The first draft of the anticipated “Great Repeal Bill” was published in July 2017 by the U.K. government. The bill sets out that from the outset of Brexit, the vast majority of existing EU law adopted by the U.K. will be incorporated into domestic legislation. This means that EU legislation, which previously had direct effect, will remain in force until the U.K. decides which legislation to keep and which to repeal. Last month’s election did not provide any party with the majority it needed to press ahead with reforms, meaning the UK will enter negotiations with the EU member states with a minority government.
This article examines the EU legislation which applies to cross-border restructuring and insolvency legislation in the U.K., and seeks to identify some of the effects that Brexit will have on such legislation and the insolvency regime in the U.K. It is highly unlikely that there will be a deletion of any of the EU legislation relevant to restructuring and insolvency. It is more likely that such legislation will remain in force in the U.K.. What is less certain, and beyond the U.K’s control, is how the remaining member states will choose to treat the proceedings and decisions taking place and made in English courts. It is uncertain how these will be applied in the EU member states, once the U.K. is no longer part of the EU.
The U.K. has a creditor-friendly, efficient and flexible regime. However, this regime’s success relies on its ability to be effective across Europe. Therefore Brexit may lessen the appeal of the U.K. insolvency regime if the U.K. government’s negotiations fail to effectively address the relevant issues.
To properly assess the impact, two key pieces of EU legislation need to be examined: the Brussels Regulation (BR) and the Insolvency Regulation (IR). Both have direct effect in the U.K., however, the extent to which they can continue to be effective depends on the type of Brexit that takes place.
Both the BR and the IR are drafted to recognize and enforce proceedings and judgments given by “Member States”. A good outcome for the U.K. would be that the government negotiates a position where other EU member states continue to recognize U.K. proceedings and judgments automatically. If this is not achieved, creditors and debtors using the English courts would have to rely on the principles of international comity or choice of law principle and other, less bespoke international treaties. This would be more time consuming and much less effective.
The use of English law schemes of arrangement by foreign companies may add a further level of complexity. It has become usual practice for the English courts to find jurisdiction in such a situation by sanctioning the scheme in reliance on the BR. Case law has developed such that when there is at least one creditor located in the U.K. and the debt documentation is governed by English law, the English courts find jurisdiction, relying on the exception in section 2 of the BR. If the English courts no longer benefit from automatic recognition given to them under the BR, they will likely have to rely on independent legal expert opinions to find such jurisdiction.
The matters are considered in more detail below:
The Insolvency Regulation
The Insolvency Regulation (EC No. 2015/848) (IR) imposes conflicts of law rules for insolvency proceedings concerning EU debtors who have operations in more than one member state. The IR provide rules to determine the proper jurisdiction for a debtor's insolvency proceedings and the applicable law to be used in those proceedings. The IR gives preference to insolvency proceedings which have commenced in the member state in which a debtor has its centre of main interests (COMI). Furthermore, it requires mandatory recognition of those proceedings which are listed in Annex A to the IR, in other EU member states.
The IR has direct effect (having automatic legal effect and prevailing over domestic legislation) in all member states in the EU, excluding Denmark. The current version of the IR has been in force since June 26, replacing the original European Insolvency Regulation (Council Regulation (EC) No. 1346/ 2000).
The Brussels Regulation
The Brussels Regulation (EU1215/2012) (BR) allows for the recognition and enforcement of judgments in civil and commercial matters, in cross-border disputes within the EU, (excluding Denmark). The central tenet of the BR is that judgments given by the court of one member state can be enforced in all other member states, without the need for any further action. The BR, like the IR has direct effect in all EU member states, excluding Denmark.
The BR and IR were drafted to dovetail almost completely with each other, with there being no overlap in their coverage and no situation which could fall between them.
Effect of Brexit on the BR and IR.
The BR and the IR (the Regulations) are currently part of English domestic law, meaning that unless they are specifically repealed by the U.K. government as part of a repeal act (or something similar), they will remain in force, even after the U.K. has left the EU. Although it is unclear what the final deal for the U.K. will look like post Brexit, it is presumed that both Regulations will remain in force in the U.K..
The Regulations will not be updated in the U.K. post Brexit if and when new amendments are added by the EU. The Regulations will remain frozen in their current status, unless specifically updated. Further, while the Regulations will continue to impose automatic recognition and enforcement obligations on the English courts in relation to foreign proceedings and judgments, this may not be reciprocated by other member states in respect of U.K. proceedings and judgments.
Both of Regulations are drafted to provide recognition in respect of: (i) proceedings opened in; or (ii) judgements given in, “Member States.” Once Brexit has taken place, the U.K. will no longer be a member state, and therefore will no longer benefit from automatic recognition and enforcement under the Regulations. Domestic legislation will not to able to compel foreign courts to recognize English law judgments or orders made by a U.K. court. Further, all U.K. proceedings may be removed from Annex A of the IR once Brexit has taken place. Annex A is where the IR lists all of the European insolvency processes to which it applies.
In order for the U.K. to benefit from automatic recognition by other member states, it would have to negotiate a position with the EU and its member states so that they will continue to recognize U.K. insolvency proceedings and judgments. It is unclear whether such negotiation would take place on a piecemeal basis, with the U.K. having to negotiate a recognition treaty individually with each remaining member state. The law here is likely to develop in a piecemeal fashion and would not be as efficient as the uniform regime that applies between the member states.
