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Borja García-Alamán and Juan Verdugo of J&A Garrigues SLP and Ivan Heredia, Professor of International Law at Universidad Autónoma de Madrid consider the draft Withdrawal Agreement and its potential impact on the restructuring and insolvency market following Britain’s exit from the EU.
On 28 February 2018, the European Commission published the Draft Agreement on the withdrawal of the UK from the EU (see LNB News, 28/02/2018 145 ). This draft, based on the Joint agreement submitted by the negotiators of the EU and the UK on 8 December 2017, will set the tone for the future negotiations between the EU and the UK.
What are the relevant provisions of the draft Withdrawal Agreement?
One of the most interesting parts of the draft is that regarding the consequences of Brexit in relation to the principal rules of Private International Law provided in EU legislation; these rules currently affect a significant number of subjects (contracts, international insolvency, torts, succession, marital breakdown, alimony, etc.).
In the specific case of cross-border insolvencies, the draft establishes that the Community Regulation on insolvency proceedings, Regulation (EU) 848/2015 (Recast Regulation on Insolvency) will continue to be applicable to all insolvency proceedings which are commenced in the Member States (including the UK) before the end of the transition period (31 December 31 2020). However, from that date onwards the authorities of the UK will cease to apply the Recast Regulation on Insolvency and will resort to its internal legislation when:
What would be the impact on English schemes of arrangement?
However, undoubtedly the most important consequences of the draft will affect the authorities of the States which continue to be EU members. Those consequences will also affect the so-called schemes of arrangements (schemes), which are essentially refinancing procedures regulated by English law and supervised by the English courts (which have been resorted to by Spanish companies like La Seda de Barcelona, Metrovacesa, Cortefiel and Codere).
Although surprisingly the schemes were excluded at the last minute from the Recast Regulation on Insolvency, there has been a debatable opinion, especially from the other side of the English Channel, which argued that they were equally enforceable in the rest of the EU Member States through another European instrument, Regulation 1215/2012 (known as Brussels I Regulation recast), which provides a simplified procedure to provide cross-border enforceability for the judicial decisions of other Member States. However, the draft now makes clear that it will not be possible to use that instrument to recognise in an EU Member State British judgments adopted after 31 December 2020 nor, therefore, schemes after that date. Furthermore, the draft itself also seems to rule out the possibility of recognising schemes by reviving the predecessor of the Brussels I Regulation recast (the 1968 Brussels Convention), which also has flexible rules for recognition of foreign judgments although not offering such a favorable framework as that of the Recast Regulation on Insolvency.
The fact that, after the end of the transition period, the authorities of the EU Member States have to apply their domestic rules to recognise judgments coming from the UK may mean in the majority of States a tougher approach when it comes to offering cooperation to the British authorities and managers, as well as greater obstacles to the cross-border recognition of insolvency and pre-insolvency proceedings commenced in the UK.
What would be the impact on seeking recognition of British judgments in Spain?
What the application of our insolvency law will mean in Spain for the recognition of British judgments in relation to insolvency is a sufficient example. On the one hand, judgments which commence insolvency proceedings in the UK will no longer enjoy automatic recognition in Spain, which means that to take effect in our country they must previously undergo the primary ordinary recognition procedure (known as exequatur) which our domestic law provides for non-Community foreign judgments. This will mean an increase of costs, of time and, of course, greater uncertainty, since the recognition of a British judgment may or may not be ordered depending on the opinion of the Spanish court which is to decide on the matter.
It is not only a problem of time and cost. From the end of the transition period onwards, the risk of not obtaining recognition of a British judgment in Spain will increase because our legislation establishes certain stricter grounds for refusal than the current Recast Regulation on Insolvency. For example: the enforcement of a British proceeding may be refused if our courts conclude that the British courts assumed jurisdiction over a matter in accordance with criteria not equivalent to ours (this may occur if the British courts continue to penalise refinancing of companies which do not have their principal center of interests, or at least their domicile, in the UK). These greater obstacles to the recognition of British proceedings will have consequences in most diverse areas. Consider the fact that, as our case law has claimed to date, the manager of an English proceeding will not be able to publicise it nor register it directly in the Spanish registries nor, in general, will he be able to act in Spain without previously obtaining recognition of the British proceeding from a Spanish judge. Furthermore, the rest of our authorities will refuse their cooperation to the British authorities until a Spanish judge recognises the English proceeding.
What would be the impact on security rights over assets in the UK?
However, the effects of the ‘insolvency Brexit’ are not limited to the recognition of insolvency or pre-insolvency proceedings conducted in the UK or to the cooperation with the authorities of that State. There will also be a greater and more worrying ripple effect of this ‘insolvency Brexit’ when the authorities of the EU Member States have to respond to certain situations related to the UK. One of the clearest examples will certainly be that of the security rights over assets located in the UK. The Recast Regulation on Insolvency at present is particularly favorable towards the position of the holder of that security and ‘shields’ the secured creditor’s position, granting him full immunity from the insolvency proceeding commenced in another country although the asset which acts as security is located in an EU Member State other than that in which the proceeding is conducted. In other words, it is as if the insolvency proceeding ‘did not exist’ for these creditors, who remain divorced from it and with their security immune to the proceeding commenced in another EU Member State. However, after 31 December 2020, with the end of the transition period, this panorama will change considerably. As a consequence of the draft, each EU Member State will begin to apply the solutions of its domestic legislation, whereupon the immunity of creditors (British or otherwise) with security rights over assets situated in the UK may be lost. Again, Spanish legislation provides good evidence of this. Our insolvency law does not provide any immunity benefiting those creditors but rather the mechanical application on its actual terms of the insolvency rules of the State in which the asset constituting security is located. And British law, like French, Italian or German law, does not grant full immunity to this type of secured creditors, but rather, to a greater or lesser extent, imposes various restrictions on them.
During the time remaining until the end of the transition period, it may be envisaged that financial creditors forewarned and with the ‘insolvency Brexit’ in view, will entrust to their lawyers the preparation of a stress test to ascertain how their cross-border security will behave in the event of insolvency of their counterparties after 31 December 2020.
What is the likely impact on schemes of arrangement?
In addition, it seems reasonable to assume that the attraction which the British schemes may have had in the past for non-British debtors and their financial creditors will fade considerably in the face of the future panorama, especially taking into account the fact that there are already alternative mechanisms in other Member States, such as the judicial approval of refinancing agreements in Spain, the forced conversions of debt into capital in Germany, the concordato preventivo in Italy or the safeguard procedure in France. In fact, the future European Directive on early restructurings will standardise all these alternative mechanisms, and will provide companies in difficulties of the Member States with extremely powerful restructuring tools, in line with the North American system, which are more modern and developed than the British schemes and easily recognisable throughout the entire EU territory.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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