In those kinds of cases the tools available to the court in the jurisdiction where the insolvency proceedings have been opened may not be adequate to protect creditors, or to maximise their recovery. EU law recognises this and in legislation known as the Recast Insolvency Regulation, it provides a system for the automatic recognition of insolvency proceedings opened in one Member State in all other EU Member States (save Denmark which opted out).
Impact of Brexit
What will happen though when the current “transition period” comes to an end and Brexit comes into full effect?
The Withdrawal Agreement between the UK and the EU provides that, after the end of the transition period (ie 31 December 2020, unless this is extended), the Recast Insolvency Regulation will only apply to insolvency proceedings commenced before the end of the transition period. For insolvency proceedings commenced after the end of the transition period, what cross-border insolvency arrangements will apply between the UK and the EU will depend on the outcome of ongoing negotiations. There is clearly a good chance however that the EU will be in no better position than third party countries with the effect that EU insolvency officeholders will need to make use of the English cross-border toolbox available to foreign insolvency officeholders in third party countries.
The Cross-Border Insolvency Regulations
Fortunately for EU insolvency officeholders, it will still be possible to seek help from the English courts by relying on the Cross-Border Insolvency Regulations 2006 (SI 2006/1030) (CBIR). This English legislation is already available to third party country insolvency officeholders and so should be available to EU insolvency officeholders after the transition period even assuming no new arrangements are reached between the UK and the EU following the transition period.
These regulations seek to bring into effect in Great Britain a standard set of rules promoted by the United Nations Commission on International Trade Law, known as the UNCITRAL Model Law on Cross-Border Insolvency.
Requirements for recognition under the CBIR
The CBIR permits an officeholder appointed in a foreign insolvency proceeding to apply to the English court for recognition of the foreign proceeding. The proceeding must be collective in character and so, as with the Recast Insolvency Regulation, a foreign receiver whose primary duty is owed not to the company's creditors as a whole but to his appointor will not be accorded recognition under the CBIR. The procedure for making a recognition application is straightforward and requires no special formalities but unlike the Recast Insolvency Regulation there is no provision for automatic recognition of specific named foreign insolvency procedures; in each case the foreign officeholder will need to evidence the criteria for recognition in their application.
A foreign proceeding must be either a foreign main or foreign non-main proceeding. The distinction between the two follows the distinction between main and territorial proceedings within the Recast Insolvency Regulation: a foreign main proceeding is defined as a foreign proceeding taking place in a state where the debtor has their centre of main interests. A foreign non-main proceeding is defined as a foreign proceeding taking place in a state where the debtor has an establishment. There is no jurisdiction under the CBIR for recognising a foreign proceeding opened against a debtor in a state other than one in which they have their centre of main interests or an establishment.
Effect of recognition under the CBIR
Recognition as a foreign main proceeding has the effect that execution against the debtor's assets is automatically stayed and the right to transfer, encumber or otherwise dispose of any assets of the debtor is suspended. This automatic stay does not however prevent secured creditors from taking action to enforce their security but such a stay on secured creditor enforcement may be granted in the discretion of the court if it can be shown that the moratorium under the insolvency law applicable in the state of the opening of the insolvency proceedings has the effect of staying enforcement actions by secured creditors.
In the case of recognition as a foreign non-main proceeding, unlike with recognition as a foreign main proceeding, there is no automatic stay on execution against the debtor’s assets but the court may order it in its discretion at the request of the foreign representative.
Upon recognition of a foreign proceeding, whether main or non-main, at the request of the foreign representative, the court may, among other things:
- provide for the examination of witness
- entrust the administration or realisation of all or part of the debtor's assets located in Great Britain to the foreign representative
Furthermore, upon such recognition, the foreign representative has standing to undo transactions by the debtor in the twilight period before the insolvency procedure. The transaction avoidance mechanisms made available to the foreign officeholder are those available in English insolvency law including powers to avoid:
- transactions at an undervalue (section 238 Insolvency Act)
- transactions amounting to a preference (section 239 Insolvency Act)
The foreign representative does not have standing under the CBIR to bring transaction avoidance mechanisms available to him under the foreign insolvency law.
The foreign representative does have standing to open British insolvency procedures against the debtor provided the usual English law requirements for the opening of such procedures are met.
Limitations of the CBIR
The CBIR has its limitations, however, and it is noticeable that after the high watermark represented by the Privy Council’s judgment in 2006 in the Cambridge Gas case there has been something of a “rowing back” by the English courts from universalism to territorialism.
- In Rubin v Eurofinance SA the Supreme Court held that judgments of the New York court given in proceedings that were the US equivalents of transaction at an undervalue and preference claims could not be enforced in England whether pursuant to the CBIR or the common law despite their being insolvency type judgments and the New York insolvency having been recognised under both the CBIR and the common law. Instead the ordinary criteria for the recognition of foreign non-insolvency type judgments had to be satisfied, namely presence or submission to the foreign jurisdiction
- The English court will not give effect under the CBIR or common law to a discharge under a foreign insolvency law of an English law governed debt unless the creditor has proved for its debt in the foreign insolvency procedure
The position under the CBIR as detailed in (1) and (2) above would appear to be less favourable to foreign representatives than the position under the Recast Insolvency Regulation.
Other tools in the toolbox beyond the CBIR?
The foreign representative can also seek recognition of the foreign proceeding under the common law albeit recognition under the common law is unlikely to provide any greater assistance to the foreign representative than recognition under the CBIR.
The foreign representative can also seek to open British insolvency proceedings which, if successful, should circumvent the discharge issue raised at (2) above but which will also lead to greater complexity and costs.
The effect of section 426 of the Insolvency Act 1986 should also be noted. This section requires the English courts with jurisdiction in relation to insolvency law to assist courts having the corresponding jurisdiction in any other part of the United Kingdom and other countries so designated by the Secretary of State. The English insolvency court, when receiving a request from the insolvency court of a relevant country, may apply in aid of that request its own law even if the insolvency law of the relevant country has no equivalent provision and may apply the foreign insolvency law where there is no equivalent English provision, but in exercising its discretion to provide assistance the English court must take into regard private international law. The countries so designated are predominantly Commonwealth states and it is unlikely that this jurisdiction will be extended to EU states in a no deal post-transition period Brexit scenario but it is raised here for completeness.
Co-operation in the opposite direction
After the Brexit transition period has ended the CBIR look set to become increasingly important to EU insolvency officeholders as a way of having EU insolvency proceedings recognised in England and getting help that may be needed from the English courts.
Interestingly though, the situation will be less clear where a debtor enters a formal insolvency procedure in England and the English officeholder is looking for assistance from the courts in an EU state.
Unlike the UK, very few of the EU member states have implemented the UNCITRAL Model Law on Cross-Border Insolvency into their domestic legislation; the exceptions being Greece, Poland, Romania and Slovenia. Following the ending of the transition period, and assuming no agreement on continuing insolvency co-operation is reached between the UK and the EU, recognition of the English procedure in the EU (even by those countries that have enacted the Model Law) will no longer be automatic.
Excluding those countries that have enacted the Model Law, the degree of assistance offered to English officeholders will depend on each country’s respective domestic insolvency conflict of laws rules. These will vary from country to country and may accord considerably less assistance than the Recast Insolvency Regulation.