With the ongoing possibility of a no-deal Brexit, it’s important that we continue to examine how legal matters will be dealt with after we leave the EU.
Currently, the UK applies various pieces of EU legislation to determine, amongst other things, choice of law and jurisdiction, enforcement and insolvency. For insolvency, the current key legislation, from an EU perspective, is Council Regulation (EC) 1346/2000 (the EC Regulation) and Regulation (EU) 2015/848 (the Recast Regulation).
In the event of a no-deal Brexit, there would be no agreed framework for ongoing civil judicial cooperation between the UK and EU member states, and the EC Regulation and the Recast Regulation would both be repealed. As most of the EU rules operate on the basis of reciprocity between EU member states, if the UK continued to apply the rules unilaterally after exit, EU member states would not consider the UK to be covered by these rules, as the UK would have the status as a ‘third country’. As a result of this loss in reciprocity, the majority of the existing civil judicial cooperation rules would cease to apply and instead the domestic rules, which each UK legal system currently applies in relation to non-EU countries, would have to be relied upon.
In September 2018, the government issued guidance – ‘Handling civil legal cases that involve EU countries if there’s no Brexit deal’ – on what would happen with civil legal cases and insolvency cases in the event of a no-deal Brexit.
The guidance – key points
The Recast Regulation would be repealed. But UK courts would still have the jurisdiction to deal with insolvency matters, relating to companies or individuals whose centre of main interests (COMI) is within the relevant UK jurisdiction. This may appear to create a straightforward and uncomplicated scenario, the issue of reciprocity ceasing to have effect could lead to a scenario where insolvency proceedings are opened in multiple locations. But which set of proceedings would have primacy?
After leaving the EU, the Recast Regulation tests would no longer restrict the opening of proceedings. It would be possible to open insolvency proceedings where permissible under UK law, regardless of whether the debtor is based elsewhere in the EU.
As reciprocity would cease to have effect, it would be necessary to apply to have orders made in a UK jurisdiction in insolvency proceedings recognised in the jurisdiction of the relevant EU member state. The guidance warns an EU member state may not recognise an order made in insolvency proceedings in a UK jurisdiction.
Whilst the EU insolvency proceedings and judgments would no longer be recognisable in the UK under the EC Regulation or Recast Regulation, they may be recognised under the UNCITRAL Model Law on Cross-Border Insolvency. This already forms part of the UK’s domestic rules on recognising foreign insolvencies under the Cross-Border Insolvency Regulations 2006 (SI2006/1030), but EU member states have not implemented this law, so it may not be of much assistance.
What is the current legislative position?
In November 2018, the government laid before Parliament the draft Insolvency (Amendment) (EU Exit) Regulations (the 2018 Regulations). Draft Regulation 4 of the 2018 Regulations says:
The EC Regulation will still continue to apply to insolvency proceedings opened within the scope of the EC Regulation before 26 June 2017 (subject to draft Regulation 5 of the 2018 Regulations – see below)
The saving provision under Article 3 of the Insolvency Amendment (EU 2015/848) Regulations 2017 (the 2017 Regulations) (i.e. that the 2017 Regulations will not apply to proceedings opened before 26 June 201) will continue to apply
Where main proceedings are opened under the Recast Regulation before exit day then the 2018 Regulations won’t apply to:
a. Those main proceedings
b. Any secondary proceedings opened in respect of the debtor
c. Any proceedings that fall within Article 6 of the Recast Regulation.
Draft Regulation 5 of the 2018 Regulations looks to grant the courts of the relevant UK jurisdiction discretion to determine whether it should continue to apply the EC Regulation or the Recast Regulation.
Draft Regulation 5 of the 2018 Regulations provides a number of instances where the court may exercise this discretion, including where to apply either the EC Regulation or the Recast Regulation may materially prejudice the interest of a creditor (Draft Regulation 5(1)(a)(i)) or it is manifestly contrary to public policy (Draft Regulation 5(1)(b)). Subject to Parliament passing the 2018 Regulations, draft Regulation 5 (if enacted as currently drafted) is likely to lead to an increase in litigation, and in particular appeals, as parties to insolvency proceedings look for final judgments as to what test(s) must be satisfied for the court to exercise their discretion.
The Schedule to the 2018 Regulations sets out, in detail, the changes to be made to the relevant insolvency legislation (including amendments to the Insolvency Act 1986). This article will not discuss these amendments.
Considerations moving forward
During this time of uncertainty, practitioners considering cross-border insolvency should think about the following:
Is cross-border recognition of English proceedings necessary or beneficial?
Have creditors submitted to the jurisdiction (by voting or proving in the English insolvency process)? (If so, comity may assist in granting recognition)
Can restructuring be commenced quickly and any recognition granted prior to the repeal of the Recast Regulation?
Do the underlying finance documents contain an English governing law clause? (If so, the proper law doctrine may support arguments that only an English insolvency process can vary or discharge those obligations).
A no-deal Brexit would inevitably have a large effect on Restructuring and Insolvency lawyers within the UK as well as across Europe. As a no-deal scenario is still a potential outcome, given that Parliament has yet to agree on the way forward, it’s important to consider the potential consequences of such an result and to stay alert to further guidance as the deadline for the UK to leave the EU becomes ever closer.
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