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Kate Stephenson and Sacha Lürken, partners at Kirkland and Ellis International LLP consider the potential practical implications for the cross-border European restructuring and insolvency landscape of a ‘no deal’ Brexit, in the context of recent developments.
UK legislation to deal with the impact of a ‘no deal’ Brexit in the restructuring and insolvency market was enacted at the end of January. The prospect of Brexit is evolving rapidly-almost daily-amid opposition to the negotiated deal and calls for a second referendum.
A negotiated Brexit would involve a transition period, currently anticipated to end on 31 December 2020. The draft Withdrawal Agreement confirms that the EU Insolvency Regulation and the EU Judgments Regulation (important for cross-border recognition of schemes of arrangement) would continue to apply to insolvency proceedings/judgments commenced before the end of the transition period. This means it would be ‘business as usual’ for European cross-border restructurings and insolvencies until the end of 2020. Recognition for later proceedings is left open for negotiation (during the transition period), and is much more uncertain. At the time of writing, it remains highly uncertain whether the UK Parliament will approve the draft Withdrawal Agreement, or any revised agreement.
Accordingly, the UK and the EU continue to step up preparations for a ‘no deal’ Brexit.
Losing the ability to deal with insolvencies via a single process, with automatic recognition across the EU, would make it more complex, lengthy and expensive to resolve cross-border mandates, with the prospect of parallel proceedings.
This would jeopardise the prospect of rescue and reduce returns for stakeholders.
Bracing for potential impact of ‘no deal’ Brexit
The UK and the EU are stepping up preparations for a possible ‘no deal’ Brexit.
The UK is currently scheduled to leave the EU on 29 March 2019. On 30 January 2019, the Insolvency (Amendment) (EU Exit) Regulations 2019 (the Insolvency Brexit Regulations), SI 2019/146 were made under the affirmative procedure for Brexit statutory instruments. Their primary purpose is to modify UK domestic legislation, and the retained elements of the EU Insolvency Regulation, so that UK insolvency laws will operate effectively after exit day. The explanatory memorandum to the Insolvency Brexit Regulations provides that the Regulations would apply in the event of ‘no deal’. We understand that, if a deal is reached, the Regulations would be repealed. The Insolvency Brexit Regulations are effective in part from 31 January 2019 for some Northern Ireland provisions, and fully from exit day.
The premise underlying the Insolvency Brexit Regulations is that it would be inappropriate for the UK unilaterally to retain the Recast Regulation on Insolvency, which is predicated on reciprocity. Accordingly, limitations on access to UK courts based on a debtor’s COMI, or the presence of an establishment, will be lifted.
The Insolvency Brexit Regulations provide:
However, this remains subject to the difficult question of whether such UK proceedings would receive the requisite recognition in other EU jurisdictions, as explored below.
The scenarios below demonstrate the potential practical implications of the Insolvency Brexit Regulations. Of course, these are only brief, illustrative summaries regarding a highly complex and uncertain area of law; they are not a substitute for definitive advice.
There are important transitional provisions in the Insolvency Brexit Regulations, which are beyond the scope of this alert.
In a nutshell: UK courts would continue to recognise European insolvency proceedings, though only upon application and with greater discretion as to the relief to be granted to the foreign insolvency officeholder. As the law presently stands, the UK courts would not recognise a purported compromise or release of English law debt pursuant to foreign proceedings.
A distressed French company has its COMI in France. Certain of its debt is governed by English law. The company opens French accelerated financial safeguard proceedings to amend and extend its existing financing arrangements.
Currently: The French insolvency proceedings would automatically be recognised in the UK under the Recast Regulation on Insolvency. This includes the amendment of the English law debt.
In a ‘hard Brexit’ scenario: The French proceedings should be recognised via a court application under the CBIR, which implement the UNCITRAL Model Law on Cross-Border Insolvency.
In a potential application by an appointed foreign representative for recognition of the French proceedings under the CBIR:
However, creditors with debt governed by English law would not be bound by the purported compromise under the French proceedings, unless they were present in France at the time the French proceedings were initiated, were a claimant or counterclaimant in those proceedings, or voluntarily submitted to the French court’s jurisdiction by appearing voluntarily or by agreement.
Compromise of French law-governed claims within the French proceedings would be likely to be recognised by an English court.
In a nutshell: EU countries would be under no obligation to automatically recognise UK insolvency proceedings. Insolvency officeholders will need to apply for recognition in other relevant EU countries. There is a significant risk that UK insolvency proceedings and schemes of arrangement would not be recognised; recognition would depend upon European conflict of law rules. Only a small minority of EU countries have implemented the UNCITRAL Model Law on Cross-Border Insolvency.
An English company, with its COMI in England, sells its business and assets to a creditor-owned Newco via (English) pre-pack administration. Certain of its direct subsidiaries and other assets are located in Germany.
Currently: The administration would automatically be recognised in Germany (including the transfer of the company’s German subsidiaries and other assets to Newco).
In a ‘hard Brexit’ scenario: The English administration would not automatically be recognised in Germany via the Recast Regulation on Insolvency. Encouragingly, however, the proceedings ought to be recognised automatically under German conflict of law rules, based on the fact that the company’s COMI is in the UK. (If the company’s COMI were outside the UK, the pre-pack would not be recognised in Germany.) There would remain a risk of parallel proceedings being opened in Germany, in respect of assets located in Germany; this contrasts with the current position under the Recast Regulation on Insolvency.
The prospect of recognition of the pre-pack would be far less certain if recognition were sought in certain other EU jurisdictions. In certain circumstances, some EU countries may not recognise the UK insolvency proceedings, for example if that would prevent creditors from taking action against the assets held in that country. Recognition would be more likely in those countries which have implemented the UNCITRAL Model Law on Cross-Border Insolvency and those countries with domestic provisions influenced by the Model Law, such as Germany.
This raises a prospective imbalance between UK ‘inbound’ recognition of EU proceedings and EU recognition of UK ‘outbound’ proceedings. The prospects of successfully obtaining recognition for a UK insolvency proceeding in an EU country would need to be carefully considered in each case. In most cases, this will be more difficult if the debtor’s COMI is located outside the UK, as mentioned above.
A Dutch company, with its COMI in the Netherlands, pursues an English scheme of arrangement to amend and extend its English law-governed facility agreement.
Currently: The scheme would likely be recognised in the Netherlands, pursuant to the EU Judgments Regulation (a.k.a. the Brussels Ia Regulation), Dutch domestic private international law or (possibly) the Rome I Regulation.
In a ‘hard Brexit’ scenario: It is likely—but far from certain—that the scheme would be recognised in the Netherlands, based on the Brussels Convention, Dutch domestic private international law and/or (arguably) the Rome I Regulation. If the facility agreement provides for the exclusive jurisdiction of the English courts, then recognition might also be afforded under the Hague Convention on Choice of Court Agreements (to which the UK will accede with effect from 1 April 2019, shortly after exit day, unless a deal is reached).
An English company pursues an English scheme of arrangement to effect a debt-for-equity swap in respect of its New York law governed high-yield notes.
Currently: The scheme would likely be afforded recognition in the US pursuant to an application under Chapter 15 of the Bankruptcy Code. This includes recognition of the compromise of the New York law-governed notes.
In a ‘hard Brexit’ scenario: The scheme and its effects would be recognised in the same way as at present. Happily, even a hard Brexit looks unlikely to make a difference from the perspective of US cross-border insolvency.
Kate Stephenson and Sacha Lürken are partners in the European Restructuring Practice Group of Kirkland and Ellis International LLP
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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