What will Brexit mean for cross-border insolvencies? Lucy McCann, of Brodies, explains.

The seismic changes to the UK’s political landscape since 23 June 2016, when the UK voted to leave the European Union, are well rehearsed. Special departments have been set up in Whitehall and teams despatched to Europe to get ‘the best deal’ for the UK in the Article 50 negotiations.

The latest development in the tale is that Prime Minister Theresa May has called a snap general election for 8 June 2017, to prevent ‘political game-playing’ from hampering negotiations with the EU.

With all the political upheaval, the question being asked by individuals, businesses and markets alike, is: what does this mean for us? To ensure a smooth transition post-Brexit, the UK government plans to enact the 'Great Repeal Bill’, which will repeal the European Communities Act 1972, while incorporating into domestic UK law the bulk of EU law as it stands the moment the UK leaves the EU.

Ministers will be empowered to make 'minor' corrections to the statute book by way of secondary legislation. In many areas of the law, this should work smoothly, as EU law will simply transition into domestic law.

Centre of main interests (COMI) 

However, one area where things might not be quite so straightforward is insolvency. Insolvency in the UK does not operate in isolation, nor does it operate within restricted borders; it relies on fundamental pillars of legislation, such as employment, property and tax, which in turn are significantly affected by EU legislation.

A specific insolvency issue to which EU law is central is the principle of centre of main interests (COMI). COMI determines in which jurisdiction (ie Member State) within the EU an insolvency proceeding should be ‘opened’, and was brought into force by the European Council Regulation on insolvency proceedings (1346/2000/EC) (‘the Regulation’). The Regulation has been recast by Council Regulation 2015/848/EU, which comes into force on 26 June 2017. 

COMI affects all collective insolvency regimes in the UK, ie both personal and corporate regimes. A key feature of COMI is that it is reciprocal between Member States. That reciprocity is mandatory and is recognised in each Member State (except Denmark) as a result of the Regulation having direct effect, ie it is implemented without need for further domestic legislation.

The way that COMI works in practice is that, where an IP is appointed by a court in the Member State where COMI has been established, the IP can ask courts in other Member States to allow the IP to recover assets within those jurisdictions, without the need for further application to their courts. COMI is generally regarded by the insolvency profession in the UK as a positive feature, as it has had the effect of streamlining cross-border insolvencies and making asset recovery easier. In addition, it promotes consistency and protects the interests of creditors by preventing forum shopping.

However, the Great Repeal Bill cannot unilaterally preserve the effect and benefits of COMI after Brexit. Specifically, UK law cannot require other Member States to recognise IP appointments made by UK courts. The government’s white paper on the Great Repeal Bill notes that there may be little point preserving EU laws based on reciprocity between Member States, unless it is agreed that that reciprocity should continue post-Brexit.

Accordingly, to maintain the benefits of COMI, the UK and EU will have to agree that reciprocity will be preserved between the UK and the other Member States. However, there is limited negotiation time and significant issues – such as the rights of each side’s citizens resident in the other’s territory and the size of the ‘divorce’ bill for Brexit – may have to be settled as a priority.

If COMI does not feature in a general UK-EU deal, the UK would have to negotiate bespoke treaties with each Member State, which would be challenging. Negotiating with different parties, each with their own interests, could produce a wide range of agreements and erode the consistency the UK is trying to preserve. However, it is to be hoped that the EU and its Member States will see the benefit in preserving the current system, particularly given the extent to which EU businesses and citizens have UK-based interests.  

The UNCITRAL Model Law on Cross-Border insolvency

One alternative, if negotiations to preserve COMI are fruitless, might be the UK seeking to rely more heavily on the UNCITRAL Model Law on Cross-Border insolvency, which allows the UK courts to recognise eligible foreign insolvency proceedings and (to an extent), vice versa. The difficulty is that UNCITRAL has limited application to cross-border insolvencies within the EU, as only four Member States (including the UK) are signatories to it. 

With all the political uncertainty it may be easy to become overwhelmed at the thought of what may lie ahead. However, what we do know is that the UK has one of the most comprehensive and sophisticated insolvency regimes in the world. It also has an insolvency profession that is highly regulated, skilled and capable. Whatever challenges the UK’s departure from the EU may bring, they are certainly not insurmountable.

About the author

Lucy McCann is an associate in the restructuring and insolvency team at Brodies LLP.