Brexit on cross-border insolvency?

So, the United Kingdom exited from the European Union on 31 March 2021.
Here we look at the impact of what is come on cross border insolvency.

Cross-border insolvencies pre-Brexit
Friday 31 May 2002 Council regulation (EC) No 1346/2000 on Insolvency Proceedings (Insolvency Regulation) came into force.

his set out for the first time the rules on jurisdiction to commence insolvency proceedings after 29 May 2002 and the law governing those proceedings across the EU.

The legislation was then updated via Regulation (EU) 2015/848 (Recast Insolvency Regulation) which applied to insolvency proceedings commenced after 26 June 2017.

The two regulations are very similar.

This article deals with the Recast Insolvency Regulation only.

Recast Insolvency Regulation article 3 offers jurisdiction to open main insolvency proceedings to the courts of the Member State within which a debtor has a centre of main interest (COMI).

Article 19 offers for the automatic recognition of these proceedings in all Member States.

As a result, another Member State 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.

Cross-border insolvencies in the UK have changed due to Brexit
Because the Brexit deal reached between the UK and the EU , the advantages 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. This was 31 December 2020 at 11pm.

Put simply, there will not be any changes to those proceedings and the rules regarding the relevant 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 mostly seeks 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 the debtor’s COMI is in the UK or  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 revoked. As such, insolvencies opened in the EU after the end of the transitional arrangement will no longer benefit from automatic recognition in the UK.

Changes to cross-border insolvencies in the EU due to Brexit
As the remainder of the Recast Insolvency Regulation has been revoked so although 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.

The limited options for recognition are shown below.

Alternatives to the Recast Insolvency Regulation

Incoming Proceedings
Because of Brexit, EU insolvency practitioners now have the same options in the UK as non-EU insolvency practitioners have, namely:

1. The Cross-Border Insolvency Regulations 2006 – which ratifies the UNCITRAL Model Law on Cross-Border Insolvency (Model Law) in the UK.This is not a reciprocal provision, so the Model Law does not have to have been ratified 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.
2. 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.
3. 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:

1. Model Law – in terms of EU Member States, only Greece, Poland, Romania, and Slovenia have put into practice the Model Law (at the time of writing). As noted above, even where the Model Law is enacted, recognition is not automatic, a Court application is required.
2. Comity – 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.
3. 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 each Member State.

Summary
The cross-border regime in insolvencies as between Member States and the UK has significantly changed since Brexit 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.

This article is for information and interest only.  It is not to be substituted for professional advice, which will take in to account any specific and individual circumstances. NBR Limited cannot accept any responsibility for the loss arising as a result of any person or organisation acting or refraining from acting on any information.