Dovetailing between the Judgments Regulation and the Insolvency Regulation

Key Points:

• The dovetailing principle dictates that there should be no gap between matters covered by the 1968 Convention on Jurisdiction and the enforcement of Judgments in Civil and Commercial matters and (as recast) in the Recast Brussels Regulation (RBR) – and the Recast Insolvency Regulation (RIR).
• Courts tend to rely on dovetailing to determine that if an action is not within the bankruptcy exception to the RBR, it will be governed by the RIR but this is problematic as in practice the scope of the RIR is
• The English scheme of arrangement falls outside the RIR and
• Post Brexit, despite the RBR and the RIR no longer having effect in the UK, dovetailing continues to be relevant to understanding the jurisdictional rules applicable to insolvency proceedings.

A. Introduction/Abstract

1. In recognition of the unique features of insolvency law, the EU developed two distinct jurisdictional and recognition regimes for civil and commercial matters on the one hand, and insolvency on the The relationship between the two regimes has been controversial, but it is now widely accepted by national courts and the CJEU that the regimes are intended to dovetail into one another. In theory, dovetailing ensures that the regulations constitute a comprehensive regime for all civil proceedings. In practice, it is often unclear which set of rules applies, and whether particular proceedings are within the scope of both regulations, or neither.

This article examines the difficulties of dovetailing, and the continued relevance of dovetailing after the UK’s exit from the EU.

B. Dovetailing: an overview

2. The separation of rules relating to bankruptcy and winding up from the jurisdictional rules on civil and commercial matters was first detailed in the Jenard Report on the original 1968 Convention¹. The Report explained that bankruptcy was to be excluded from the scope of the 1968 Convention by the Article 1(2) bankruptcy The rules relating to bankruptcy were to be contained in a separate Convention (which was never enacted but the plans for which formed the basis of Regulation No 1346/2000 and as recast, the Recast Insolvency Regulation (“RIR”)), due to the “peculiarities” of this branch of law.

3. The principle of dovetailing was first set out in the Schlosser Report on the 1968 Convention². Dr Schlosser states that the 1968 Convention and the contemplated bankruptcy Convention were intended to “dovetail almost completely with each other”. This principle has been adopted by the CJEU in recent decisions (see e.g. Nickel & Goeldner, Case C-157/13 and F-Tex SIA, Case C-213/10) and by the English courts.

4. In broad terms, the principle dictates that there should be no gap between matters covered by the 1968 Convention, and as recast in the Recast Brussels Regulation (“RBR”), and the More particularly, dovetailing mandates that jurisdiction over matters excluded from the scope of the RBR by Article 1(2)(b), which provides that the RBR does not apply to “bankruptcy, proceedings relating to the winding-up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous proceedings”, will be governed by the RIR.

5. In Gourdain v Nadler (Case 133/78) [1979] ECR 733) the CJEU determined that for decisions to be excluded from the 1968 Convention by the Article 1(2) exception, they must (i) derive directly from the bankruptcy or winding-up and (ii) be closely connected with the relevant insolvency proceedings.

6. The dovetailing principle pervades the drafting of the RIR, as provisions such as Article 6(1) RIR are defined in terms of the Gourdain formulation of the bankruptcy exception, granting the courts of the Member State in which insolvency proceedings have been opened jurisdiction over actions which derive directly from insolvency proceedings and are closely linked with them.

C. Dovetailing: recent application

7. The English courts have adopted the dovetailing principle when determining which regulation an action is governed The courts’ usual approach is to consider firstly whether the action falls within the bankruptcy exception. If it does, the courts then rely on the complementary nature of the regulations to find that the action is governed by the RIR. Notably, the courts do not tend to engage in examinations of the scope of the RIR, which, as detailed below, may prove to be problematic, and particularly so in a post- Brexit landscape.

8. In the recent High Court case Emerald v Cassini [2021] EWHC 2010 (Ch), the lender, Emerald, sought declarations as to the obligations of the borrower, Cassini, pursuant to a senior facilities agreement (“SFA”). Cassini was subject to a French Sauvegarde, a form of restructuring tool intended to assist debtors in financial Cassini challenged the jurisdiction of the English court to make the declarations sought, arguing that the claim was directly derived and closely connected to the Sauvegarde as the issue in the action concerned the effects of the French insolvency proceedings on its contractual obligations. Article 6(1) RIR therefore mandated that the action must be brought in France, where the insolvency proceedings had been opened.

9. Emerald contended that the action fell within the scope of the RBR, as the correct question for the court was whether the action itself derived from the French insolvency As the action sought declaratory relief as to the effect of a contract it was a civil and commercial matter, falling outside the Article 1(2)(b) exception for bankruptcy and winding up proceedings.

