Leiden Law Blog

Brexit and its consequences for European Insolvency Law

Posted on by Bob Wessels in Private Law
Brexit and its consequences for European Insolvency Law

‘UK EU exit would be global economy shock’, according to G20 leaders last weekend. The mood in the UK is rather split, but indeed what if the UK were to exit after the referendum of June 2016? And what would it mean for the restructuring and insolvency of natural persons and companies? The applicable instrument for its release is Article 50 of the Treaty on European Union (TEU). It provides that after receiving a notification to cease to be a Member State of the EU, the EU will negotiate with such Member State ‘… the arrangements for its withdrawal, taking account of the framework for its future relationship.’ A withdrawal agreement could almost have any content, including maintaining all applicable EU law for a specific time period, as well as the grandfathering of all approvals, listings, registrations and licences and other rights relating to products and services or distribution channels relating to such products and services. In the absence of such a withdrawal agreement between the ceasing Member State and the EU, two years after the receipt by the European Council of the termination notification, the TEU and the TFEU will then no longer apply to the exiting Member State. So, in the case of a Brexit, the UK would no longer have the status of a Member State of the EU and the persons and companies domiciled in the UK, and the products and services originating from or being distributed through the UK, would have ‘third country’ status of the kind that e.g. Peru or Tanzania has. Can that status be upgraded? Article 50(3) TEU provides that the European Council and the ceasing Member State can enter into an agreement which extends the two-year period mentioned if it is likely that this extension would be required to cement the future UK-EU relationship in a new contractual framework which deals with all the economic and legal consequences of the UK ceasing to be a Member State. Here a gamma of options is possible, including an agreement mirroring the European Economic Area (EEA) or an even more tailor-made agreement.

A Brexit will undoubtedly cause the gigantic task of unscrambling EU primary and secondary law from existing UK Law. Just one issue: what will happen with the EU Insolvency Regulation (Recast)? The ‘need’ for renewal of the existing European Insolvency Regulation (EIR) was based on the European Commission’s identification of five main shortcomings in the EIR that its proposal aims to address: (i) EIR excludes pre-insolvency proceedings, hybrid proceedings, and certain personal insolvency proceedings, (ii) the application of the ground rule of international jurisdiction of a court (i.e. the centre of main interest (or: COMI)) of an insolvent debtor has led to some difficulties and to forum shopping by relocating COMI, (iii) opening of secondary proceedings has proved to disturb efficient administration of the debtor’s assets, (iv) there is no obligation to publicise the opening of insolvency proceedings, for the lodging of claims creditors need to be aware of an insolvency proceeding; and (v) the EIR does not deal with the insolvency of groups of companies. For a short note on the changes, see 'Short note on EIR recast'. The EIR Recast comes into force on 26 June 2017. One could say that a Brexit after that date means that the UK is no longer a party to the Recast. Where the Regulation includes the system of automatic recognition of Member States’ insolvency judgments, based on the principle of mutual trust, one would be surprised to see such a cold and harsh divorce. But if so, the UK may have to rely on its Cross-Border Insolvency Regulations 2006 which implements the UNCITRAL Model Law on Cross-Border Insolvency of 1997, unless section 426 of the Insolvency Act 1986 applies which provides for the co-operation between courts exercising insolvency jurisdiction in relation to some twenty named countries, mostly former British Commonwealth Countries.

From the perspective of creditors and insolvency courts situated in the other Member States of the EU a Brexit would mean, inter alia, (i) that insolvency proceedings commenced in the UK would  not automatically be recognised in the other Member States of the EU, (ii) that mandatory duties of communication and cooperation between insolvency practitioners and courts are without a legal basis, (iii) that main insolvency proceedings opened in one of the Member States would not have as an auxiliary measure secondary proceedings in the UK,  and (iv) that in rem rights acquired in respect of the foreign assets of British companies miss their untouchable function as foreseen in the EIR Recast under Article 5 of the Recast Insolvency Regulation as they would be recognised today. Whether and how this would apply in relation to insolvency proceedings which have already commenced at the time of a Brexit is an open question. The EIR Recast (as well as the existing EIR) replaces - in respect of the matters referred to therein, in the relations between Member States - the Conventions concluded between two or more Member States. Bi-lateral conventions apply to the Netherlands in relation to Belgium and Germany. The UK only has a convention with Belgium providing for the Reciprocal Enforcements of Judgements in Civil and Commercial matters of 1934. Will Brexit result in similar bi-lateral conventions with other Member States or more general multi-country agreements? Questions that will be on the table (or not) after the referendum.

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