UK insolvency laws in event of ‘no deal’ Brexit

04 Dec 2018 | 10 min read

Hamish Anderson, consultant at Norton Rose Fulbright LLP, considers the potential implications of the draft Insolvency (Amendment) (EU Exit) Regulations 2018 (the 2018 Regulations) which deal with the scenario where the UK leaves the EU without a deal on insolvency.

Insolvency (Amendment) (EU Exit) Regulations 2018, SI 2018/Draft: This draft enactment is laid in exercise of legislative powers under the European Union (Withdrawal) Act 2018 and the European Communities Act 1972 in preparation for Brexit. This draft enactment amends UK legislation and retained EU legislation in relation to insolvency and the protection of employees in the event of the insolvency of their employers. It comes into force partly on exit day.

What is the main impact of this draft on the Recast Regulation on Insolvency 2015/848?

Impact of the draft Regulations

The 2018 Regulations are a draft—they will only come into force if a deal is not reached. There is therefore no immediate impact on the Regulation (EU) 2015/848 on insolvency proceedings (the Recast Regulation on Insolvency).

To start at the beginning, the Recast Regulation on Insolvency is the EU measure which regulates where insolvency proceedings can be opened within the EU. The fundamental concept of the Recast Regulation on Insolvency is that the jurisdiction of Member States to open proceedings should be restricted so as to avoid competing proceedings and that, in return, proceedings opened in accordance with its provisions receive EU-wide recognition. The consequence of the UK leaving the EU will be that the Recast Regulation on Insolvency will cease to apply as a matter of EU law. However, section 3 of the European Union (Withdrawal) Act 2018 (EU(W)A 2018), provides that it will become part of our domestic law on exit day except in so far as ministers make regulations under EU(W)A 2018, s 8 to deal with deficiencies arising from withdrawal. There would be deficiencies because the proper operation of the Recast Regulation on Insolvency depends on reciprocity, without which restrictions on jurisdiction are not accompanied by guaranteed recognition of insolvency proceedings in other Member States. The 2018 Regulations, if made, would be an exercise of EU(W)A 2018, s 8 powers.

Deal or no deal?

As to whether leaving the EU without a deal on insolvency is likely to occur, the big question is whether there is likely to be any deal on anything. Drilling down on to the specific question of insolvency, there are grounds for optimism that a deal would make the 2018 Regulations unnecessary (at least in their present form):

  • first, there is a general consensus at home and abroad that the Recast Regulation on Insolvency works well in facilitating cross-border insolvencies and restructurings within the EU—a home, that consensus includes both Brexiteers and Remainers
  • secondly, Article 67 of the Withdrawal Agreement would, if signed, provide for the continued application of the Recast Regulation on Insolvency to all insolvency proceedings where main proceedings had been opened before the end of the transition period
  • thirdly, the UK government has repeatedly stated its wish for the future relationship of the UK and EU to include provision for jurisdictional rules and applicable law, and the recognition and enforcement of judgments relevant to insolvency proceedings across borders, ie the substance of the Recast Regulation on Insolvency

While it is true that the political declaration makes no mention of insolvency proceedings, that is not surprising in a document pitched at such a high level of general aspiration.

Content of the 2018 Regulations

Having dealt with the background and the likelihood of the 2018 Regulations being needed, it is appropriate to turn to their more detailed content in order to appraise their potential significance. As is not uncommon with instruments of this sort, the 2018 Regulations as such are comparatively succinct but they are accompanied by a lengthy schedule of largely consequential amendments. (To be clear, the 2018 Regulations also deal with some related employment law issues which are outside the scope of this summary and there are regional variations concerning Scotland and Northern Ireland which are also not considered here.)

Access to the UK courts and reciprocity

The premise on which the 2018 Regulations have been prepared is that departure from the EU should not restrict access to the UK courts but that the unilateral retention of an EU measure founded on reciprocity is otherwise not appropriate. Although the general effect of the Recast Regulation on Insolvency (and its predecessor, the Regulation on Insolvency EC 1346/2000) was to restrict the jurisdiction of the English courts to open insolvency proceedings by superimposing jurisdictional tests based on the debtor’s centre of main interests (COMI) or the presence of an establishment, there were variations between the jurisdictional bases for different forms of insolvency proceedings such that the introduction of the EU tests served to enlarge jurisdiction in some cases.

