Sommario/Summary:

1. Introduction and context - 2. The Brexit phenomenon - 3. The meaning of Brexit in legal terms - 4. The Brexit legal process: May 2015 – July 2018 - 5. Some working assumptions about the contours of Brexit - 6. Current law and practice under the Insolvency Regulation - 7. Brexit implications: general points - 8. Inbound implications (treatment of EU27 insolvency proceedings in the UK) - 9. Outbound implications (treatment of UK insolvency proceedings in the EU27) - 10. The special case of UK schemes of arrangement under the UK Companies Acts - 11. Final observations - NOTE

1. Introduction and context

This article considers the implications of Brexit for cross-border insolvency and restructuring practice under the EU Regulation on Insolvency Proceedings (recast).[1] I will not discuss the detailed implications of Brexit for the EU's judicial cooperation framework. But much of what I will say about the implications of Brexit for the Insolvency Regulation is directly relevant to other EU judicial cooperation instruments, such as the Brussels Regulation (recast),[2] that have their legal foundation in Article 81 of the Treaty on the Functioning of the European Union. The article proceeds as follows, First, I will provide an account of the Brexit phenomenon and an outline of the Brexit negotiations up to the time of writing (July 2018). Second, I will describe law and practice under the Insolvency Regulation at the present moment. These two steps will provide the necessary context for the analysis of how Brexit will affect current practice in the field of cross-border insolvency and restructuring within Europe.

2. The Brexit phenomenon

So what exactly is Brexit? As this is a law review article written with an international audience of lawyers in mind, I will characterize Brexit primarily as a legal process. But let me offer some personal thoughts on the wider political, economic, social, and cultural background to the UK electorate's decision in the referendum of 23 June 2016 to leave the EU. Brexit is, of course, a revolution with many causes and I do not have the space to discuss all of those causes here. However, I think Brexit is best understood as the final culmination of a process that unfolded over the forty years prior to June 2016 in which the EU has sought to advance the project of wider and deeper integration while, at the same time, finding ways to accommodate British exceptionalism. As European integration moved forward with the establishment of the EU in the Maastricht Treaty[3] and the subsequent treaty amendments culminating in the Lisbon Treaty of 2007, euroscepticism in the UK grew. The correlation is far from perfect as polling evidence over time suggests considerable volatility in public attitudes towards the EU.[4]  But a persistent theme of public sentiment that has been reflected in UK government policy formation and diplomatic practice is that the UK is generally in favour of the EU's transactional and market aspects - the internal market and the customs union - but much less enthusiastic about the treaty commitment to "ever closer union"[5] and what that might entail in terms of wider and deeper political and monetary integration and further loss of sovereignty. This tendency to resist the broader political, social, cultural, and monetary aspects of the EU integration project was exacerbated by several other factors: the eastward expansion of the EU and its contribution to inward immigration into the UK under free movement rules; the global financial crisis; the Eurozone crisis; and the refugee crisis. Under the leadership of David Cameron, the UK government increasingly worried about the different priorities of the Eurozone countries as compared to non-Eurozone EU member states, especially the UK. Cameron's view was that the EU could not and should not pursue a common destination (such as a federal Europe) with member states heading for that destination at different speeds (a so-called multi-speed EU). He preferred instead the idea of a Europe of different destinations with a common trading platform - a Europe in which the core Eurozone [...]

3. The meaning of Brexit in legal terms

Brexit is both a process and a destination. It is the process by which the UK is leaving the EU's supranational treaty-based legal order. It is also the end state after the process of leaving is complete.  From the EU's perspective, once the UK has left, the UK will be a third country. So my working legal definition of Brexit is as follows. It is the process by which the UK leaves the EU legal order and becomes a third country as far as its relations with the EU are concerned.[9]

