Insights

BusinessRestructuringReview

Uphill Struggles in the Sunlit Uplands? The Brexit Deal and UK-EU Insolvencies

The deal reached between HM Government and the European Union on December 24, 2020, does not include any framework for the coordination and mutual recognition of cross-border insolvencies and restructurings. For the purposes of insolvency law, the deal represents a "Hard Brexit."

Therefore, following Brexit, UK insolvency proceedings no longer benefit from automatic recognition across the European Union pursuant to Regulation (EU) 2015/848 of the European Parliament ("EU Insolvency Regulation"), and vice versa (save for those proceedings commenced prior to December 31, 2020). UK insolvency proceedings commenced after December 31, 2020, will, where necessary, need to be recognized in each relevant EU Member State.

Without the benefit of mutual recognition, cross-border insolvency proceedings involving both the European Union and the United Kingdom will undoubtedly become more complex, time-consuming, and expensive as stakeholders, advisers, and insolvency practitioners seek to navigate this new landscape. In many situations, parallel proceedings in multiple jurisdictions may now be required. Going forward, it is hoped that a new framework for the mutual recognition of insolvency proceedings can be agreed between the European Union and the United Kingdom. However, in the short term at least, notwithstanding the increased levels of financial distress and insolvency proceedings that are likely to follow as and when government support programs in the United Kingdom and Europe are withdrawn, mutual recognition of insolvency proceedings does not appear to be a high priority for the European Union and the United Kingdom at this time.

The Status Quo

Before the transition period ended on December 31, 2020, the United Kingdom enjoyed the benefit of the EU Insolvency Regulation. The EU Insolvency Regulation provides, inter alia, a framework for the automatic and mandatory recognition of insolvency proceedings between Member States of the European Union (excluding Denmark). The EU Insolvency Regulation also determines the applicable law in the case of cross-Member State insolvency proceedings.

The New Landscape

Outbound UK Insolvency Proceedings. Following Brexit and the end of the transition period on December 31, 2020, insolvency proceedings involving both an EU Member State and the United Kingdom are now in a rather different position.

If a UK insolvency proceeding requires recognition in the European Union, the company or relevant insolvency practitioner will need to seek recognition in each EU Member State where it is considered expedient to do so. In each case—with the exception of Greece, Poland, Romania, and Slovenia, which have each adopted the UNCITRAL Model Law on Cross-Border Insolvency ("Model Law")—the availability of recognition and the terms thereof will depend on any applicable terms for the recognition of a third country under the EU Insolvency Regulation or local laws for the recognition of foreign insolvency proceedings in each relevant Member State. Where a UK insolvency proceeding has been commenced in the United Kingdom, but an EU Member State considers that the center of main interests ("COMI") of the relevant entity is in the European Union, the EU Insolvency Regulation will continue to apply without regard to the UK proceeding.

Schemes and Restructuring Plans. For schemes of arrangement and the new restructuring plan, it was generally considered (but never tested) that the recognition of such proceedings across the European Union fell under the ambit of Regulation (EU) 1215/2012 of the European Parliament and of the Council on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast) ("EU Judgments Regulation"). Following December 31, 2020, the EU Judgments Regulation has also ceased to apply to the United Kingdom, and therefore the United Kingdom and European Union will no longer benefit from mutual recognition of civil judgments.

As an alternative to the EU Judgments Regulation, there are a number of different routes pursuant to which English schemes and restructuring plans may be recognized in Europe. These routes include the Hague Convention and Regulation (EC) No. 593/2008 of the European Parliament ("Rome I"), both of which continue to apply to the United Kingdom and the European Union in the context of civil proceedings. The Hague Convention provides for the recognition of exclusive jurisdiction clauses where both contracting parties have agreed to the exclusive jurisdiction of a contracting state. Similarly, Rome I seeks to uphold and recognize the governing law of a contract as agreed between contracting parties. Like the EU Judgments Regulation, the application of the Hague Convention and Rome I have not as yet been tested in respect of schemes and restructuring plans.

Going forward, the United Kingdom has applied to join the Lugano Convention. Parties to the Lugano Convention include the European Union, Switzerland, and Norway. The Lugano Convention provides a framework for the recognition of civil law judgments between contracting states in a similar way to the EU Judgments Regulation. Given the generally accepted principle that schemes sanctioned by the English court constitute civil law judgments, it was anticipated that the Lugano Convention would provide an alternative route for the recognition of schemes and restructuring plans within the European Union and beyond.

However, in the recent case of Re gategroup Guarantee Limited [2021] EWHC 304 (Ch), the English High Court held that a restructuring plan constituted a bankruptcy proceeding and therefore fell outside the scope of the Lugano Convention. There are a number of distinguishing features between a scheme and a restructuring plan, and in coming to its decision, the court placed great emphasis on these differences. In particular, while a company may propose a scheme irrespective of its financial state, in order to propose a restructuring plan: (i) the company must have encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern; and (ii) the purpose of the restructuring plan must be to eliminate, reduce, prevent, or mitigate the effect of any of the financial difficulties noted in (i) above. Accordingly, the context in which a restructuring is proposed could be entirely different for a scheme or a restructuring plan and may justify the potential classification of a restructuring plan as a bankruptcy proceeding, but not a scheme. While the decision in Re gategroup does not directly affect schemes, this decision does create greater uncertainty as to the basis for recognition of both schemes and restructuring plans in Europe. Further, it may follow that restructuring plans will now similarly fall within the bankruptcy exception to the Hague Convention, thereby further limiting the available frameworks for the recognition of restructuring plans in Europe.

