Although the UK left the EU on 31 January 2020, the impact of Brexit on cross-border insolvencies was largely postponed until the end of the transition period at 11pm on 31 December 2020.
The UK is now designated as a "third country" from the perspective of the EU, directly applicable EU laws and regulations no longer apply, and the Brexit Trade and Cooperation Agreement does not deal with cross-border insolvencies. As such, insolvency practitioners may now be left feeling that they are effectively in a "no-deal" scenario.
- During the transition period, EU laws and regulations continued to apply directly to the UK, including the Recast Insolvency Regulation.
- The Recast Insolvency Regulation governs the opening and conduct of insolvency proceedings in EU Member States and provides that where the centre of main interests (COMI) of a debtor is located in an EU Member State, insolvency proceedings opened in that Member State are "main proceedings" and automatically recognised in all other EU Member States.
- The Recast Insolvency Regulation will continue to apply to main proceedings opened before the end of the transition period but does not apply to new proceedings opened in the UK from 1 January 2021.
What has changed?
Recognition of insolvency proceedings
EU insolvency proceedings within the UK
From 1 January 2021, EU insolvency proceedings no longer benefit from automatic recognition in the UK.
An insolvency officeholder may still be able to seek recognition under:
- Cross-Border Insolvency Regulations 2006 (CBIR): The CBIR implement the UNCITRAL Model Law on Cross-Border Insolvency (the Model Law) in the UK which provides for the recognition of insolvency proceedings and cooperation between participating jurisdictions. Recognition under the CBIR is not automatic and will require an application to court.
- Common law under comity principles: This is the general principle that courts will recognise and enforce foreign proceedings. In the UK the court has power to assist foreign insolvency proceedings so far as it properly can.
- Section 426 Insolvency Act 1986: This section allows courts in the Republic of Ireland (the only EU Member State included) and "relevant countries" (eg the Commonwealth countries) to seek assistance from English courts, including recognition of foreign insolvency proceedings.
Reciprocity is not required under the above routes to recognition. The issue of recognition of EU insolvency proceedings is, however, distinct from recognition or enforcement of a compromise of creditor claims as a result of the EU insolvency proceedings. Following Brexit, under the (arguably controversial) English common law rule in Gibbs, English courts will not recognise a compromise of an English law governed debt unless the creditor submits to the EU insolvency proceedings.
UK insolvency proceedings within the EU
From 1 January 2021, UK insolvency proceedings no longer benefit from automatic recognition in the EU.
An insolvency officeholder may be able to seek recognition under:
- The domestic laws of the Member State.
- The Model Law: The only EU Member States to have implemented the Model Law thus far are Greece, Poland, Romania and Slovenia and as above, recognition under the Model Law is not automatic and will require an application to the foreign court.
The UK Insolvency Service has recently published a guide providing insolvency officeholders with basic information regarding the applicable frameworks for recognition in the different EU member states, with some more detail for seven of the UK’s most significant EU trading partners.
Many of the EU Member States have a regime for recognition of foreign insolvency proceedings. Germany, for example, has adopted a broadly equivalent approach to that found in the Recast Insolvency Regulation to deal with the recognition of non-EU insolvency proceedings and it is expected that most insolvency proceedings will still be mutually recognised on the assumption that the company's COMI is in England. For a summary of Brexit's impact on insolvency proceedings in Germany see our recent article.
Recognition of schemes of arrangement and restructuring plans in the EU
- Schemes of arrangement are not included in the list of "insolvency proceedings" for the purposes of the Recast Insolvency Regulation.
- Before the end of the transition period, it was generally accepted that schemes of arrangement were governed by the Recast Brussels Regulation and that sanctioned schemes would benefit from recognition in EU Member States. From 1 January 2021, the Recast Brussels Regulation no longer applies.
- There are various options by which schemes could continue to be recognised by EU Member States, including under the Lugano Convention, the Hague Convention and Rome I Regulation (although the impact and availability of these conventions and regulations remains to be seen).
- A recent English High Court judgment held that restructuring plans are "insolvency proceedings" within the bankruptcy exclusion and so fall outside the Lugano Convention. This suggests that different recognition rules apply to restructuring plans and schemes raising additional considerations in deciding which process to use as discussed here.
Will Brexit make the UK insolvency regime less attractive?
There will inevitably need to be more planning to ensure that the insolvency of a pan-European group is managed effectively and there will be a timing and cost implication to this. While the most effective routes to recognition in the EU become more clearly determined, the UK's ability to offer expert advice, flexible restructuring tools and a world-renowned judiciary is likely to continue to instil confidence in stakeholders and maintain its status as an attractive jurisdiction for international cross-border restructuring
Find out more
We have experts with local knowledge of the effective routes to recognition across many EU jurisdictions. To discuss the issues raised in this article in more detail, please reach out to a member of our Restructuring & Insolvency team.