Significant changes will come into force after 31 December if no agreement is reached (or is not finalised and ratified) before the end of the transition period for cross-border insolvency proceedings. Importantly, the changes will alter the grounds for jurisdiction to open insolvency proceedings in the UK and impact the recognition of those UK insolvency proceedings in the EU.
Those working in the insolvency profession should familiarise themselves with the changes detailed below and, if insolvency is being considered in a case where recognition in Members States will be required, it may be beneficial to open main proceedings before 31 December.
The UK left the EU on 31 January 2020. However, as a result of the Withdrawal Agreement and its implementation in the UK, a transition period, during which the UK and EU continue to act for most purposes as if the UK were still a Member State, is in place until 11pm on 31 December 2020.
While the UK is still treated as a Member State, EU Regulations provide a clear framework for conducting cross-border insolvency proceedings. The EU Insolvency Regulations (the 2000 Insolvency Regulation and the 2015 Recast Insolvency Regulation) include provisions that:
- govern jurisdiction to open insolvency proceedings;
- govern the law applicable to insolvency proceedings;
- provide for the automatic recognition of insolvency proceedings opened in one Member State in all other Member States; and
- co-ordinate insolvency proceedings that relate to the same debtor or, since the 2015 Recast Insolvency Regulation came into force, to several members of the same group of companies.
The EU Insolvency Regulations facilitate cross-border cooperation and reduce the time, costs and uncertainty involved in cross-border insolvencies within the EU.
What will the law look like after the transition period?
When the transition period comes to an end, most EU law as it currently applies in the UK will be 'copied' into the UK rulebook to avoid a legal 'cliff edge'. The European Union (Withdrawal) Act 2018 (as amended) (EUWA), among other things:
- converts directly applicable EU law as it stands at the moment the transition period comes to an end into UK domestic law ('retained EU law'); and
- empowers Ministers and devolved authorities to make changes to such 'retained EU law'.
Many changes to 'retained EU law' are being made by secondary legislation (styled 'EU Exit' Regulations) to address any operating failures, and any other 'deficiencies' arising out of Brexit and/or the end of the transition period in 'retained EU law'.
One such deficiency is when any 'retained EU law' makes provision for reciprocal arrangements that no longer exist or are no longer appropriate. The 2015 Recast Insolvency Regulation falls into this category.
It would not be appropriate for the UK to continue to apply the 2015 Recast Insolvency Regulation unilaterally in respect of EU insolvency proceedings when it will not be applied to UK insolvency proceedings by the Member States (the UK will become a 'third country' following the end of the transition period).
A number of insolvency-related 'EU Exit' Regulations have been made under the powers contained in the EUWA which come into effect at the end of the transition period. Together they:
- amend the 2015 Recast Insolvency Regulation as it has effect in the UK (and Scotland); and
- make consequential changes to relevant domestic insolvency legislation.
Jurisdiction to open insolvency proceedings post-transition
The 'EU Exit' Regulations delete large parts of the 2015 Recast Insolvency Regulation and amend the provisions dealing with jurisdiction. There will be grounds for jurisdiction to open insolvency proceedings in the UK where:
- the debtor's centre of main interests (COMI) is in the UK; or
- the debtor's COMI is in a Member State and there is an establishment in the UK,
in addition to any existing grounds for jurisdiction to open such proceedings that apply in the laws of any part of the UK.
The restrictions on jurisdiction contained in the 2015 Recast Insolvency Regulation regarding the opening of main and secondary/territorial proceedings will no longer apply.
Consequently, the jurisdiction of the courts to wind up companies registered in Great Britain will no longer be subject to the 2015 Recast Insolvency Regulation. It will also no longer be necessary to read the jurisdiction to open administration proceedings or to propose a CVA as being subject to the 2015 Recast Insolvency Regulation.
However, the amendments to the 2015 Recast Insolvency Regulation do not apply in respect of any insolvency proceedings and actions falling within Article 67(3)(c) of the Withdrawal Agreement. That provision states that in the United Kingdom, as well as in the Member States in situations involving the United Kingdom, the 2015 Recast Insolvency Regulation shall apply to insolvency proceedings, and actions referred to in Article 6(1) of that Regulation (which deals with jurisdiction for actions deriving directly from insolvency proceedings and closely linked with them), provided that the main proceedings were opened on or before 31 December.
Therefore, where main proceedings are opened before the end of the transition period, the 2015 Recast Insolvency Regulation shall continue to apply to:
- those main proceedings;
- any secondary proceedings deriving from those main proceedings; and
- any actions deriving directly from those insolvency proceedings and closely linked to them,
and all such proceedings and actions will be recognised in the UK and Member States.
Recognition of insolvency proceedings and co-operation post-transition
From one Member State to another, recognition of insolvency proceedings under the 2015 Recast Insolvency Regulation is automatic. Once the transition period ends, subject to the exception detailed above, it will be necessary to apply for recognition of UK proceedings under relevant domestic European laws on a case by case basis.
There are already provisions in place in the UK that deal with the recognition of insolvency proceedings and co-operation between courts exercising jurisdiction in relation to insolvency.
The 1997 UNCITRAL Model Law on Cross-Border Insolvency (Model Law) is designed to provide uniform legislative provisions to deal with the recognition of foreign insolvency proceedings and the coordination of concurrent proceedings. It was implemented in Great Britain by the Cross Border Insolvency Regulations 2006 (CBIR). However, although the Model Law and the CBIR provide a recognised path for foreign representatives administering relevant foreign insolvency proceedings to apply to the British courts for recognition of such proceedings, it will be of limited assistance to insolvency practitioners and their solicitors in Scotland or England and Wales who need to seek recognition of insolvency proceedings in the EU. The Model Law has been implemented in just four other Member States - Greece, Poland, Romania and Slovenia. With the exception of those countries, it will be necessary to seek recognition under local law on a case by case basis.
In addition, the Insolvency Act 1986 provides that the courts having jurisdiction in relation to insolvency law in any part of the UK shall assist the courts having the corresponding jurisdiction in any other part of the UK or any relevant country or territory. The list of relevant countries and territories does not include any Member States. However, that may change in the future, presumably on the basis of reciprocity.
Reliance can also be placed on common law, with one of the leading authorities on the law of corporate insolvency in Scotland suggesting that there is no limit in principle to the type of help that may be requested in the UK to aid a foreign court and vice versa.
The loss of the EU Insolvency Regulations will add to the complexity of European cross border insolvency cases. However, the challenges which this presents are not insurmountable. The insolvency profession successfully manage cross border cases involving non-EU borrowers and will be able to adopt the same practises when dealing with European cases going forward.
To read more on recognition and enforcement of judgments for insolvency practitioners, see our related blog.