Situation before Brexit

Currently, a UK court’s decision to open insolvency proceedings, and the subsequent proceedings, are automatically recognised under Articles 16 and 17 of the European Insolvency Regulation.

Recognition of insolvency proceedings

After Brexit, it is most likely that the UK will be treated as a non-Member State (unless the UK reaches any special agreement with the EU).

Background

Under German law, when a company becomes insolvent or over-indebted, its directors are obliged to file for insolvency. If they fail to fulfil this duty, according to s 64 German limited liability company Act (GmbHG) from this point in time onwards, they have to compensate the company for those payments which (objectively) would not have been made by a prudent businessman. Such imprudence is presumed.

In practice, s 64 is one of the most powerful tools available to insolvency administrators claiming against directors.

The reform of the European insolvency regulation (EIR) comes into force in mid-2017. Inter alia, it will alter the rules on which jurisdiction is competent to open insolvency procedures.

Legal Background

If a debtor needs to file for insolvency, there are two main ways of manipulating the existing legal competence rules:

Background

The EU-Commission is planning a European wide pre-insolvency (preventive) restructuring procedure in order to harmonise pre-insolvency proceedings within the EU, thus strengthening the EU domestic and capital markets, bringing clarity to cross-border transactions, and preventing forum-shopping.

At the end of 2016, the European Parliament issued a proposed directive (COM (2016)723/30/EU) in this regard (Directive Proposal).

Facts

German insolvency law contains provisions that allow for the challenge of payments/securitisation of certain shareholder loans in insolvency proceedings. The reason for this is that under German insolvency law, a loan repayment claim of a shareholder against ‘his’ corporation is subordinated by law (sec. 39 para. 1 no. 5 German Insolvency Code).

Brexit is now a reality; what lies ahead for restructuring and insolvency law? These views are limited to English law and do not apply to credit institutions and insurance undertakings, which are subject to their own regimes in the UK and across the EU.

What, when, how? No change in the short term

Based on a referral by the German Federal Court of Justice (BGH) the ECJ held that provisions such as § 64 of the German Limited Liability Companies Act (GmbHG) which regulates the personal liability of German GmbH directors in cases of insolvency, can be regarded as an insolvency law rule by virtue of Art. 4 para. 1 European Insolvency Regulation. The provision can therefore be applicable to a UK limited company (having its centre of main interest in Germany) and its director respectively, in accordance with European law: according to Art. 4 para.

Daycare company Estro was declared bankrupt in July 2014, but the undertaking was relaunched immediately, as the relaunch was prepared in a ‘pre-pack’ insolvency. All 3600 employees of the bankrupt company were dismissed by the administrator. About 2600 employees were immediately employed again by the relaunched company, which company was a so called ‘connected party’ as the shareholder also held a substantial part of the shares of Estro.

Legal background

Council Regulation (EC) No 1346/2000 concerns insolvency proceedings with debtors which operate cross-border in the EU.

Broadly, the law applicable to insolvency proceedings is the law of the member state in which the insolvency proceedings are opened. This includes rules relating to the voidness, voidability or unenforceability of legal acts which are detrimental to all creditors; article 4.