The United Kingdom ("UK") has established itself as a leading restructuring destination in Europe. Julie Murphy O'Connor, Tony O'Grady, Brendan Colgan and Kevin Gahan highlight the impact Brexit, and the uncertainty relating to Brexit, may have on cross border transactions and restructurings in the UK.
However, Brexit brings with it an opportunity for Ireland when it comes to cross-border corporate restructuring in light of:
- our common law system, English speaking jurisdiction and well-developed court system with a practical and commercial approach to restructuring and insolvency law matters;
- our well-developed corporate and debt restructuring alternatives, namely examinership (which offers court protection and is analogous in many ways to US Chapter 11) and schemes of arrangement (similar in all material ways to the English scheme of arrangement); and
- our continued membership of the European Union (“EU”) and consequent certainty and predictability when it comes to recognition and implementation of cross border insolvency and restructuring related matters across the EU.
How does cross border insolvency work in the EU at present?
The cross-border insolvency and restructuring regimes as between Ireland and the UK are embedded in the EU framework under the Insolvency Regulation (1), as augmented to some extent by the provisions of the Brussels Regime (2).
Since 2002 Ireland and the UK have been subject to the Insolvency Regulation, which applies in all EU member states (with the exception of Denmark). The Insolvency Regulation is the cornerstone of cross-border insolvency in Europe determining which courts in the EU have jurisdiction to commence insolvency proceedings and which EU member states’ laws apply. The Insolvency Regulation also ensures that the appointment of an administrator, liquidator or trustee in bankruptcy in one member state is automatically recognised in all member states without the need for a court order. The Insolvency Regulation has become a key-feature of commercial life in the EU and has, for the most part, allowed for the effective management of cross border insolvency in the EU and reduced the cost and time involved in dealing with cross border issues.
Following the triggering of Article 50 of the Treaty on European Union, the UK will exit the EU on 29 March 2019. If the Withdrawal Agreement (3) comes into effect, the Insolvency Regulation and the Brussels Regime will remain in force until the end of the transition period provided for in the Withdrawal Agreement, which will essentially preserve the status quo until 31 December 2020.
In the event of a “no-deal” Brexit, the Insolvency Regulation and the Brussels Regime will be repealed in the UK.
Given the close geographic and economic ties and significant trading links between Ireland and the UK, the mutual recognition of insolvency proceedings and related judgments has clear benefits. The UK government’s position is that, as the Insolvency Regulation would not be applied by member states to UK proceedings following Brexit, it would not be appropriate for the UK to continue to apply the Insolvency Regulation unilaterally with the following consequences:
The draft Insolvency (Amendment) (EU Exit) Regulations (the “EU Exit Regulations”), which seek to address the issues arising from the repeal of the Insolvency Regulation, would come into effect. Saving and transitional provisions are included which provide that the Insolvency Regulation and associated domestic legislation will continue to apply in the UK in the same manner in cases where main proceedings were opened before exit day. However, the EU Exit Regulations do give the UK courts discretion not to apply the Insolvency Regulation to such proceedings where any potential prejudice could arise.
Post exit day, for insolvency proceedings commenced in EU member states to be recognised and enforced in the UK, they would need to rely on the UK’s domestic rules of recognition. The UK Cross-Border Insolvency Regulations 2006 (which enacted the UNCITRAL Model Law on Cross Border Insolvency (the “UNCITRAL Law”)) and the common law rules of private international law are central in this regard. The UNCITRAL Law provides for cooperation and coordination regarding foreign insolvency proceedings, but the provisions and their effect are not as extensive in scope as the Insolvency Regulation. Furthermore, not all member states of the EU have acceded to the UNCITRAL Law (including Ireland) (4).
As a result of its historic ties with the UK, Ireland is entitled to avail of section 426 of the UK Insolvency Act 1986 which provides that the UK courts may give assistance to the courts of certain designated countries (which are essentially members of the Commonwealth, Hong Kong, and Ireland) in relation to insolvency matters. However, assistance is not mandatory and is decided on a case by case basis.
