With the UK losing access to mutual recognition of proceedings in the EU, we explore the far-reaching implications for the insolvency sector.
- Insolvency practitioners, debtors and creditors in both the UK and the EU will need to modify their approach where a debtor and its insolvency proceedings have a cross-border element.
- Recognition of English insolvency proceedings in the EU will now depend on the local law of each member state. Only four member states have adopted the UNCITRAL Model Law, permitting cross-border insolvency recognition upon application to the member state’s courts. Recognition is not automatic.
- For insolvency proceedings originating in a member state, recognition in England will be possible under the UNCITRAL Model Law.
- Schemes of arrangement were given effect in the EU via civil jurisdiction rules, not insolvency jurisdiction rules. These have now been lost, though schemes are likely to retain effectiveness at least in relation to English law debts or debts arising under agreements containing a mutual, exclusive jurisdiction clause in favour of England.
- As to restructuring plans, this is a live issue before the English courts, but may also be impacted by local laws in the EU.
Recognition in the EU of English insolvency proceedings
From 31 December 2020, the European Regulation on Insolvency Proceedings (the "EIR") ceased to apply in the UK. English insolvency proceedings opened after 31 December 2020 will no longer be automatically recognised throughout the EU.
The immediate impact of this loss of automatic recognition is that an English officeholder may need to have the English proceedings recognised in the EU and/or simultaneous local insolvency proceedings in the EU may need to be opened. While there may be routes to recognition, this will be an issue to be determined under the national laws of each EU state. The Insolvency Service on 15 January 2021 released guidance on how UK proceedings might be recognised under the national law of each state. There are also other possible routes to recognition, for example under the UNCITRAL Model Law in the four EU states which have adopted it so far – Poland, Slovenia, Romania and Greece (see below).
The European Regulation on Insolvency Proceedings
At a high level, the EIR can be boiled down to five key principles:
- Jurisdiction to open insolvency proceedings is governed by a debtor’s centre of main interests (“COMI”). Within the EU, only the courts of the member state in which a debtor has its COMI have jurisdiction to open main proceedings.
- The courts of another member state may open secondary proceedings where the debtor has an establishment within that member state. These proceedings are generally limited so that they only deal with assets within that member state.
- Where insolvency proceedings have been opened in the courts of a member state, those courts will also have jurisdiction in relation to actions deriving directly from and closely linked with the insolvency proceedings.
- The courts in each member state apply their own laws to insolvency proceedings opened in that member state. However, that law will not be applied in certain, limited circumstances prescribed in the EIR.
- Insolvency proceedings in one member state are automatically recognised in all other member states and shall have the effect in each member state as they would have in the state in which proceedings have been opened.
From 31 December 2020, the courts in England are no longer courts of a member state and English law is no longer the law applicable in a member state. It is these changes which produce the consequences explored in this briefing.
A significantly slimmed down version of the EIR was retained in English law from 31 December 2020, amended by the UK Insolvency (Amendment) (EU Exit) Regulations 2019 (the “Retained EIR”). The Retained EIR preserves aspects of the EIR including the jurisdiction of the English courts to open insolvency proceedings in relation to debtors who have their COMI in England. This means that insolvency proceedings may still be opened in England where the debtor has its COMI in England, although those proceedings will not benefit from any automatic recognition in the EU as the Retained EIR has no effect in the EU. This has very real and immediate consequences. For example, the English law moratorium preventing the commencement of new civil proceedings against a debtor will no longer be given automatic effect in the EU and creditors in the EU may quickly race to enforce against any assets situated in the EU or even open main proceedings in the EU if they can persuade the court of an EU state that the debtor's COMI is in that state.
Aspects of the Retained EIR which derive their origin from EU law, such as COMI, will not necessarily be construed in the same way as those same aspects are in future construed by EU courts. The English courts should have regard to decisions of the Court of Justice of the EU on these aspects made before 1 January 2021, but there is no certainty that the English courts will continue to do so after that date. The prospect of divergence between the English and EU approaches to COMI and other defined concepts could cause issues in future cross-border proceedings.
Take a debtor who, in preparation for the UK’s exit from the EU, has divided its operations broadly equally between England and France so as to have a base in both jurisdictions. The debtor becomes insolvent. Main insolvency proceedings are opened in England on an argument that the debtor has its COMI in England. Shortly afterwards main insolvency proceedings are also opened in France on an argument that the debtor has its COMI in France.
The English insolvency practitioner is likely to need to seek assistance or recognition (for example, to deal with assets) from the courts in France and any other EU state under the relevant state’s national law, which is likely to involve at the very least the incurring of costs in the relevant EU state. Moreover that assistance may not be forthcoming because there are already main proceedings in France which will be automatically recognised in every other EU state as the main proceedings.
In practice, this may mean that:
- An English officeholder's ability to deal with assets in the EU is diminished, so that either recognition or additional local insolvency proceedings are required in the EU where previously none were required.
