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Posted: 13 Nov, 2018

Post-Brexit, how would creditors in the U.K. retrieve assets that had been transferred to Europe? How would creditors recover debts from European Union (EU) companies that are insolvent? This article looks at how the European Regulation on Insolvency Proceedings (EIR) and recognition of insolvency judgments, as well as schemes of arrangement, will be impacted by Brexit. Just to be clear, English law in relation to insolvency and restructuring procedures is not impacted by Brexit.

Current Position

The EIR was adopted in 2000, came into force in 2002, and was recast in 2017. It effectively automatically recognises U.K. insolvency proceedings in other EU member states and vice versa. The EU (Withdrawal) Act 2018 seeks to import any EU law that applies in the U.K. immediately into U.K. law before the U.K. leaves the EU. The problem is that the list of laws to be imported isn’t presently available; hence the uncertainty. The EU (Withdrawal) Act says that U.K. courts are not bound by European Court of Justice decisions from the date the U.K. leaves the EU.

From the perspective of U.K. insolvency proceedings, the EU Withdrawal Act recognises insolvency proceedings that have already been opened in the EU, but future U.K. insolvency proceedings cases would not be automatically recognised in the EU, once the U.K. is no longer a member state. Therefore, cross-border insolvency planning is no longer available to the U.K.

Cross-Border Insolvency

Cross-Border Insolvency Regulations 2006, SI 2006/1030 (CBIR) were designed to implement the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency. The CBIR have hitherto been overridden in EU situations by the EIR, but this would no longer be the case upon the U.K. leaving the EU.

The CBIR provides that foreign insolvency proceedings can be recognised in the U.K. on application to and by order of the High Court. However, most EU member states do not have similar provisions, as they have not implemented the UNCITRAL Model Law. The exceptions are Ireland, Poland, Slovenia, and Greece. The result, post-Brexit, would be that insolvency practitioners in countries such as Germany, France, Spain, and Italy could apply simply in the U.K. for recognition of their proceedings, but practitioners in the U.K. would not necessarily be able to do the same in those countries.

Applying this to practice, certain cases may involve individuals moving assets out of the U.K. before a bankruptcy occurs. Currently, a notice of bankruptcy can be registered at the EU member land registry to stop, for example, property in Germany from being sold until the claim is dealt with. It ultimately benefits creditors and is quick and efficient, and there is mutual automatic recognition.

Without this accommodation in place, the process of tracing and recovering the property or assets in Germany will be far slower and will increase cost for the insolvency practitioner, which will only serve to have a detrimental impact on the outcome for creditors. Also, those debtors determined to distance their assets from their creditors would soon learn that, in a post-Brexit world, hiding assets in EU member states would present U.K.-based insolvency practitioners with a more difficult task to secure and realise those assets.

Possible Solutions

What could the solution be? As with a lot of the issues arising out of Brexit, the answer is far from straightforward. The government could bring legislation into effect that brings the relevant legislation (including the EIR) onto the U.K. statute books, but that will take a lot of time, particularly given that in a post-Brexit world the U.K. Parliament will be dealing with a confetti of new statutes and regulations. In addition, the wholesale adoption of the EIR in the U.K. may rely on EU states agreeing to its adoption, and obviously their willingness to do that will very much depend on the "hardness" of any Brexit.

The alternative is that the U.K. signs up to some pre-existing bilateral enforcement treaties, such as the Lugano Convention. This may be little more than a stopgap, on the basis that such arrangements could add an additional layer of complexity to any attempts to take enforcement action across EU.

There is also the possibility that the issue will work itself out over time as the U.K. government does deals with various countries within the EU, but that is going to take a great deal of time—possibly years—and is unlikely to provide an immediate solution.

Failing all of that, insolvency practitioners will have to be prepared to take separate proceedings alongside those they are already taking in the English courts. That is possible but will add greatly to their work and therefore the costs. Also, for those who have attempted to litigate in some EU states, experience dictates that litigating in multiple jurisdictions is hardly the most efficient and effective method of recovering assets, save for cases which are already complex and asset-dense anyway.

Conclusion

Practitioners therefore need to keep a close eye on developments in the next few months as the U.K. government negotiates the exit deal. It is unlikely that this issue will be given the same level of attention as some of the others confronting the government, so it may take some time to play out and for a satisfactory solution to be found.

 

BY PETER BREWER, PARTNER, CLARKE WILLMOTT LLP

Peter Brewer is a partner with U.K. national law firm Clarke Willmott LLP and leads the commercial litigation team in Birmingham. He deals with complex commercial disputes and acts on corporate litigation involving shareholders, directors, investors, and other stakeholders. He regularly advises on the enforcement of post-termination restrictions, the abuse of confidential information, and breaches of implied and express duties, including fiduciary duties. Brewer is an active member of the TMA UK Chapter and chairs the committee that organizes West Midlands events.


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