Recognising UK insolvency proceedings in the EU - where does the UK stand post-Brexit?

From 1 January 2021, automatic recognition under the EU Regulation on Insolvency Proceedings has fallen away. In our first Thought of the Month of 2021, we consider what this means for recognition of UK insolvency proceedings in the EU27 and whether there is an unequal insolvency playing field between the UK and EU member states.

With reluctance, the restructuring and insolvency industry said a fond farewell on 31 December 2020 to the EU Regulation on Insolvency Proceedings 2015 (848/2015) (EUIR) at the end of the Brexit transition period. The EUIR and its forbear, the EC Insolvency Regulation (1346/2000), had served the UK's insolvency officeholders well for two decades, making cross-border insolvency proceedings¹ more efficient and thereby providing swifter outcomes and better returns to creditors of insolvent companies throughout the EU. Notable highpoints included the successful UK administrations of 19 Nortel Network companies with operations in 16 EU countries.

However, the latter phases of the Brexit negotiations were largely silent on the subject of restructuring and insolvency, and therefore it came as no surprise that the 410 page Trade and Cooperation Agreement (TCA) between the EU and UK, which marked the departure of the UK from the world's largest trading bloc, made no reference to coordination and cooperation of cross-border insolvency proceedings. For a summary of what the TCA did contain, see our Ashurst briefing here.

The disapplication of the EUIR means that for any new insolvency proceedings opened in the UK from 1 January 2021 onwards, automatic recognition and other benefits under the EUIR are no longer available². This could be a big loss to UK insolvency officeholders appointed to cases with cross-border aspects. Formerly, under the EUIR, UK insolvency proceedings were automatically recognised and effective throughout the EU (subject to limited exceptions), bringing certainty to and reducing the costs of cross-border insolvency proceedings. Going forward, UK insolvency officeholders seeking recognition and assistance in EU member states will have to rely upon the domestic laws of the relevant member states. As one might expect, these laws differ on a state-by-state basis, which will make obtaining recognition and relief in EU member states more cumbersome and costly, and less predictable.

The disapplication of the EUIR also raises questions about whether there is now an unequal insolvency playing field between the UK and EU member states. While officeholders appointed to EU insolvency proceedings opened from 1 January 2021 will also not be able to rely on the EUIR for automatic recognition in the UK³, they can take advantage of the UNCITRAL Model Law on Cross-Border Insolvency Proceedings, which the UK has implemented by means of the Cross-Border Insolvency Regulations (CBIR)⁴. This gives EU officeholders of EU 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.

The end of the Brexit transition period has also brought an end to the application of the Brussels Regulation⁵ to the UK. The Brussels Regulation was often relied upon for the recognition of UK schemes of arrangement in the EU (schemes historically being treated as distinct from collective insolvency proceedings and therefore not falling under the EUIR regime). How UK schemes of arrangement and restructuring plans will be recognised in the EU going forward is currently subject to much debate within the restructuring community, particularly in respect of the relatively untested restructuring plan, but ultimately we will need judicial guidance to map out the position. Given the popularity of schemes of arrangement and restructuring plans as restructuring tools, we expect this area to develop quickly. See our 'Business after Brexit: Considering Restructuring and Insolvency' briefing for further consideration of the recognition of schemes of arrangement and restructuring plans, and the wider impact of Brexit on restructuring and insolvency generally.

Where does this leave UK insolvency proceedings with assets, creditors and/or other interests and liabilities in the EU?

While the position is now undoubtedly more complex, all is not lost. This month, the Insolvency Service published a guide entitled "Cross-Border Insolvencies: Recognition and Enforcement in EU Member States from 1 January 2021". The guide provides a high level summary of the relevant domestic recognition regime in each of the EU27 jurisdictions (with a little more detail for the 7 main EU trading partners of the UK) and explains how a UK insolvency officeholder might seek recognition and deal with assets in each jurisdiction. Ashurst, working with local counsel in the EU27 jurisdictions, is delighted to have assisted the Insolvency Service with the preparation of this guide.

The preliminary findings set out in the guide suggest that all but 2 of the EU27 member states have a recognition regime, the majority of which envisage an application to the local court by the UK insolvency officeholder for recognition and relief. Broadly, these recognition regimes are in many cases not too dissimilar to our own inbound recognition process in the UK under the CBIR. The scope of the guide is necessarily high level and there will, of course, be significant legal and procedural differences between different jurisdictions but these findings are, nevertheless, quite reassuring.

In Belgium, for example, upon application to court for recognition and relief for most mainstream UK insolvency proceedings, the Belgian court will grant certain assistance to a UK insolvency officeholder without reviewing the merits of the UK insolvency judgment. This assistance can include granting the UK officeholder the powers they would have in the UK, subject to compliance with Belgian law.

In addition, the domestic regimes of a few EU states (Austria, Croatia, Germany, Netherlands, and Sweden) provide some form of automatic recognition of foreign insolvency proceedings, through which a foreign insolvency officeholder may avoid the need to apply to court. Germany is the most "recognition-friendly" of the EU jurisdictions, having adopted into domestic law a very similar approach to the EUIR, benefitting non-EU insolvency proceedings. Broadly, this means that UK insolvency proceedings opened on the basis of a UK centre of main interest will still be automatically recognised in Germany (with the UK insolvency officeholder having the power to deal with assets in Germany) without the need for a court order⁶. See the map above for a pictorial representation of the preliminary findings in the Insolvency Service's guide.

So, while UK insolvency officeholders and insolvency stakeholders are demonstrably worse off without the EUIR, in most EU member states, it appears there are still ways to obtain recognition and necessary relief, albeit via a more costly and cumbersome court application. The proof is in the pudding, however, and much will depend on how the new system works for UK insolvency officeholders in practice. For now at least, the early indications are that the playing field between UK insolvency proceedings seeking recognition in the EU and vice versa may not be so unequal after all.

For advice on recognition of insolvency proceedings abroad, please get in touch.

1. Cross-border insolvency proceedings refer to insolvency proceedings opened in respect of company in one jurisdiction where that company has assets, creditors or interests in another jurisdiction.
2. Unless main proceedings in respect of the debtor were opened in an EU member state prior to 11pm on 31 December 2020, in which case the EUIR continues to apply as a result of savings provisions in the implementing legislation.
3. Except where main proceedings in respect of the debtor were opened in the UK prior to 11pm on 31 December 2020, in which case the EUIR continues to apply as a result of the aforementioned savings provisions.
4. Of the EU27, only Poland, Romania, Greece and Slovenia have adopted the UNCITRAL Model Law on Cross-Border Insolvency Proceedings.
5. EU Regulation on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (1215/2012)
6. Though an optional application to court may be helpful in certain circumstances.