Updated: Aug 16
The Implementation of the UNCITRAL Model Law on Cross-Border Insolvency in Great Britain
The UNCITRAL Model Law on Cross-Border Insolvency was adopted by the United Nations Commission on International Trade Law in 1997 and is designed to assist States to manage transnational insolvency cases in an efficient, fair and cost-effective manner. In its simplest form, a transnational insolvency involves an insolvency proceeding in one country, with creditors located in at least one additional country. In the most complex case, it involves multiple proceedings, subsidiaries, affiliated entities, assets, operations and creditors in dozens of nations.
The Model Law does not attempt to harmonise local insolvency law. The main issues addressed by the Model Law include the recognition of foreign proceedings, coordination of proceedings concerning the same debtor, rights of foreign creditors, rights and duties of foreign insolvency representatives, and cooperation between authorities in different States. Since the Model Law is not binding on any State, its operation depends on how it is enacted locally.
In the United Kingdom, Section 14 of the UK Insolvency Act 2000 gives the Secretary of State power to enact the Model Law, with or without modification, by secondary legislation. Pursuant to this power, the Cross-Border Insolvency Regulations 2006 (herein referred to after as the "Regulations") have been enacted, effective as of 4 April 2006. In enacting the Regulations, the UK Government's policy has been, to the extent possible, to adopt the Model Law as drafted.
Most of the differences between the British legislation and the original Model Law provisions are to take account into the established local requirements and are not meant to depart from the underlying intent of the Model Law. These differences include references to Council Regulation (EC) 1346/2000 on Insolvency Proceedings (EU Regulation), section 426 of the Insolvency Act 1986, the British court systems, and the different forms of relief available under British insolvency law. The scope of the automatic stay following the recognition of a foreign main proceeding has also been clarified. The main provisions and effect of the Regulations in the United Kingdom are summarised below.
Scope and Structure of the Regulations
The Regulations only apply to Great Britain (thus, excluding Northern Ireland). Regulation 2 provides that the Model Law in the form set out in Schedule 1 to the Regulations shall have the force of law in Great Britain. As mentioned above, the government's approach has been to "graft" the Model Law onto British insolvency law.
At present, the Regulations do not apply to certain entities (such as credit institutions, building societies, insurance companies, utility companies and certain statutory bodies. The Model Law, however, will apply to the following cases:
1. Where assistance is sought in Great Britain by a foreign court or a foreign representative in connection with a foreign insolvency proceeding;
2. Where assistance is sought in a foreign State in connection with a British insolvency proceeding;
3. Where a foreign insolvency proceeding and a British insolvency proceeding in respect of the same debtor are taking place concurrently; or
4. Where creditors or other interested persons in a foreign State have an interest in requesting the commencement of, or participating in, a British insolvency proceeding.
To the extent that the Model Law conflicts with an obligation of the United Kingdom under the EU Regulation, the requirements of the latter will prevail.
Section 426 of the Insolvency Act 1986 will continue to be available to provide assistance (and very powerful assistance at that) in cross-border insolvency matters on the current terms. The Model Law, the EU Regulation and Section 426 will therefore operate in parallel and provide a foreign insolvency representative a menu of cross-border insolvency regimes to consider when seeking judicial assistance in Great Britain.
Recognition of Foreign Insolvency Proceedings
The Model Law allows a foreign insolvency representative to apply directly to a British court without having to meet any formal requirements such as licences or consular formalities. A British court is required to decide on an application for recognition of a foreign insolvency proceeding at the earliest possible time. The court may, at the request of the foreign representative, grant relief of a provisional nature, such as staying execution against the debtor's assets, where such relief is urgently needed to protect the assets of the debtor or the interests of the creditors. Provided certain criteria are met (such as the production of a certificate from the foreign court affirming the existence of the foreign proceeding and of the appointment of the foreign representative), the British court is required to recognise the foreign proceeding.
The consequences of recognition differ depending on whether the foreign proceeding is a foreign main or non-main proceeding. A foreign main proceeding is a foreign proceeding taking place in the State where the debtor has the centre of its main interests (COMI), whereas a foreign non-main proceeding is a foreign proceeding taking place in a State where the debtor merely has an establishment. The concepts of COMI and establishment are similar to those in the EU Regulation. While COMI has no defined meaning, "establishment" is defined to mean a place of operations where the debtor carries out a nontransitory economic activity with human means and assets or services. Note that in the absence of proof to the contrary, the debtor's registered office, or habitual residence in the case of an individual, is presumed to be the COMI.