In the alternative, the EU could introduce an overarching update to the Regulations to ensure that they continue to benefit the U.K. It would clearly benefit the U.K. to have such an EU wide update, and the reciprocity afforded by the U.K. courts would be beneficial to parties in foreign member states seeking enforcement and recognition of a judgement or proceedings in the U.K. For this outcome to be reached, the U.K. would be the only non-EU state to have automatic recognition of its proceedings and judgments across the EU. Given the current testy relationship between the British government and the EU bodies, this could be difficult.
Without suitable mechanisms in situ to replace the Regulations, there could be a serious and detrimental effect to the UK economy, as the insolvency regime becomes less attractive to creditors and debtors alike. A lack of automatic recognition as currently provided for by the Regulations is likely to seriously slow down the restructuring process.
Alternative Procedures for Recognition
While the U.K.’s adoption of the UNCITRAL model law in 2006 is helpful, not all other EU member states have adopted the model law (currently it is only Greece, Poland, Romania and Slovenia). As the model law provides mainly for coordination and assistance amongst courts and not for recognition and enforcement of foreign insolvency judgments, it is unlikely to provide a definitive solution.
Another option is that the U.K. could remain party to the Lugano Convention in its own capacity (it is currently a party in its capacity as a member of the EU). While not specifically providing for bankruptcy proceedings, the Convention does provide for matters in relation to jurisdiction and the recognition and enforcement of judgments as between EU member states and Switzerland, Iceland and Norway.
Failing a treaty based solution between the U.K. government and the EU and its member states, parties would have to rely in international principles of comity to gain recognition of proceedings and judgments in member states. Unless a solution is found, there may be a major issue for the U.K. insolvency regime and without a solution, the U.K. may become less attractive to creditors and debtors alike.
Specific Issues: English law Schemes of Arrangement
Schemes have become an important and useful restructuring tool for debtors and creditors alike in member states across the EU. The purpose of a scheme is to allow a company to reach agreement for a consensual restructuring with the approval of 75% in value and 50% in number of a certain class of its creditors.This agreement will then bind all creditors in that class, including those who have voted against it. A scheme can be used to implement steps in a proposed restructuring process and can be used to sidestep requirements which require creditor unanimity.
The English courts have readily taken jurisdiction for the purposes of sanctioning schemes of Arrangement for foreign companies so long as a “sufficient connection” with England is found. This has been easily demonstrated by applicants who have COMI in the U.K. A variety of creative tactics have been used by parties to allow the English courts to assume jurisdiction over foreign debtors and sanction schemes (see Reorg’s schemes guide). Tactics include: (i) changing the COMI of a debtor; (ii) amending the governing law of the debtor’s finance documentation; (iii) ensuring the debtor has assets in the U.K.; and (iv) finding creditors which are located in the U.K..
The IR does not to apply to schemes, as they are not insolvency proceedings and therefore not contained in the insolvency legislation, instead originating in the Companies Act 2006. In addition, schemes are not listed in the annex to the IR, which provides a full list of foreign insolvency proceedings to which it applies.
The approach that has been taken by the English courts is to assume that the BR applies to schemes and that therefore jurisdiction can be found by the English courts under the BR. This has historically been an uneasy fit, however the approach of the U.K. courts has been to treat scheme creditors as defendants, and the debtor as the claimant for the purposes of the BR. The parties then rely on the exception in section 2 of the BR which sets out that a defendant has a right to be sued in the member state in which it is domiciled.
In DTEK’s scheme sanction hearing, Norris J provided that so long as one scheme creditor was located in the United Kingdom, then this was potentially sufficient for jurisdiction to be exercised provided the debtor had its COMI in the U.K..
Following Brexit, if the BR ceases to apply to judgments given in the U.K., it will no longer apply to schemes. This may make it easier for the English court to be persuaded to exercise its jurisdiction. This is because when working on the assumption that the BR applies, the English court, hearing schemes for foreign companies, has been forced to find jurisdiction through one of the exceptions to the principle in section 2. In the absence of the BR, the English court may instead rely, for example, on opinions on enforceability from local law experts. The opinions would be used to explain to the court that recognition of the judgment would be given through either international principles of comity, or under one of the conventions mentioned above.
The main downside to the changes resulting from Brexit will be the loss of protection against challenges which are made in other EU member states against the English court taking jurisdiction. Furthermore, if a scheme company is not incorporated in the U.K., or has no English law governed debt, this is likely to invite a challenge. Careful structuring and forward planning will need to take place to sidestep these issues.
Further points for consideration
The following points should be considered when evaluating the possible effect of Brexit on the U.K. insolvency regime:
- English judges are likely to continue to offer recognition and enforcement under the IR and BR for debtors located in member states and rely on international principles of comity. Whether or not this pragmatic approach is reciprocated by the courts of EU member states remains to be seen. It is possible that there remains a view in the EU that the U.K. insolvency regime has exercised its jurisdiction too widely in previous years, for example by exercising its jurisdiction over foreign companies too frequently. This view may be reflected in how willing courts in EU member states are to recognize English judgments.
- Foreign parties located in EU member states who have entered into debt documentation which is explicitly governed by English law and submits to the English courts have a legitimate expectation that decisions given by English courts shall be recognized and enforced by member state courts. For the EU member states to disregard the decisions made, particularly by sophisticated parties, would be detrimental to the European financial markets in general, and not a particularly pragmatic decision. This is especially poignant given the European Commission’s drive towards a capital markets union and the proposed introduction of the Pre-Insolvency Directive.