The 2018 Regulations therefore retain the Recast Regulation on Insolvency tests as additional grounds for jurisdiction. The importance of this is underlined by the rule in Gibbs v La Société Industrielle et Commerciale des Métaux (1890) 25 QBD 399, [1886-90] All ER Rep 804 where the Court of Appeal held that the discharge of a debt under foreign insolvency law will not be given effect in England where the contract creating the debt is governed by English law. The rule in Gibbs is on course to be challenged in the Supreme Court but, so long as it remains good law in England, it is important to ensure that as many debtors as possible needing relief under English law (because of, for example, the choice of English law as the governing law of finance documents emanating from the London market) can satisfy English jurisdictional requirements if the London market is to retain its position as the dominant financial centre in Europe. The Recast Regulation on Insolvency will no longer prevent the opening of insolvency proceedings in England on other (domestic law) jurisdictional grounds. The 2018 Regulations also include provisions designed to assist foreign courts in deciding whether to recognise English insolvency proceedings based on the COMI or establishment tests. The remainder of the Recast Regulation on Insolvency, which relies on reciprocity, would be repealed (ie, its prospective incorporation into UK law by EU(W)A 2018, s 3 would be reversed).

Transitional provisions

There are also some important transitional provisions. Regulation 4 provides that the Recast Regulation on Insolvency would continue to apply where main proceedings were opened before exit day—as would the Regulation on Insolvency EC 1346/2000 predecessor where proceedings opened before 26 June 2017, that being the date when that regulation was superseded by the Recast Regulation on Insolvency. However, Reg 5 provides a qualification to avoid unintended consequences. Where the court considers that the effect of Reg 4 is or would be different following Brexit to what it would have been before in such a way as to prejudice relevant interests or to be contrary to public policy, the court is given power to apply UK law or to make any other order it thinks fit. The potential scope of this qualification is not immediately obvious. It is drafted in general terms but some examples serve to illustrate how the post-Brexit application of the Recast Regulation on Insolvency to proceedings which had been opened in one of the remaining Member States might be detrimental. These include:

  • first, the Recast Regulation on Insolvency contains a series of safe harbour provisions where the governing law of the insolvency proceedings yields to another applicable law in the interests of transactional certainty eg rights in rem, set-off, claw-back actions etc—some of those provisions apply to matters which are subject to the law of another Member State and might therefore apply differently (depending entirely on the facts and the law of the insolvency proceedings) after the UK was no longer a Member State
  • secondly, the Recast Regulation on Insolvency contains rights and protections for ‘foreign creditors’ but that is a defined term meaning creditors habitually resident, domiciled or having their registered office in another Member State—upon exit day, UK creditors will cease to be ‘foreign creditors’ for these purposes, and Reg 5 would be relevant if an EU office-holder sought relief in support of proceedings which discriminated in some way against UK creditors

Does this draft impact on the Insolvency Act 1986 or on other insolvency legislation, and if so, how?

There are consequential amendments to the Insolvency Act 1986 and the Insolvency (England and Wales) Regulation 2016, SI 2016/1024 in Parts 2–4 of the 2018 Regulations. Consequential amendments are made to other legislation (including the Cross-Border Insolvency Regulations 2006, SI 2006/1030 in Parts 5 and 6.)

What are the other key impacts on cross-border insolvencies in practice?

There will be no key impacts unless until the 2018 Regulations come into force (which requires affirmative resolutions in Parliament).

Are there any surprises in the draft?

The 2018 Regulations are a major departure from what might have been perceived to be the intended result of EU(W)A 2018, s 3 but the government had already signalled its acceptance that unilateral retention of the Recast Regulation on Insolvency would make no sense. The substance of the 2018 Regulations then became fairly predictable but the extent of the necessary consequential amendments to UK law, resulting from removing or modifying references to EU law in our domestic laws, is a reminder of how pervasive EU law has become.

Is there anything missing from the draft that you believe should be included?

Given the premise on which it is drafted, and the constraints of the ministerial powers under EU(W)A 2018, s 8, the subject has been thoroughly addressed. Arguably, the widening of the jurisdiction to open corporate insolvency proceedings does not go far enough to facilitate access to the English courts. As a matter of domestic law, the English courts have jurisdiction to wind up foreign companies although it is not a jurisdiction which will be exercised unless there is a sufficient connection with this jurisdiction. The availability of administration and company voluntary arrangements is much more circumscribed and it would be rational to assimilate the jurisdiction in respect of all forms of corporate insolvency proceedings in line with the liquidation test. However, that would require an amendment of primary legislation (the Insolvency Act 1986) which would be out with the s 8 powers because it would going beyond dealing with deficiencies arising from withdrawal from the EU.

In your view is it likely this draft will be amended significantly before being finalised?

That rather depends on the progress of negotiations. The 2018 Regulations are only intended as preparation for a no-deal Brexit (at least as regards insolvency). In that eventuality, substantial amendment seems unlikely—not least because insolvency proceedings are unlikely to be high on the political agenda. The more interesting question is what would happen in the event of there being some agreement going beyond the Withdrawal Agreement. Everything would then depend on how far the EU was minded to adopt the same position as the UK in respect of ongoing co-operation. If nothing else, the 2018 Regulations will serve as a useful checklist of the interaction of EU law with UK law in relation to insolvency.

Interviewed by Susan Ghaiwal.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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