Cross-border insolvency in the post-Brexit era

Almost four and a half years after Britain voted in favour of Brexit, the United Kingdom officially left the European Union at the close of 31 December 2020. 

As part of the withdrawal agreement signed between the two parties early last year, the UK continued to be treated as a Member State under EU law up until midnight. Then, on 1 January 2021, under the Trade and Cooperation Agreement (TCA), the two bodies diverged and began operating under distinct regulatory and legal regimes.

In its wake, the TCA, which was rushed through to prevent a “no deal Brexit”, failed to traverse issues surrounding the coordination of cross-border insolvency and restructuring proceedings. This has left insolvency officeholders in a precarious position, clouded by the uncertainty of how best to now navigate cross-border insolvency appointments in the post-Brexit era.

Farewell to an enviable regime 

Prior to Britain’s departure from the EU, the European Regulation on Insolvency Proceedings (EIR) applied to the UK. Broadly speaking, the EIR, which still applies to the remaining Member States, provides for the proper jurisdiction and law to apply in a debtor’s insolvency proceedings, as well as mandatory recognition of those proceedings across other Member States.

In more specific terms, the jurisdiction to open insolvency proceedings is governed by the debtor’s ‘centre of main interest’ (COMI) and it is only courts within that COMI that have the jurisdiction to open main proceedings. Whilst courts of other Member States are able to open secondary proceedings, where the debtor has an ‘establishment’ therein, these proceedings are generally limited to dealing with assets located within the territory of that Member State. 

The primary benefit of the EIR is that any of these above proceedings will be automatically recognised in all other Member States with the same effect. This ensures that the proceedings can be enforced across the EU and that debtors’ assets can be properly dealt with by insolvency officeholders no matter where in the bloc they may be located.

As was to be expected, since its introduction, the EIR has been widely praised as an effective legislative mechanism that has offered unprecedented levels of certainty to otherwise highly complex cross-border insolvencies. The predictable operation of the EIR has led to swift outcomes in court proceedings, reducing time and costs and, as a corollary, producing a better return to creditors. 

Not all is lost post-Brexit

The position is now substantially different in the post-Brexit era. Pursuant to the withdrawal agreement, the only proceedings that will now be governed by the EIR are those main insolvency proceedings opened before the end of the transition period, as well as any related secondary proceedings. In these circumstances, proceedings commenced in the EU will continue to be recognised by the UK, and the UK will also obtain the same mutual recognition from the remaining EU Member States.

However, for all remaining insolvency proceedings opened from 1 January 2021 onwards, the EIR will no longer apply to the UK aspects of those proceedings. In other words, there is no longer automatic recognition of UK insolvency proceedings in the Member States, and vice versa. Rather, recognition will now rely predominantly upon the internal laws of the UK and each individual Member State.

One of the defining aspects of this new approach is that mutual recognition is no longer guaranteed. Whilst insolvency proceedings from one Member State may be recognised in the UK, that does not necessarily mean that UK proceedings will also be recognised in that same Member State. This has led to the initial belief that it may no longer be a level playing field between the UK and EU with respect to cross-border insolvencies.

A more favourable outlook for EU insolvency proceedings

For insolvency proceedings that commence in the EU, whilst the EIR no longer offers automatic recognition in the UK, the UNCITRAL Model Law on Cross-Border Insolvency Proceedings may offer an alternative route for recognition. 

Under the UNCITRAL Model Law, which has long been implemented in the UK, officeholders of EU insolvency proceedings can apply to UK courts for recognition. Whilst such recognition is not guaranteed, and the benefits available under the UNCITRAL Model Law are not as extensive as the EIR, this offers an effective mechanism that somewhat resembles the previous position pre-Brexit.

On the other hand, obtaining recognition for UK insolvency proceedings in the EU is much more complex. Whilst the UNCITRAL Model Law has been adopted in Greece, Poland, Slovenia and Romania, recognition in the vast majority of the Member States depends upon their individual domestic laws. As these laws differ on a state-by-state basis, outbound UK insolvency proceedings will be less predictable than under the EIR, which likely means a more time consuming and costly process.

However, in the face of this new regime, The Insolvency Service (a UK Government agency) published a guidance, “Cross-border Insolvencies: Recognition and Enforcement in EU Member States from 1 January 2021”. The guide, released in January, offers a high level summary of the domestic recognition laws in each Member State. This is intended to assist UK insolvency officeholders understand how to obtain recognition, and deal with assets, in each of the EU Member States.

The guide indicates that most Member States have a recognition regime similar to that of UNCITRAL Model Law, whereby UK insolvency officeholders will be able to apply to local courts to have their UK insolvency proceedings recognised. It is only in Denmark and Hungary, where no recognition is offered, that it is likely that parallel insolvency proceedings will be required.

These findings provide initial confidence to insolvency officeholders, suggesting that cross-border insolvencies will still retain a degree of predictability in the post-Brexit era. They also tend to suggest that the position is not all that different in terms of the recognition of inbound and outbound UK insolvency proceedings. 

However, as The Insolvency Service’s guide is necessarily a high level overview, it will only be with time for the new European insolvency landscape to become fully understood in practice.

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