10. Zacaroli J adopted the dovetailing principle, and it was agreed between the parties that, insofar as possible, proceedings falling outside the scope of the RBR (being within the bankruptcy exception) would fall within the RIR and vice The scope of the bankruptcy exception was as defined in Gourdain v Nadler. The judge agreed with Emerald that it is the legal basis of the action which must directly derive from the insolvency proceedings, not the issue which the court is required to determine. The legal basis of Emerald’s claim for declaratory relief was the SFA, which existed independently of and prior to the Sauvegarde. The action therefore did not derive directly from the French insolvency proceedings and fell outside the bankruptcy exception. According to dovetailing, as the action was not within the RIR, it would have fallen within the scope of the RBR had it been commenced prior to 31 December 2020.

11. A similar issue was considered in ING v Santander [2020] EWHC 3561 (Comm). In that case Santander applied for a declaration that the English courts did not have jurisdiction to hear a claim brought by ING to retain interest received pursuant to various finance agreements from Marme, during the course of Marme’s liquidation in Spain. Santander was not a party to the finance agreements, but ING claimed that it was liable for Marme’s obligations via its subsequently acquired subsidiary, Sorlinda, which had successfully bid to assume Marme’s assets and liabilities in the Spanish liquidation.

12. The primary jurisdictional issue was, again, whether the claim fell within the scope of the RIR and was excluded from the RBR pursuant to Article 1(2)(b). ING argued that the claim did not derive directly from and was not closely connected to Marme’s liquidation, as it was between two solvent entities in respect of contractual obligations which pre dated the liquidation. Santander contended that the legal basis of the claim was the assumption of Marme’s liabilities, the nature of which depended on the effects of the liquidation plan in the Spanish insolvency proceedings.

13. Cockerill J held that the claim derived directly from Marme’s insolvency, as ING’s action was based on liabilities assumed by Sorlinda, and therefore Santander, in the Spanish insolvency process. The scope of Santander’s liabilities, and ING’s corresponding rights, formed the legal basis of the claim and these were dependent on the application of provisions of Spanish insolvency law as to the effect of the liquidation plan and the Sorlinda bid. As the action fell within the bankruptcy exception in the RBR, dovetailing dictated that it was governed by the RIR.

14. Importantly, Cockerill J rejected an argument that the applicability of the RIR should be determined on the burden of Although introduction of such a rule may have made the division between the regulations easier to predict, it would plainly threaten to undermine the utility of the RIR. Instead, Cockerill J repeated the dovetailing principle, determining that any case would properly fall into either regulation on application of the Gourdain test, although recognising that the test may be difficult to apply.

15. The ING v Santander judgment emphasises the importance of developing a clear notion of what dovetailing entails, as the principle itself is of relatively little use without a clear demarcation between the two regulations.

D. Jurisprudential issues

16. Courts have tended to avoid considering the scope of the RIR, relying on dovetailing to determine that if an action is not within the bankruptcy exception, it will be governed by the RIR. This is problematic, as in practice the scope of the RIR is uncertain.

17. Article 1(1) RIR provides that the RIR applies to public collective proceedings which are based on laws relating to However, recital 9 provides that the insolvency proceedings covered are listed exhaustively in Annex A, and this scope has been adopted by the CJEU (see e.g. Bank Handlowy w Warszawie SA, Case C 116/11). Annex A is comprised of the domestic insolvency proceedings submitted by individual Member States for inclusion. The obvious issue with dovetailing is therefore that the bankruptcy exception is not exactly co-extensive with the scope of the RIR, whether that be as determined broadly in Article 1(1) or narrowly in Annex A.

Schemes of arrangement: Mind the gap

18. On the narrow view that the scope of the RIR is determined by Annex A, dovetailing dictates that any proceedings not within Annex A will fall within the scope of the RBR.

19. The first complication is raised by Recital 7 RIR, which states that the mere fact that a proceeding is not listed in Annex A does not necessitate its being within the scope of the RBR. Accordingly, by the terms of the RIR a proceeding could be outside Annex A and simultaneously fall outside the scope of RBR.

20. A potential solution to this problem may be to read Article 1(1) RIR as defining the substantive scope of the The broader definition would cover insolvency proceedings not included in Annex A, expanding the scope of the RIR to capture those proceedings falling outside both regulations. However, pre insolvency or “hybrid” proceedings demonstrate why this is far from a perfect solution.

