The UK officially left the European Union (EU) at 11:00 pm on 31 January 2020. However, as part of the Withdrawal Agreement with the EU to help the UK transition away from EU membership, EU law continued to apply to the UK as if it were still a Member State until the end of 31 December 2020. On 24 December 2020, the EU and UK reached the Trade and Cooperation Agreement (TCA), which applies as of 1 January 2021. From this time, the UK and EU became two distinct regulatory, legal and customs territories.
The TCA does not cover coordination and cooperation for cross-border insolvency proceedings. Therefore, there are significant changes to cross-border restructuring and insolvency from 1 January 2021 as follows:
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Will UK insolvency proceedings be recognised in EU Member States?
From 1 January 2021, automatic recognition in EU Member States under the EU Regulation on Insolvency Proceedings (EUIR) will generally only apply where UK insolvency proceedings based on an entity's centre of main interest (COMI) located in the UK were commenced before the end of the transition period. For any new UK insolvency proceedings opened since 1 January 2021, the benefits of automatic recognition contained in the EUIR have fallen away. UK insolvency officeholders seeking recognition and assistance in EU Member States will have to rely upon the domestic laws of those Member States which grant assistance to foreign officeholders. These laws differ on a state-by-state basis. Where recognition is sought in Greece, Poland, Slovenia or Romania, the UK insolvency officeholder will be assisted by the adoption of the UNCITRAL Model Law on Cross-Border Insolvency in those countries (see below).
For a more detailed consideration of what the disapplication of the EUIR means for recognition of UK insolvency proceedings in the EU27, please see our briefing 'Recognising UK insolvency proceedings in the EU – where does the UK stand post-Brexit?'
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Will insolvency proceedings opened in EU Member States be recognised in the UK?
EU officeholders of entities with a COMI or an establishment in an EU Member State who need recognition and assistance from the UK courts can rely on the UNCITRAL Model Law on Cross-Border Insolvency (which the UK has implemented by means of the Cross-Border Insolvency Regulations (CBIR)). This gives representatives of foreign insolvency proceedings a right to apply to the UK courts for recognition and relief. The relief available is not as powerful as the effects of the EUIR, but it does facilitate cross-border effectiveness for European insolvencies needing assistance from the UK.
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How will the recognition of winding-up proceedings and reorganisation measures for credit institutions change?
The above analysis applies to non-bank corporate entities. Credit institutions are excluded from the scope of the EUIR and instead have their own separate winding-up and reorganisation regime governed by the Credit Institutions Winding Up Directive (CIWUD), which (until the end of the transition period) was implemented in the UK by the Credit Institutions (Reorganisation and Winding Up) Regulations 2004 (CIRWR).
From 1 January 2021, CIWUD and CIRWR apply only where reorganisation measures or winding-up proceedings in respect of a credit institution were already in flight at the end of the transition period. Any new winding-up proceedings or reorganisation measures of an EU counterparty credit institution will not be automatically recognised in the UK, and the CBIR would not help because they do not apply to credit institutions. Any assistance required from the UK courts, for example to deal with a UK branch of the insolvent European counterparty, would need to be sought under UK domestic law. It is likely that our courts would strive to assist, but there might be a need to instigate local parallel UK insolvency proceedings in respect of the UK branch.
Likewise, for an insolvent UK credit institution with branches in a Member State, it might be the case that the Member State's regulatory authority would want control over a local insolvency process dealing with the branch’s assets and creditors/depositors. The absence of the CIWUD regime is likely to bring about the need for multiple parallel insolvency processes that may or may not coordinate and communicate with each other, resulting in inefficiency and unnecessary expense.
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Will UK schemes of arrangement and restructuring plans be recognised in other EU Member States?
The Brussels Regulation was often relied upon to recognise schemes (and, by extension, restructuring plans) in EU Member States. From 1 January 2021, the Brussels Regulation no longer applies. If the UK were to accede to the Lugano Convention, this would provide a reasonable alternative to the Brussels Regulation for recognising schemes (and possibly restructuring plans, though this is less clear). However, the consent of the EU to the UK's accession to the Lugano Convention remains outstanding, which if it is not obtained, will make the recognition of schemes in the EU more complicated.
Other possible routes to recognition of UK schemes and restructuring plans in EU Member States include the Hague Convention and the Rome Regulations (and possibly the UNCITRAL Model Law on Cross-Border Insolvency where recognition is sought in Poland, Slovenia, Greece or Romania), although these are not without their difficulties in this context. Where these routes to recognition do not assist, recognition will rely on the domestic laws of the relevant Member States, which differ on a state-by-state basis. As a general rule, the prospects of successful recognition under these routes will be greater where the scheme (or restructuring plan) company's COMI is in the UK, and the finance documents contain an exclusive English jurisdiction clause and an English governing law clause. Where there remains a lack of certainty as to the effective recognition of an English scheme or restructuring plan in a Member State, it may be possible to use a parallel scheme process in that Member State to achieve the restructuring.
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Will insolvency proceedings opened in EU Member States affect the enforcement of English law security?
From 1 January 2021, the "safe harbour" provisions in the EUIR which protect security rights no longer apply (except where insolvency proceedings based on an entity's COMI were already in flight at the end of the transition period). Notably, the CBIR basic stay, which is available in relation to foreign insolvency proceedings upon recognition, expressly does not affect any right to enforce security. However, the CBIR also entitle the foreign officeholder to apply for additional discretionary relief, which can include a moratorium on enforcement. This may give rise to complex issues when considering whether a bank's English law-governed security over a borrower’s UK-located assets should be affected by foreign insolvency proceedings.
If you require further information or if you need tailored advice, please do get in touch with your usual Ashurst contact, or any of the people listed below.