Conversely, the UK would no longer be able to take advantage of the Insolvency Regulation when it comes to having its insolvency proceedings and related judgments recognised across all EU member states. Under the EU Exit Regulations the well-known “centre of main interests” (“COMI”) test would be retained in the UK, but as an additional test to any other grounds for jurisdiction which apply in the UK which means that the UK would be able to open insolvency proceedings under the provisions of its domestic law regardless of whether the debtor’s COMI is elsewhere in the EU. Any insolvency process commenced in the UK would therefore no longer benefit from automatic recognition in other EU member states, and recognition and enforcement would be dependent on the domestic laws of, and any applicable international conventions or treaties that may apply in, each member state. This brings with it an extra layer of uncertainty and additional cost. This also potentially raises difficult jurisdictional issues. We can foresee, for example, there being a difficulty in having UK proceedings recognised by a member state in which the debtor’s COMI is located and / or a risk of parallel proceedings.
In Ireland, the courts have an inherent power pursuant to the common law rules of private international law to make orders in aid of insolvency proceedings in other jurisdictions. The Irish courts have an inherent jurisdiction to recognise (as opposed to enforce) orders of foreign courts (in the sense of non-EU courts) for the winding up of companies and the appointment of liquidators. However, while comity of the courts is of importance, the Irish courts retain a discretion to refuse such applications and each case is determined on its own facts.
Such a curtailment of the UK’s cross border insolvency regime following a no-deal Brexit carries with it increased risk, delay, cost and uncertainty, ultimately resulting in a reduced return for creditors / stakeholders.
London has been a global market leader in restructuring for many years and the English scheme of arrangement has been used successfully as a restructuring method with effect across the EU and internationally, especially for large international restructurings with finance obligations. A hard Brexit will bring with it some risks to its leading position in this regard.
The UK scheme of arrangement does not constitute an insolvency proceeding for the purposes of the Insolvency Regulation. Despite there being some doubt as to the applicability of the Brussels Regime to an insolvent scheme of arrangement in circumstances where “judicial arrangements, compositions and analogous proceedings” are excluded from its scope, there is English caselaw to the effect that the UK scheme of arrangement does in fact come within its scope. Accordingly, its withdrawal from the Brussels Regime, absent some new arrangement, will be a factor to be considered with regard to the recognition of schemes of arrangement in jurisdictions across the EU where creditors and assets of corporations may be located.
There is a stated consensus in the UK that the exit from the EU is unlikely to have a material impact on schemes of arrangement. However, a sole reliance on the private international law of other states brings with it increased risk, complexity and cost in terms of cross-border recognition and enforcement. In particular, recognition and enforcement of a scheme of arrangement for a company incorporated in an EU member state with a stated COMI or other connection to the UK may be more susceptible to challenge before the courts of that member state than might otherwise have been the case if the Brussels Regime was held to apply.
With regard to filling some of the void of the Brussels Regime, the UK has confirmed that in the event of a “no-deal” Brexit, the Hague Convention on Choice of Court Arrangements 2005 (the “Hague Convention”) will come into effect in the UK on 1 April 2019 (two full days after Brexit). The Hague Convention currently applies to all EU member states as a result of accession on the part of the EU (rather than each member state individually). (The UK Government will withdraw its instrument of accession if the Withdrawal Agreement comes into force.) The Hague Convention, however, is not as extensive in its application as the Brussels Regime and applies only where there is an exclusive jurisdiction clause in favour of one of the contracting states which was concluded after the Hague Convention came into force for that state. The types of judgments it covers are far narrower than under the Brussels Regime. Furthermore, “insolvency, composition and analogous matters” are excluded from its scope, making it highly unlikely that it could be held to apply to a UK scheme of arrangement. Also, recognition and enforcement is not automatic as is the case under the Recast Brussels Regulation. Rather, it is necessary to obtain a court order for recognition and enforcement in the foreign State. These are all factors that limit the Hague Convention’s effectiveness in the context of a scheme of arrangement.
It is anticipated, therefore, that Brexit will result in corporates and their advisors evaluating the restructuring processes on offer in other jurisdictions. Ireland already has extensive restructuring tools available to corporates. In recent years there have been moves in other EU countries towards introducing corporate rescue procedures and a number of EU member states (such as the Netherlands, Spain, Germany and Italy) have already reformed or plan to reform their legislation, providing alternatives to UK schemes of arrangement.