21. The paradigm example is the English scheme of arrangement, which is not included in Annex A and are expressly excluded from the scope of the RIR by Recital However, schemes also appear to fall within the Article 1(2)(b) bankruptcy exception, as a judicial arrangement, composition or analogous proceeding, and fall outside the scope of the RBR. Schemes therefore sit somewhere between the two regulations. The practice of the English courts has been to assume that they have jurisdiction to sanction schemes pursuant to the RBR, without deciding the point³. However, as detailed below, the courts have been unable to do the same in respect of restructuring plans after Brexit, and the lack of authority as to how to address this apparent lacuna has mandated a somewhat unwelcome return to first principles in respect of the Lugano Convention.

22. A further issue is presented by the language of the RBR, which describes civil claims concerning claimants suing defendants pursuant to This jars with the nature of schemes of arrangement or similar proceedings. For example, jurisdiction in respect of a scheme cannot be determined (a) pursuant to Article 4 according to the domicile of the defendant, where there is no defendant, or (b) pursuant to Article 21 as proceedings which concern the dissolution of companies, where the object of a scheme is debt readjustment. The RBR toolkit appears entirely unequipped to deal with the particular nature of schemes or similar proceedings.

E. Post Brexit dovetailing

23. The RBR and the RIR ceased to apply in the same form upon the United Kingdom’s exit from the European Union, as although the courts’ existing jurisdiction to open insolvency proceedings under the RIR was retained, the remainder of the RIR was repealed. However, the decision of the court in Re Gategroup Guarantee Limited [2021] EWHC 304 (Ch) sheds light on how dovetailing may be of continued relevance in the post- Brexit landscape.

24. In Re Gategroup, Zacaroli J was asked to consider whether the English courts have jurisdiction under the Lugano Convention to sanction a restructuring plan under Part 26A of the Companies Act The bankruptcy exception in Article 1(2)(b) of the Lugano Convention is in identical terms to the exception in the RBR. A creditor opposing the Plan argued that the exception fell to be construed in the same way as the RBR provision. The creditor advocated for the “narrow” dovetailing principle, meaning any proceeding not in Annex A would be within the scope of the RBR and therefore similarly within the Lugano Convention.

25. As the Lugano exception mirrors the RBR exception, Zacaroli J examined the underlying rationale as detailed in the accompanying reports to the 1968 Convention, noting that the dovetailing principle was described as applying to the 1968 Convention even though the corresponding bankruptcy Convention had not yet been Accordingly, dovetailing appears to apply to the Lugano Convention as a standalone provision.

26. However, as the judge noted, the narrow conception of the RIR cannot apply to the Lugano Convention in the same For parties to the Lugano Convention that have not also adopted the RIR, such as the UK and Switzerland, it simply does not make sense to define the Article 1(2)(b) exception in terms of Annex A, as those countries are unable to volunteer their domestic insolvency proceedings for inclusion.

27. Considering the wider conception of the RIR, Zacaroli J held that restructuring plans were within the scope of Article 1(1) as collective proceedings based on laws relating to insolvency, in which the assets and affairs of the debtor are subject to court supervision or control. As restructuring plans fall within the scope of the RIR, as broadly conceived, dovetailing mandates that they are excluded from the scope of the Lugano Convention.

28. Although there is a clear justification for rejecting the Annex A scope of the RIR, the positive justification for adopting the broader Article 1(1) scope is unclear and there is notably little case law supporting this Further, the outcome of this approach is somewhat counter-intuitive, asparties’ inability to submit insolvency proceedings for inclusion in Annex A enlarges the scope of the RIR and therefore, according to dovetailing, limits the jurisdictional and recognition options available to them under the Lugano Convention. This appears to run counter to the rationale for dovetailing, to provide a comprehensive jurisdictional regime with suitable rules for all types of proceedings and provides a forceful reason for dovetailing to no longer apply in the context of the Lugano Convention.

29. However, at present, despite the RBR and RIR no longer having effect in the UK, dovetailing continues to be relevant to understanding the jurisdictional rules applicable to insolvency Assuming that Re Gategroup is upheld, the continued acceptance of dovetailing in its wider form nullifies the utility of the Lugano Convention in obtaining cross-border recognition of restructuring plans, in the event that the UK is successful in its accession application.

30. The widened scope of the RIR raises questions as to the applicable rules to schemes of arrangement, as not being listed in Annex A would no longer act as a bar to schemes being covered by the Dovetailing as applied in Re Gategroup may dictate that schemes also fall outside the Lugano Convention, meaning parties would be forced to rely on the Model Law or private international law in order to found jurisdiction and obtain recognition. Whilst this is conjectural at present, it is clear that the wider approach to dovetailing could imply significant limitations on the scope of the UK’s cross border recognition toolkit.

Note:

This article was first published in the November edition of the Butterworths Journal of International Banking & Financial Law (JIBFL).