EU Insolvency Regime v2.0

The EU's primary piece of cross-border insolvency legislation is getting an upgrade today.  Insolvency proceedings commenced before Monday 26th June 2017 in respect of companies with their central administration in an EU member state (other than Denmark) will continue to fall under the original version: the EC Regulation on Insolvency Proceedings 2000/1346 (the Original Regulation).  But those opened on or after Monday 26th will fall under its successor: the EU Regulation on Insolvency Proceedings (Recast) 2015/848 (the Recast Regulation). The Recast Regulation has expanded coverage to include a wider range of insolvency and rescue procedures, a few new features and some important bug fixes and improvements.

What did the Original Regulation do?

Back in 2000, the Original Regulation was a ground-breaking piece of cross-border insolvency legislation.  It was designed for insolvent debtors whose businesses or affairs spanned more than one EU member state.  It provided a framework to co-ordinate the insolvency regimes of each member state (excluding Denmark) so as to avoid the inefficiencies and costs of multiple uncoordinated and competing proceedings opened in different member states in respect of the same debtor.

Broadly, the Original Regulation permitted one set of universal inslvency proceedings to be opened in the member state in which the insolvent debtor was based.  Those insolvency proceedings would be called main insolvency proceedings.  They would be governed by the law of the member state in which they were opened and, importantly, would be effective and recognised throughout the EU (excluding Denmark). No other main proceedings could be opened elsewhere in the EU in respect of the same debtor.

The Original Regulation contemplated that in some limited circumstances, a second set of insolvency proceedings (called "secondary proceedings") could be opened in a different EU member state in respect of the same debtor, but secondary proceedings had to be co-ordinated with the main proceedings, and the scope and effect of the secondary proceedings would be limited to the assets located in the second member state.

Lastly, in order to protect the legal certainty of some specific types of transactions and certain important local law rights, the Original Regulation contained limited exceptions applying local laws instead of the law of the main proceedings in particular circumstances.  Examples include security rights where the secured asset is located outside of the state of the main insolvency proceedings, and local employment law rights.

It was an enlightened and bold move, with EU member states trusting, and agreeing to submit to, each other's insolvency regimes in the name of commercial expediency, and allowing the European Court of Justice to oversee the whole operation. No other economic block has such a powerful cross-border insolvency tool.  And it has served the UK well, being put to good use in major insolvencies such as the Nortel administrations, where the EU group members' insolvencies were all run and co-ordinated from the UK on the basis of the Original Regulation. Many smaller insolvencies (and their stakeholders) have also benefitted.

So what's changing in the Recast Regulation?

Since the Original Regulation has been working well, its functionality has survived intact in the Recast Regulation, which should be regarded more as an upgrade and bug-fix than a complete makeover.  There are, however, some new key features: 

• The scope of the Recast Regulation has been expanded from pure insolvency proceedings to include pre-insolvency restructuring or reorganisation proceedings, including debtor-in-possession proceedings.
• The Recast Regulation contains new features designed to help co-ordinate the insolvencies of several members of the same group, where those proceedings are located in more than one EU member state.
• Communication and co-operation measures between both main and secondary proceedings relating to the same debtor, and between separate proceedings relating to members of the same group have been expanded.  Subject to appropriate safeguards, insolvency practitioners and courts have to communicate and co-operate not only insolvency practitioner to insolvency practitioner, and court to court, but also insolvency practitioner to court and vice versa.
• New powers have been introduced permitting insolvency practitioners in main proceedings to give undertakings to local creditors in a different member state where they seek to prevent the opening of secondary proceedings.  The effect of the undertaking is to apply the local insolvency rules in the second member state as if secondary proceedings had been opened, but without their actually being opened.  This process has become known as "synthetic secondary proceedings".
• As from June 2018, each Member State must have an online searchable database of its insolvency proceedings, and as from June 2019, all these databases must be linked up so that an EU-wide search of insolvency proceedings should be possible.

So what?

Overall, the changes brought in by the Recast Regulation are relatively modest, but useful.

The expansion of scope to include pre-insolvency reorganisation or restructuring procedures is to be welcomed.  This reflects what is happening in the market: that more debtors undergo restructuring in preference to a formal insolvency because where available a restructuring generally produces a value-preserving outcome for creditors.

The market remains less convinced about the new group insolvency provisions, however.  There is definitely a need for some kind of solution for the insolvency of groups, but it is not clear how effective these new measures will be.  From a UK perspective, there is not much that the new communication and co-operation group insolvency measures can facilitate that we could not already do if the group companies' officeholders wanted to.  And the group co-ordination proceedings are entirely voluntary so in the absence of a will to collaborate and co-operate, these measures are unlikely to help.  Time will tell whether they will be used much.

Similarly, the synthetic secondary proceedings mechanism feels cumbersome to UK restructuring lawyers who are used to being able to use a rather more streamlined technique honed by the English courts in cases such as MG Rover. But for those member states whose officeholders lack such flexible powers, the synthetic secondary powers might be useful. It will be interesting to find out whether UK office holders persist in trying to use the lower tech (but more flexible) MG Rover version now that that the higher tech (but more complex and expensive) option is available.

And what about Brexit?

We do not have any Brexit details yet, but absent a fairly major political U-turn it is most likely that the UK will lose its privileges under the Recast Regulation (and its predecessor) when it leaves the EU.  This is because retaining them would require the UK both to submit to the jurisdiction of the European Court of Justice, which has been repeatedly ruled out by the Government, and to allow the application of foreign insolvency law automatically within the UK.

It is possible that insolvency proceedings opened before the Brexit referendum outcome was known in June 2016 might continue to have the benefit of Original Regulation privileges going forward, but there will not be very many of these still on-going by the Spring of 2019, when the UK is expected to leave the EU. Most proceedings still on foot in the Spring of 2019 will have been opened after June 2016, and so, in the absence of some kind of interim political deal, will fall outside the Recast Regulation when the UK exits.  In practical terms, this means that English administrations, for example, will cease to be automatically recognised in the 27 remaining EU member states after this date, and an English administrator's ability to realise assets located in one of the EU member states or pursue claims there may become more difficult, cost more and take longer.  The experience will differ from member state to member state.

Unlike the UK, the EU and most of its on-going 27 member states have not adopted the UNCITRAL Model Law on Insolvency.  The exceptions are Greece, Poland, Romania and Slovenia. It seems unlikely that the EU will now adopt it wholesale.  This matters because the UK's adoption of the UNCITRAL Model Law on Insolvency (by means of the Cross Border Insolvency Regulations 2006) means that foreign EU insolvency officeholders will find it relatively easy to obtain recognition and assistance from English courts.  The same may not be true the other way around, except in Greece, Poland, Romania and Slovenia.

Are English schemes of arrangement affected?

The jury is still out whether English schemes of arrangement, in particular those concerning non-English companies, will be affected by Brexit.  What is certain, however, is that since restructuring schemes of arrangement are not within the scope of either the Original Regulation or the Recast Regulation, they are not affected by this particular reform.

What other restructuring or insolvency reforms are happening at an EU level?

The Recast Regulation is only part of the EU's current plans to reform its member states' restructuring and insolvency regimes.  A draft directive intended to provide minimum standards for a restructuring framework in every member state is currently being negotiated between the Commission and the Parliament.  These initiatives form part of a larger project to produce a more harmonised approach to insolvency regimes within the EU because the diversity of 27 separate insolvency regimes has been identified as a barrier to the creation of the single capital markets union and the inflow of investment capital.