The UK left the European Union on 31 January 2020. The transitional period, during which EU law continued to apply to the UK and the UK was, in many respects, still treated as an EU member state, ended at 11 p.m. on 31 December 2020 (IPCD). At the 11th hour, the EU and the UK agreed to terms of a trade and co-operation agreement, the signing of which prompted sighs of relief in many quarters. However, the 1,449-page document barely mentions insolvency. This article looks at the resultant “brave new world.”
Council Regulation (EC) 1346/2000 on insolvency proceedings (EUIR) came into effect on 31 May 2002. Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency Proceedings (recast) (Recast Insolvency Regulation) amended the EUIR and applies to insolvency proceedings started on or after 26 June 2017. Both Regulations apply directly in all EU member states, other than Denmark, which opted out. Thus, EU member states, as used in this article, exclude Denmark. The UK was an EU member state pre-IPCD.
Neither Regulation applies to credit institutions, insurers, investment firms, or collective investment undertakings. They also only apply to those insolvency proceedings detailed in the annexes of the Recast Insolvency Regulation. In the UK, neither Regulation applied to receiverships, schemes of arrangement, restructuring plans, or the moratorium process under Part A1 of the Insolvency Act 1986.
The EU Regulations provide an overarching framework of rules covering the following four key areas.
1. The proper jurisdiction for a company's insolvency proceedings. Insolvency proceedings are classified as main, secondary, or territorial.
Main proceedings can only be started where the company has its centre of main interests (COMI). A company's COMI is in the place where it conducts the administration of its interests on a regular basis and is ascertainable by third parties. There is a rebuttable presumption that a company's COMI is in the jurisdiction where it has its registered office.
Secondary (or territorial) proceedings can be opened wherever the company has an establishment, which is any place of operations where a debtor carries out a nontransitory economic activity with human means and assets. However, secondary proceedings can only affect assets in the jurisdiction where the proceedings have been opened.
2. The mandatory recognition of insolvency proceedings in all other EU member states. Proceedings opened in an EU member state will be recognised automatically in all other EU member states, as will the authority of the appointed insolvency practitioner.
3. The applicable law to be used in insolvency proceedings. It is invariably the law applicable in the jurisdiction of the main proceedings that will dictate how an insolvency develops. The Regulations provide that questions relating to the conduct of the insolvency and to issues such as whether transactions can be challenged or the effects of the insolvency on the company's contracts should be determined under the laws of the jurisdiction where the main proceedings have been opened. They also provide that the insolvency officeholder can exercise as of right in another EU member state all the powers conferred on that officeholder by the EU member state of the main proceedings, provided secondary proceedings have not been opened in that EU member state and no preservation measures to the contrary have been taken.
There are exceptions. For example, rights of set-off will be determined in accordance with the law applicable to the insolvent company’s claim. In addition, the insolvency practitioner cannot challenge a transaction as being void or voidable if the person who benefitted from the transaction provides proof that the transaction is subject to the laws of another EU member state and the law of that EU member state does not allow any means of challenging that transaction in the relevant case.
4. Co-ordination, co-operation, and communication. The Recast Insolvency Regulation materially expanded the provisions relating to co-ordination, co-operation, and communication. In particular, it introduced a mechanism for co-ordinating multiple insolvency proceedings within a group.
Despite their relatively recent arrival on the scene, the Regulations soon underpinned cross-border insolvency recognition across the EU.
The Recast Insolvency Regulation became part of UK law from IPCD. However, because it relies on reciprocity between EU member states, the onshored Regulation (Retained Regulation) has been amended and largely repealed under the Insolvency (Amendment) (EU Exit) Regulations 2019 (the Brexit Insolvency SI).
There are certain savings. It would appear that proceedings started under the EUIR will still be governed by the EUIR. However, although the position is set out in the Brexit Insolvency SI, no mention of it is made under the agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community (2019/C 384 I/01).
