“No Deal Brexit” and cross border insolvency cases in the EU

Posted in Financial restructuring and insolvency

On 13 September 2018 the UK Government published a briefing on the likely response post exit of the UK to cases which currently fall within the Recast EU Insolvency Regulation (2105/848) (“Regulation”).

The full text of its proposal for insolvency cases is as follows:

Cross-border insolvency cooperation

The majority of the Insolvency Regulation, which covers the jurisdictional rules, applicable law and recognition of cross-border insolvency proceedings, would be repealed in all parts of the UK. We would retain the EU rules that provide for the UK courts to have jurisdiction where a company or individual is based in the UK, and the law will ensure that insolvency proceedings can continue to be opened in those circumstances. But after exit, the EU Insolvency Regulation tests would no longer restrict the opening of proceedings, and so it would also be possible to open insolvency proceedings under any of the tests set out in our domestic UK law, regardless of whether (or where) the debtor is based elsewhere in Europe.

UK insolvency practitioners would need to make applications under an EU country’s domestic law in order to have UK orders recognised there. In certain circumstances, some EU countries may not recognise UK insolvency proceedings, for example if that would prevent creditors from taking action against the assets held in that country. Where appropriate, insolvency practitioners may wish to take professional advice on the prospects of successfully obtaining recognition for a UK insolvency order in an EU country. EU insolvency proceedings and judgments would no longer be recognisable in the UK under the EU Insolvency Regulation, but may be recognised under the UNCITRAL Model Law on Cross-Border Insolvency, which already forms part of the UK’s domestic rules on recognising foreign insolvencies.

Comment

Immediate wholesale repeal seems like self-harming, particularly if repeal provokes retaliation from the EU.

At present the relevance of the Regulation’s rules regarding the opening of insolvency proceedings in the UK is whether or not they will achieve automatic recognition in the EU (other than Denmark).  The EU Regulation does not generally restrict the circumstances in which insolvency proceedings may be opened in the UK, rather it prescribes the conditions for recognition in the EU, once proceedings are opened. Repeal will restrict the ability to gain assistance of member state courts on the mainland.  The briefing is correct in that piecemeal recognition in relevant member state jurisdictions will be necessary post repeal.

As far as individual bankruptcy is concerned, s. 265 of the UK Insolvency Act 1986 grounds jurisdiction on centre of main interests  (“COMI”), an EU Regulation concept.  However if the COMI test is repealed, domicile in the jurisdiction will suffice as it always has.  Three years residence or carrying on a business for that time will also suffice.  What is clear, if the COMI route disappears, is that bankruptcy tourism, EU individuals basing themselves here for a matter of months to grasp the opportunity of the UK’s benign attitude to bankruptcy (automatic one year discharge), will disappear.

Foreign companies are treated as unregistered companies for UK domestic purposes and it has always been possible to wind up such a company here, wherever registered, if it has or had a place of business, branch office or assets in the UK..  This jurisdiction has been exercised since well before the UK’s accession to the Treaty of Rome in 1972. 

In the case of administration orders and Company Voluntary Arrangements, UK registered companies and those within the EEA with their COMI here can currently go into administration or propose a CVA.  EEA (including EU companies) will lost that facility under the proposal mooted in the briefing. The announcement seems not to mean that any companies that currently have recourse to English insolvency proceedings will lose that facility.

It is also worth noting that schemes of arrangement under Part 26 (s.895) of the Companies Act 2006 are formulated and approved, in part, based upon this jurisdiction to wind up.  Such schemes have never been included within the vocabulary of the Regulation and recognition is broadly a matter for the Court which focusses on the connection of the scheme with the UK.

Although the briefing is completely silent on what is intended in respect of the EU regulations and directives relating to insolvent insurance companies and credit institutions (banks!). That is the preserve of the Treasury who will doubtless brief in due course.

Reference is made to the UNCITRAL Model Law on Cross Border Insolvency enacted in the UK under the Cross Border Insolvency Regulations 2006, which deal only with recognition and assistance in the UK of proceedings abroad. Only four member states of the EU (other than the UK) have enacted the Model Law thus far, Greece, Poland, Romania and Slovenia.  40 other non EU countries globally have now enacted the Model Law. 

So the reach of UK insolvency proceedings will be circumscribed by no deal exit, but common law assistance and the CBIR will be available to all incoming applicants to the UK for assistance.  This begs the question whether the  anticipated repeal in response to a no deal Brexit achieves anything worthwhile.

It should not be forgotten that Article 5 of Schedule I of the CBIR authorises UK insolvency officeholders to act in a foreign state as permitted by local laws.

If there is an agreed exit deal, the text of the relevant portion of any withdrawal agreement has now been agreed as set out in the Joint Statement by the EU and UK, but it remains to be seen whether any such agreement is ever entered into. Watch this space!

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