COMI reps and EU Insolvency Regulation

Posted in Financial institutions Banking and finance Financial restructuring and insolvency

Will the UK lose the benefit of reciprocal recognition and enforceability of insolvency proceedings under the European Insolvency Regulation?

The European Insolvency Regulation provides for reciprocal recognition and enforcement of insolvency proceedings across Member States. The European Insolvency Regulation determines the proper jurisdiction for a debtor's insolvency proceedings, the applicable law to be used in those proceedings and provides for mandatory recognition of those proceedings in other Member States (with the exception of Denmark, which has opted out). Where a debtor’s centre of main interests is within a Member State, the European Insolvency Regulation recognises that Member State as the appropriate forum for main insolvency proceedings concerning the debtor, and requires recognition by the courts of the other Member States. June 2017 sees the commencement of the recast European Insolvency Regulation across the EU which, amongst other things, introduces group co-ordinated proceedings for the purposes of implementing group wide co-ordination plans where groups of companies are established across multiple member states.

The European Insolvency Regulation has proved a useful tool in European cross-border insolvencies since its introduction in 2000 and its withdrawal would inevitably reintroduce conflicts of law issues for debtors operating in more than one Member State. Continuation of reciprocal recognition and enforcement of insolvency and restructuring procedures will be a matter for negotiation as part of the UK’s withdrawal. For further consideration of the implications of Brexit on cross-border insolvencies see Insolvency analysis.

If the European Insolvency Regulation no longer applies, will COMI representations in loan agreements still be relevant?

The concept of COMI originates from the European Insolvency Regulation. The purpose of a COMI representation is to give comfort that in the event a company is in financial difficulties and may become subject to insolvency proceedings, any such proceedings will be conducted in the jurisdiction from which the lenders understand the debtor’s operations to have been managed since the time of the financing, and to discourage the borrower from concentrating its business operations in a jurisdiction where creditor enforcement action may be difficult.

Regardless of whether the European Insolvency Regulation continues to apply, a company is likely to be capable of being wound-up (or subject to restructuring proceedings) most effectively in the place of its COMI, so a representation remains useful in contractually obliging a party to adhere to this, and a withdrawal by the UK from the European Insolvency Regulation will not affect contractual cross references to the European Insolvency Regulation for the purposes of determining the meaning of “centre of main interests” or “establishment” commonly used in COMI representations. (Note, of course, that there have been numerous instances of borrowers acting in a manner that is inconsistent with COMI representations in any event.)

COMI is also used to determine the level of relief applicable under the UNCITRAL Model law on Cross-Border Insolvency as enacted across the UK; and therefore COMI representations will still be useful.

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