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Restructuring & Insolvency

Brexit will mean the end of the direct applicability in the UK of the Recast Regulation on Insolvency (EU) 2015/848 (which applies to insolvencies from 26 June 2017 onwards) and Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings (together the Insolvency Regulation). In turn, this would mean the end of automatic recognition across the EU for main and secondary insolvency proceedings opened in the UK, and thus an end to all the commercial benefits that recognition brings.

Cross-border insolvency law in the UK (minus the Insolvency Regulation) is governed predominantly by three alternative laws: the UNCITRAL Model Law on Cross-Border Insolvency (the Model Law), s.426 of the Insolvency Act 1986 and the common law principle of comity / modified universalism. The concern for insolvency practitioners is whether any of these options will be able to adequately fill the gap left by the Insolvency Regulation.

Model Law

Operating independently of the Insolvency Regulation, the Model Law provides a framework for recognition by domestic courts of insolvency proceedings opened in other jurisdictions. From the perspective of UK Restructuring and Insolvency Practitioners,  the Model Law is unlikely to constitute an appropriate substitute for the Insolvency Regulation in the majority of cases. That is because the Model Law is ‘inward looking’ and it only applies in countries that have implemented it.

For UK insolvency practitioners looking to have their proceedings recognised in a foreign country, it is first necessary to ascertain whether that other country has incorporated the Model Law into their own domestic law.

s.426 Insolvency Act

s.426(4) requires UK courts having jurisdiction in relation to insolvency law to assist other courts having the corresponding jurisdiction in any other part of the UK, or in any “relevant” country or territory.

There are only approximately 20 “relevant” countries and territories to whom this section applies. As with the Model Law therefore, the scope of this option is far more limiting than the existing regime, so if s.426 is to be of use in a post-Brexit world, then its scope will need to be widened. Furthermore, as with the Model Law, it is very much an ‘inward looking’ piece of legislation.

Comity

Comity is a common law set of principles which dictate when the courts and laws of one particular country should supersede, or alternatively defer to, the courts and laws of another. There are two schools of thought which stem from the theory of comity: universalism and territorialism.

Universalism as applied to insolvency law encourages the idea that insolvency proceedings should apply worldwide and that no person or corporation should have an advantage because they happen to be residing in a country where fewer of their creditors, or more of their assets, are located. Territorialism in contrast seeks to protect local creditors’ rights by realising local assets using local laws that the parties know and understand.

 

Recognition of UK restructuring and insolvency proceedings

In the absence of the Insolvency Regulation, UK companies in an insolvency or restructuring process who require assistance in an EU Member State that has not implemented the Model Law will need to rely exclusively on the local laws of that Member State. or alternatively the office holder could attempt to open separate insolvency proceedings in that state.

There is no doubt that both options present a far more complex, expensive and time- consuming process than that currently in place under the Insolvency Regulation. In addition, the Court’s response is likely to differ between jurisdictions, thus creating considerable uncertainty.

Exceptions to the rule and effect on cross border restructuring

In recent years, a number of large European corporate groups have either transferred their Centre of Main Interests (COMI) to the UK or sought to enter a Scheme of Arrangement in the UK on the basis of a sufficient connection to the UK in order to benefit from the well regarded and flexible insolvency and restructuring procedures available in the UK.

Members Voluntary Liquidations, Schemes of Arrangement and receiverships all fall outside of the EC Regulation regime and as such will be largely unaffected by Brexit.

Jurisdiction for, and recognition of, these insolvency options is instead governed by the Insolvency Act 1986, the Companies Act 2006, the Law of Property Act 1925, as well as the domestic laws of other EU Member States. As a result Schemes of Arrangement will be largely unaffected save when combined with Administration.

Following Brexit, a company can no longer be sure that any insolvency process, including Schemes of Arrangement, obtained in the UK Court will automatically be recognised and enforced in the EU. The automatic recognition is often cited in evidence as a reason why a European company should have the ability to use the UK Courts to sanction a Scheme of Arrangement.

 

Recommended Actions

  • Consider carefully whether cross border recognition of UK proceedings is necessary or beneficial.
  • Keep a watching brief on the negotiations as they unfold and the effect on restructuring and insolvency processes. R3 the trade body for restructuring and insolvency professionals will be lobbying the UK government to maintain the effect of the Insolvency Regulation perhaps by way of a bilateral treaty.
  • Review the underlying finance documents to see if there is an English governing law clause. This will support arguments that only a UK insolvency process is appropriate.
  • Consider whether the restructuring can take place while the UK still remains subject to the Insolvency Regulation given exit is unlikely to take place before 2019.

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