Brexit and EU cross-border insolvency – what comes next?

Pre-Brexit

The commencement and course of insolvency proceedings in EU Member States (except for Denmark) is regulated by Regulation EU 2015/848 – the “Recast Insolvency Regulation”. As the Recast Insolvency Regulation is directly applicable under EU law, it is automatically constituted within the domestic laws of each Member State without the need for any implementing legislation to bring it into force domestically. Significantly, it also prevails over any conflicting domestic laws. The Council Regulation (EC) 1346/2000 (EU Insolvency Regulation) still applies to EU insolvency proceedings opened prior to 26 June 2017.

Pursuant to the Recast Insolvency Regulation, where the centre of main interests (COMI) of a debtor is located in an EU Member State (except for Denmark) insolvency proceedings opened in that Member State are recognised as “Main Proceedings” which are automatically recognised throughout the EU thereafter. The laws of the Member State opening such Main Proceedings (in general terms) will govern the nature and effect of insolvency proceedings throughout the EU.

If a debtor’s COMI is located in one EU Member State, insolvency proceedings can be opened in another EU Member State, if the debtor has an “establishment” there. These are known as either “Secondary Proceedings” if they are initiated after Main Proceedings have been opened, or, are known as “Territorial Proceedings” if they are opened before Main Proceedings are initiated.

Brexit and the Withdrawal Agreement

The UK ceased to be a member of the EU at 11pm 31 January 2020 (Brexit Day). The UK left the EU having entered into the “Withdrawal Agreement” with the EU, which was implemented in the UK via the European Union (Withdrawal Agreement) Act 2020 (EWA). The effect of the Withdrawal Agreement, as regards cross-border insolvencies as between the UK and the EU, means that there is a period during which EU legislation which is directly applicable in the UK remains in place as between the EU and the UK in the same way as prior to Brexit Day (Transition Period).

Pursuant to the Withdrawal Agreement, during the Transition Period (envisaged to conclude on 31 December 2020) the EU Insolvency Regulation and the Recast Insolvency Regulation continue to apply as regards insolvency proceedings within the UK and EU Member States (save for Denmark). The Withdrawal Agreement specifically confirms that at the end of the Transition Period, the Recast Insolvency Regulation shall apply to insolvency proceedings, provided that the Main Proceedings were opened before the end of the Transition Period. Therefore, during the Transition Period, there will be no substantive change in relation to the jurisdictions in which insolvency proceedings can be opened by way of the Recast Insolvency Regulation.

After the transition period…

The Insolvency (Amendment) (EU Exit) Regulations 2019 (Brexit Regulations) were made on 30 January 2019 and they have been subsequently amended by two further statutory instruments. The Brexit Regulations, as amended, will apply with effect from the end of the Transition Period. The Brexit Regulations look to deal with the following issues (and many others):

  1. Retaining the effect of the Recast Insolvency Regulation where Main Proceedings have been opened under it before the end of the Transition Period and
  2. Ensuring UK insolvency processes can be used by a debtor if the debtor has its COMI in the UK, or its COMI is an EU Member State and it has an establishment in the UK.

At the end of the Transition Period, the EWA will transplant the EU Insolvency Regulation and the Recast Insolvency Regulation into English law. However, the Brexit Regulations will significantly impact upon the scope of their effect.

Once the Transition Period ends (in the event no further agreements are entered into to resolve these matters) there will be no EU mechanism whereby other Member States of the EU will be able/obliged to apply the terms of the Recast Insolvency Regulation to insolvency proceedings commenced in the UK. Therefore, the automatic recognition of insolvency proceedings, applicable law and insolvency officeholder status that subsists within the Recast Insolvency Regulation will not apply as between the UK and the EU.

Accordingly, given this potential for lack of mutual recognition and co-operation as between UK and European cross-border insolvencies, the UNCITRAL Model Law on Cross-Border Insolvency (Model Law) (implemented under the Cross-Border Insolvency Regulations 2006 (CBIR) in the UK) is likely to be relied upon more prevalently going forward. Few EU Member States have implemented the Model Law and therefore a UK insolvency officeholder would potentially have to seek recognition of their domestic appointment in an EU Member State (where this is necessary) under the relevant local laws of that EU Members State (if that Member State has not implemented the Model Law). Conversely, EU Member State insolvency officeholders can apply for recognition of their appointment and their local insolvency proceedings in the UK pursuant to the CBIR.

The Brexit Regulations make substantial changes to the Recast Insolvency Regulation as it is to apply within the UK post the Transition Period. Those elements of the Recast Insolvency Regulation that are retained post the Transition Period provide for a debtor to be put into insolvency proceedings in the UK if the debtor has:

  • Its COMI in the UK
  • Its COMI is an EU Member State and there is an establishment in the UK.


These provisions will be applicable where insolvency proceedings are commenced on or at the end of the Transition Period and where no Main Proceedings have previously been commenced in relation to the debtor under the Recast Insolvency Regulation.

Other points to note

Implications for Antecedent Transaction Claims

An important temporal restriction ought to be borne in mind when the CBIR is being utilised by a foreign office holder looking to utilise English insolvency law provisions. Article 23 (1) of the CBIR provides that upon recognition of a foreign (insolvency) proceeding the foreign officeholder effectively has standing to make an application to Court under or in connection with the antecedent transaction provisions found in the Insolvency Act 1986, including but not limited to sections, 238,239, 339, 340 and 423 of the Insolvency Act 1986. However, paragraph 9 of Article 23 then stipulates that nothing in Article 23 shall apply in respect of any preference given, floating charge create, alienation, assignment or relevant contribution made, or other transactions entered into before the date on which this Law comes into force (4 April 2006). Therefore, if a foreign insolvency officeholder seeks to rely upon the CBIR in this manner, he will not potentially be able to rely upon the provisions of section 423 of the Insolvency Act 1986 in relation to any such transactions which pre-date the CBIR (ie before 4 April 2006).

Determination of RoT Claims

Further difficulties will potentially arise, for instance in circumstances where the Recast Insolvency Regulation dictates that local law of an EU Member State should apply as regards discrete matters (as against the usual provision that the law of the country which opened the insolvency proceedings applies). In relation to retention of title claims for instance (RoT Claims), Article 10 of the Recast Insolvency Regulation provides that the laws of another Member State will apply in relation to RoT claims as regards an asset situated in that other Member State. EU Member States will, after the Transition Period, not arguably be obliged to apply such local law provisions in circumstances where they might have otherwise applied under the Recast Insolvency Regulation, to say RoT claims regarding RoT assets located in the UK.

Comment

As can be seen therefore, UK insolvency office holders looking to secure recognition of their appointment in the EU (where necessary) post the Transition Period, will no longer be able to avail themselves of the benefit of automatic recognition of appointment and applicable law throughout the EU, as was available under the EU Insolvency Regulation and the Recast Insolvency Regulation. The means by which their appointments can be recognised throughout the EU, without further agreement in place, will be subject to a high degree of uncertainty in terms of (i) outcome (ii) cost and (iii) timing, particularly where local laws of the EU Members State where recognition is being sought have to be utilised. This will be a marked departure from the spirit of European universalism which the EU Insolvency Regulation and the Recast Insolvency Regulation sought to foster.

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