Brexit, Cross-Border Insolvencies, and the Common Law
- The EU Insolvency Regulation ensures UK insolvencies are recognised automatically in the EU and EU insolvencies are recognised automatically in the UK
- Brexit, and the ever-more-likely 'no deal' exit, threatens this
- In the event that the EU Insolvency Regulation no longer applies to the UK, how can the UK's attractiveness as an insolvency forum be maintained?
- This article examines the UK's Common Law on cross-border insolvencies, and consider whether it may go some way toward mitigating the effect of a hard Brexit on the UK's insolvency community
"No deal was never our desire… but the EU 27 is now prepared. It becomes day after day more likely."
These are the words spoken by the EU's chief Brexit negotiator, Michel Barnier, two days after the UK Government failed, for the third time, to have its negotiated withdrawal deal approved by the House of Commons.
The implications of no deal Brexit are much forecast, with significant disruption expected to hit all manner of services and industries across the UK and the EU.
Within the sphere of insolvency law, a great deal of concern crystallises around the effect that a no deal Brexit will have on the application of the EU Insolvency Regulation ("Regulation") to UK insolvencies.
Currently, insolvency proceedings in the UK are automatically recognised across the EU, allowing an insolvency practitioner appointed in the UK to deal with all assets located in other EU Member States. On this basis, it has been easy for companies and creditors with interests and assets spread throughout the EU, to choose the UK as the jurisdiction in which to open insolvency proceedings, while being able to deal with all non-UK EU assets and interests seamlessly, as part of the UK insolvency proceedings.
As an EU treaty, the Regulation will cease to apply to the UK if the UK ceases to be an EU Member State. There will be no automatic recognition, meaning insolvency office-holders will have to make an application for recognition in each relevant jurisdiction. Such an application will be governed by the local law, and will inevitably take longer, cost more, and be exceedingly more complex than the process of automatic recognition previously available. There may also be a local insolvency practitioner seeking appointment, or competing judgements from different countries' courts about the same assets, leading to a legal quagmire and much indecision about who can do what.
Overnight, a UK insolvency office-holder will find it a much harder task to identify, locate, secure, and realise any assets of a company that are in the EU but out with the UK. The change is perhaps best framed as choosing to exit a motorway, instead opting for a B-road. It is not hard to imagine the impact that this will have on the net funds creditors will recover from an insolvency: it is they who will ultimately bear the burden of this more encumbered procedure. The longer it takes to get control of an asset, the more its value might diminish, or, in the worst case scenario, the more likely it is that the asset will disappear entirely. In short, the lack of automatic recognition could act to put European assets out of reach for UK creditors – a fact not likely to go unnoticed by prospective debtors.
The unfortunate correlative of the above is that the UK is in danger of becoming a much less attractive forum for insolvency. Further, by way of simple cause and effect, the wider UK economy will be impacted: if it is more difficult to recover sums lent to, invested in, or traded with a multi-national company based in the UK, then that is a reason for lenders, investors, and traders not to do business with such companies; and if a company is worried that it will struggle to secure funding, investment, and business if it has its base in the UK, then that is a reason for it to have its base elsewhere.
Additionally, without seamless access to European assets, the UK's advantage over other market hubs, such as New York, will be harder to maintain, regardless of its creditor friendly reputation. There is also the worry that several European jurisdictions, notably the Netherlands and Spain, which have been involved in a program of revamping their insolvency laws over the last few years, could provide tempting alternative choices for creditors when selecting an insolvency regime.
Given these considerable concerns, the UK must look to find ways in which its longstanding attractiveness as an insolvency forum can be maintained. Ironically, a solution may be found in the UK's judiciary – previously considered to be a quagmire of uncertainty in matters of cross border insolvency.
In 2006, Lord Hoffman stated that, in the field of cross-border insolvency: 'the undeveloped state of the common law means that the unifying principles which apply to both personal and corporate insolvency have not been fully worked out'. However, in recent years, the UK courts, both at first instance and at appellate level, including the Supreme Court, have given significant consideration to the common law principles that govern the judicial assistance available from the UK's courts with regards cross-border insolvency matters.
