Brexit: Where are we going? Chequers or “No Deal”?

Mark Phillips QC
Company LawInsolvency & Restructuring
Government/Regulation
Published October 2018

In the last edition of the Digest I likened the Brexit negotiations to a squabbling family who had set off on a journey without knowing where they were going1

Continuing the analogy, since then the squabbling in the back of the car has become so bad that two of the children, Boris and David, have got out and they’ve jumped into Uncle Jacob’s car declaring that they’re not playing with Michel ever again. The ever-studious Theresa has produced a new game with rules she has written out and she’s invited a new friend Dominic to come along. So three quarters of the way along the journey, Dad (Nigel) has his head down and is heading for the coast, trying to keep up with Uncle Jacob, who seems to be having all the fun. But the atmosphere in the car is one of increasing nervousness. “I think my new game will be fun” says Theresa. “Michel, if we don’t play Theresa’s game, then we’re going to take all our toys and play with someone else, and then you’ll be sorry”, says Dominic. “OK, my friends Angela and Emmanuel said you can include Ireland in the game, but you need to let us have some of the City.” And so it goes on, but it can’t go on and on, 29 March 2019 is now only 6 months away.

Having examined in the June 2018 Digest what the position would be on recognition and enforcement of insolvency proceedings and schemes during the transition period and beyond based upon the EU (Withdrawal) Act 2018 and the Draft Withdrawal Agreement, I now turn to what the position might be based upon the Chequers White Paper of July 2018 and HMG’s announcement of the impact of no deal made on 13 September 2018.

The “Chequers” White Paper

The formal title of the Chequers’ White Paper is “The Future Relationship Between the United Kingdom and the European Union.” In her foreword the Prime Minister says that leaving the EU “requires pragmatism and compromise from both sides”. Both she and the Secretary of State for Brexit, Dominic Raab, state that they will take the UK out of the Single Market. That is significant when it comes to insolvency procedures and schemes.

The White Paper runs to 98 pages. There are only two references to insolvency, and none to schemes. Chapter 1 is concerned with the Economic partnership. Sub-chapter 1.7 deals with “Socio-economic cooperation”. The subchapter starts (paragraph 127) by stating that there are “many other areas where the UK and EU economies are closely linked”, including civil judicial cooperation. The starting point is that civil judicial cooperation, which is central to the successful operation of cross border insolvency, as well as all other forms of cross border dispute resolution, together constitute an “other area”. The Paper goes on to say that “the UK recognises that it will not be possible to replicate [the close integration in these areas] once [the UK] has left the EU”. This, it is said, is because this cooperation reflects the EU Member States’ membership of the Single Market. It is debatable whether the international cooperation in insolvency matters across Europe has been a result of the EU Single Market, or a response to a wider international movement, reflected by the UNCITRAL Model law and various international professional bodies. In any event, the EU Insolvency Regulation is not a necessary incident of Single Market membership 2. The wider movement helped move cross border insolvency law from the fragmented discipline that it was in the early 90s when, for example, Sir Nicholas Browne-Wilkinson VC said in BCCI that “there must be a better way”, to an approach that embodied recognition of the processes of different jurisdictions and a number of core principles, such as the COMI. By linking insolvency to the Single Market, rather than acknowledging that our cross border insolvency regimes reflect something more international, it is arguable that the White Paper has sold our insolvency laws short.

The White Paper acknowledges that there are precedents outside the Single Market for close cooperation and says that the UK would seek to draw on these precedents in the future relationship. The most obvious precedent in an insolvency context is the UNCITRAL Model law.

Paragraph 128 sets out the UK’s proposals in relation to socio-economic cooperation, which includes air transport, maritime, rail, energy, civil nuclear, intellectual property and audit and accounting. As regards civil judicial cooperation, it refers in (g) to:

“…seeking to join the Lugano Convention and exploring a new bilateral agreement with the EU on civil judicial cooperation, covering a coherent package of rules on jurisdiction, choice of jurisdiction, applicable law and enforcement of judgments in civil, commercial, insolvency and family matters.”

The second reference to insolvency comes in paragraph 148. This comes in sub-chapter 1.7.7 on civil judicial cooperation. That starts by recording that civil judicial cooperation is mutually beneficial to both the UK and the EU. “Businesses benefit from legal certainty in the event of disputes and are more confident trading across borders”. This sub-chapter sets to “protect” the advantages of cooperation. Paragraph 146 says:

The UK is therefore keen to explore a new bilateral agreement with the EU, which would cover a coherent package on jurisdiction, choice of jurisdiction, applicable law, and recognition and enforcement of judgments in civil, commercial, insolvency and family matters. This would seek to build on the principles established in the Lugano Convention and subsequent developments at EU level in civil judicial cooperation between the UK and Member States. This would also reflect the long history of cooperation in this field based on mutual trust in each other’s legal systems….”

