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The impact of Brexit on cross-border bankruptcy and restructuring proceedings

How will Brexit affect cross-border bankruptcy and restructuring proceedings involving the UK? Will judgments issued by an insolvency court in the UK still be recognised in Poland?

The United Kingdom ceased to be a member of the European Union from 1 February 2020, and the Brexit transition period ended on 31 December 2020. This means that from 1 January 2021, EU law no longer applies to the UK.

Therefore, Brexit is linked with discontinuation of application of the EU regulations on insolvency proceedings. The rulings of British insolvency courts are no longer automatically recognised in Poland.

How has it been so far?

The acts governing cross-border insolvency proceedings (bankruptcy and restructuring) within the EU, with the exception of Denmark, are Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast) and its predecessor, Council Regulation (EC) No 1346/2000 of 29 May 2000, which continues to apply to insolvency proceedings opened before 26 June 2017.

Until the end of the transition period, Regulation 2015/848 applied between EU member states and the United Kingdom. It served, among other things, to:

  • Determine in which member state insolvency proceedings may be opened
  • Determine the applicable national law for a given proceeding, and
  • Define the rules on cooperation between foreign courts and administrators.

Pursuant to Regulation 2015/848, a ruling to open insolvency proceedings issued in one EU country is automatically recognised in all other EU countries with the same effect.

The jurisdiction to open the “main insolvency proceedings” lies with the court of the member state within whose territory the centre of the debtor’s main interests lies. The method of conducting insolvency proceedings, as well as their effects, is in principle governed by the law of the state opening the main proceedings (however, the regulation provides for a number of exceptions to this rule).

Where a court of a member state has opened main insolvency proceedings against a debtor, the courts of other member states may open insolvency proceedings against the same debtor only if it has a branch of its enterprise in the territory of that other member state. This is known as “secondary insolvency proceedings.” In principle, they are governed by the law of the member state in whose territory they are brought. The effects of those proceedings are limited to the debtor’s assets located within the territory of that member state.

Regulation 2015/848 also ensures that the appointment of a liquidator, court administrator or receiver in one member state is automatically recognised in all member states without the need for a court ruling. This solution has allowed for efficient management of cross-border insolvency proceedings in the EU. It has also reduced the costs and time associated with dealing with cross-border cases.

Can Regulation 2015/848 continue to apply in relations between the EU and the UK?

Pursuant to the Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community, Regulation 2015/848 will apply with respect to the UK only to those insolvency proceedings in which the main insolvency proceedings were opened before the end of the transition period. This means that the UK will continue to recognise insolvency proceedings opened in other member states and will obtain mutual recognition of insolvency proceedings opened in the UK if the main proceedings were opened before 1 January 2021.

What changed from 1 January 2021?

From 1 January 2021, rulings issued by insolvency courts in the UK are not automatically recognised in EU member states. The jurisdiction and recognition of rulings in insolvency matters are governed by the internal laws of the UK and individual member states.

Recognition in the EU of a decision of a UK court to open insolvency proceedings requires an application by the eligible entity to the national court of each state where recognition is sought, in accordance with the relevant national legislation. Depending on the circumstances, this may require additional analysis of the case.

Alternative paths to mutual recognition of insolvency proceedings

A possible alternative path to obtain recognition under domestic law in the UK and some member states is the UNCITRAL Model Law on Cross-Border Insolvency, issued by the United Nations Commission on International Trade Law.

The Model Law is a series of recommendations for ratifying states regarding the incorporation of insolvency laws into their legal systems. It aims to provide a uniform mechanism for the recognition of foreign proceedings and to set rules for cooperation between foreign courts or authorities in the course of foreign insolvency proceedings.

The UK introduced the Model Law into its domestic legislation through the Cross-Border Insolvency Regulations 2006 (CBIR 2006). Apart from that, only four EU member states have adopted the Model Law: Greece, Romania, Slovenia and Poland. This means that recognition of insolvency proceedings opened in the UK within the territory of those countries, as well as recognition of insolvency proceedings opened in one of those countries in the UK, should not cause much difficulty in practice.

However, recognition of foreign insolvency proceedings under the Model Law is not automatic (as is the case with Regulation 2015/848), but requires an application to the court. For example, a British administrator interested in having a decision of a British court on the opening of foreign insolvency proceedings recognised by a Polish court should apply to that court and attach documents listed in the Polish Bankruptcy Law (through which Poland has introduced the Model Act into its legal system).

The Bankruptcy Law also contains regulations in respect of the effects of recognition of a decision on the opening of foreign bankruptcy proceedings in Poland. They concern, among other things:

  • The scope of the foreign administrator’s powers
  • The effect of the declaration of bankruptcy on the debtor’s assets in Poland
  • Secondary insolvency proceedings which may then be opened by a Polish court.

However, if the Model Law is not more widely disseminated and adopted in other member states, it will not provide a universal alternative means of recognising cross-border insolvency proceedings involving the UK.

An agreement is needed

On 1 January 2021, the more than 1,200-page Trade and Cooperation Agreement between the EU and the UK came into force (so far applied temporarily), governing various aspects of the future relationship between EU and the UK after Brexit. Unfortunately, it completely ignores civil judicial cooperation, including mutual recognition of judgments between EU and UK courts in insolvency cases. This means that there is currently no uniform system of judicial cooperation in insolvency matters between the UK and EU member states.

So now the task of the UK government is to work out an agreement on cross-border insolvency proceedings improving mutual recognition of judgements between the UK and the EU and bringing benefits similar to those previously enjoyed under Regulation 2015/848.

Ewa Kruszko, Restructuring & Bankruptcy practice, Wardyński & Partners