4. The Brexit legal process: May 2015 – July 2018

David Cameron's Conservative Party governed in coalition with the Liberal Democrats between 2010 and 2015. At the general election in May 2015, the Conservatives campaigned on the basis that, if elected, they would seek to resolve the European question by putting it to a referendum.[10] It was this promise of a referendum on the UK's membership of the EU that arguably won the Conservatives an outright parliamentary majority in May 2015 (the first time they had done so since 1992). Cameron's calculation, which had been trailed in a speech about the EU he gave in January 2013,[11] was that the electorate would support his idea of a "new settlement" between the UK and the EU and this would enable him to re-establish public consent for EU membership and decisively resolve a long standing split within his own party. Having won the election, Cameron's government set about honouring the campaign promise. While Cameron sought to renegotiate the terms of the UK's membership of the EU along the lines of his January 2013 speech,[12] Parliament passed primary legislation that provided the domestic legal basis for the "in-out" referendum. This legislation - the European Union Referendum Act 2015[13] - established the referendum question ("should the United Kingdom remain a member of the European Union or leave the European Union?"), set out who would be entitled to vote, and made other rules about the conduct of the referendum, including rules about campaign expenditure. It is important to note that Parliament did not bind itself to accept and implement the outcome of the referendum in the 2015 Act. The referendum was therefore "consultative" or "advisory".[14] The government used the fact that the referendum was in legal terms advisory rather than binding on Parliament to justify rejecting legislative amendments that would have imposed super-majority voting requirements reflecting the constitutional significance of a decision to leave the EU.[15] In practice, the Cameron government's political commitment to implement the outcome of the referendum has been treated by the UK Parliament as de facto binding even though in strict legal terms the 2015 Act was non-binding.[16] In the event, as is well known, the UK electorate voted on 23 June 2016 by a margin of 51.9% to 48.1% to leave the EU. The next and critically important stage of the legal process of Brexit was the UK government's notification to the European Council of the UK's [...]

5. Some working assumptions about the contours of Brexit

For the purposes of the analysis in the remainder of the article I will make the following two assumptions: That the UK does indeed "Brexit" and becomes a third country on 29 March 2019. That the draft withdrawal agreement in something like its current form is ratified and that EU law continues to apply in the UK until 31 December 2020 by treaty as a matter of EU / international law and domestically in the UK by virtue of parliamentary ratification of the withdrawal agreement. The first assumption holds even in the event of a "no deal" Brexit. The second assumption only holds if the UK and EU reach agreement on the terms of the UK's withdrawal and as regards the future framework. In a "no deal" scenario, the UK would cease to be subject to, and cease to benefit from, the EU acquis on 29 March 2019. But as we have seen retained EU law would continue to apply domestically by virtue of the 2018 Act.  In a "deal" scenario, we can safely assume that the transitional provisions of the domestically ratified withdrawal agreement would supersede the 2018 Act provisions on retained EU law for the transitional period. In other words, if there were a deal, the relevant EU law (for our purposes, the Insolvency Regulation) would presumably only become retained EU law for the purposes of the 2018 Act at the end of 31 December 2020. It is not yet entirely clear how the concept of retained EU law (which, as we have seen above, is defined by reference to EU law as it stands immediately before 29 March 2019) will mesh with the transitional period in the withdrawal agreement. But the government has power under section 9 of the 2018 Act to make regulations necessary to implement the withdrawal agreement and this power could conceivably be used to redefine the scope of retained EU law to reflect the transitional period. Alternatively, the domestic legislation that is necessary to ratify the withdrawal agreement could address the point. Either way, in my opinion, as under the withdrawal agreement the UK would remain subject to the acquis and the jurisdiction of the Court of Justice until 31 December 2020 the reference date for the concept of retained EU law in the 2018 Act would surely have to be changed from 29 March 2019 to 31 December 2020 to reflect the legal reality enshrined in international law that EU law and jurisdiction would continue to apply during the transitional period.[33] It would have been much easier simply to provide in the 2018 Act for the [...]

6. Current law and practice under the Insolvency Regulation

Before I consider how Brexit will affect cross-border insolvency and restructuring practice in Europe, let me first provide an outline of law and practice under the Insolvency Regulation currently works.  The original Insolvency Regulation became effective on May 31, 2002 and was replaced by the current instrument - Regulation 2015/848 - after a full review process with effect from 26 June 2017.[35]  It is important to understand that the Regulation does not harmonize the substantive insolvency laws of the Member States.  The Commission has now proposed a draft directive on preventive restructuring frameworks, which does aim at minimum harmonization of restructuring law.[36] But the Insolvency Regulation does not address the substantive insolvency and restructuring law of member states. What the Insolvency Regulation does instead is create harmonized EU rules that address the following conflict of laws questions: (i) which member states are competent to exercise international insolvency jurisdiction in a cross-border insolvency; (ii) whose law is to govern the conduct of insolvency proceedings that are opened; and (iii) what degree of recognition should be accorded to insolvency proceedings opened in a member state, and further decisions made during the course of those proceedings, throughout the rest of the EU. Article 1(1) of the Insolvency Regulation defines broadly the types of insolvency proceeding that fall within its scope. It applies to "public collective proceedings… based on laws relating to insolvency and in which, for the purpose of rescue, adjustment of debt, reorganization or liquidation…" (i) a debtor is totally or partially divested of its assets and an insolvency practitioner is appointed; (ii) the assets and affairs of a debtor are subject to control or supervision by a court: or (iii) a temporary stay is granted to allow for debtor-creditor negotiations to take place. The following points flow from the definition. To qualify, the proceedings must be proceedings under insolvency law and they must be "collective." The concept of collectivity is quite loose. It is clear that proceedings that can be initiated by a single creditor principally for the benefit of the initiating creditor (such as the UK's administrative receivership procedure) do not qualify as "collective". But recital (14) indicates that proceedings are collective if they include a significant part of the creditors to whom a debtor owes a [...]