What the White Paper fails to recognise is that recognition of insolvency processes is not simply another aspect of recognition of civil judgments. Whilst an insolvency will often give rise to questions of jurisdiction and the need to enforce judgments, in an insolvency recognition is being given to an insolvency process, not to a judicial process. By focussing on the Lugano Convention and including insolvency as one of several different types of jurisdiction that the UK hopes to agree will be recognised, the White Paper has failed to take account of the very different nature of an insolvency process, and the different nature of the questions of recognition and enforcement that arise.

There is a further problem at the heart of this negotiation. The UK has enacted the Cross-Border Insolvency Regulations 2006 that give effect to the UNCITRAL Model law. 23 EU member states have not yet adopted the UNCITRAL Model Law; the 4 exceptions are Greece, Poland, Romania and Slovenia. The recognition in the UK, as main proceedings, of EU insolvency proceedings taking place where the Centre of Main Interests (‘COMI’) is located will continue, but under the Cross-Border Insolvency Regulations 2006 (unless it is going to be suggested that proceedings in EU countries are “manifestly contrary to public policy”). Thus, the UK will continue to give effect to EU based insolvency regimes and, if the UK signs up to the Lugano Convention, effect will be given in the UK to orders made by EU courts. The problem after Brexit is that there will no longer be a clear mechanism for recognition of UK insolvencies and judgments in much of the EU. Once the EU Insolvency Regulation ceases to have effect in relation to the UK, the UK will need to agree recognition and enforcement of insolvency processes and orders in 23 of the 27 remaining EU member states. If the UK fails to secure such an agreement, recognition and enforcement in 23 EU member states, including Germany, France, Holland and Italy, will depend upon their domestic laws. As I analysed in my previous article, in relation to several issues, once the UK is a third party and no longer a member state, there will be no mechanism for automatic recognition. What the White Paper highlights is the UK’s need to secure EU agreement to recognition of UK insolvency processes and judgments.

Her Majesty’s Government’s (HMG’s) announcement on no deal

HMG’s announcement on the impact of a no deal Brexit on cross-border insolvency is two paragraphs long. The first paragraph says:

The majority of the Insolvency Regulation, which covers the jurisdictional rules, applicable law and recognition of crossborder insolvency proceedings, would be repealed in all parts of the UK. We would retain the EU rules that provide for the UK courts to have jurisdiction where a company or individual is based in the UK, and the law will ensure that insolvency proceedings can continue to be opened in those circumstances. But after exit, the EU Insolvency Regulation tests would no longer restrict the opening of proceedings and so it would also be possible to open insolvency proceedings under any of the tests set out in our domestic UK law, regardless of whether (or where) the debtor is based elsewhere in Europe.”

Put this way it looks as if the UK is going to be able to take primacy in insolvency proceedings, provided we have jurisdiction, which depends on there being a connection with the UK, and we need not be concerned about the location of the COMI. However, there is (rightly) no suggestion that the UK would repeal the Cross-Border Insolvency Regulations 2006. Therefore, whilst the automatic application of the EU Insolvency Regulation would cease, if the COMI is in an EU Member state, the Foreign Representative will be able to apply to a UK court for recognition of the proceedings in the COMI as a foreign main proceeding under the Cross Border Insolvency Regulations 2006. Article 17(2)(a) provides that a foreign proceeding shall be recognised as a foreign main proceeding “if it is taking place in the State where the debtor has [its COMI].” Recognition of a foreign main proceeding has all the effects identified in article 20, including an automatic stay. Additional relief could be sought by the Foreign Representative under articles 21 to 25, and under articles 25 to 27 the UK court can cooperate “to the maximum extent possible” with foreign courts or foreign representatives. Article 28 make it clear that once the foreign main proceeding is recognised the effect of a proceeding under British insolvency law in relation to the same debtor is restricted “to assets that are located in Great Britain and, to the extent necessary to implement cooperation and coordination under articles 25, 26 and 27, to other assets of the debtor that, under the law of Great Britain should be administered in that proceeding.” While there will be procedural differences, notably the need for an application for recognition of the EU proceedings, and there will be nuanced differences in treatment, although these can be ironed out by the court, repealing the EU Insolvency Regulation will be a matter of form rather than substance. EU insolvency proceedings in the country where the debtor’s COMI is located will continue to be foreign main proceedings in the UK, and UK proceedings of the debtor’s assets will continue to be restricted. An incidental consequence of the Cross-Border Insolvency Regulations 2006 in this context is article 8. Article 8 requires the UK courts in the interpretation of the Model law, and in the present context the meaning of the COMI to have regard to “the international origin and to the need to promote uniformity in its application and the observance of good faith.” On one view this requires UK courts to have regard to the decisions of EU courts, including the European Court of Justice when it comes to concepts such as the COMI. Clearly to some Brexiters this would be the antithesis of a certain view of the purpose of Brexit.

