The Recast Insolvency Regulation
January 2021
By Stephen Phillips, Temple Bright
Stephen Phillips | Partner
T. +44 (0) 20 7139 8233
M. +44 (0) 7811 113 895
Introduction
Judicial cooperation amongst EU Members States relating to the opening and conduct of insolvency proceedings has been greatly assisted by European Insolvency Regulation 2003 (EIR) which was replaced and enhanced by the Recast Insolvency Regulation 2015 (RIR). Under this regulation, the courts of members states where a main insolvency proceeding is opened have the jurisdiction to hear actions derived directly from the insolvency proceedings – such as avoidance actions. The courts of the jurisdiction of the member state where the centre of main interest (COMI) is situated within the EU is where an insolvency proceeding must be opened. It means, for example, that if a company files for insolvency in a member state that insolvency will be recognised throughout the EU even where the company may have assets or obligations which are governed by the laws of another member state (note that Denmark opted out of RIR). Since the inception of EIR there have been large numbers of companies which have benefited from having one jurisdiction control a restructuring process and a considerable number of occasions where a company has shifted its COMI in order to take advantage of the most suitable jurisdiction to undertake a restructuring.
The RIR applied to the UK during the transition period under the EU / UK Withdrawal Agreement which ceased on 31 December 2020 and will continue to apply where the main proceedings were opened before the end of the transition period. After the transition period the coordination mechanisms in the RIR will not apply between the EU and the UK.
EU / UK Trade and Cooperation Agreement (TCA)
There is no reference to judicial recognition of insolvency laws in the draft TCA which was agreed in principle prior to Christmas and has now been signed. UK lawyers will need (save for the small number of member states listed below) to apply for recognition direct from any relevant member state’s court under any rules of comity or if applicable any relevant treaty with that member state. It remains to be seen how these procedures might apply or whether they exist in practice. I note that in the recent past when I assisted with the restructuring of a Cayman entity, Ocean Rig, (Re Ocean Rig UDW Inc. and others (Unreported, Grand Court, 18 September 2017)) we were able to obtain an opinion from Dutch counsel which we submitted to the Cayman court that a scheme of arrangement should be recognised in Holland as a matter of international comity – there being no treaty between Cayman and Holland/the EU.
The UNCITRAL Model Law
The picture is better for insolvency officers in member states looking for recognition of their status in the UK. The 1997 UNCITRAL Model Law on Cross-Border Insolvency (Model Law) provides for recognition of foreign insolvency proceedings. Recognition of a foreign main proceeding gives an automatic stay on enforcement against a debtor and the court may as a matter of discretion give other forms of relief. The Model Law was implemented in Great Britain by the Cross Border Insolvency Regulations 2006 (CBIR) and it provides for recognition of foreign office holders on a unilateral basis, in other words the UK will recognize foreign insolvencies even if the foreign territory in question has not implemented the Model Law. The CBIR has generally been considered to provide procedural rather than substantive relief so there are limits to its efficacy as I describe below.
The Limits of the Model Law
The Model Law has been implemented in just four other Member States - Greece, Poland, Romania and Slovenia so will be of limited use to English insolvency officers looking for assistance in the other EU member states. EU insolvency professionals should note that whilst CIBR will provide assistance there have been a number of recent English decisions reaffirming the famous English common law Rule in Gibbs. Broadly speaking the effect of the rule is that unless a creditor submits to a foreign proceeding, a foreign proceeding designed to bring about the cancellation of a debtor’s obligations will discharge only those liabilities governed by the law in the country in which those proceedings took place. In other words an English court will likely not recognize the discharge of an English law loan agreement or contract by a court in a foreign insolvency proceeding. The Rule in Gibbs was examined and upheld in Re OJSC International Bank of Azerbaijan [2018] EWCA Civ 2802 where a foreign process purported (and ultimately was held not) to effect a discharge of an English law governed debt. Given that billions possibly trillions of debt has been issued by EU based companies this is an issue which will need to be creatively addressed as a matter of urgency.
The Answer?
The UK has taken steps towards signing up to two international conventions that might assist office holders after the transition period - the 2005 Hague Convention on Choice of Court Agreements, and the 2007 Lugano Convention. Note these two conventions deal with recognition and choice of law rather than the opening and conduct of insolvency proceedings but nevertheless they may well be of assistance in the absence of a treaty between the EU and UK which replicates the RIR.