Inbound EU Insolvency Proceedings. Any EU insolvency proceedings commenced after December 31, 2020, will similarly cease to benefit from automatic mutual recognition in the United Kingdom. However, there are a number of different routes in the United Kingdom pursuant to which foreign companies and officeholders can seek recognition in the United Kingdom of foreign insolvency proceedings. These routes include:

  • Cross Border Insolvency Regulations 2006 ("CBIR"), pursuant to which the Model Law has been incorporated into English law. The CBIR provides a framework for the recognition of main (COMI-based) and non-main (establishment-based) insolvency proceedings in the United Kingdom. Recognition is not automatic and requires an application to be made to the English court;
  • Section 426 of the Insolvency Act 1986, which provides a framework for the recognition of insolvency proceedings in relation to certain designated jurisdictions, including Ireland; and
  • English common law. 

The grant of recognition and/or the provision of assistance pursuant to one of the above routes does not replicate the same terms as are applicable under the EU Insolvency Regulation. However, such frameworks: (i) do provide a clear and tested procedure for recognition of foreign proceedings; and (ii) are not dependent on there being reciprocal arrangements in place for the recognition of English insolvency proceedings. The existing regime in the United Kingdom will therefore undoubtedly assist foreign companies and insolvency practitioners in coordinating cross-border insolvency matters involving UK companies and/or assets.

For money judgments only, the Administration of Justice Act 1920 and the Foreign Judgments (Reciprocal Enforcement Act) 1933 each provide a regime for the recognition of debt claims. However, utilization of such regimes is dependent on equivalent arrangements being available to assist UK parties in the jurisdiction seeking the assistance of the English court.

The Rule in GibbsAs a matter of English law, a contract governed by English law may be amended, discharged, or otherwise compromised pursuant to an English proceeding only, unless the relevant counterparty has submitted itself to the jurisdiction of the foreign proceeding. Submission to the jurisdiction of a foreign proceeding can occur in a number of ways, including a creditor submitting a proof of debt or voting in the relevant foreign proceeding.

Prior to December 31, 2020, the Rule in Gibbs was not applied while the United Kingdom was subject to the EU Insolvency Regulation. However, post-Brexit, contracts governed by English law will need to be carefully considered by all stakeholders in the context of any restructuring proceeding that attempts to compromise the rights of creditors with English law-governed contracts without such creditors submitting to the laws of the relevant jurisdiction.

In practice, a foreign proceeding that seeks to compromise the rights of creditors pursuant to an English law-governed contract may still (subject to the eligibility criteria being satisfied) be recognized in the United Kingdom, for instance pursuant to the CBIR. However, recognition does not mean that the English courts will be prepared to enforce the terms of the foreign proceeding on a creditor who has not submitted to the jurisdiction of the foreign court. This is a different and complicated question that will need to be considered on a case-by-case basis.

Jurisdiction of English Courts. As a consequence of the United Kingdom no longer being subject to the EU Insolvency Regulation, by virtue of the Insolvency (Amendment) (EU Exit) Regulations 2019, the English courts will no longer be limited to opening certain insolvency proceedings, such as administration, in those situations where a company has its COMI in the United Kingdom. In certain circumstances, this may provide additional flexibility to open proceedings in the United Kingdom where this was not previously possible. Issues of recognition will still need to be considered on a case-by-case basis, but this increased flexibility could be helpful in some cross-border situations.

Outlook

The EU Insolvency Regulation undoubtedly provides an important framework for the recognition of cross-border insolvency and restructuring situations. The fact that the United Kingdom and the European Union will no longer enjoy the benefits of mutual recognition of insolvency proceedings and civil judgments is regrettable, but not fatal.

The CBIR will provide an important gateway into the United Kingdom for the recognition of EU insolvency proceedings. The implementation of the Model Law across the European Union would similarly go some way to restoring the confidence of mutual recognition in EU–UK insolvency proceedings under the EU Insolvency Regulation, even if recognition under the Model Law is secured by court application as opposed to being automatic.

In the meantime, English law finance documents retain the primacy conferred on them by the Gibbs Rule, which, in spite of significant hostile commentary from other jurisdictions, continues to hold that foreign insolvency proceedings cannot discharge debts put in place by an English law contract. Moreover, the fact that the overwhelming majority of standard LMA-form international financing agreements will benefit from the protection of Rome I will be of some reassurance to certain stakeholders in the interim. Schemes and restructuring plans will therefore continue to play an important role in cross-border restructurings both within the European Union and in respect of non-EU companies that may continue to access schemes and restructuring plans in much the same way as before.

Moving forward, the Lugano Convention could provide an alternative route for the recognition of schemes. However, in the case of restructuring plans, the decision in Re gategroup has, for now, ruled out the possibility of the Lugano Convention providing any framework for the recognition of restructuring plans. In the case of restructuring plans, on the other hand, the decision in Re gategroup has, for now, ruled out the possibility of the Lugano Convention providing any framework for the recognition of restructuring plans. In any event, the United Kingdom is not yet a signatory to the Lugano Convention (the European Union and Denmark have yet to give their support to the United Kingdom's accession). It is also worth noting that there would be a delay of three months between the United Kingdom's accession and it taking effect.

However, before further steps are taken to re-homogenize insolvency and recognition procedures between the United Kingdom and the European Union, stakeholders should prepare for the need to implement more complex and carefully planned restructurings, including, for example, parallel proceedings both in the United Kingdom and relevant EU Member States, in order to achieve certainty of outcome in any given situation.

Robin Muir, an associate in the London Office, assisted in the preparation of this article.

Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our “Contact Us” form, which can be found on our website at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.

 
We use cookies to deliver our online services. Details of the cookies and other tracking technologies we use and instructions on how to disable them are set out in our Cookies Policy. By using this website you consent to our use of cookies.