What Opportunities does Brexit Present for Ireland for Cross-Border Restructuring and Insolvency?
Once the UK leaves the EU, Ireland will be the largest remaining English speaking, common law EU member state. Ireland’s legal processes and procedures and court structure will be familiar to those accustomed to doing business in the UK. Furthermore, Ireland has a well-developed restructuring and insolvency regime, which, like many aspects of Irish law, has been heavily shaped and influenced by developments in the UK, as well as the option of examinership which is not available in the UK. The following will be important considerations for those evaluating Ireland’s restructuring regime as an alternative:
The Irish scheme of arrangement can be availed of in the same way as an English scheme. Interestingly, however, the scheme of arrangement process has not proved particularly popular in Ireland to date. This is mainly due to the separate restructuring tool available in Ireland through the well-utilised examinership process, which has been in place since 1990. Examinership is similar to the Chapter 11 procedure in the US and offers a flexible, speedy (100 days maximum) restructuring process, with significant latitude for debt cramdown and change of ownership, together with a lower creditor approval threshold. Furthermore, unlike the scheme of arrangement, examinership is a listed insolvency procedure under the Insolvency Regulation and therefore benefits from automatic recognition and enforcement across the EU.
English case law and precedent, whilst not binding, has long been cited and accepted as persuasive authority by the Irish judiciary. As the principles regarding schemes of arrangement have been extensively tried and tested in the English courts, these principles are of significant guidance and influence for the Irish courts in dealing with schemes in Ireland.
The similarity of the regimes in Ireland and the UK offers the possibility of running an Irish scheme of arrangement (or examinership) in parallel with an English scheme of arrangement for group restructurings.
Taking into consideration the established attractiveness of the English scheme of arrangement internationally, by offering a corresponding restructuring tool (together with the further option of examinership), along with the potential benefit of greater uniformity and ease of recognition across the EU, Brexit brings with it a significant opportunity for Ireland to position itself as an EU jurisdiction of choice for cross-border restructuring.
Developments in the future
Ireland is not currently a signatory to the UNCITRAL Law and this issue has assumed even more importance as the UK plans its exit from the EU. The adoption of the UNCITRAL Law in Ireland would provide greater certainty and predictability regarding cross border insolvencies to which the Insolvency Regulation does not apply. Ireland’s open and international economy and its significant trading relationship with the US and the UK (both of which are signatories to the UNCITRAL Law) would benefit from the adoption of such an international cross border insolvency regime. Recently the Company Law Review Group (5) has recommended the adoption of the UNCITRAL Law and further review and discussion on adoption is inevitable in light of Brexit.
As a member of the EU, Ireland now has a unique opportunity to take advantage of the fact that it has a similar insolvency and restructuring regime to the UK that is automatically recognised and enforced across the EU.
The Insolvency Regulation brought a fundamental change to commercial relations across the EU and the restructuring and insolvency landscape in the EU is developing further all the time. The European Commission has been assessing further harmonisation of EU insolvency law and the negotiation of the preventive restructuring framework for EU member states (which is designed to assist companies experiencing financial difficulties to implement a restructuring at an early stage) is at an advanced stage. By leaving the EU, the UK loses the opportunity to shape and influence future development in this area and to benefit from the changes once enacted.
Regulation (EU) 2015 / 848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (the “Recast Insolvency Regulation”). The original insolvency regulation came into force in 2002 and was updated and amended by the Recast Insolvency Regulation, which came into force in 2017 (together referred to as the “Insolvency Regulation”). The Insolvency Regulation deals with individuals and companies. Credit institutions, investment undertakings and insurance undertakings are dealt with by way of separate EU directives, which will also be affected by Brexit.
Regulation (EU) 1215 / 2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the “Recast Brussels Regulation”). The original Brussels Regulation came into force in 2001 and was updated and amended by the Recast Brussels Regulation which came into force in 2015 (together referred to as the “Brussels Regime”).
Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community, as endorsed by leaders at a special meeting of the European Council on 25 November 2018 (the “Withdrawal Agreement”).
The only EU member states to have adopted these provisions are Greece, Poland, Romania and Slovenia.
The Company Law Review Group is a statutory group set up to advise the Minister for Business, Enterprise and Innovation on changes required in company law.