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What effect could Brexit have on cross border insolvencies?

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What effect could Brexit have on cross border insolvencies?

Reviewed: 11th July 2016

Currently, if a debtor operates in more than one EU member state the proper jurisdiction for any insolvency procedures, and the law that applies in these cases, is determined by the EC Insolvency Regulation.

Cross border deals and investments have been supported by the EC Regulation, allowing specific English insolvency procedures to be recognised across the whole of Europe.

This piece of legislation has also helped to address the inevitable legal issues connected with cross border insolvencies between EU member states. So having now voted to leave the EU, what might happen when Article 50 is triggered and we are no longer an EU member?

How will actions to deal with cross border insolvencies be affected in the anticipated two years before we exit, and will the insolvency procedures of other countries potentially become preferable in cross border cases?

Alternatives to the EC Regulation

  • Negotiation of bilateral agreements with EU member states: in the hope of recreating the benefits of the EC Regulation, but in another form. The likelihood of this alternative would be affected by whether or not we remain part of the European Economic Area (EEA).
  • The UNCITRAL Model Law on Cross Border Insolvency: this is an alternative structure to the current EU law and EC Regulation. There are currently 41 countries signed up to UNCITRAL, and only five of these are EU member states (including the UK prior to the referendum).
  • Section 426 of the UK Insolvency Act, 1986: allows for the courts in different countries to cooperate and work together in relation to cross border insolvencies. As with UNCITRAL, however, there are far fewer countries signed up to this piece of legislation than were part of the EC Regulation – currently around 20 countries, mainly in the Commonwealth.
  • Common law: the concept of ‘universalism’ suggests that insolvency proceedings against a debtor should take on a worldwide scope, rather than disjointed actions across a number of different countries or EU member states. This alternative brings with it a degree of uncertainty in the face of legal disputes, however, unless a formal treaty is in place with each country.

A good example of where the concept of universalism in common law has been applied successfully is Denmark. Although they are part of the EU, the country is not involved in the EC Regulation. They have paved the way for cooperation with some of the other Nordic countries by negotiating separate arrangements with each, concerning jurisdiction for cross border insolvencies.

In practical terms, loss of the EC Regulation could mean creditors need to bring action against a debtor in the individual countries where assets are found. An application to each member state to recognise UK insolvency procedures may also be required, making this an expensive and time-consuming process.

Unfortunately, this could have an adverse effect on how the UK is viewed by those making cross border deals and investments. The uncertainty surrounding what will happen post-Brexit may make us appear less attractive to companies who previously would have chosen England as the jurisdiction for any insolvency procedures.

If we remained party to the EC Regulation even after leaving the EU, there could still be significant drawbacks, and it’s important to consider that we may have little input into any amendments to the legislation in the future.

Real Business Rescue is part of Begbies Traynor, the UK’s largest independent corporate rescue and recovery specialists. We offer independent, unbiased advice on all aspects of insolvency, including cross border cases, and offer a same-day consultation with no charge.


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