The position is better for proceedings under the Recast Insolvency Regulation. Article 67(3)(c) of the withdrawal agreement applies the Recast Insolvency Regulation to insolvency proceedings, and actions derived directly from or closely connected to those proceedings, provided that the main proceedings were opened before the end of the transition period. There is no reference to secondary or territorial proceedings. On one reading, it could mean that provided main proceedings were started before 31 December 2020, secondary and territorial proceedings opened at any time will still fall under the Recast Insolvency Regulation. On another, it could mean that the saving is only for main proceedings, which would be unhelpful. Time will tell which reading is correct.
In summary, under the Retained Regulation:
In theory, the retention of an amended Recast Insolvency Regulation broadens the insolvency jurisdiction of UK courts. However, the UK has lost more than it has gained. UK insolvency proceedings will no longer be classified as main, secondary, or territorial proceedings. Where a company has gone into an English administration, it is possible that competing and conflicting insolvency processes will be opened in different EU member states. Inevitably this will increase uncertainty, delay, and cost. The answers to such uncertainties will hinge on the level of recognition and assistance that the relevant EU member state is willing to give to the UK proceedings and the insolvency practitioner.
EU member states need not recognise automatically proceedings started in the UK, even if the company’s COMI is in the UK.
The courts of an EU member state will be free to disregard any UK finding that a company’s COMI is in the UK. Few EU member states have implemented the UNCITRAL Model Law. Instead, recognition will be a matter of local law. Hence, the types of proceedings that will be recognised, the extent of the assistance that can be given, and the process to obtain recognition are likely to differ among jurisdictions. If an English company has assets in a number of different jurisdictions, the English insolvency practitioner may have to incur considerable time and costs in seeking individual recognition, potentially with differing outcomes.
The position is different for UK schemes of arrangement under Part 26 of the Companies Act 2006 (CA06) and restructuring plans under Part 26A CA06. These fall outside the Regulations. The remaining analysis is equally applicable both to schemes and to plans.
As a starting point, the court can sanction a scheme in relation to any company liable to be wound up under the Insolvency Act 1986. This includes "unregistered companies," which in turn include companies incorporated overseas.
Before assuming jurisdiction in relation to an overseas company, the court must first be satisfied that there is a sufficient connection between the company and the UK. It could be that the company's COMI is in the UK. However, it could also be that the company has assets in this jurisdiction or that its debt documents have English governing law and jurisdiction clauses.
The court must also be satisfied that the scheme will be effective in all key jurisdictions, and that relies on recognition. Prior to IPCD, companies argued that schemes would be recognised, and therefore effective, in EU member states on the basis of one or more of the following:
With effect from IPCD, judgments issued by English courts will no longer be recognised automatically in other EU member states.
Then there are the Lugano Convention and the Hague Convention.
The Lugano Convention is similar in many respects to the Recast Brussels Regulation, and governs issues of jurisdiction and enforcement of judgments between member states and the European Free Trade Association (EFTA) countries other than Liechtenstein. The UK has applied to accede to the Lugano Convention but is still waiting for consent from the EU. If the UK accedes to the Lugano Convention, it is likely to become another route to recognition of schemes in member states.
The UK acceded in its own right to the Hague Convention on Choice of Court Agreements on 1 January 2021. The Convention governs the recognition and enforcement of judgments across contracting states, which includes the EU. However, there are a number of potential issues when seeking to rely on the Convention for recognition of schemes:
Although the position as regards the recognition of schemes in member states is more difficult than it was pre-IPCD, the picture is far from bleak. Rome I does not rely on reciprocity and applies largely unchanged post-IPCD, so it remains a possible route to scheme recognition. Private international law is unchanged and will offer a route to recognition in many jurisdictions. The UK may yet accede to the Lugano Convention.
One should not forget that the English courts have built up a considerable wealth of experience in considering schemes both for UK and for overseas companies and in dealing with cross-border insolvencies. They have a proven record of quality and commerciality. It is therefore to be hoped that, over time, the uncertainties addressed in this article will be replaced by a new set of judicially expressed principles. One should also not lose hope of another agreement between the UK and the EU which would include insolvency.
Margaret Kemp, counsel knowledge lawyer, business restructuring and insolvency, with Hogan Lovells in London contributed to preparation of this article.