The Brexit Deal Is Done: What Does it Mean for Recognition in Cross-Border Restructurings and Insolvencies? – Sidley Austin LLP

Recognition in the transition periodWhile the benefits of English R&I processes continue to exist post-Brexit, it is important to understand the complexities that arise from key pieces of EU legislation no longer being applicable to the UK. Until December 31, 2020, the commencement of insolvency proceedings1 in EU Member States (except Denmark), in sofar as it applies to the UK, was regulated primarily by Regulation No 2015-848 on Insolvency Proceedings (Recast Regulation). Pursuant to the Recast Regulation, where the centre of main interests (COMI) of a debtor is located in an EU Member State (except Denmark), insolvency proceedings opened in that Member State are automatically recognized throughout the EU as Main Proceedings. Further, if a debtors COMI is located in an EU Member State, it can open secondary insolvency proceedings in another EU Member State if the debtor has an establishment there, as Secondary Proceedings.

The UK ceased to be a member of the EU from January 31, 2020 (Exit Day), and entered into the EU-UK Withdrawal Agreement, which came into force on February 1, 2020, and was ratified and incorporated into UK domestic law via the European Union (Withdrawal Agreement) Act 2020 (EWA). The EWA provided for a period of time (the transition period) during which EU legislation continued to apply to the UK, which ended on December 31, 2020. During the transition period, the Recast Regulation continued to apply as between the EU and the UK in the same way as prior to Exit Day, resulting in the UK continuing to recognize insolvency proceedings commenced in other EU Member States while receiving reciprocal recognition of UK insolvency proceedings, in each case, where Main Proceedings were commenced on or before December 31, 2020 (Article 67(3), EWA).

Recognition after the end of the transition periodThe Insolvency (Amendment) (EU Exit) Regulations 2019 (as amended by the Insolvency (Amendment) (EU Exit) Regulations 2020) sought to provide a general alignment of treatment of EU Member States and the UK in a hard Brexit scenario. Effectively, UK courts are given jurisdiction to open insolvency proceedings after the end of the transition period where either the debtors (i) COMI is in the UK, or (ii) COMI is in another EU Member State and there is an establishment in the UK. Further, such jurisdiction tests sit alongside pre-existing UK jurisdiction tests (e.g. sufficient connection for the winding-up of foreign companies), which are no longer restricted by the Recast Regulation and could result in the UK courts taking a more expansive jurisdiction in insolvency proceedings.

Significantly, the TCA does not reference any transitional provisions that would afford automatic recognition of UK insolvency proceedings in EU Member States (and vice versa), nor does it extend the protections contained in the EWA. Therefore, while the TCA is considered a deal for certain industries and sectors, we are actually facing a no-deal Brexit scenario raising further complexities and recognition issues with respect to R&I processes of pan-European corporations that are led out of, respectively, the UK and an EU Member State.

Recognition by EU Member States of UK R&I proceedings post-Brexit (outward)

1.UNCITRAL Model Law on Cross-Border Insolvency has been implemented into UK domestic legislation through the Cross Border Insolvency Regulations 2006 and provides for recognition of insolvency proceedings and cooperation between participating jurisdictions. While the U.S. and Singapore are notable jurisdictions that have enacted the Model Law with success, its impact on implementing restructurings post-Brexit throughout Europe may be more limited given that the only EU Member States to implement the Model Law to-date are Poland, Slovenia, Greece, and Romania.

2.Local laws: For EU Member States that have not enacted the Model Law, UK officeholders will need to rely on relevant local laws to gain recognition and enforcement of UK orders in the relevant Member State. For example, Germany has provisions allowing for recognition of foreign insolvency proceedings. Further, recognition in EU Member States may be bolstered by considerations of mutual recognition with the UK.

Recognition by EU Member States of UK judgments and orders post-Brexit (including those handed down in relation to English schemes of arrangement and the new restructuring plans) (outward)

3.Lugano Convention 2007 (Lugano): provides a framework for the recognition and enforcement of judgments (including those handed down in relation to English schemes of arrangement and the new restructuring plan). The general position is that a defendant domiciled in an EU Member State shall be sued in the courts of that EU Member State, and judgments given in one Member State shall be registered and enforced in another Member State. However, this regime has been revoked following the end of the transition period and jurisdiction will be determined, at least for the time being, by applying existing local law of the relevant EU Member State, save where a relevant international convention or agreement applies. On April 8, 2020, the UK deposited a request for re-accession to Lugano as an individual member, which requires the unanimous consent of all contracting parties. However, the EU and Denmark have yet to give their explicit consent. Further, the UK government would prefer to build on the principles of Lugano via a new bilateral agreement with the EU. Whether such a new bilateral agreement can be agreed and, if so, what it will contain remains to be seen.

