What will a Brexit mean for the UK's Cross Border Insolvency involvement?
Wednesday, 25th May 2016
The UK is a well-established jurisdiction for cross border insolvencies, both within the EU and the rest of the world. The main piece of EU legislation that governs this area of law is the EC Council Regulation 1346/2000 ("the Insolvency Regulation"). Ultimately, this legislation facilitates the recognition of insolvency proceedings that span multiple jurisdictions. The Insolvency Regulation sets out the correct jurisdiction in cross border situations and, crucially, makes it mandatory for Member States to recognise insolvency proceedings in other EU countries. The use of the Insolvency Regulation is well established and relatively straight forward.
Due to the direct effect of the Insolvency Regulation, in the event of a Brexit this law will cease to apply in the UK. For UK insolvency proceedings this may result in creditors being required to bring new insolvency proceedings against a debtor in each country where assets have been located. Alternatively, creditors may need to apply to the relevant Member State for recognition of the UK proceedings on a case by case basis. Such requirements would clearly be complex, resulting in additional time and costs being incurred by the parties involved.
With this is mind, one option for the UK would be to negotiate with the EU following a Brexit in order to remain a party to the Insolvency Regulation. There is no precedent for such a bespoke agreement; therefore it is difficult to predict whether this would be accepted by all the remaining Member States. However, one important consideration would be that whilst the EU may allow the UK to continue to be a party to the Insolvency Regulation, as a non-Member State, the UK would have limited say in any amendments to the Insolvency Regulation itself in the future.
Are there any alternatives to the Insolvency Regulation?
The UNCITRAL Model Law on Cross Border Insolvency ("UNCITRAL") provides a cross border structure totally independent of the Insolvency Regulation and EU law. However there are some overlaps with the EU framework, in particular the requirement to recognise insolvency proceedings in other jurisdictions. Crucially, only 41 countries in total have signed up to UNCITRAL, with the UK, Greece, Poland, Romania and Slovenia being the only current Member States to have done so. Due to the minimal European reach of UNCITRAL, this may not be a suitable replacement when compared to the Insolvency Regulation.
Another alternative following a Brexit would be the application of s426 of the UK Insolvency Act 1986 ("Section 426"). Similarly to the Insolvency Regulation, Section 426 provides for the co-operation between courts exercising insolvency jurisdiction in relation to cross border cases. Again, however, there are only approximately 20 designated countries, mainly Commonwealth Countries, in relation to Section 426, far less than those covered by the Insolvency Regulation for insolvencies in Europe.
A final possible consideration is that of a common law substitute. The main principle of the common law in this area is 'universalism'. This concept is the idea that insolvency proceedings should apply worldwide, rather than various unconnected proceedings taking place in multiple jurisdictions against the same debtor. However, without a formal treaty it is up to each country to balance their own domestic insolvency law with this concept. In the event of a conflict, it will be up to the relevant court to decide how to apply these principles, resulting in uncertainty for cross border insolvency proceedings. However, it should be noted that whilst a common law alternative may be uncertain, this sort of arrangement is not without precedent. In particular Denmark, whilst being part of the EU, is not a party to the Insolvency Regulation. Denmark has therefore negotiated a separate convention with several other Nordic countries to ensure the recognition of cross border insolvency proceedings.
In the event of a Brexit occurring, with the UK failing to remain a party to the Insolvency Regulation, complex, uncertain and expensive cross border proceedings are likely to follow. In particular, this may result in the UK becoming less appealing to the EU and the rest of the world as a jurisdiction for such insolvency proceedings.
In the absence of any suitable alternatives, following a Brexit the UK should negotiate hard to continue to be a party to the Insolvency Regulation. However it cannot be certain whether this will be possible given that other Member States, who may benefit from the UK's loss of reputation in this area, are unlikely to vote in favour of our continued involvement.