Brexit: implications for restructuring and insolvency law and practice post-transition

Brexit: implications for restructuring and insolvency law and practice post-transition

Brexit update - where are we now?

The United Kingdom formally left the European Union (EU) at 11pm on the 31 January 2020 (Exit Day) and entered into a period of transition. This transition period largely maintained the “status quo” with regards to restructuring and insolvency law and practice, primarily due to the UK having secured ratification of the withdrawal agreement. This made the arrangements between the UK and the EU fully reciprocal post-Exit Day and avoided the no-deal “cliff edge” Brexit, which many had initially feared.

Following the expiry of the transition period on 31 December 2020 – and the UK finally cutting its remaining ties with Brussels - what are the immediate implications for restructuring and insolvency professionals throughout the UK?

UK considerations

The Recast European Insolvency Regulation 2015/848 (EUIR) was incorporated into English law following the end of the transition period – however, this was significantly tempered by the Insolvency (Amendment) (EU Exit) Regulations 2019 (the “Exit Regulations”), so that relatively few active provisions of the EUIR were actually incorporated into English law in practice (it should be noted that specific changes were also made to Scottish and Northern Irish insolvency legislation following the end of the transition period which are not dealt with in this article). 

The Exit Regulations retain the effect of the EUIR post-transition period in respect of insolvency proceedings commenced prior to or during the transition. The EUIR will similarly continue to govern subsequent secondary and related proceedings which are opened in the post-transition period, where main proceedings were previously opened under the EUIR. The EUIR will therefore have a degree of continuing significance for UK insolvency professionals, although this significance will likely decrease with time.

Whilst post-transition, the familiar concept of centre of main interest (COMI) is retained, the certification requirements relating to the opening of insolvency proceedings have changed. The previous categorisations of main, secondary and territorial proceedings are replaced by “COMI” and “establishment” proceedings pursuant to the new framework provided by the Exit Regulations. There is also an extension of the jurisdiction of the English courts over CVAs and administrations. A company may now enter either process – even if incorporated outside of the EEA – provided that it has its COMI in an EU member state; there is no longer a related requirement to have an establishment within the UK (as was previously the case under the EUIR). 

There will undoubtedly be a period of adjustment as those in the restructuring and insolvency sector acclimatise to these changes and the new legislative framework post-transition period, although it is unlikely that these will present a major cause for concern. 

Cross-border considerations

Of more significance to UK professionals will be the cross-border implications which have arisen following the end of the transition period. With the UK now designated a “third country” from the EU’s perspective, the recognition and enforcement mechanisms embodied within the EUIR have (broadly speaking) ceased to apply in relation to new insolvency proceedings, creating immediate consequences for the manner in which cross-border insolvencies are dealt with as between the UK and remaining EU member states.

Absent further agreement - and outside of those exceptions where the EUIR will continue to govern certain insolvency proceedings (addressed above) - there is now no available mechanism where an EU member state is bound, or even able, to apply the benefit of procedures/constraints under the EUIR to insolvency proceedings commenced in the UK, post-transition period. 

Some practical consequences include:

  • A determination by an UK court or insolvency practitioner - that COMI is located in the UK - will no longer bind the courts of an EU member state unless that member state has implemented domestic law provisions that will have this effect;
  • Where a debtor’s COMI is in the UK, the EUIR will no longer apply in relation to any UK debtor insolvency proceedings. What will this mean? There will be no automatic recognition of the UK proceedings throughout the EU and therefore any additional insolvency proceedings commenced in an EU member state will be governed by its domestic laws. This might result in parallel insolvency proceedings in different jurisdictions being opened and without regard to the pre-existing UK proceedings; and
  • Equally, there will be no automatic recognition within the UK of EU insolvency proceedings. The UK’s implementation of the UNCITRAL Model Law (as the Cross Border Insolvency Regulations 2006) will potentially provide a mechanism for EU insolvency office-holders seeking recognition and assistance within the UK. However, given the relatively few EU members states (Greece, Romania, Poland and Slovenia) that have implemented the Model Law at a domestic level, this will only provide scant assistance EU-wide.

Implications for UK office-holders

From 1 January 2021, the law throughout the UK and the domestic laws of each EU member state will effectively replace the legal framework of the EUIR for the purposes of dealing with new insolvency proceedings concerning cross-border assets and interests as between the UK and EU bloc. The shift away, from the uniform regulation of cross-border insolvencies under the EUIR, towards a patchwork of disparate insolvency regimes across individual member states, will inevitably make matters less straightforward.

UK insolvency office-holders will therefore need to give careful consideration, at an early stage, as to whether an appointment is likely to involve assets located within an EU member state. On the basis there is a cross-border element, local legal advice will be required as to the necessary legal steps or processes that should be taken within that jurisdiction to ensure the effective recognition and enforcement of the UK proceedings by that member state. Of critical importance will be whether a court application is required in an EU member state, primarily to ensure that any UK office-holder has the full “toolkit” of legal powers available to them for the purposes of dealing with local assets.

On 15 January 2021, the Insolvency Service published guidance for insolvency professionals setting out the applicable framework for the recognition and enforcement of UK insolvency proceedings in certain key EU jurisdictions from 1 January 2021 (the “Guidance”). What is plainly apparent from the Guidance is that what is required in each case differs vastly between member states. It is also clear that in the majority of cases, UK insolvency office-holders will now be required to make at least some form of court application to domestic courts for recognition and/or assistance.

Finally, an incidental effect of the end of the UK’s transition period was that the Recast Brussels Regulation also ceased to apply as between the UK and the EU – the relevance being the jurisdiction of the English courts to sanction a scheme of arrangement in respect of a foreign company. The UK applied to accede to the Lugano Convention in its own right in April 2020, since this would provide for some continuing mutual recognition and enforcement of judgments between the EU and UK. However, the UK’s accession to Lugano is dependent upon EU consent – consent which, at the time of writing, has not been granted.

Tim Carter, co-head of the restructuring and insolvency department at Stevens & Bolton LLP comments that:

Without the familiar framework of the EUIR, cross-border insolvencies have clearly become more complex for UK insolvency office-holders following the end of the transition period. Whilst the issues presented are not insurmountable by any means, the piecemeal approach of requiring UK office-holders to seek recognition of UK proceedings on a case-by-case basis by the relevant EU member state’s domestic court is certainly sub-optimal, and will inevitably increase costs for the insolvency estate. As time progresses, it will be interesting to observe whether the political will develops, between the UK and the EU, to implement some form of cooperation arrangement in relation to cross border recognition and enforcement of insolvency proceedings.

Whether the UK accedes to the Lugano Convention will also be a matter many in the restructuring and insolvency sector will be following with a keen interest - since this would provide at least some basis for formal cooperation and recognition as between the UK and EU (specifically as regards English schemes of arrangement) – and might effectively set the tone for future negotiations between the parties. 

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