7. Brexit implications: general points

Let me start this section of the article by restating my two assumptions set out earlier in section 5 of the article. For the purposes of analysis my assumptions are: That the UK does indeed "Brexit" and becomes a third country on 29 March 2019. That the draft withdrawal agreement in something like its current form is ratified and that EU law continues to apply in the UK until 31 December 2020 by treaty as a matter of EU / international law and domestically in the UK by virtue of parliamentary ratification of the withdrawal agreement. On these assumptions, the EU acquis will cease to apply at the end of 31 December 2020. Thereafter, the position in international law will be governed by whatever future framework (if any) the EU and UK agrees to take effect on 1 January 2021. The effect of the 2018 Act, together with the domestic UK legislation required to implement the withdrawal agreement, is that EU law will remain part of UK domestic law. This means that the EU private international law principles in the Insolvency Regulation will continue to apply in the UK as regards insolvency proceedings in the EU27 until such time as the UK government or parliament legislates to diverge from EU law by replacing these principles.

8. Inbound implications (treatment of EU27 insolvency proceedings in the UK)

To illustrate, take a hypothetical Italian debtor, with its COMI unquestionably in Italy, that enters a concordato preventivo proceeding and needs to bind creditors in the UK. Up until 31 December 2020, the UK will recognize the proceeding and its effects under Italian law in accordance with EU law. If the proceeding starts after 31 December 2020 the effect of the 2018 Act is that UK will continue to apply the Insolvency Regulation principles unilaterally and will therefore automatically recognize the Italian proceeding and its Italian law effects in the UK as a matter of UK law. What if the Italian proceeding commenced, say, on 1 December 2020 but the foreign representative will need continuing UK assistance after 31 December 2020?  In other words, what is the implication as regards insolvency proceedings commenced in the EU27 during the transitional period but which need to continue after the EU acquis ceases to apply as a matter of international law? Absent some new EU-UK mutual recognition treaty which also grandfathers proceedings commenced between 29 March 2019 and 31 December 2020, the treatment of these proceedings after 31 December 2020 will rest on the UK law foundations of the 2018 Act. Initially, the practical effect may be imperceptible. Insofar as the Italian foreign representative relies on retained EU law domesticated by the 2018 Act, a UK court would be obliged as a matter of UK law to continue to recognize the Italian concordato and give full effect to it in the UK. However, the legal basis for the continuing recognition of the Italian foreign representative's authority and the Italian law effects of the proceeding would change, mid-proceeding, from EU law to UK law. As time goes on, inbound treatment of proceedings in the EU27 post-Brexit will depend on either the terms of a future EU-UK agreement (if one is agreed) or UK domestic law (pending such agreement). As regards UK domestic law, there is, of course, uncertainty about the extent to which the UK may move away in the future from the soft, unilateral application of the Insolvency Regulation as retained EU law envisaged by the 2018 Act. But UK law does provide alternative means by which a foreign representative of an insolvency proceeding in the EU27 could seek recognition and relief in the UK currently and after Brexit. The main statutory alternative to a domestic regime based on Insolvency Regulation principles is the Cross-Border Insolvency Regulations 2006,[63] which [...]

9. Outbound implications (treatment of UK insolvency proceedings in the EU27)

Let us now consider the reverse hypothetical. What will happen if there is, say, a UK administration and the debtor has assets in Italy. On what legal basis will the administrator be authorized to deal with those assets? At present under the Insolvency Regulation the answer is straightforward.  If the COMI is in the UK, the UK court will open a main proceeding and the Italian courts must automatically recognize it and allow the English administrator to deal with the assets (unless there is an Italian establishment and the Italian court opens a secondary proceeding). This will be the position also during the transitional period until 31 December 2020. But in the scenario where the UK and EU do not reach agreement on a future mutual recognition framework to operate from 1 January 2021, EU law will cease to apply both to existing UK proceedings, and to UK proceedings commenced after 31 December 2020. A debtor whose central administration is based in the UK will have its COMI in the UK, a third country, outside of the scope of the Insolvency Regulation. The treatment of a UK administration in Italy - and across the rest of the EU27 - will depend on domestic Italian private international law and the domestic private international law of every other member state in which there are assets or issues that need to be managed. Without some kind of comparable mutual recognition framework, the UK proceeding would not have universal effect in the EU27 and the result on the UK side would be the disintegration of the harmonized system in the Insolvency Regulation. This fragmentary outcome is far from being in the UK's interests and would almost certainly make the UK less attractive to forum shoppers during and after the transitional period. From a UK perspective therefore it appears to be imperative to conclude a deal with the EU based on mutual recognition.

