How the impending Brexit impacts the legal framework of doing business with the UK – the German perspective: Restructuring/cross-border insolvency proceedings
Newsletter Brexit July 2016
Cross-border insolvency proceedings involving the UK
The question of which law is applicable to cross-border insolvency proceedings within the EU and which court has jurisdiction over the opening, monitoring or conducting of the insolvency proceedings, is regulated by Council Regulation (EC) No. 1346/2000 on Insolvency Proceedings (Insolvency Regulation) that is directly applicable in all EU member states, with the exception of Denmark.
The most important practical consequence of application of the Insolvency Regulation is that the opening of insolvency proceedings by a responsible court in an EU member state, as well as the measures taken for the conducting of these insolvency proceedings, are automatically recognized in all other EU member states, thus preventing the opening of further insolvency proceedings in another EU member state.
The applicability of the rulings of the Insolvency Regulation to insolvency proceedings presupposes that the focal point of the debtor's main interests (Centre of Main Interests, COMI) is situated in an EU member state (with the exception of Denmark), and that the insolvency proceedings are based on cross-border circumstances - i.e. either the debtor has assets in other EU member states and/or legal relationships have been created with a connection to another EU member state.
Accordingly, the Insolvency Regulation is not applicable to proceedings in an EU member state with no connection whatsoever to cross-border circumstances or only to third countries (i.e. non-EU member states or Denmark).
With effect from the date on which the UK leaves the EU, the Insolvency Regulation would cease to apply in the UK, and would likewise no longer be applied to the EU member states in relation to the UK.
The possible consequences of this depend on whether and what agreements are made between the UK and the EU.
- The EU and the UK could agree on continued application of the Insolvency Regulation between the UK and the EU member states. This would mean that cross-border insolvency proceedings opened in the UK would continue to enjoy automatic recognition in the respective member state.
- If the EU and the UK make no agreement, the following consequences would have to be reckoned with.
On the one hand, there would be the possibility of competing insolvency proceedings being opened parallel to one another - in the UK and in the respective EU member state.
On the other hand, automatic recognition of the cross-border insolvency proceedings, opened in the UK, in the respective EU member state and vice versa would no longer be guaranteed; rather, these would be based on the national law of the UK or of the respective EU member state as a fundamental rule.
Nevertheless, the UK has adopted the UNCITRAL model law that aims to develop a global standard for cooperation in cross-border insolvency proceedings. In particular, this standard ensures harmonized criteria for the recognition of foreign insolvency proceedings, irrespective of whether the foreign country concerned has implemented the UNCITRAL model law. In contrast to the situation under the Insolvency Regulation, the recognition of foreign insolvency proceedings under the UNCITRAL model law is not automatic, but rather depends on formal recognition.
Schemes of Arrangement
German companies have also made isolated use of the Scheme of Arrangement (SoA) under the English Companies Act 2006 for restructuring measures on the liabilities side, e.g. TeleColumbus, Primacom and Rodenstock.
The reason for the implementation of an SoA in these cases was the fact that the SoA enables the company to restructure its debts by way of a majority resolution of the creditors against an opposing minority (agreement disrupters), whilst at the same time avoiding extensive insolvency proceedings.
Companies with their registered office outside the UK can implement an SoA in the UK if they have a sufficiently close connection to the UK. As a rule it is sufficient in this respect if the company concerned has assets in England, or if the material contract documentation is governed by English law and the parties have agreed to an English place of jurisdiction.
However, the courts in the UK impose a further precondition for the implementation of an SoA in the form of confirmation that the SoA will be recognized in the country in which the company has its registered office, and in the other countries in which the company holds relevant assets (so-called recognition option).
The EU Regulation on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters currently ensures direct recognition and enforceability of an SoA in the other EU member state, in which the relevant company has its registered office and/or assets.
Following withdrawal of the UK from the EU, the EU Regulation on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters will no longer be applicable in relation to the UK. The recognition of an SoA in Germany or in another EU member state will then be based on the respective national law.
If the UK remains a member of the Lugano Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters, the SoA could be capable of similar recognition in the EU member states via this convention as under the EU Regulation on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters.
The possibility must by all means be reckoned with of the uncertainty concerning the legal recognition of an SoA in the EU member states resulting in increased expense - a fact that can reduce the attraction of the SoA. Given the ongoing need for a solution to the problem of the agreement disrupters when restructuring complex corporate financing arrangements, there will be an increased search for other, more legally secure instruments in practice.