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Impact of Brexit on insolvency

Background  Pre-Brexit

The Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on Insolvency Proceedings (Recast) ("Recast Insolvency Regulation") sets out the rules on jurisdiction to commence insolvency proceedings after 26 June 2017 and the law governing such proceedings. Insolvencies opened prior to that date are subject to the Council Regulation (EC) No 134/2000 of 29 May 2000 on insolvency proceedings ("Insolvency Regulation") but for ease while below we only refer to the Recast Insolvency Regulation, the same principles apply for the Insolvency Regulation.

Article 3 of the Recast Insolvency Regulation allocates jurisdiction to open main insolvency proceedings to the courts of the Member State within which a debtor has a centre of main interest ("COMI") and Article 19 provides for the automatic recognition of these proceedings in all Member States. Consequently, another Member States can only commence secondary insolvency proceedings against that debtor if it has an establishment in the jurisdiction of that Member State.

The proceedings subject to the Recast Insolvency Regulation are governed, with few exceptions, by the law of the Member State which opened the proceedings.

What has changed in the UK?

Following the end of the transitional period, and because the Brexit deal reached between the UK and the EU does not deal with cross border insolvencies, the benefit of the Recast Insolvency Regulation as between the UK and the EU is lost. However the Recast Insolvency Regulation  will continue to apply to insolvencies, where the Main Proceedings were opened prior to the expiry of the transitional period (11PM on 31 December 2020). Put simply, there will not be any changes to those proceedings and the rules regarding the applicable law, jurisdiction and automatic recognition will continue to apply unamended.

The Insolvency (Amendment) (EU Exit) Regulations 2019 (SI 2019/46 ("Exit Regulations") retain the existing jurisdiction in the UK under the Recast Insolvency Regulation.

The Exit Regulations came into force on 31 December 2020 and generally seek to:

  • reinforce the position that the UK courts will largely continue to apply the Recast Insolvency Regulation (renamed the Retained Recast Regulation) to insolvencies opened prior to end of the transition period without any changes (Regulation 4);
  • grant jurisdiction to the UK courts to open proceedings where (i) the debtor’s COMI is in the UK or (ii) the debtor has an establishment in the UK. In practice this opens the possibility of English insolvency proceedings in respect of EU companies without the need for a COMI shift (subject to meeting the UK jurisdictional tests);
  • make necessary changes to the Insolvency Act 1986 ("IA 1986"), the Insolvency (England and Wales) Rules 2016 and the Cross-Border Insolvency Regulations 2006 ("CBIR 2006").

The remainder of the Recast Insolvency Regulation has been repealed. As such, insolvencies opened in the EU after the end of the transitional arrangement will no longer benefit from automatic recognition in the UK.

What has changed in the EU?

The remainder of the Recast Insolvency Regulation has been repealed so whilst the UK will be able to open insolvencies meeting the requirements of the COMI test, these proceedings (or any other proceedings for UK companies) will not benefit from automatic recognition in Member States. As mentioned above insolvencies opened before the end of the transitional period will largely continue to benefit from the provisions of the Recast Insolvency Regulation.

There are limited options for recognition as set out below.

What alternatives are there to the Recast Insolvency Regulation?

Incoming Proceedings

As a consequence of Brexit, EU insolvency practitioners now have the same options in the UK as non-EU insolvency practitioners have, namely

  • the Cross Border Insolvency Regulations 2006 (“CBIR”) which enacts the UNCITRAL Model Law on Cross Border Insolvency (“Model Law”) in the UK. This is not a reciprocal provision (i.e. the Model Law does not have to have been enacted in the country requesting recognition). However, it should be noted that the CBIR does not provide for automatic recognition in the same way as the Recast Insolvency Regulation did and an application to the UK Court will have to be made;
  • section 426 of the IA 1986. Section 426 essentially allows the courts in any other part of the UK and in "relevant countries", which largely are Commonwealth countries, to request assistance from the UK Courts. Practically Ireland is the only Member State which is listed as a relevant country, and
  • English common law under comity principles. Common law principles in cross border insolvencies are based on the concept of universalism, which promotes the idea of one set of insolvency proceedings being recognised worldwide and applied to all creditors and assets in the same manner. In the UK common law is based on the principle of modified universalism which means that the court has power to assist foreign insolvency proceedings so far as it properly can.

Outgoing Proceedings

Given UK Insolvency Practitioners have lost the benefit of the Recast Insolvency Regulation options are limited to:

  • Model Law. In terms of EU Member States, at the time of writing, only Greece, Poland, Romania and Slovenia have enacted the Model Law. As noted above even where the Model Law is enacted recognition is not automatic, a Court application is required;
  • Typically jurisdictions based on the English common law system will tend to favour comity.  As regards to EU Member States this would include Cyprus and Ireland;
  • Law of the EU Member State. This will differ depending on the conflict of law rules where recognition is sought. For example Germany has domestic provisions allowing for recognition of certain foreign insolvency proceedings. This will largely mean however an application to the local court rather than automatic recognition, and potential inconsistency even among different courts in a given Member State.

Conclusions

Following Brexit, the cross-border regime in insolvencies as between Member States and the UK has significantly changed and it will inevitably increase timing and costs of such proceedings, especially in the early days of applying "new" laws. Separate recognition applications will likely be needed by UK Insolvency Practitioners across each Member State where the debtors assets are situated whereas Insolvency Practitioners in EU Member States will have the advantage of a single application under the CBIR in the UK. It will be more important than ever to consider the need for the cross-border proceedings and obtain early advice on the local laws that may be applicable to the proposed process.

For more information on the article above please contact Karolina Lewandowska or Alan Bennett.

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