on 31 January 2020 but immediately entered into a ‘transition period’ pursuant to the European Union (Withdrawal Agreement) Act 2020 (the EUWA). Throughout the transition period, Recast continued to apply to all UK / EU insolvencies.
The transition period ended on 31 December 2020.
What is the position now the transition period has ended?
Pursuant to Article 67 (3) of the Withdrawal Agreement, Recast continues to apply to UK / EU insolvencies provided the main proceedings were started before the end of the transition period .
However, this is not the case for proceedings commenced from 1 January 2021 as whilst the UK government did secure a deal with Europe, that deal did not incorporate Recast, nor did it make any other provision for cross-border insolvencies. New proceedings (UK / EU insolvency proceedings commenced after 11:00pm on 31 December 2020) no longer benefit from the automatic recognition of the other EU member states, and the remaining member states are not obliged to recognise English or Welsh proceedings (and vice versa). Furthermore, Recast’s cooperation measures and its rules regarding applicable law will cease to apply.
What is the starting point for IPs in England and Wales wanting to issue cross-border insolvencies in EU member states?
As Recast is no longer applicable to new cross-border proceedings, insolvency practitioners will have to rely on alternative legal processes.
The Insolvency (Amendment) (EU Exit) Regulations 2019 (the Exit Regulations) were drafted in anticipation of a hard Brexit and they now apply to new insolvency proceedings. They effectively grant the courts of England and Wales the jurisdiction to open certain insolvency proceedings where (i) the debtor’s COMI is in the UK; or (ii) the debtor’s COMI is in a EU Member State and there is an establishment in the UK.
English and Welsh courts also have jurisdiction to wind up or place into administration any foreign company (even if the centre of main interest is in another Member State, provided the court considers there to be sufficient connection in the UK; there is no requirement for the company to be registered in the UK.
As already stated, Recast was not the only cross-border insolvency process available to insolvency practitioners under English and Welsh law. Recast may no longer apply to new insolvency proceedings but there has long been a well-established legal framework for recognition of cross-border insolvencies which will endure post-Brexit. We discuss these further below.
Will EU member states still recognise English and Welsh insolvency proceedings post-Brexit?
The UNCITRAL Model Law on Cross-Border Insolvency continues to provide a framework for recognition of insolvency proceedings, cooperation between participating jurisdictions and assistance to foreign representatives.
Although the Model Law (implemented in the UK through the Cross Border Insolvency Regulations 2006) has been enacted in a number of key jurisdictions (USA, Canada, Australia, New Zealand and Singapore to name but a few), only a handful of EU member states have, to date, implemented the Model Law. For all other EU states, UK officeholders will need to rely on relevant local laws in order to gain recognition. For example, some member states allow for recognition of foreign insolvency proceedings irrespective of Recast or Model law. Take Germany, for instance.
Will the UK courts recognise the proceedings and / or assist that member state?
The courts of certain designated jurisdictions (including the Isle of Man, the Channel Islands, Ireland and some Commonwealth countries) are able still to make requests for recognition and assistance from UK courts pursuant to section 426 of the Insolvency Act 1986.
Foreign officeholders may also be assisted by the English and Welsh courts under common law principles; viz the global principle that unitary insolvency proceedings in a debtor’s home court should be recognised, or they may be recognised in the UK pursuant to the Cross-Border Insolvency Regulations 2006 provided a debtor has a place of business, residence or assets situated in England or Wales.
Will IPs still be able to operate cases effectively within the EU?
There is no longer a uniform European regime and our IPs have lost access to Recast and the automatic recognition that went in hand with it – but does that loss really matter? Is Brexit really likely to severely affect our restructuring and insolvency processes?
In the majority of EU member states, where Model Law does not apply, IPs may need to issue parallel proceedings in order to apply to domestic courts for recognition of their role and in order to request assistance. This will certainly add timing issues and greater complexities and challenges for the IP, as well as generate additional costs. IPs will need to consider these factors and the practical consequences on a case by case basis – they will likely vary depending on the specific circumstances and jurisdictions involved.
Expertise will develop over time and the courts will adapt as they become more acquainted and familiar with post-Brexit proceedings. After all, IPs have successfully been managing cross-border insolvencies with non-EU debtors for decades.
What does the future hold?
We may see a flurry of new insolvency processes from remaining EU member states as they introduce their own versions of restructuring plans and schemes of arrangements. The Netherlands have already implemented its own alternative scheme, and Germany is also in the process of introducing a plan akin to a scheme of arrangement.
We may even see shifts of COMIs before proceedings are issued so that companies with European guarantors (or vice versa) can utilise (or continue to rely upon) the insolvency tools available to them under Recast (in the case of the remaining EU member states) or under their local regimes.
There may be little change. After all, the UK’s restructuring and insolvency processes have always been popular; our courts are often the preferred forum for restructuring and insolvency proceedings due to its established range of options for stakeholders. Take for example, the UK’s universally popular scheme of arrangement. It has been successfully used as a restructuring tool for UK-based and foreign companies for quite some time, and the flexible restructuring plans introduced by the Corporate Insolvency and Governance Act 2020 further bolsters the UK’s attractiveness as a forum for cross border restructurings.
What does the future hold for cross-border insolvencies in a post-Brexit world? Time will tell.
-  Note that Article 67(3) (c) of the EUWA does not make any reference to secondary proceedings instituted before the end of the transition period and unless the secondary proceedings are either closely linked to, or stem from, main proceedings commenced before the end of the transition period, recognition of proceedings will depend on the domestic law of the relevant country.
-  Viz. liquidations, administration, reorganisation or restructuring debts,
-  Romania, Poland, Slovenia and Greece