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Impact on cross border insolvency in a no deal Brexit

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With every day bringing a new Brexit headline, and a range of different outcomes still possible, it’s important for businesses to plan for a potential no deal situation. Here we take a look at the potential effects a no deal Brexit could have on cross border insolvency.

Current position on EU insolvency regulation

The UK’s insolvency framework is world renowned for its flexibility and cost-effectiveness, currently holding 14th overall place on the World Bank’s list for ‘resolving insolvency’. The UK has become a worldwide insolvency hub, providing solutions for distressed corporates working in Europe. However, should a no deal Brexit occur it could become very difficult for insolvency practitioners to practice across borders within the EU.

The Insolvency Regulation 2000, the Recast Insolvency Regulation and the EU Regulation on Insolvency Proceedings 2015 (the “Regulations”) currently apply to all insolvency proceedings opened in all EU Member States and Denmark. The Regulations determine which EU Member State cross-border insolvency proceedings may be opened in, by assessing where the Company in question has their Centre of Main Interests (“COMI”).

Once proceedings are opened in an EU country where the company’s COMI is based, those proceedings will be “main proceedings” and the insolvency will be governed by the laws of that country. Essentially, the Courts of other EU Member States are then bound by the laws of the country in which those main proceedings were opened, thereby preventing them from opening separate main proceedings, or from failing to recognise the appointment of an insolvency practitioner (“IP”).

The Regulations therefore allow insolvency issues to be brought together and dealt with as if all the assets were under one jurisdiction and not spread across several countries. This means that IPs are able to control multiple assets from across the EU much more easily. However, this could all come to an end if a no deal Brexit came into fruition.

No deal and cross border insolvency?

In the event that the UK leaves the EU without an agreement, the Regulations will no longer be automatically recognised by the other Member States. Due to the way that EU law is incorporated into UK law, on leaving the EU, the UK would have continued to recognise EU insolvency appointments and judgments, with no guarantee that UK appointments and judgments would be recognised in return. As such, the Government’s position is that it would not be appropriate for the UK to apply the Regulations in EU cross-border insolvency proceedings because the remaining EU Member States will not apply the Regulations to proceedings involving the UK Courts.

The Government has therefore drafted the Insolvency (Amendment) (EU Exit) Regulations 2018 (“IAER”), which was published on 20 November 2018 and essentially ‘turns off’ the automatic recognition. Under the IAER, the restriction on beginning proceedings in the Member State of the Company’s COMI is removed and proceedings would be able to be opened in the UK Courts, where the COMI of a company, for example, was in Spain.

However, the remaining EU Member States will not be bound by the IAER and the IAER will not prevent the remaining Member States from opening proceedings in their own Courts. In practice, this means that the UK Courts cannot force an EU Member State to recognise an IP appointment in cross-border insolvency. UK IPs would instead have to initiate proceedings and open applications in every country and local court where the distressed company in question has staff, subsidiaries or any other assets. This process is likely to be complex, time consuming and expensive. It also relies on those applications being granted in various foreign countries, which historically has been inconsistent.

It is now for the UK government to secure a post-Brexit agreement in respect of insolvency, which replicates the current framework of mutual recognition between the UK and the EU and the benefits that brings in dealing with cross-border insolvencies within the EU.

Clarion has a dedicated Corporate Recovery and Insolvency Team and if any of the matters mentioned above impact you or your business and you require advice, please do not hesitate to contact us.

Disclaimer: Anything posted on this blog is for general information only and is not intended to provide legal advice on any general or specific matter. Please refer to our terms and conditions for further information. Please contact the author of the blog if you would like to discuss the issues raised.