Cross border insolvency and Brexit: a known unknown

As of 11pm this evening, the maps adorning the walls of the EU Council will be re-drawn to show the United Kingdom moving from the blue and yellow starred colouring of a Member State to the rather less attractive beige of a third party state. From the perspective of a restructuring and insolvency professional, this historic act of re-colouring signals the beginning of the end in the restructuring and insolvency arena of an unparalleled degree of cross-border recognition and cooperation. Whatever else may be lost or gained once the ink has dried on the maps, the passing of the EU Regulation on Insolvency Proceedings will be keenly felt if, as we are led to believe, trade with our European friends is to continue unabated.

COMI

Having created an environment in which people, goods and services could flow across national borders, it was natural that provision should be made for failed or failing economic entities to be the subject of as few competing processes as possible. Short of harmonising the national laws, anathema to national states, provision had to be made for the functioning of the internal market. At the heart of the snappily titled EU Regulation on Insolvency Proceedings 2000 (Regulation (EC) 1346/2000) was the need for a meaningful connection between a debtor entity and the place in which that debtor’s insolvency should be administered. Although this “centre of main interest” principle gave rise to much litigation over the years, as debt sought out the more stable, predictable or beneficial national jurisdictions in which to be situated, the Regulation did create a system of EU wide recognition for practitioners appointed to an insolvent estate. It also provided for the applicable law in administering the estate, determining the ownership of assets, and settling the claims of creditors. True, the Regulation was rejected by Denmark, and it provides for local asset based processes but its successor (“the Recast Regulation” of 2015), tightened the COMI principle, and continued the work of its predecessor as the touchstone for every cross-border practitioner. We all knew where we stood, or at least we knew where to look to find out.

And now, where do we stand?

The magically “oven ready” European Union (Withdrawal Agreement) Act 2020 introduces the fabled transition period during which the actual relationship between the EU and UK will be settled. Although parliament has provided that the transition cannot delay beyond 31 December 2020, the current legal framework remains in place whilst the deals are done, so the framework continues during the transition period until something else is announced. So, in short, and insofar as the restructuring framework is concerned, the passing from blue to beige this evening is a bit of a damp squib; nothing changes. Out but still not a rule maker.

The looming known unknown?

The ideal position is, arguably, to roll over the Recast Regulation at the end of the transition period but, as known to every practitioner with an ear for things European, harmonisation of substantive law is the next big EU idea, and that would seem to rule out roll over. UK is a signatory to the United Nation’s Model Law. It appears in English law as the Cross Border Insolvency Regulations 2006. It contains a useful framework of its own for recognition and assistance between courts and professionals, and it has been widely used by non-EU practitioners as a platform for court applications into the UK. Should we not “do a deal” in this arena, perhaps the Model Law will provide a platform for future relations. The slight issue at present for this approach is that the Regulation was so successful in what it did that only Greece, Poland, Romania and Slovenia are presently Model Law countries.

Regrettably, and should there be no deal on a restructuring and insolvency framework, the post-transition landscape looks like a step into the past; office-holders seeking to assert their authority in EU states other than Model Law countries will have to apply to the court of the state in which there might be an asset. Imagine for a moment the failure in 2021 of, say, a UK based regional airline with valuable ground assets, material, stock and employees in several EU Member States. Imagine then liabilities and creditors in several other EU Member States and it is not difficult to anticipate a fresh multi-jurisdiction race to the court door, and further competing litigation with vested national interests seeking to realise local assets to the detriment of the broad class of creditor claims. There is no comfort at all to UK practitioners in the knowledge that some of our European friends may need finally to understand that Scotland, England and Northern Ireland are in fact distinct legal jurisdictions.

With apologies then, to Donald Rumsfeld, we know there are known unknowns as we roll into the transition period. Unfortunately, there are also things we do not know that we do not know. Standing in the shadow of the parliament in which there is a bell that will not toll for the prime minister’s pleasure, we have to hope at this hour that the things we do not know that we do not know about the post transition period turn out to be a little more benign than the things that we do know that we don’t know.

If you have any questions regarding this topic, please contact Simeon Gilchrist or any other member of the Restructuring & Insolvency team.

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