European distressed debtors and creditors face uncertainty regarding English law-governed debt and, more generally, their overall restructuring strategy. This uncertainty arises against the backdrop of the UK’s imminent departure from the EU, the Covid-19 pandemic and turbulent markets. Many major out-of-court or in-court European debt restructurings use English law governed loan debt and Luxembourg-based debtors, which are frequently used as borrowers or bond issuers in international corporate groups. English schemes of arrangement and administrations or other insolvency proceedings were used easily in the past, but now, with Brexit looming around the corner and the uncertainty around which alternative will be retained in respect of the recognition of English insolvency judgments, real strategic considerations considering the options for European debt restructurings arise. The automatic recognition of English insolvency proceedings remains free from doubt for any insolvency proceedings opened before 31 December 2020 under Regulation (EU) No 2015/848 on insolvency proceedings (the Insolvency Regulation). However, the recognition of any insolvency proceedings commenced in the UK from 2021 will need to be assessed on a country-by-country basis as the Insolvency Regulation will no longer apply in respect of English insolvency proceedings and the absence of an alternative recognition framework.
Recognition of third country (non-EU) insolvency proceedings in Luxembourg
Luxembourg courts recognise the principles of unity and universality of bankruptcies and that the courts of the jurisdiction –in the case of non-EU states –of the principal establishment1 of the debtor are competent to open insolvency proceedings and to rule on insolvency-related matters in connection with that debtor.
In principle, the opening of foreign (non-EU) insolvency proceedings in respect of a Luxembourg entity is recognised in Luxembourg. However, in order for said proceedings to be enforceable against the Luxembourg-situated assets of a debtor entity, the judgment is subject to an exequatur recognition procedure.2
An exequatur procedure includes, among others, possible checks on the validity of the foreign court’s jurisdiction to rule upon the case according to its own laws and to the Luxembourg conflict of laws rules3, the respect of the defendant’s rights of defence, the non-contravention of Luxembourg international public policy and a determination by a Luxembourg judge that Luxembourg law has not been evaded (fraude à la loi) as a result of the issuance of the judgment.
Impact of Brexit on the recognition of English insolvency proceedings
Until 31 December 2020, the withdrawal agreement (2019/C 384 I/01) agreed on 17 October 2019 between the EU and the UK (the Withdrawal Agreement) ensures the recognition of insolvency proceedings opened in the UK in the EU.4
After the expiration of the transition period, the Withdrawal Agreement will cease to apply along with the automatic recognition of insolvency judgments.5 As a result, recognition must be sought through alternative paths individually set in each EU member state and typically driven by local conflict of law rules. There will be an added risk, absent automatic recognition, that a court in a member state could take jurisdiction over a debtor if an application is brought before recognition is determined in another relevant jurisdiction.
Recognition of English schemes of arrangement
The English schemes of arrangement (the Schemes) fall under a separate regime and are not insolvency proceedings but proceedings under English company law. Any procedures started before 31 December 2020 would be automatically recognised in the EU under Regulation (EU) No 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Brussels I Recast).6
However, if the UK does not accede or adhere to an alternative international recognition convention with the EU such as the Lugano Convention (ie, in case of a hard Brexit), a Scheme judgment would be subject to the exequatur procedure in order to be enforceable in Luxembourg. Even when all the above-noted conditions are complied with, this could potentially add significant delay to such recognition, which could strip the Scheme from part of its usual efficiency and attractiveness in certain jurisdictions, including Luxembourg.
This Luxembourg requirement is separate from the English requirements needed for a English court to find jurisdiction. Parties may wish to consider this as, to date, most have been focused on awarding English jurisdiction as opposed to rebutting a Luxembourg court’s jurisdiction.
Impact on restructurings
The trend in the Luxembourg restructuring market for companies in financial distress has been to, in light of the short timeline until the end of the transition period, transfer their centre of main interest (the COMI) to benefit from the remnants of the UK membership in the EU. However, the window for this method is closing and, realistically, if a Luxembourg company needed to move its COMI to the UK today to benefit from the protection of the Insolvency Regulations ‘against’ proceedings opened elsewhere in the EU, it might struggle to find the much needed legal certainty, due to the impending Brexit and the three-month waiting period for the COMI shift presumption in the Insolvency Regulation.
Brexit will have a considerable impact on the restructuring market even though its effects have not yet crystallised on account of the uncertainty it has raised, tilting the balance in favour of other jurisdictions’ restructuring mechanisms (mainly the US Chapter 11 and possibly, in the future and to a certain extent, the Dutch Scheme of Arrangement) which already compete to some extent with the English Scheme of Arrangement, flagship of the UK’s restructuring legal tools.
The US Chapter 11 procedure is being more commonly used for filings by European entities despite the great cost of such procedures. With Brexit, this tool may become even more popular due to its well-known extra-territorial effect and its flexibility and ability to solvently restructure entire groups of companies. The worldwide effect of the US stay order associated with a Chapter 11 proceeding and the sanctions for its breach are a strong deterrent to ensure creditors’ compliance regardless of (ie lack of) enforceability in European debtor jurisdictions.
Notes
- ‘Principal establishment’ is a concept very similar in practice to the concept of centre of main interest under the Insolvency Regulation. Cour d’appel, Luxembourg, 21 December 2011, BIJ n° 2013-5, p90-91.
- Cour d’appel 13 December 1932, Pas 13, p356.
- Articles 2 and 440 of the Luxembourg commercial code underpin the principles of unity and universality of bankruptcies. Cour d’appel, Luxembourg, 21 December 2011, BIJ n° 2013-5, p90-91.
- Article 67(3)(c) of the Withdrawal Agreement and Article 19 of the Insolvency Regulation.
- Article 126 of the Withdrawal Agreement. It is worth mentioning that the UK government has published an internal market bill on 9 September 2020 entitling its ministers to circumvent certain provisions of the Withdrawal Agreement which could impact the above analysis.
- The UK submitted in April 2020 an application to accede to the 2007 Lugano Convention on jurisdiction and the recognition and enforcement of judgments. If the accession is completed, the UK Schemes will continue to be recognised in Luxembourg under the same conditions as pre-Brexit under the Brussels I Recast regulation.