This consideration at first seemed to espouse a common law doctrine of ‘universalism’. In Cambridge Gas Corp v Official Committee of Unsecured Creditors (of Navigator Holdings PLC), Lord Hoffmann reiterated what he considered to be the traditional view of the courts in stating:
The common law has traditionally taken the view that fairness between creditors requires that, ideally, bankruptcy proceedings should have universal application. There should be a single bankruptcy in which all creditors are entitled and required to prove. No one should have an advantage because he happens to live in a jurisdiction where more of the assets or fewer of the creditors are situated.
From Cambridge Gas, then, it seemed that the courts felt it was open to them to provide assistance to foreign insolvency proceedings, and that they could do whatever was appropriate in any given case to encourage the universalism of insolvency proceedings.
However, in two subsequent cases, also heard in the UK’s highest court, the judiciary somewhat rowed back. In 2012, the Rubin case involved two insolvencies where liquidators were seeking to enforce, in England, a default judgement made by a foreign insolvency court setting aside a prior transaction entered into by an insolvent company on the grounds that it involved a fraudulent preference. The view of the Supreme Court, predominantly espoused by Lord Collins, whose opinion was agreed with by the remainder of the bench, was that it was inappropriate to invent a new judge-made rule that a foreign court judgement made in an insolvency context should be enforceable in the UK, if well-established principles meant that it would have been unenforceable if it had not been made in that context.
Seen at the time as perhaps a rejection of any common law principle of universalism, the position was clarified, to a degree, in Singularis Holdings v PricewaterhouseCoopers in which the issue for the court was whether a Bermuda court could order the former auditors of a Cayman company in liquidation to give information to the Cayman liquidators. Although all five judges on the Supreme Court bench considered that such an order could not be made on the facts of the case, the majority did opine that the court had a prima facie right, by way of the doctrine of universalism, to do so if the facts had so allowed. This approach is often termed ‘modified’ universalism, and is characterised by Lord Sumption as:
The principle of modified universalism is part of the common law, but it is necessary to bear in mind, first, that it is subject to local law and local public policy and, secondly, that the court can only ever act within the limits of its statutory and common law powers.
This seems very much now to be the established position: speaking in June 2017, the then-President of the UK Supreme Court, Lord Neuberger stated that 'all UK judges recognise, indeed I think we all strongly support, the desirability of international co-operation and co-ordination in the field of insolvency.' And, in Re HIH Casualty and General Insurance Ltd, modified universalism was referred to as ‘the golden threat’ running through the UK’s cross-border insolvency law since the 18th Century. Furthermore, the principle has also recently received recognition in the Scottish courts, through the case of Hooley v Petitioners, which offered a rare consideration of the issues involved in cross-border insolvencies from the standpoint of Scots law.
Accordingly, having begun with a relatively sweeping approach to universalism, the UK judiciary has settled on a form of modified universalism, whereby there is a common law power to assist a foreign court of insolvency jurisdiction, but no assistance should be given to foreign insolvency proceedings which would result in the court exercising powers analogous to those that would be exercisable in the context of a domestic insolvency, but which would not ordinarily apply to a cross-border insolvency. This measured approach can be seen to be largely the result of the wariness of judges not to step on the toes of existing treaties, the EU Insolvency Regulation in particular, and legislation. In other words, the EU and the UK legislators had already spelled out how cross-border insolvencies should be dealt with, and to go beyond these rules would be beyond the proper remit of the courts.
However, it may now be pertinent to ask whether it is time for judges to take a more pro-active approach in dealing with cross-border insolvencies, whenever and wherever they have the opportunity to do so. In other words, in lieu of the EU Insolvency Regulation, there could be an opportunity for the UK judiciary to take a particularly universalist stance, marking the UK as receptive to the needs of international insolvency efforts. Such a stance could go a considerable way toward preserving its reputation as a world leader with regards insolvency proceedings.
Of course, the danger is that it would be to the UK’s disadvantage if British judges pursued such a universalist line of jurisprudence without the certainty of reciprocity in other jurisdictions. The common law approach of the UK does not compel a similar approach by the courts of other jurisdictions in which UK insolvency practitioners and proceedings seek to be recognised. However, it is not entirely unreasonable to suggest that a move toward greater openness with regards the recognition of foreign proceedings would have a positive impact on the recognition of UK insolvencies across Europe and the wider world.
To conclude, Brexit does not alter the fact that the UK common law remains as attuned as ever to the realities of the international business and commercial world, nor does it diminish the unique and respected expertise of UK lawyers and insolvency practitioners.