Brexit: Cross-border insolvency proceedings after 31st December

Following the end of the transition period on 31st December 2020 and the United Kingdom’s complete and final departure from the European Union, significant changes to cross-border insolvency proceedings came into effect.

It is of note that these alterations will affect the rules on the jurisdiction to open insolvency proceedings in the UK, as well as the extent to which these proceedings are recognised in the European Union.

The situation prior to 31st December

Whilst the UK officially left the European Union on 31st January 2020, the Withdrawal Agreement stipulated that a transition period would remain in place until 31st December, during which the UK still functioned as a Member State in the EU for all intents and purposes.

In this transition period, whilst the UK was still considered a Member State, EU Regulations with regards to cross-border insolvency proceedings were as follows:

The EU Insolvency Regulations would…

…govern jurisdiction to open insolvency proceedings.

…govern the law relating to insolvency proceedings.

…allow for insolvency proceedings opened in on Member State to be recognised in all other Member States automatically.

What has changed after 31st December?

As it stands, when the transition period ended, most EU law as it currently applies to the UK will be “duplicated” into UK law. However, Ministers and devolved authorities will be able to make changes to aforementioned incumbent laws. Many changes to inherited EU law will be made in order to correct any immediate operating failures, or to address any other “deficiencies” as a result of the inherited law.

A “deficiency” would include any instance in which a retained EU law references reciprocal arrangements that are no longer in effect in a post-Brexit United Kingdom. One such example of this is the 2015 Recast Insolvency Regulation, as the UK will become classified as a “third country” and no longer as a Member State.

As a result, a number of “EU Exit” Regulations relating to insolvency proceedings came into effect after 31st December 2020.

These will:

  • Amend the 2015 Recast Insolvency Regulations as applicable to the UK.

Make any relevant changes to domestic insolvency legislation that may arise. In consequence.

Jurisdiction to open insolvency proceedings

The EU Exit Regulations essentially erase a great deal of the 2015 Recast Insolvency Regulation and amend the provisions that apply to jurisdiction.

There will be grounds to open insolvency proceedings in the UK where:

  • The debtor’s centre of main interests (COMI) is in the UK.
  • The debtor’s COMI is in a Member State with an establishment in the UK.

This is in addition to any existing grounds for jurisdiction that already apply in UK law.

Because the jurisdiction contained in the 2015 Recast Insolvency Regulation no longer apply, the jurisdiction of the courts to wind up companies registered in the United Kingdom is no longer be subject to this Regulation. It is no longer required to read the jurisdiction to open insolvency proceedings or to propose a CVA as subject to the 2015 Recast Insolvency Regulation.

However, it must be noted that the adjustments to the 2015 Recast Insolvency Regulation do not apply with respect to any insolvency proceedings and actions falling within Article 67(3)(c) of the Withdrawal Agreement. This states that in the United Kingdom, as well as in any Member States in situations involving the United Kingdom, the 2015 Recast Insolvency Regulation will apply to insolvency proceedings, as well as to actions referred to in Article 6(1) of that Regulation, which handles jurisdiction for actions deriving directly from, or closely linked with, insolvency proceedings. This is provided that the main proceedings were opened on or prior to 31st December 2020.

This means that any insolvency proceedings opened on or prior to 31st December 2020 will find that the 2015 Recast Insolvency Regulation shall apply to the main proceedings, as well as to any derivative secondary proceedings and to any actions derived from, or closely linked to, these proceedings. All such proceedings and actions will be recognised in the UK and in all Member States automatically.

Recognition of Insolvency Proceedings After 31st December

The UK is now deemed to be a “third country” and therefore no longer benefits from the automatic recognition of insolvency proceedings between Member States. Going forward, it will be necessary to apply for recognition under relevant EU law on a case-by-case basis.

Although the UK’s Insolvency Act of 1986 provides that the courts have jurisdiction relating to insolvency law in any part of the UK and shall assist the courts in having the corresponding jurisdiction in any other part of the UK or any relevant country or territory, the list of relevant countries and territories does not presently include any EU Member States. This may well change in the future, however, most likely on the basis of reciprocity.

Some relief may also be found in common law. A leading authority in Scotland has suggested that, in principle, there is no limit to the type of aid that may be requested in the UK to aid a foreign court and, indeed, vice versa.

Whilst the loss of EU Insolvency Regulations will no doubt add complexity to EU cross-border insolvency cases, the challenges faced will by no means be insurmountable.

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