Upon recognition of a foreign main proceeding, the following matters are automatically stayed or suspended:
1. Commencement or continuation of individual actions or individual proceedings concerning the debtor's assets, rights, obligations or liabilities is stayed;
2. Execution against the debtor's assets; and
3. The right to transfer, encumber or otherwise dispose of any assets of the debtor is suspended.
Apart from seeking judicial recognition of a foreign insolvency proceeding, a foreign insolvency representative is entitled to participate in a proceeding regarding the debtor under British insolvency law, to intervene in any proceedings in which the debtor is a party and to make an application to the court to avoid acts detrimental to creditors (such as unlawful preferences and transactions at an undervalue).
Cooperation with Foreign Courts and Foreign Insolvency Representatives
The Court may cooperate to the maximum extent possible with foreign courts or foreign representatives, either directly or through a British insolvency officeholder. In this connection, the court is entitled to communicate directly with, or to request information or assistance directly from, foreign courts or foreign representatives.
A British insolvency officeholder is, in the exercise of his functions and subject to the supervision of the court, mandated to cooperate to the maximum extent possible with foreign courts or foreign representatives, provided it is consistent with his other duties under the law of Great Britain. In this connection, the British insolvency officeholder is entitled to communicate directly with foreign courts or foreign representatives.
The forms of cooperation mentioned above include the following:
1. The appointment of a person to act at the direction of the court;
2. Communication of information by any means considered appropriate by the court;
3. Coordination of the administration and supervision of the debtor's assets and affairs;
4. Approval or implementation by courts of agreements concerning the coordination of proceedings; and
5. Coordination of concurrent proceedings regarding the same debto
Brexit and its consequences for European Insolvency Law
The outcome of the referendum held in the United Kingdom in June 2016 has literally opened Pandora’s Box making “uncertainty” the key word for many years to come. For the time being the number of question marks arising out of the current political scenario clearly outnumbers the answers, in particular on the issue of which legal position the UK will have after leaving its status as a member state of the European Union. In the light of cooperation being essential to modern international insolvency, the bottom line is whether this principle can mitigate the fact that the UK is leaving the reign of mutual trust. The main risk of Brexit relates to those involved in current, complex insolvencies which cross EU borders, have a British angle and are expected to last until after Brexit happens.
Currently, insolvency proceedings in the UK and other any Member State (excluding Denmark) are subject to primarily by:
1. The EC Insolvency Regulation (EUIR)
The EC Regulation imposes a framework of rules setting out where insolvency proceedings can be opened, the laws applicable to matters arising in such proceedings, and the recognition of the proceedings in other Member States.The primary implication therefore is that Brexit without terms of an exit agreement, would result in the Regulation no longer being applicable to the UK.
Following Brexit: The EUIR will no longer apply and EU insolvency proceedings will no longer be automatically recognised by the English courts. A recast EUIR comes into effect in June 2017. The EUIR is generally reviewed every five years. The UK is unlikely to be involved in this review process going forwards. UK insolvency proceedings would no longer benefit from automatic recognition across the EU. Similarly, insolvency proceedings commenced in EU Member States would not benefit from automatic recognition in the UK.
2. The Cross Border Insolvency Regulations (CBIR) 2006
The UK has implemented the UNCITRAL Model Law in the form of the Cross Border Insolvency Regulations 2006. This means that insolvency office holders from the EU who wish proceedings to be recognised in the UK could apply for recognition under the 2006 Regulation, bringing many of the benefits of recognition under the EC Regulation.
Following Brexit: It is likely that Member States will be able to apply to the English Courts who will recognise EU insolvency proceedings without the need for reciprocity under the CBIR, although this recognition will not be automatic. However, the only other Member States that have signed up are Greece, Poland, Romania and Slovenia. Therefore, in any most EU Member States, UK office holders would need to rely on getting recognition either under local law or would have to open territorial insolvency proceedings in every state in which assets are located. In effect UK office holders would be reverting to the legal processes for international recognition which were conducted prior to the introduction of the EC Regulation.
3. S.426 of the Insolvency Act 1985
It is currently possible to apply to the English Court for assistance in relation to insolvencies commenced in designated countries, including many key offshore jurisdictions (e.g. the British Virgin Islands, the Cayman Islands, Guernsey and Hong Kong).The reach of this section is limited to those countries designated by the Secretary of State through a statutory instrument.
Following Brexit: It remains unclear whether Section 426 will be extended to include EU Member States.
Hopefully, for many creditors, part of the Brexit agreement is going to be a negotiated settlement that allows the UK to remain part of the EU Insolvency Regulation. As a legal framework that works both ways it would make sense to keep this in place but, as with so much in the brave new world of Brexit, we are in unchartered territory.
Author: Navin Kumar Jaggi
Co-Author: Avni Sharma, IIIrd Year, Amity Law School, Delhi.