Recognition and enforcement of judgments for insolvency practitioners after 31 December

Businesses and individuals increasingly own assets in multiple jurisdictions. As an insolvency practitioner (or office holder), the chances of being appointed over an estate with assets located outside the UK are greater now than they ever have been.

That is why the Recast Insolvency Regulation, with its mandatory recognition of UK insolvency proceedings, has been so valuable to insolvency practitioners. However, from 11pm on 31 December 2020, office holders will need to apply under the domestic law to have their appointments recognised in the relevant EU member state. The UNCITRAL Model Law on Cross-Border Insolvency might help if you are seeking to have your appointment recognised in Greece, Poland, Romania and Slovenia (the only countries who have signed up so far). For any other EU member state it will be the relevant local law that will determine how your appointment is recognised. To read more on this, see our related blog on Brexit and cross-border insolvency proceedings.

However, bear in mind that it is not just the automatic recognition of your appointments that disappears on 1 January. The reciprocal rules regulating which courts ought to determine matters arising out of an insolvency and the recognition and enforcement of court judgments will also cease to apply.

To understand what impact this might have, let's look at a simple example.

Case Example with cross-border issues

You are appointed as a liquidator of a Scottish registered company. One of the directors is domiciled in Germany, although he is thought to have assets scattered across Europe. There is an outstanding loan account in the director's name. You want to raise proceedings against the director to obtain a judgment for the outstanding debt. Which court do you raise your proceedings in? How easy will it be to enforce any court judgment obtained against the director and his assets? Is the position different if the claim is a gratuitous alienation under section 242 of the Insolvency Act 1986?

Pre-1 January 2021

Currently, the starting point is the Recast Brussels Regulation. It provides a single set of rules for determining which court has jurisdiction over a dispute and provides for reciprocal recognition and enforcement of judgments between member states. The Brussels Regulation provides that a defendant should be sued in his country of domicile, though there are some exceptions to this general rule.

Importantly, the Brussels Regulation does not apply to "bankruptcy, proceedings in relation to the winding up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous proceedings." This exclusion recognises the special nature of insolvency proceedings and applies to insolvency appointments and "decisions relating to bankruptcy and winding up" that derive directly from the bankruptcy or winding up, or are closely connected with the insolvency proceedings.

The Recast Insolvency Regulation was designed to 'fill the gap' left by the insolvency exclusion in the Brussels Regulation. Under the Recast Insolvency Regulation, the law applicable to the insolvency proceedings opened in a member state was the law of that member state. It was to determine the conditions for the opening of proceedings, their conduct and their closure. Generally speaking, if an office holder was to raise proceeding in the courts where the insolvency proceedings were opened, these would be recognised and enforced in accordance with the Recast Insolvency Regulation. This would include actions in relation to preferences or gratuitous alienations.

However, proceedings brought in the name of the debtor to recover assets of, or debts owed to, the debtor are more likely to fall within the Brussels Regulation. This is because such claims are not thought to be "closely connected with and directly derived from" the insolvency proceedings and so not subject to the separate 'insolvency' jurisdictional rules.

In the case example above, the liquidation appointment benefits from automatic recognition in Germany. However, proceedings to recover the outstanding director's loan account is not likely to come within the insolvency exclusion and so jurisdiction would be determined by the Brussels Regulation, which would probably mean raising proceedings in Germany. Any judgment issued by the German court would be capable of being easily enforced in any other EU member state.

The position may well be different if the claim against the director is a gratuitous alienation, as this is derived directly from the insolvency proceedings and therefore proceedings raised in accordance with Scots law would be recognised and enforced in accordance with the Recast Insolvency Regulation. However, as with the director's loan account, any judgment is going to be easily enforced in any other EU member state.

From 1 January 2021

The question of which court has jurisdiction to determine the claim against the director will be governed by the existing Scottish private international law rules. These are the same laws that we would apply for non-EU countries. In Scotland, we look to Part III and Schedules 8 and 9 of the Civil Jurisdiction and Judgements Act 1982. These generally reflect the Brussels Regulation, and so going back to our case example it is likely that any proceedings would still need to be raised in Germany. However, the lack of any reciprocal arrangements means there is a risk that another EU member state might not recognise that choice.

Furthermore, the enforcement of any judgment (whether obtained here or in Germany) will, subject to any relevant international convention, be governed by the national rules of the relevant member state. This change is likely to create additional costs and delay for any office holder seeking to enforce a judgment in that member state.

Two international conventions that may help

The UK has taken steps towards signing up to two international conventions that might be of assistance to office holders: the 2005 Hague Convention on Choice of Court Agreements, and the 2007 Lugano Convention.

States that are signatories to the Hague Convention undertake to recognise contractual exclusive jurisdiction clauses and are required to enforce judgments issued by the courts selected by the parties. The UK will join the Hague Convention, in its own right, from 1 January 2021.

There are complexities involved however, which means you might not be able to wholly rely on the Hague Convention. It came into force on 1 October 2015 in all EU member states (except Denmark) and only applies to contracts entered into after that date. It also only applies where a contract has an exclusive jurisdiction clause included – i.e. one that gives a country exclusive jurisdiction to hear a dispute in its courts. The EU Commission has issued a statement suggesting that the UK can only apply the Convention to contracts entered into after 1 January 2021, that being when the UK becomes a party to the Convention in its own right. The UK disagrees with that interpretation, but this does add uncertainty for those who may seek to rely on it.

The UK has also taken steps to sign up to the Lugano Convention, which governs jurisdiction and the recognition and enforcement of judgments between the EU, Norway, Iceland and Switzerland. This Convention reflects earlier iterations of the current Brussels enforcement regime and so would be a better solution than the Hague Convention.

Unfortunately, while statements of support for the UK’s accession have been issued by Norway, Iceland and Switzerland, unanimous approval by all contracting parties (including the EU) is required before the UK is permitted to use the Lugano Convention. So far, the EU has not yet provided its approval. This may simply be a bargaining chip in wider Brexit negotiations. However, failure to reach a wider deal with the EU may mean that the UK won't be able to sign up to this Convention after all.

What should I do now?

The Withdrawal Agreement provided a transition period that ends on 31 December 2020. Until then, the current regime continues to apply to and in the UK. Significantly, the current regime will continue to apply to insolvency proceedings started, and court proceedings issued, prior to the end of the transition period. Therefore, if you are considering raising proceedings against an EU counter-party and might benefit from the current more streamlined enforcement arrangements, you should consider raising those proceedings now.

If you are reviewing contracts entered into by the debtor with a view to establishing whether you wish to take any proceedings off the back of those contracts, you will want to establish: if the other side are in Hague Convention countries, the start date of those contracts, and whether they contain exclusive jurisdiction clauses that would enable legal action to be raised under the enforcement measures governed by the Hague Convention.

Cross-border insolvency cases have always had an extra layer of complexity and difficulty for office holders. Unfortunately, from 1 January 2021, unless an agreement can be reached with the EU on issues such as mutual recognition and enforcement of judgments, the job of realising assets in those cases is going to become even more difficult (and perhaps more expensive).