Exiting the EU – the no-deal effect on cross-border insolvency disputes
Currently the European Insolvency Regulation (EIR) regulates European cross-border insolvencies by prescribing the jurisdiction in which to commence insolvency proceedings and for their automatic recognition across other Member States once opened. This system streamlines the administration of insolvent estates throughout Europe and does so by relying upon mutual application by Member States. In the event of a no-deal Brexit (no-deal), Member States will no longer be compelled to apply the EIR in relation to the UK and so on ‘exit day’ in a no deal scenario, insolvency proceedings commenced in the UK will no longer enjoy automatic recognition in EU Member States.
In an attempt to tackle this concern, in November 2018, the government drafted the Insolvency (Amendment) (EU Exit) Regulations 2018 (the Regulations). The Regulations will come into force should a no-deal occur and will seek to address deficiencies that arise in relation to cross-border insolvency jurisdictional issues, employment rights and the transitional provisions for insolvency proceedings.
The Regulations allow for insolvency proceedings to be opened where those proceedings are opened for the purposes of rescue, adjustment of debt, reorganisation or liquidation and:
- The centre of the debtor’s main interests is in the UK; or
- The centre of the debtor’s main interests is in a Member State and there is an establishment in the UK.
The Regulations provide for transitional arrangements, so that where proceedings have commenced before exit day, the Regulations do not apply.
However, the Regulations contain a safeguard mechanism, which operates where the continued application of the EIR (under the transitional arrangements) in the UK would require the UK to accept from a Member State a prejudicial outcome based on that Member State not treating the UK as a Member State. In such cases, the court can decline to apply the EIR and instead apply other relevant UK law, such as the Cross Border Insolvency Regulations 2006 (CBIR).
Implications of no-deal for employees of an insolvent employer
In a no deal scenario, people working within the UK will continue to be protected by current provisions. As such, any organisational changes or redundancies in relation to an insolvent employer would find no change in procedure or the protections available to the affected employees, who will still be able to continue to bring claims in the same way.
It is important for creditors and other stakeholders of insolvent estates within Europe to have a clear framework for dealing with cross border insolvencies going forward following Brexit. If the UK leaves the EU with a no deal on cross border insolvency, EU countries will, as a result of the EIR falling away in relation to the UK, no longer be under any obligation to automatically recognise UK insolvency orders in their jurisdictions. As such, UK insolvency practitioners would incur additional costs in having to make an application under a Member States domestic law, in order to have their UK insolvency proceedings recognised there, if such recognition is required for the administration of the insolvency estate. However, it will be possible to open insolvency proceedings where any of the relevant tests set out in UK law (as mentioned earlier) are satisfied, irrespective of whether the debtor in question is a resident or located in the UK or in a Member State.
Related item: Brexit focus area