The second paragraph of HMG’s announcement says:

UK insolvency practitioners would need to make applications under an EU country’s domestic law in order to have UK orders recognised there. In certain circumstances, some EU countries may not recognise UK insolvency proceedings, for example if that would prevent creditors from taking action against the assets held in that country. Where appropriate, insolvency practitioners may wish to take professional advice on the prospects of successfully obtaining recognition for a UK insolvency order in an EU country. EU insolvency proceedings and judgments would no longer be recognisable in the UK under the EU Insolvency Regulation, but may be recognised under the UNCITRAL Model Law on Cross-Border Insolvency, which already forms part of the UK’s domestic rules on recognising foreign insolvencies.”

The first sentence recognises that, absent an agreement, UK insolvency practitioners would need to make applications under an EU country’s domestic law in order to have the UK proceedings (not just orders) recognised there. That hides an unwelcome truth. In the four countries that have given effect to the UNCITRAL Model Law, recognition is relatively certain and the underlying principles readily understood. That is Greece, Poland, Romania and Slovenia. In the 23 other EU member states, recognition is going to depend on the old pre-EU Insolvency Regulation domestic laws. Thus, for example, an insolvency that involves the UK, Germany and France, the UK insolvency practitioner needs to know
how to get the UK process recognised. The insolvency practitioner will also need advice on how the UK process will fit in with processes in Germany and France that will be subject to the EU Insolvency Regulation and how that might affect the previous domestic laws of Germany and France as regards the UK process. One question HMG’s statement does not address, is when the UK insolvency practitioner is supposed to get this advice. The answer may impact significantly on the effectiveness of a UK insolvency process. It follows that this is not a question that can be left outstanding and that, if there is no deal, UK insolvency practitioners will need to know in advance of any appointment what the domestic laws are in the 23 EU member states who have not given effect to the UNCITRAL Model Law. The third sentence advising that UK insolvency practitioners may want to take professional advice is something of an understatement, but I question whether this is something that should be done on a case by case basis or whether more market-wide research should be done. The second sentence recognises the sorts of problems that could arise. If creditors cannot take action against assets in EU countries, that signals a return to the days before modified universalism. As is well known, such an outcome could result in unnecessary complication and consequential costs.

As regards schemes, ‘no deal’ would result in the repeal of Brussels 1 insofar as it applies to UK judgments, which would raise squarely the question whether recognition of schemes of arrangement in the EU depends upon the application of choice of law rules or upon recognition of the UK court’s order. On a ‘no deal’ Brexit, reliance cannot be placed entirely on the court order and so it will depend upon establishing that the scheme is effective by an application of the choice of law to the restructured contracts.

A cause for concern?

In the insolvency context it is very difficult to take comfort from either the Chequers White Paper or HMG’s announcement on ‘no deal’. If a deal is negotiated with the EU, the UK should seek continued application to UK insolvencies in EU member states of the principles found in the UNCITRAL Model Law and if possible the EU Insolvency Regulation. Absent agreement along those lines, what the UK will be left with is an asymmetric system whereby recognition and enforcement is given to EU insolvencies, but in relation to UK insolvencies the answer will be “we do not know” and we may return to a messy system that depends upon disparate domestic EU laws.

Yes Minister

Minister, I have been giving some thought to what happens to insolvencies on a no deal Brexit.”

Oh, do we have to deal with insolvency, it sounds rather depressing.

We do Minister. What we will do is repeal the EU Insolvency Regulation and we will say we will do it ‘in all parts of the UK’. We will say that we will abolish the rules that currently make the proceedings in the country where the Centre of Main Interest is located, the main proceedings.”

That sounds excellent, Sir Humphrey, that will show the EU we mean business.

Well, the beauty of it Minister, is that in the UK we have given effect to the UNCITRAL Model Law. That means that insolvency proceedings where the Centre of Main Interests is located will be recognised in the UK as ‘foreign main proceedings’.”

So instead of calling the EU insolvency proceedings ‘main proceedings,’ we will call them ‘foreign main proceedings’. Yes, I like that, Sir Humphrey. That’s giving effect to the referendum result”.

It’s the ideal solution, Minister. We tell the world at large that we are taking big steps to repeal the EU rules, and apart from calling them ‘foreign’ we change as little as we can.”

And what about our UK proceedings, will they call ours ‘foreign’?

We haven’t worked out what they will call ours, or if they will recognise them at all I’m afraid.”

That’s the EU for you, Sir Humphrey, I knew we were right to withdraw.

 

 

1I gratefully acknowledge the assistance and advice given by my colleagues Riz Mokal and Toby Brown.
2This is confirmed by the position of Denmark.

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