What is the impact of Brexit on cross-border insolvency?

Following the United Kingdom’s exit from the European Union, Alan Bennett and Karolina Lewandowska of Ashfords LLP explain the impact of Brexit on cross-border insolvency.

Cross-border insolvencies pre-Brexit

On Friday 31 May 2002 Council regulation (EC) No 1346/2000 on Insolvency Proceedings (Insolvency Regulation) came into force. For the first time this set out the rules on jurisdiction to commence insolvency proceedings after 29 May 2002 and the law governing those proceedings across the EU. This was subsequently updated via Regulation (EU) 2015/848 (Recast Insolvency Regulation) which applied to insolvency proceedings commenced after 26 June 2017. While the two regulations are largely similar, for the purposes of this article we shall reference the Recast Insolvency Regulation only.

Article 3 of Recast Insolvency Regulation allocates jurisdiction to open main insolvency proceedings to the courts of the Member State within which a debtor has a centre of main interest (COMI) and Article 19 provides for the automatic recognition of these proceedings in all Member States. Consequently, another Member State can only commence secondary insolvency proceedings against that debtor if it has an establishment in the jurisdiction of that Member State.

The proceedings subject to the Recast Insolvency Regulation are governed, with few exceptions, by the law of the Member State which opened the proceedings.

How has Brexit changed cross-border insolvencies in the UK?

Following the end of the transitional period, and because the Brexit deal reached between the UK and the EU does not deal with cross-border insolvencies, the benefit of the Recast Insolvency Regulation as between the UK and the EU is lost. However, the Recast Insolvency Regulation will continue to apply to insolvencies where the Main Proceedings were opened prior to the expiry of the transitional period (11pm on 31 December 2020). Put simply, there will not be any changes to those proceedings and the rules regarding the applicable law, jurisdiction and automatic recognition will continue to apply unamended.

The Insolvency (Amendment) (EU Exit) Regulations 2019 (SI 2019/46 (Exit Regulations)) retain the existing jurisdiction in the UK under the Recast Insolvency Regulation.

The Exit Regulations came into force on 31 December 2020 and generally seek to:

reinforce the position that the UK courts will largely continue to apply the Recast Insolvency Regulation (renamed the Retained Recast Regulation) to insolvencies opened prior to end of the transition period without any changes (Regulation 4).
grant jurisdiction to the UK courts to open proceedings where (i) the debtor’s COMI is in the UK or (ii) the debtor has an establishment in the UK. In practice this opens the possibility of English insolvency proceedings in respect of EU companies without the need for a COMI shift (subject to meeting the UK jurisdictional tests).
make necessary changes to the Insolvency Act 1986 (IA 1986), The Insolvency (England and Wales) Rules 2016 and The Cross-Border Insolvency Regulations 2006 (CBIR 2006).

The remainder of the Recast Insolvency Regulation has been repealed. As such, insolvencies opened in the EU after the end of the transitional arrangement will no longer benefit from automatic recognition in the UK.

How has Brexit changed cross-border insolvencies in the EU?

The remainder of the Recast Insolvency Regulation has been repealed, so whilst the UK will be able to open insolvencies meeting the requirements of the COMI test, these proceedings (or any other proceedings for UK companies) will not benefit from automatic recognition in Member States. As mentioned above insolvencies opened before the end of the transitional period will largely continue to benefit from the provisions of the Recast Insolvency Regulation.

There are limited options for recognition as set out below.

What alternatives are there to the Recast Insolvency Regulation?

Incoming Proceedings

Because of Brexit, EU insolvency practitioners now have the same options in the UK as non-EU insolvency practitioners have, namely:

The Cross-Border Insolvency Regulations 2006 – which enacts the UNCITRAL Model Law on Cross-Border Insolvency (Model Law) in the UK. This is not a reciprocal provision, so the Model Law does not have to have been enacted in the country requesting recognition. However, it should be noted that the CBIR does not provide for automatic recognition in the same way as the Recast Insolvency Regulation did and an application to the UK Court will have to be made.
Section 426 of the IA 1986 – section 426 essentially allows the courts in any other part of the UK and in "relevant countries", which largely are Commonwealth countries, to request assistance from the UK Courts. Practically, Ireland is the only Member State which is listed as a relevant country.
English common law under comity principles – common law principles in cross-border insolvencies are based on the concept of universalism, which promotes the idea of one set of insolvency proceedings being recognised worldwide and applied to all creditors and assets in the same manner. In the UK, common law is based on the principle of modified universalism which means that the court has power to assist foreign insolvency proceedings so far as it properly can.

Outgoing Proceedings

Given UK Insolvency Practitioners have lost the benefit of the Recast Insolvency Regulation, options are limited to:

Model Law – in terms of EU Member States, only Greece, Poland, Romania and Slovenia have enacted the Model Law (at the time of writing). As noted above, even where the Model Law is enacted, recognition is not automatic, a Court application is required.
Comity - typically jurisdictions based on the English common law system will tend to favour comity. As regards to EU Member States, this would include Cyprus and Ireland.
Law of the EU Member State – this will differ depending on the conflict of law rules where recognition is sought. For example, Germany has domestic provisions allowing for recognition of certain foreign insolvency proceedings. This will largely mean, however, an application to the local court rather than automatic recognition, and potential inconsistency even among different courts in each Member State.

Summary

Following Brexit, the cross-border regime in insolvencies as between Member States and the UK has significantly changed and it will inevitably increase timing and costs of such proceedings, especially in the early days of applying "new" laws.

Separate recognition applications will likely be needed by UK Insolvency Practitioners across each Member State where the debtors’ assets are situated, whereas Insolvency Practitioners in EU Member States will have the advantage of a single application under the CBIR in the UK. It will be more important than ever to consider the need for the cross-border proceedings and obtain early advice on the local laws that may be applicable to the proposed process.

About the authors

Alan Bennett is a Partner and Head of Restructuring & Insolvency at Ashfords LLP with a specialism in cross-border insolvency.

Karolina Lewandowska is a Solicitor in the Restructuring and Insolvency Team at Ashfords LLP and advises on all aspects of insolvency law, including both contentious and non-contentious matters.

See also

Place an insolvency notice

Gazette Firsts: The history of The Gazette and insolvency notices

UK company insolvency statistics - Q4 2020

UK individual insolvency statistics - Q4 2020

Find out more

Council regulation (EC) No 1346/2000 (Insolvency Regulation) (EUR-Lex)

Regulation (EU) 2015/848 (Recast Insolvency Regulation) (EUR-Lex)

The Insolvency (Amendment) (EU Exit) Regulations 2019 (Legislation)

Insolvency Act 1986 (Legislation)

The Insolvency (England and Wales) Rules 2016 (Legislation)

The Cross-Border Insolvency Regulations 2006 (Legislation)