Brexit and the end of the transition period: insolvency and pre-insolvency impacts from December 31, 2020 onwards

One of the most interesting parts of the draft is that regarding the consequences of Brexit in relation to the principal rules of Private International Law provided in EU legislation; these rules currently affect a significant number of subjects (contracts, international insolvency, torts, succession, marital breakdown, alimony, etc.).

In the specific case of cross-border insolvencies, the draft establishes that the Community Regulation on insolvency proceedings (EU Regulation 2015/848) will continue to be applicable to all insolvency proceedings which are commenced in the Member States (including the United Kingdom) before the end of the transition period (December 31, 2020). However, from that date onwards the authorities of the United Kingdom will cease to apply the Community Regulation and will resort to its internal legislation when: a) declaring themselves to have jurisdiction to commence an insolvency proceeding; b) identifying the national law which will apply to that proceeding; c) deciding whether  they recognize and under what conditions an insolvency proceeding conducted in an EU Member State; d) assessing whether or not they cooperate with the authorities of the EU Member State in which that proceeding is conducted, or whether they will provide that same cooperation for the managers appointed to manage it.

However, undoubtedly the most important consequences of the draft will affect the authorities of the States which continue to be EU members. Those consequences will also affect the so-called schemes of arrangements (“SoAs”), which are essentially refinancing procedures regulated by English law and supervised by the English courts (which have been resorted to by Spanish companies like La Seda de Barcelona, Metrovacesa, Cortefiel and Codere).

Although surprisingly the SoAs were excluded at the last minute from the Community Regulation on insolvency proceedings, there has been a debatable opinion, especially from the other side of the English Channel, which argued that they were equally enforceable in the rest of the EU Member States through another European instrument, Regulation 1215/2012 (known as Brussels I Regulation recast), which provides a simplified procedure to provide cross-border enforceability for the judicial decisions of other Member States. However, the draft now makes clear that it will not be possible to use that instrument to recognize in an EU Member State British judgments adopted after December 31, 2020 nor, therefore, SoAs after that date. Furthermore, the draft itself also seems to rule out the possibility of recognizing SoAs by “reviving” the predecessor of the Brussels I Regulation recast (the 1968 Brussels Convention), which also has flexible rules for recognition of foreign judgments although not offering such a favorable framework as that of the Regulation.

The fact that, after the end of the transition period, the authorities of the EU Member States have to apply their domestic rules to recognize judgments coming from the United Kingdom may mean in the majority of States a tougher approach when it comes to offering cooperation to the British authorities and managers, as well as greater obstacles to the cross-border recognition of insolvency and pre-insolvency proceedings commenced in the United Kingdom.

What the application of our Insolvency Law will mean in Spain for the recognition of British judgments in relation to insolvency is a sufficient example. On the one hand, judgments which commence insolvency proceedings in the United Kingdom will no longer enjoy “automatic recognition” in Spain, which means that to take effect in our country they must previously undergo the primary ordinary recognition procedure (known as exequatur) which our domestic law provides for non-Community foreign judgments. This will mean an increase of costs, of time and, of course, greater uncertainty, since the recognition of a British judgment may or may not be ordered depending on the opinion of the Spanish court which is to decide on the matter.

It is not only a problem of time and cost. From the end of the transition period onwards, the risk of not obtaining recognition of a British judgment in Spain will increase because our legislation establishes certain stricter grounds for refusal than the current Community Regulation on insolvency proceedings. For example: the enforcement of a British proceeding may be refused if our courts conclude that the British courts assumed jurisdiction over a matter in accordance with criteria not equivalent to ours (this may occur if the British courts continue to sanction refinancing of companies which do not have their principal center of interests, or at least their domicile, in the United Kingdom). These greater obstacles to the recognition of British proceedings will have consequences in most diverse areas. Consider the fact that, as our case law has claimed to date, the manager of an English proceeding will not be able to publicize it nor register it directly in the Spanish registries nor, in general, will he be able to act in Spain without previously obtaining recognition of the British proceeding from a Spanish judge. Furthermore, the rest of our authorities will refuse their cooperation to the British authorities until a Spanish judge recognizes the English proceeding.

However, the effects of the “insolvency Brexit” are not limited to the recognition of insolvency or pre-insolvency proceedings conducted in the United Kingdom or to the cooperation with the authorities of that State. There will also be a greater and more worrying ripple effect of this “insolvency Brexit” when the authorities of the EU Member States have to respond to certain situations related to the United Kingdom. One of the clearest examples will certainly be that of the security rights over assets located in the United Kingdom. The Community Regulation on insolvency proceedings at present is particularly favorable towards the position of the holder of that security and “shields” the secured creditor’s position, granting him full immunity from the insolvency proceeding commenced in another country although the asset which acts as security is located in an EU Member State other than that in which the proceeding is conducted. In other words, it is as if the insolvency proceeding “did not exist” for these creditors, who remain divorced from it and with their security immune to the proceeding commenced in another EU Member State. However, after December 31, 2020, with the end of the transition period, this panorama will change considerably. As a consequence of the draft, each EU Member State will begin to apply the solutions of its domestic legislation, whereupon the immunity of creditors (British or otherwise) with security rights over assets situated in the United Kingdom may be lost. Again, Spanish legislation provides good evidence of this. Our Insolvency Law does not provide any immunity benefiting those creditors but rather the mechanical application on its actual terms of the insolvency rules of the State in which the asset constituting security is located. And British law, like French, Italian or German law, does not grant full immunity to this type of secured creditors, but rather, to a greater or lesser extent, imposes various restrictions on them.

During the time remaining until the end of the transition period, it may be envisaged that financial creditors forewarned and with the “insolvency Brexit” in view, will entrust to their lawyers the preparation of a stress test to ascertain how their cross-border security will behave in the event of insolvency of their counterparties after December 31, 2020.

In addition, it seems reasonable to assume that the attraction which the British SoAs may have had in the past for non-British debtors and their financial creditors will fade considerably in the face of the future panorama, especially taking into account the fact that there are already alternative mechanisms in other Member States, such as the judicial approval of refinancing agreements in Spain, the forced conversions of debt into capital in Germany, the concordato preventivo in Italy or the safeguard procedure in France. In fact, the future European Directive on early restructurings will standardize all these alternative mechanisms, and will provide companies in difficulties of the Member States with extremely powerful restructuring tools, in line with the North American system, which are more modern and developed than the British SoAs and easily recognizable throughout the entire EU territory.