Brexit, transition period till 31 December 2020, and beyond
In the draft Withdrawal Agreement between the EU and the UK the Insolvency Regulation (Recast) will apply till the end of a transition period in 31 December 2020. But what’s next?
The end of last year saw concrete evidence of the uncertainties surrounding Brexit. In December 2017, the joint administrators of Nortel Networks UK Limited and the other 18 companies involved, approached the English court (once more) - see England and Wales High Court (Chancery Division) 14 December 2017,  EWHC 3299 (Ch). They wished to extend their terms of office by a period of 12 months, to 13 January 2019. These terms had been extended on four previous occasions, most recently by that same Court on 2 December 2015, by 24 months to 13 January 2018: see High Court of Justice  EWHC 3618 (Ch). The period of extension sought by the administrators is only one year, namely to 13 January 2019. Why an extension for one year only? The High Court is rather clear on this: ‘… That is largely because of the uncertainty caused by the fact that on 29 March 2017 HM Government gave notice of the United Kingdom's intention to withdraw from the European Union. That withdrawal is expected to take effect on 29 March 2019.’ The High Court clearly specifies the controversy by considering that administrations (and where applicable the Company Voluntary Arrangements (CVAs) of the companies concerned are main proceedings for the purposes of the Insolvency Regulation (Recast), and that pending the completion of any withdrawal agreement between the UK and the European Council, it is uncertain whether and if so, how, the Insolvency Regulation will apply to the administrations of the companies or the CVAs and what, if any, recognition will be given to the Administrators or the CVA Supervisors by the courts of the EU Member States after 29 March 2019: ‘… Given this uncertainty, the Administrators consider, and I agree, that it is prudent not to extend the administrations beyond 29 March 2019 at this stage.’ Subject to reaching final agreement with the local tax authorities, the administrators consider that it should be possible to complete the administrations of the companies (other than three of them, one of which is the company responsible for making distributions) within a one-year extension period. What about a new extension? The Court again: ‘'The Administrators intend to seek further directions in late 2018 in respect of the administration of any of the Companies which is likely to continue beyond 13 January 2019. By that time, it is hoped that the position of the administrations and CVAs following the withdrawal of the United Kingdom from the European Union will be clearer.’ Snowden J, therefore, proposes to grant the one-year extensions sought by the administrators.
Some light in the darkness may be given by the draft Withdrawal Agreement between the European Union and the United Kingdom, published 28 February 2018. The draft Withdrawal Agreement consists of six parts, including introductory provisions, citizens’ rights, other separation issues such as goods placed on the market before the withdrawal date, the financial settlement, transitional arrangements, and institutional provisions and a protocol on Ireland / Northern Ireland. See for its content Cees de Groot’s blog. Now it’s the turn of the Council and the European Parliament’s Brexit Steering Group for discussion, before being transmitted to the UK. Regarding insolvency, the draft establishes that the Insolvency Regulation (Recast) will continue to be applicable to all insolvency proceedings which are commenced in the Member States (including the UK) before the end of the transition period, which is 31 December 2020. OK. But then?
Related to cross-border insolvency matters, the original Insolvency Regulation (which entered into force in 2002) and the Recast have generally been regarded as positive by all Member States, including the UK, which has ensured the full integrity of its insolvency top-product, the Scheme of Arrangement. The Insolvency Regulation (Recast) does not apply to it.
From the perspective of creditors and insolvency courts of Continental Member States, a de facto Brexit (after the elapse of the transition period on 31 December 2020) would mean, amongst others things (i) that insolvency proceedings commenced in the UK would not automatically be recognised by EU Member States, (ii) that main insolvency proceedings opened in one of the Member States would not have as an auxiliary measure secondary proceedings in the UK, (iii) that mandatory duties of communication and cooperation between insolvency practitioners and courts are without a legal basis, and (iv) that there will be great uncertainty as to what law will be applicable and whether the strong protection of third parties’ rights in rem and set-off rights can be maintained. In fact, all these questions have to be resolved and be resorted to in internal, domestic law.
Without a bilateral or multilateral framework for recognition and enforcement, UK insolvency judgments will be subject to stricter review. Overall, this means that the recognition and enforcement of UK judgments in EU Member States will become more costly, time-consuming and burdensome for commercial parties. The Insolvency Regulation (Recast) does not cover third countries’ judgments. All Member States have their own rules. Only a few of the other EU Member States have implemented the UNCITRAL Model Law. These are Romania (since 2002), Poland (2003), Slovenia (2007) and Greece (2010). Generally, these countries would recognise UK insolvency proceedings. Several other legal frameworks would provide a nearly similar approach, such as the laws of Germany and Spain, as well as present case law in the Netherlands. The UK, however, recognises proceedings from all EU Member States based on its Cross Border Insolvency Regulations 2006 (which incorporate the UK version of the UNCITRAL Model Law on Cross Border Insolvency). In the Member States not mentioned (generally) UK insolvency office holders, such as administrators, seeking recognition would have to rely on obtaining recognition under the local laws of these Member States. This may be difficult, sometimes not possible, or conditional, e.g. on reciprocity requirements. Alternatively, provided that local laws allow for this, a UK office-holder may file for the opening of territorial insolvency proceedings. Either way, it would all be rather cumbersome. Belgium may be more easy for the UK, however. The Insolvency Regulation (Recast) replaced older bi-lateral conventions. Between Belgium and the UK we may see the revival of the convention with Belgium providing for the Reciprocal enforcement of civil and commercial judgements (1934).
There are some other ancient legal documents which the negotiating parties may blow the dust off. The Insolvency Regulation also replaced the European Convention on Certain International Aspects of Bankruptcy, signed in Istanbul on 5 June 1990. This convention has been signed by Belgium, Cyprus, France, Greece, Italy, Luxembourg and Turkey, but only Cyprus has ratified it. The convention provides for menus. Article 40 of that Convention offers the opportunity to make a reservation with regard to its Chapter II (exercise of certain powers by the insolvency office holder) and Chapter III (secondary proceedings). For this reason, it allows for different rules to apply in different states, which evidently results in a substantial hindrance to the application of the Convention.
In the light of this rather poor and fragmented legal field, it should be in the interest of both the UK and the EU to reach an agreement whereby UK proceedings will benefit from some form of recognition, from some rules on the applicable law, and from some cross-border cooperation rules similar to the ones available under the Regulation. The precise form that such an agreement would take is, of course, a matter of speculation. What is needed is that parties understand not only each other’s needs, but also the needs of businesses and investors for an efficient and effective cross-border regime. Although the current system from the Insolvency Regulation is certainly not perfect, it does generally deliver clarity and predictability, and thus reduces costs and maximises value for creditors, which is much better than the dismal situation prior to 2002. In a recent resolution, the European Parliament stressed that the uncertainties created by Brexit are also felt by ‘economic operators’, and it called for actions to be launched towards the greatest number of concerned sectors and people. In the list that then follows, there is no mention of the insolvency matters touched upon above. Constructive initiatives should be welcomed.