Insolvency and Restructuring: Are you ready for Brexit?
Key issues
- The EU Insolvency Regulation has ceased to apply to the UK
- The English court acquires new grounds for jurisdiction under the EU EXIT Regulations
- Insolvency proceedings opened in an EU Member State may be recognised by the UK courts based on the UNCITRAL Model Law
- Cross-border insolvencies between the EU and the UK will likely become more time consuming, complex and expensive
- Recognition of UK scheme of arrangements is subject to the Hague Choice of Court Convention or the Convention between the Kingdom of the Netherlands and the United Kingdom of Great Britain and Northern Ireland providing for the Reciprocal Recognition and Enforcement of Judgments in Civil Matters of 1967
- The English Gibbs Rule states that a debt governed by English law cannot be discharged or compromised by foreign insolvency proceedings. This can reduce the effectiveness of a WHOA restructuring plan
EU Insolvency Regulation
The EU Insolvency Regulation provides common rules of jurisdiction for opening insolvency proceedings in the EU (excluding Denmark), the applicable law and the recognition of insolvency proceedings and judgments. As of 1 January 2021, the EU Insolvency Regulation has ceased to apply to the UK. Any main proceedings opened before the end of the transition period are still subject to the European Insolvency Regulation. Other insolvency and restructuring proceedings opened in the UK will no longer be automatically recognised in the EU and vice versa.
What applies from 1 January 2021?
The Brexit agreement does not contain an alternative arrangement for cross-border insolvency proceedings. This means that the national law of the EU Member States and the UK will apply in relation to the jurisdiction to open insolvency and restructuring proceedings and the recognition of such proceedings in cross-border EU-UK situations.
In the UK, the European Insolvency Regulation is transposed into English law by means of secondary legislation (the ‘EU EXIT Regulations’). The EU EXIT Regulations delete large parts of the European Insolvency Regulation and amend the provisions regarding jurisdiction. Based on the EU EXIT Regulations, there are grounds for jurisdiction to open insolvency proceedings in the UK where the debtor has:
(i) its centre of main interests (COMI) in the UK; or
(ii) its COMI in a Member State and an establishment in the UK.
These grounds are additional to the existing grounds for jurisdiction in the UK to open such proceedings. The effect of the EU EXIT Regulations is that the restriction on jurisdiction contained in the EU Insolvency Regulation – i.e. that only the court of the Member State within the territory of which the debtor’s COMI is situated has jurisdiction to open the main proceedings – no longer applies. This considerably extends the jurisdiction of the English courts. Incidentally, the EU Exit Regulations do not prevent debtors from EU Member States from also commencing proceedings in their own courts, which makes it possible that several main proceeding may be conducted side by side. Another consequence of the EU EXIT Regulations is that insolvency proceedings opened in EU Member States are no longer automatically recognised in the UK.
In the UK, however, there are already alternative provisions in place that deal with the recognition of foreign insolvency proceedings. English courts have the ability to recognise insolvency proceedings opened in an EU Member State under the UNCITRAL Model Law on Cross Border Insolvency, even if the relevant Member State has not adopted this Model Law. However, recognition via the Model Law still requires a court application, which will add time, cost, and complexity to the recognition process.
Conversely, if an English debtor wishes to open insolvency proceedings in an EU Member State, the jurisdiction to open these proceedings will be established on the basis of the national law of that Member State. The same applies in many cases to the recognition of insolvency proceedings opened in the UK. The above-mentioned Model Law is only of limited assistance to insolvency practitioners in the UK who need to seek recognition of insolvency proceedings in the EU, as only four Member States (Greece, Poland, Romania and Slovenia) have implemented this law. Therefore, in most proceedings, recognition will have to be sought on a case-by-case basis under relevant domestic European laws, which will involve a high degree of uncertainty. If a Member State does not recognise insolvency proceedings opened in the UK, it may even be necessary to open parallel insolvency proceedings in that Member State. The settlement of cross-border EU-UK insolvencies is therefore considerably more complicated than before Brexit and these proceedings will require careful planning.
Scheme of arrangement
The English scheme of arrangement does not fall within the scope of the Insolvency Regulation. Before Brexit, it was assumed that the scheme of arrangement was eligible for recognition in the EU under the Brussels I bis Regulation. However, as of 1 January 2021, the Brussels I bis Regulation has also ceased to apply to the UK. Parties will therefore have to rely on national private international law rules of the individual Member States, unless alternative arrangements are put in place.
In this context it should be noted that the UK has formally applied to accede to the Lugano Convention. The provisions of this Convention are very similar to the provisions of the predecessor of the Brussels I-bis Regulation. However, accession requires the approval of all contracting parties, so this procedure may take some time. In case of an exclusive choice of law, the scheme of arrangement may be recognised under the Hague Choice of Court Convention, provided that the agreement in which the choice of law is made was entered into after 1 January 2021 (the date the UK became a party to this Convention).
WHOA
On 1 January 2021, the Dutch Scheme (WHOA) entered into force in the Netherlands. The WHOA introduces the possibility for a debtor or creditor to offer a restructuring plan to all (other) creditors and shareholders outside bankruptcy.
A WHOA restructuring plan may in some cases fall within the scope of the European Insolvency Regulation and will therefore automatically be recognised in other Member States. As the European Insolvency Regulation is no longer in force in the UK and there is (yet) no alternative arrangement between the EU and the UK, WHOA restructuring plans may be governed by English law. In that case, the English Gibbs Rule may cause problems. This Gibbs Rule is an English common law rule that states that a debt governed by English law cannot be discharged or compromised by a foreign insolvency proceeding – which would include a WHOA restructuring plan. This can reduce the effectiveness of a WHOA restructuring plan.
Please also see the articles on the impact of Brexit in other practice areas. For a more detailed analysis of the impact of Brexit on your business, please do not hesitate to contact any of our experts.