4.Hague Convention on Choice of Court Agreements: where parties have stipulated an exclusive choice of court agreement in their contracts, the Hague Convention requires that the parties decision and choice of court is respected. It further provides that any judgment rendered by the chosen court will be recognized and enforced in other signatory states. On September 28, 2020, the UK deposited a new request for re-accession to the Hague Convention to ensure the continuity of the Hague Convention following the end of the transition period.

5.Rome I Regulation (Rome I): determines the law governing contractual and non-contractual obligations and applies in all EU member states (except Denmark). Following the end of the transition period, Rome I will be converted into UK domestic law allowing parties to choose the law applicable to the relevant agreements and providing for recognition across EU Member States (except Denmark). In the context of English law governed debt that is compromised under an English scheme of arrangement, Rome I will allow the relevant scheme order to be recognised throughout the EU.

Recognition by the UK of EU R&I proceedings post-Brexit (inward)

6.Section 426 of the Insolvency Act 1986 provides a unique tool whereby recognition is sought in the UK of an insolvency proceeding taking place in a designated jurisdiction, thereby giving English courts permission to assist foreign courts. However, this statutory power is available only upon request by a foreign court and is limited to certain designated jurisdictions (e.g., Commonwealth countries and Ireland).

7.Cross Border Insolvency Regulations 2006 (CBIR): In order for foreign proceedings to be recognised in the UK under the CBIR, the debtor must have a place of business or residence or assets situated in the UK, or the Court must otherwise consider recognition appropriate. The CBIR apply without the need for reciprocity (which means, for example, that the UK will recognise eligible foreign insolvency proceedings even if the relevant foreign country has not itself enacted the Model Law).

8.Common law principles of insolvency assistance: Key principles derived from case law2, provide that, ideally, there should be a unitary insolvency proceeding in the court of the debtors domicile that receives worldwide recognition and that should apply universally to the debtors assets (known as universalism).

Although there are alternative legal mechanisms available to pursue recognition of R&I proceedings, these need to be considered on a case by case basis for restructurings post-Brexit. Eventually, precedent will establish a clearer route, and there is always the possibility of a subsequent deal between the EU and the UK.

Practical consequences

The Brexit deal is likely to have a greater impact on European R&I proceedings involving the UK, particularly given that reciprocal automatic recognition will no longer apply with the loss of access to key EU legislation. Consequently, although the practical consequences will vary depending on the specific circumstances and jurisdictions involved, there may be a possible need for parallel proceedings (particularly for recognition) that will entail additional time and costs. Other possible practical consequences worth noting include these:

1.English-headquartered groups may decide to shift the COMI of European guarantors to the UK ahead of implementing an English R&I process, to ensure they take advantage of the comprehensive toolkit made available under English procedures that are well regarded on the global stage.

2.EU-headquartered groups may similarly decide to shift the COMI of UK guarantors to their home EU Member State and continue to rely on EU legislation and local R&I regimes and tools. However, note that a number of EU Member States have failed to provide the same level of certainty that English courts can offer. For example, European R&I processes have not been as successful as the UK in compromising guarantees that have been granted by group entities that are domiciled in other EU Member States.

3.The rule in Gibbs3 is likely to take on more significance following a hard Brexit. Gibbs provides that only an English R&I process would be effective to compromise or discharge English law governed debt. Under the Recast Regulation, the rule in Gibbs is effectively overriden in respect of European compromise proceedings, but that will no longer be the case, and we may start to see the English courts revert to the rule in Gibbs. Consequently, companies may be required to weigh the benefits of using the English judicial system against the greater harmonisation amongst the remaining EU Member States.

4.A number of European jurisdictions are introducing new restructuring tools akin to the English scheme of arrangement or new restructuring plan. For example, the Netherlands have already introduced their own scheme, and Germany is in the process of introducing its own scheme as an alternative to the English scheme of arrangement.

Despite the loss of access to key EU legislation (predominantly, the Recast Regulation and the Judgments Regulation) that have provided a uniform legal regime for European R&I processes, the popularity of English R&I processes is unlikely to be severely affected post-Brexit. We expect that the English courts will continue to be favored as the choice of forum for many R&I proceedings. UK restructuring tools provide great flexibility to implement a wide range of restructuring options (from short standstills to full holistic restructurings), quick access to the English courts (particularly in the context of implementing an English scheme of arrangement or the new restructuring plan, each of which can be completed in a matter of weeks), and tried and tested procedures providing confidence and certainty for all stakeholders.

1 -Note that judgments (and, as such, UK schemes of arrangement) were generally considered to be dealt with by the Recast Regulation.2 -Rubin v Eurofinance [2012] UKSC 463 -Antony Gibbs & Sons v La Socit Industrielle et Commerciale des Mtaux (1890) LR 25 QBD 399

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The Brexit Deal Is Done: What Does it Mean for Recognition in Cross-Border Restructurings and Insolvencies? - Sidley Austin LLP