Reed Smith Client Alerts

  • Brexit ripped up the rules on automatic cross-border recognition of formal insolvency proceedings and restructuring tools between the UK and the EU.
  • Recognition will now depend on a patchwork of domestic legislation, private international law and treaties and may lead to different outcomes depending on the jurisdiction.
  • Cross-border recognition is still achievable but involves careful navigation and a more tailored approach in individual cases to selection of the most effective process and its route to recognition.

Legal landscape

  • Loss of automatic recognition of formal insolvency proceedings: With Brexit, the automatic recognition regime of formal UK insolvency proceedings in the EU (and vice versa) was lost:
    • Outbound recognition: UK insolvency practitioners seeking recognition of UK proceedings in the EU now need to apply to the courts of each relevant jurisdiction for recognition on the basis of national rules or open parallel local proceedings in the relevant member states.
    • Inbound recognition: EU insolvency practitioners seeking recognition of EU proceedings in the UK must now seek recognition on the basis of rules previously only applicable to non-EU proceedings, namely section 426 of the Insolvency Act 1986, the Cross-Border Insolvency Regulations 2006 and common law. 

All of the new routes to recognition are subject to greater court scrutiny and uncertainty due to the lack of recent case law.

  • Recognition of UK schemes of arrangement in the EU: If the contract being compromised is English law governed or contains an exclusive jurisdiction clause in favour of the English courts, international treaties provide for recognition rules. If not, practitioners need to rely on the national laws of the member states where recognition is sought. In practice, the English courts now require more detailed evidence as to the likelihood of recognition in the relevant jurisdictions.
  • Recognition of UK restructuring plans in the EU: UK restructuring plans may face additional hurdles compared to schemes, as they are more likely to be considered insolvency proceedings, in which case they must meet the same requirements for recognition in the EU as do formal UK insolvency proceedings.
  • Recognition of EU restructuring processes in the UK: While many are still being developed, it is likely that many of these processes will be considered insolvency proceedings by the English courts, in which case they must meet the same requirements as formal EU insolvency proceedings. 

Evolving area of law

  • Individual applications: Given the previous reliance on the automatic recognition regime, the most effective routes to recognition are still being identified. National laws do provide for avenues to achieve recognition, but each framework is subject to individual requirements and expert advice in each jurisdiction must be sought.
  • Compromising English law debts: The ‘Gibbs Rule’ has presented a barrier to English law-governed debt being compromised by foreign law insolvency or restructuring proceedings unless the creditor has submitted to such proceedings. One solution to deal with this restriction is to run a parallel scheme in England to compromise English law obligations. Another possible workaround is the thoughtful choice of EU restructuring procedures, which may avoid the need for parallel proceedings in the UK.