ARTICLE: INSOLVENCY AND RESTRUCTURING – LIFE AFTER BREXIT

Raquel Agnello QC sets out why this issue merits a proactive approach in the Brexit negotiations.

Insolvency has undergone a real cross border transformation in the last 20 years. A recent letter dated 31st October 2017 from the City of London Solicitors Law Society to the Government stated, that in their experience, ‘…the existence of a predictable and transparent process for the implementation and recognition of insolvency and restructuring procedures is a key factor taken into account by lenders and investors in their decisions on whether, and if so to what extent, they shall enter into financing transactions that are governed by English law as against the law of other jurisdictions.‘

Insolvency law is dominated by EU Regulations and other international treaties. It is one of the areas of law which requires an active and purposeful negotiation with EU member states relating to life after Brexit and as highlighted below, this cannot be left to the current mechanisms in the Withdrawal Bill but instead requires separate negotiations with Member States.

The current insolvency regime

There are two principal pieces of EU legislation which govern insolvency and restructuring:

(1) the Council Regulation No 2015/848 on Insolvency Proceedings (the Recast EUIR) replacing the Council Regulation (EC) No 1346/2000 on Insolvency Proceedings ‘the EUIR’; and

(2) Regulation (EU) No 1215/2012 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (the Recast Brussels Regulation).

The Recast EUIR

The Recast EUIR, as well as its predecessor the EUIR, is an enabling tool, which does not attempt to harmonise the substantive insolvency law. Instead, it provides a regime for enabling UK and EU insolvency office holders to be recognised in other EU respective jurisdictions as well as enabling them to take appropriate action in that jurisdiction.

Importantly, the Recast EUIR prevents more than one jurisdiction from opening and dealing with the main insolvency proceedings. This is done by way of the centre of main interest (COMI) provisions. This prevents there being costly parallel proceedings in different EU jurisdictions and enables the ‘main proceedings’ office holder to realise and administer the assets of the company/individual no matter where situated. There are of course exceptions including the ability to open secondary proceedings in another Member State jurisdiction to deal with local assets and claims.

And on D-day?

There is uncertainty as to what will happen to the Recast EUIR on the effective Brexit day. Currently, English office holders will lose the automatic recognition in the Courts of the EU Member States as well as losing the streamlined ability to enforce related orders and judgments in these other countries or even to seek to repatriate assets located in other jurisdictions.

It is not possible for the UK to legislate to replicate the effects of the Recast EUIR by providing for post Brexit recognition in the EU of the UK’s domestic insolvency proceedings. This requires ratification or agreement in some way by the EU Member States.

The Withdrawal Bill could provide that the Recast EUIR becomes part of the UK’s domestic legislation. However this will require UK courts to recognise and enforce the status and actions of EU insolvency office holders without the reciprocity which lies at the heart of the Recast EUIR. It is not certain at present whether the Government will incorporate the Recast EUIR into domestic legislation, but it is doubtful that the UK would legislate for such a ‘one-sided’ regime.

The Recast Brussels Regulation

The Recast Brussels Regulation which is of course familiar to those dealing with civil and commercial disputes, relating to jurisdiction and enforcement of judgments, is also important in insolvency/restructuring and more particularly, corporate restructuring.

The Recast Brussels Regulation is relied upon for the recognition of schemes of arrangement, the very popular restructuring tool used in corporate restructurings. Schemes of arrangement fall outside the EUIR/Recast EUIR, but have been held to fall within the original Brussels Regulation and arguably the Recast Brussels Regulation.

This restructuring tool will therefore face similar problems to cases under the Recast EUIR in relation to the position to be taken by the UK Government in relation to recognition and enforcement of judgments post Brexit.

Life after Brexit

Currently, the EU position papers set out very practical solutions for dealing with ongoing cases, namely that any proceedings commenced prior to the withdrawal date will continue to be recognised in line with the Recast EUIR. Equally, judgments or orders given prior to the withdrawal date will be recognised and dealt with under the Recast EUIR.

What is not clear is whether an office holder would be able to take steps under the Recast EUIR and seek orders pursuant to it after the withdrawal date. The UK Government’s position paper seeks to negotiate an agreement with the EU involving cross border judicial cooperation on a reciprocal basis, without specific reference to insolvency.

From the UK’s point of view, agreeing something as close as possible to the Recast EUIR would be beneficial both to the UK (which has really benefited from the existence of the Regulation) as well as the EU. However, politics may well intervene to prevent this, namely the UK government’s ‘red line’ stance relating to the jurisdiction of European Court of Justice and the fact that outside the EU must never be better than inside the EU (the refusal to allow the UK to ‘have your cake and eat it’, or to carry out ‘cherry picking’).

Without a new treaty or treaties between the EU/Member States and the UK, the giving of recognition and assistance in insolvency cases will be governed by:

(1) The common law doctrine of modified universalism which will allow for recognition and assistance to non-UK office holders, but not the enforcement of orders and judgments. The latter will fall under the general rules of private international law. (Rubin v. Eurofinance SA [2012] UKSC46, Singularis Holdings Ltd v. PriceWaterhouseCoopers [2014] UKPC 36). Essentially, this will allow for foreign office holders to be recognised and be provided with assistance under common law principles and comity. There has been recent case law dealing with the ambit of modified universalism and it is anticipated that there will be a growth of case law in this area.

(2) Section 426 of the Insolvency Act 1986 – this provides a statutory power to assist upon request of a foreign court but this is restricted to those foreign jurisdictions which have been ‘designated’, for most commonwealth countries and Ireland.

(3) UNCITRAL Model law, which is located in the Cross Border Insolvency Regulations 2006 (2006/1030). This provides for recognition in UK courts of non-UK insolvency office holders, obtaining an automatic stay and enabling them to seek actions and remedies in the UK courts. The Model Law is in general not reciprocal in that UK courts will apply the Model Law to all non-UK insolvency office holders (subject to meeting certain conditions) regardless of whether the relevant foreign country itself has ratified the Model Law. At present, only 41 countries have ratified the Model Law. Its present use to UK office holders is therefore limited. To be an effective substitute for the Recast EUIR (which applies whenever the COMI is in the UK) more countries would need to ratify the Model Law.

(4) UK insolvency office holders seeking recognition and enforcement of orders in other jurisdictions will need to rely on the local laws. In some cases, fresh insolvency proceedings may be the only route into the particular jurisdiction.

Insolvency deserves further post Brexit consideration alongside recognition and enforcement of civil and commercial judgments. It has served the UK well and has enabled the UK to attain a well-deserved reputation for these areas of cross border work.

This article first appeared in Harbour View Winter 2017/18 published by Harbour Litigation Funding.

Barristers
Raquel Agnello QC