Brexit and Insolvency – A View from the Continent

The now famous Article 50 of the Treaty on European Union (‘TEU’) provides that, after receiving a Member State’s notification of the intention to withdraw from the EU, the EU will negotiate with such Member State ‘… the arrangements for its withdrawal, taking account of the framework for its future relationship.’ A withdrawal agreement therefore could have any content, including – in principle – maintaining all applicable EU law for a specific time period. In the absence of such a withdrawal agreement between the ceasing Member State and the EU, then, two years after the notification, the TEU and the Treaty on the Functioning of the European Union (‘TFEU’) will no longer apply to the withdrawn Member State and the UK will no longer have the status of a Member State of the EU. In the absence of any specific agreement, it will have the status of a ‘third country’ (which we shall call de facto Brexit): that is, the same status with regard to the EU as, for instance Peru’s, Cameroon’s or Vietnam’s. That is Boris’ legacy. In the area of restructuring and insolvency law, the question now is:  how can the negotiations deviate from such a default outcome in a way that ensures better coordination between UK and other Member States insolvency proceedings?

Cross-border cases

Related to cross-border cases, the EU Insolvency Regulation (‘EIR’) has now been applicable for some 14 years, and the EIR Recast comes into force on 26 June 2017. The new regime has generally been regarded as positive, including in the UK. England’s insolvency top-product, the Scheme of Arrangement, has been secured, as the Recast EIR does not apply to it.

From the perspective of creditors and insolvency courts of Continental Member States, a de facto Brexit would mean, amongst others things, (i) that insolvency proceedings commenced in the UK would not automatically be recognised by EU Member States, (ii) that main insolvency proceedings opened in one of the Member States would not have as an auxiliary measure secondary proceedings in the UK, (iii) that mandatory duties of communication and cooperation between insolvency practitioners and courts are without a legal basis, and (iv) that there will be great uncertainty as to what law will be applicable and whether the strong protection of third parties’ rights in rem and set-off rights can be maintained.

Transitional law

Would the EIR cease to have any effect after a de facto Brexit? Whether and how that would be the case also in relation to insolvency proceedings which were to have already been commenced at the time when de facto Brexit becomes effective is an open question. One could think of a rule mirroring the transitional provision of Article 84(2) of the EIR Recast, i.e. that the EIR Recast shall continue to apply to insolvency procedings which fall under its scope and which have been opened before the de facto Brexit reference date.

Fall back on existing treaties?

In the relations between Member States, the EIR Recast (as well as the existing EIR) replaces, in respect of the matters referred to therein, the Conventions concluded between two or more Member States. The Netherlands, for instance, only has bi-lateral conventions with Belgium (1925) and Germany (1965). The UK has a convention with Belgium providing for the Reciprocal enforcement of civil and commercial judgements (1934) (see Article 85(i) EIR Recast) Will this 80 year-old convention be revisited?

Istanbul Convention

The EIR also replaces  the European Convention on Certain International Aspects of Bankruptcy, signed in Istanbul on 5 June 1990 (see Article 85(k) EIR Recast). 26 years later, this convention has been signed by Belgium, Cyprus, France, Greece, Italy, Luxembourg and Turkey, but only Cyprus has ratified it. It is not a uniform model, but rather provides menus. Article 40 of that Convention offers the opportunity to make a reservation with regard to its Chapter II (exercise of certain powers by the liquidator) and Chapter III (secondary bankruptcy proceedings). For this reason it allows for different rules to apply in different States. Such differences could result in a substantial hindrance to the application of the Convention.

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Without a bilateral or multilateral framework for recognition and enforcement, UK judgments may be subject to stricter review. Overall, this means that the recognition and enforcement of UK judgments in EU Member states would become more costly, time-consuming and burdensome for commercial parties. The EIR Recast does not cover third countries’ judgments. All Member States have their own rules. Only 4 out of 27 EU member states have implemented the UNCITRAL Model Law. These are Greece, Poland, Romania and Slovenia. Generally, these countries would recognise UK insolvency proceedings, as the UK is recognising proceedings from all EU Member States based on its Cross Border Insolvency Regulations 2006 (which incorporate the Uk version of the UNCITRAL Model Law on Cross Border Insolvency.

Compared to the present situation, there is clearly a mismatch. In all these other Member States, UK insolvency office holders, such as administrators, seeking recognition would have to rely on obtaining recognition under the local laws of these Member States. This may be difficult, sometimes not possible, or conditioned, eg by reciprocity requirements. Alternatively, provided that local laws allow for this, a UK office-holder may file for the opening of territorial insolvency proceedings. Either way, it would be all rather cumbersome.

New multi-party initiative?

In these circumstances, it should be in the interest of both the UK and the EU to reach an agreement whereby UK proceedings will benefit from some form of recognition, from some rules on the applicable law, and from some cross-border cooperation rules similar to the ones available under the Regulation. The precise form that such an agreement would take is, of course, a matter of guessing. Will Brexit be a cold and harsh divorce between the EU and the UK, or will parties understand not only each other’s needs, but the needs of businesses and investors for an efficient and effective cross border regime?

In general, in view of the asymmetric recognition landscape and the inefficient, time-consuming, uncertain, and complex post-de-facto-Brexit situation, one would hope that the EU and the UK will enter into an open and constructive phase of negotiation and will come to a result that will generally reflect the current EU framework. Although the current system is certainly not perfect, it does generally deliver clarity and predictability, and thus reduces costs and maximises value for creditors, which is much better then the dismal situation prior to 2002. Academics and practitioners should support such an initiative.

Harmonisation initiative

A final word on the harmonisation of key topics in the EU. Under the European Commission’s Capital Markets Union initiative, the Commission is working hard on an instument for harmonisation of EU insolvency laws, with the first legislative proposal to be issued in a few months time. Due to the sophistication of the UK’s restructuring and insolvency market, its laws have always been influential for the continental Member States. The new harmonisation result is likely to bring greater change to these Member States, especially in the Eastern part of Europe. Curiously, the work in Brussels has inspired the UK government in May 2016 to issue a consultation on several proposals to improve its business rescue regime, including a moratorium, a cram-down mechanism and a form of protection for rescue finance (see Jennifer Payne’s critical posts , available here and here). In Australia, Japan, Malaysia, India, OHADA countries in Central-Africa, the US proposals to reform Chapter 11 (business rescue) are all the rage now. Some practitioners expect the influence of the UK, after a de facto Brexit, to be limited (see here). My take is that geographical borders are no insurmountable obstacle to convergence of laws. If many continental states have been open to the influence of US Chapter 11, it is reasonable to predict that the UK’s restructuring and insolvency laws will continue to be influential in continental Member States.

Bob Wessels is a Professor Emeritus of International Insolvency Law at the University of Leiden, in the Netherlands. He is also an External Scientific Fellow of the Max Planck Institute Luxembourg for International, European and Regulatory Procedural Law.