- The costs incurred in seeking recognition in the EU may prove prohibitively expensive and lead creditors to focus on commencing proceedings in the EU before seeking recognition of those proceedings in the UK (for which, see below). Moreover, delays at the start of any proceedings will likely diminish the value of assets.
- If there are multiple insolvency proceedings in relation to the same debtor, creditors may need to claim in all of them in order to maximise their returns. This may be problematic. Creditors may be wary of submitting to unfamiliar jurisdictions. If the creditor’s proof is admitted in one jurisdiction but rejected in another, how will the courts deal with those conflicting judgments? Will officeholders cooperate to harmonise distributions between rival insolvency proceedings to avoid double recovery?
Recognition in England of EU insolvency proceedings
The picture is different for insolvency proceedings opened in the EU seeking recognition in England where there is already a relatively advanced system for recognising foreign insolvency proceedings. The UK has already adopted the UNCITRAL Model Law in the UK in the Cross Border Insolvency Regulations 2006 and recognition is regularly granted to foreign proceedings outside the EU. From 31 December 2020, an insolvency practitioner in an EU state can seek recognition of the relevant insolvency proceedings as either foreign main proceedings (being an insolvency proceeding opened where the debtor has its COMI) or foreign non-main proceedings (being insolvency proceedings opened where the debtor does not have its COMI but does have an establishment) in England.
Where a foreign insolvency proceeding is recognised in England as a main proceeding, English civil proceedings against the debtor are stayed and the foreign insolvency practitioner may be entrusted with the administration or realisation of all or part of the debtor’s estate which is located in England. The foreign insolvency practitioner is even permitted to apply to the English court under English transaction avoidance laws, including in respect of transactions at an undervalue and preferences.
Restructurings without insolvency proceedings – schemes and restructuring plans
Schemes of arrangement have always been outside the scope of the EIR. Schemes usually relied on the Brussels Regime for recognition and enforcement of civil and commercial judgments for effectiveness in the EU. The Brussels Regime will not apply to schemes from 1 January 2021 onwards so another recognition tool will be needed to give effect to English schemes in the EU.
- Hague Convention. This means that courts in the EU should suspend or dismiss proceedings where the aim of those proceedings is to recover a debt under a contract with an English jurisdiction clause, perhaps forcing the claimant to commence proceedings in England where the effect of the English scheme cannot be avoided.
- Bilateral treaties. Some EU states have their own laws, or bilateral treaties with the UK, that might enable recognition of an English scheme. However the number of these states is limited and the application of these laws and treaties to schemes and restructuring plans is untested.
- Rome Regime. The governing law of contractual and non-contractual obligations is uniform across EU states as a result of the Rome Regime. Where parties have chosen English law to govern their contracts, the courts in an EU state are bound to apply that law (even though it is no longer the law of an EU state). If under English law, a debt has been compromised by a scheme, the EU state’s court should therefore give effect to that compromise. (The position is different where it is alleged that a foreign insolvency proceeding has compromised an English law debt. Then, the English law debt remains undischarged as a result of the rule in Gibbs.)
It is currently under consideration by the English courts the extent to which a restructuring plan is treated differently from a scheme of arrangement given the differences between the two processes.
This is a fast moving area of law – a number of overseas businesses are expected to propose schemes and restructuring plans in England in response to Covid-related distress, and will want those proceedings to be effective in multiple jurisdictions. The way the courts react to these proposals may dictate the formula for future cross-border restructurings and more creative proposals may be contemplated, such as multiple or parallel schemes in each jurisdiction.
While it appears unlikely that any treaty mirroring the EIR will be agreed between the UK and the EU in the near future, there remains hope of certain changes which may improve the recognition of English insolvency proceedings in EU states.
- First, more EU states may adopt the Model Law. While that would not give automatic recognition to English insolvency proceedings in the EU states, it would likely ease the process of English insolvency practitioners seeking recognition and may make it less costly to seek recognition.
- Second, the UK has indicated that it wishes to accede to the Lugano Convention, which provides for the automatic recognition and enforcement of civil and commercial judgments made in a contracting state. In addition to the EU, the contracting states are Switzerland, Norway, Iceland and Denmark. The UK’s accession is subject to agreement from each of the other contracting parties. If the UK were to accede, English schemes of arrangement should be recognised and given effect in the courts of each other contracting state. The English court is currently considering whether the same analysis would apply to restructuring plans given the differences between restructuring plans and schemes of arrangement.
- Third, the national laws of the EU states may develop to give greater recognition to insolvency proceedings opened in non-EU states, including significant commercial markets such as Singapore, Hong Kong and the US as well as the UK.
In the meantime and as many predicted, there is uncertainty as to how cross-border business may effectively restructure or seek protection from their creditors, and how insolvency practitioners will manage insolvency proceedings efficiently for the benefit of creditors.
If you have any questions, or would like to discuss how these changes are likely to affect you, please phone or email our key contacts below. We will shortly be circulating a second note on the post-EIR landscape focusing on which law will now be applied in the context of insolvency proceedings and also intend to update further regarding restructuring plans.