States that are signatories to the Hague Convention undertake to recognize contractual exclusive jurisdiction clauses and are required to enforce judgments issued by the courts selected by the parties. The UK joined the Hague Convention, in its own right, from 1 January 2021. Note that the Hague Convention excludes insolvency matters but arguably as schemes of arrangement are derived from companies law not insolvency law, schemes should be covered by the Hague Convention.
On 8th April 2020 the UK formally applied to become an independent contracting party to the Lugano Convention, which governs jurisdiction and the recognition and enforcement of judgments between the EU, Norway, Iceland and Switzerland. Lugano clarifies which court has jurisdiction in cross border civil and commercial disputes and ensures that judgements will be enforced. Commentators have made the point that the current Brussels enforcement regime is reflected in the Lugano Convention and so it is considered superior to the Hague Convention which has limitations which I describe below.
Statements of support for the UK’s accession have been issued by Norway, Iceland and Switzerland, unanimous approval by all contracting parties (including the EU) is required before the UK is permitted to use the Lugano Convention. So far, the EU has not yet provided its approval. It is not clear why this was not addressed in the TCA. At the time of writing the position is that after 31 December 2020 the UK will not be party to the Lugano Convention.
The Limitations of the Hague Convention
There are a number of practical issues which means there may be some issues with the Hague Convention. It applies in all EU member states (except Denmark) and it only applies where a contract has an exclusive jurisdiction clause included in the contract– i.e. one that gives a country exclusive jurisdiction to hear a dispute in its courts. In fact many contracts have non-exclusive jurisdiction clauses. There is disagreement between the UK and the EU as to when this Convention applies, with the UK stating that it can apply to contracts from the inception of the treaty (2015) with the EU taking the view that the UK can only apply the Convention to contracts entered into after 1 January 2021. Unfortunately this debate does not appear to have been settled under the TCA.
If the EU consents to the UK’s accession to the Lugano Convention there would be little change from the current regime in relation to jurisdiction and enforcement - English court judgments would continue to be enforceable throughout the EU and in EFTA countries, and English jurisdiction clauses would continue to be respected by those countries, and vice versa. As a matter of speculation there may be commercial considerations which might persuade
EU officials to block the UK’s accession to Lugano in order to dissuade EU companies from entering into contracts governed by English law. This is speculation however. If so this position may be short sighted in view of the lack of clarity for many EU based companies which have entered into English law contracts.
Conclusion?
Restructuring law in many EU countries has improved considerably in recent years and BREXIT may naturally hasten the demise of COMI shifts to England. The Dutch have recently passed a new restructuring procedure which can compromise secured debt and has many of the characteristics of UK schemes. Germany has passed a similar law which became effective on 1 January 2020.
For EU companies with English law governed debt, I speculate that well advised companies with the help of creative counsel may overcome some of the issues raised above in practice. I could imagine that solutions might be considered such as parallel processes in the EU and the UK, in the way it is not unusual for a Cayman company to pursue a scheme of arrangement in English and Cayman courts – so called parallel schemes. Alternatively creative use of the Hague Convention may be made notwithstanding its limitations mentioned above. For example it might be possible to amend a jurisdiction clause where it is currently non-exclusive to make it exclusive. Given the uptick in insolvencies and consequent litigation likely to flow from the covid pandemic the race is on to find practical solutions.
Stephen Phillips | Partner
T. +44 (0) 20 7139 8233
M. +44 (0) 7811 113 895
Temple Bright | templebright.com
81 Rivington Street | London EC2A 3AY
This article is written by Stephen Phillips for Temple Bright LLP (both of whom are together referred to hereafter as “we”, “us” and “our”). It is not intended to provide tax, legal or investment advice. You should seek independent tax, legal and/or investment advice before acting on information obtained from this presentation. We shall not be liable for any mistakes, errors, inaccuracies or omissions in, or incompleteness of, any information contained in this presentation, nor for any delay in updating or omission to update the information as we have not undertaken to do so
We make no representations or warranties in regard to the contents of and materials provided in this presentation and exclude all representations, conditions and warranties, express or implied arising by operation of law or otherwise, to the fullest extent permitted by law. We shall not be liable under any circumstances for any trading, investment, or other losses which may be incurred as a result of use of or reliance on information in this presentation. All such liability is excluded to the fullest extent permitted by law
Any opinion expressed herein is a statement of our judgement at the date of presentation and is subject to change without notice
Reproduction without prior written permission of Stephen Phillips of Temple Bright LLP is prohibited