10. The special case of UK schemes of arrangement under the UK Companies Acts

The UK scheme of arrangement is a mechanism in the UK Companies Act[67] by which the debts of participating classes can be restructured by means of a court-approved deal supported by a majority in number representing 75% in value of the stakeholders in each class.[68]  The scheme of arrangement was kept out of Annex A to the Insolvency Regulation at the UK's insistence mainly on the ground that it is a company law not an insolvency law proceeding, even though in practice it is widely used by UK and non-UK debtors for preventive restructuring.[69] At present, it is not entirely clear what is the legal basis for recognition of schemes of arrangements in the EU27. One theory that has some support among practitioners and courts is that the court order approving a scheme is a judgment that qualifies for pan-EU recognition under the Brussels I Regulation (recast).[70] This theory is open to doubt in my opinion for at least two reasons. First, the Brussels I Regulation expressly does not apply to "bankruptcy, proceedings relating to the winding-up of insolvent companies…judicial arrangements, compositions and analogous proceedings"[71]and there is a good case for saying that a scheme is akin to a judicial arrangement or composition as it involves the court sanctioned compromise of debt obligations. Second, the Brussels I Regulation appears to be concerned with adversarial inter partes civil and commercial litigation where there is a dispute between a plaintiff and a defendant. A scheme of arrangement sanctioning the modification of multiple creditor obligations does not have the same character.[72] The basis of the theory seems to be the proposition that the Insolvency Regulation and Brussels I Regulation are supposed to dovetail seamlessly and leave no gaps. In other words, a proceeding falling within the Brussels I Regulation is outside of the Insolvency Regulation and vice versa in perfect symmetry. On this view, proceedings involving solvent companies - and even possibly insolvent companies where the proceeding is not listed in Annex A - fall within the scope of Brussels I.[73] From this premise, UK judges have suggested that Article 8 of Brussels I would confer jurisdiction on the UK court in respect of a foreign debtor as long as there are "defendants", meaning creditors within a participating class, domiciled in the UK.[74]  If the EU-UK cannot agree a mutual recognition framework to replace Brussels I then it [...]

11. Final observations

It would clearly be in the UK's interests to reach an agreement with the EU that ensures continuity of mutual recognition after 31 December 2020. There is little doubt that the UK government aspires to such an agreement.[79] In the absence of a mutual recognition framework, the short term prospects for UK treatment of insolvency and restructuring proceedings in the EU27 looks reasonable because retained EU law will continue to apply domestically in the UK under the 2018 Act. However, it will be much less easy for the UK to export its proceedings, as recognition and enforcement would depend on domestic private international law in each of the EU27. For the EU and UK to reach an agreement on mutual recognition, it seems likely that the UK would have to agree to the continuing jurisdiction of the Court of Justice or, at very least, seek to remain within the orbit of EU jurisprudence perhaps by joining the European Economic Area and acceding to the jurisdiction of the EFTA court. The UNCITRAL Model Law on Cross-Border Insolvency provides another intriguing possible basis for future EU-third country legal relations. To create such a legal foundation would entail the EU adopting the Model Law as a Regulation that would harmonize the legal basis for judicial cooperation between the EU27 and third countries (which will include the UK). Were the EU to pursue EU-wide adoption of the Model Law, it would obviously assist the UK because a uniform pan-European set of procedural private international law rules would apply to the outbound treatment of UK insolvency and restructuring proceedings in the EU27. While this is perhaps not as good as the status quo or a replacement mutual recognition framework, it is better than the alternative in a "no deal" scenario. There are reasons for thinking that this move would also be in the EU's interests. EU participation in the Model Law would help legitimize it as a global solution and the Court of Justice would become an important and influential source of Model Law jurisprudence thus providing a counterweight to the current dominant influence of the United States. * Ralph L. Brill Professor of Law, Chicago-Kent College of Law, Illinois Institute of Technology (USA) and Professor, Centre for Business and Insolvency Law, Nottingham Law School, Nottingham Trent University (UK). E-mail: awalters@kentlaw.iit.edu. The article is based on lectures that I presented at the Faculty of Law, Sapienza University of Rome and [...]

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