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      Insolvency and restructuring

       

      Current state of play

      • EU member states have made little attempt to harmonise insolvency and restructuring law across the bloc, so the rules remain largely the concern of the individual member states. The main impact of EU law relates to the mutual recognition of insolvency or restructuring proceedings that take place within a particular EU member state.
      • The EC Regulation on Insolvency Proceedings (EIR) applies to all member states except Denmark. This means that an insolvency proceeding listed in Annex A to the EIR and commenced in a member state is automatically recognised and – to a certain extent – has exclusivity in any other EU member state, again bar Denmark.
      • Companies wanting a scheme of arrangement sanctioned by an English court under the Companies Act 2006 usually argue that the court’s sanction order may be recognised under certain other EU legislation (but not the EIR), including the EU Judgments Regulation.
      • The EIR does not apply to credit institutions, insurance undertakings, investment undertakings that provide services involving the holding of funds or securities for third parties and collective investment undertakings (collectively ‘financial institutions’). However, EU member states, including the UK, have adopted legislation to implement the EU Credit Institutions Winding-up Directive and the Insurance Undertakings Winding-up Directive. These recognise insolvency and reorganisation measures commenced in a financial institution’s home EU member state without any further requirements and without the opportunity to open territorially limited proceedings. 

       

      What should I be thinking about now?

      • What insolvency proceedings in EU member states are available to us? Which process would benefit us most (including from a later recognition perspective)? Will that change if the UK leaves the EU?
      • Will an English scheme of arrangement be an option for us and, if so, how beneficial will it be?
      • Do we need further legal analysis to ensure that any cross-border insolvency restructuring will have the intended effects across all relevant jurisdictions? 
      • In a multi-jurisdictional restructuring or insolvency, would we have to take separate restructuring measures with respect to branch offices, subsidiaries or assets in the UK?

       

      What could the position be following a Brexit?

      The answers to many of the above questions would depend on the nature of a post-Brexit UK/EU relationship

      To give an idea of the range of possible outcomes, we have considered what the position would be under the ‘Norwegian option’ and the ‘World Trade Organisation (WTO) option’ – on the basis that these are at opposite ends of the spectrum of existing models for an alternative relationship with the EU.

      What if the UK leaves the EU but joins the European Free Trade Association and remains part of the EEA? (the Norwegian option)

      Recognition of insolvency proceedings

      • Norway has not implemented the EIR. However, it is party to the Nordic Bankruptcy Convention, which also applies in Denmark, Finland, Iceland and Sweden.
      • It seems that the UK will have to decide whether or not the EIR should continue to have effect and, if so, in what form. If it does want the EIR to apply, the UK will have to agree with the EU that its insolvency proceedings will continue to be recognised automatically under the EIR. If such an agreement was reached, UK insolvency proceedings would be the only non-EU insolvency proceedings automatically recognised across the bloc. 

      Impact on schemes of arrangement

      • English courts are willing to sanction schemes of arrangement affecting companies incorporated outside of England where a ‘sufficient connection’ is established. In doing so, the courts are concerned that their orders will be effective in practice. In particular, courts have looked at whether a scheme would have effect in the scheme company’s jurisdiction of incorporation. Effectiveness is usually argued for companies incorporated in EU member states by reference to the EU Judgments Regulation. 
      • Norway is party to the Lugano Convention, which applies to the EU, Switzerland, Norway and Iceland and is similar to the EU Judgments Regulation.
      • It is likely then that the UK would also sign up to the Lugano Convention. As it is so similar to the EU Judgments Regulation, signing up to the Lugano Convention would seem to minimise any real impact to the continued use of English schemes of arrangement.

      What if the UK leaves the EU without any form of free trade agreement? (the WTO option)

      Recognition of insolvency proceedings

      • If the UK does not agree with the EU on the future effect of the EIR:
        • the recognition of UK insolvency proceedings in the EU will likely require applications to the domestic courts for judicial assistance under the Cross-Border Insolvency Regulations 2006 (‘the Regulations’) as well as the much-debated common-law concept of comity of insolvency proceedings; and 
        • inbound insolvency proceedings (ie those seeking recognition in the UK) will become reliant on the Regulations and common law comity.
      • These issues also arise in relation to entities covered by the EU’s Credit Institutions Winding-up Directive and Insurance Undertakings Winding-up Directive. 
      • The critical impact would be that recognition and assistance in insolvency proceedings would require court applications in the UK and EU, which can be determined based on judicial discretion.

      Impact on schemes of arrangement

      In the absence of any agreement with the EU on the mutual recognition of court judgments, it is expected that English courts would continue to respect provisions in commercial contracts (including finance documents) that confer jurisdiction by agreement on the English courts. 

      The question of how such clauses and judgments made by English courts assuming jurisdiction from such clauses will be treated by courts in EU member states will be a matter for the laws of those member states. 

      Finally, with no mutual recognition agreement, the enforcement of English court judgments in the EU is likely to be significantly more complex than it currently is. This in turn would make the grounds on which English courts sanction schemes of arrangement uncertain.