How cross-border insolvency works in practice
July 30, 2024
Decades of increasing globalisation and the dominance of ever more complicated multi-national corporate groups have meant that even quite small and otherwise straightforward UK businesses have international relationships that become far more problematic in an insolvency scenario.
The issues may concern an unpaid receivable, a key supplier relationship, an overseas joint venture or a foreign subsidiary. Tangible assets may located in another jurisdiction. Realising value from intangibles may depend on co-operation in other countries. The buyer of the insolvent business and/or its assets may also be abroad.
The one absolute certainty is that wherever the UK insolvency practitioner (IP) needs to engage, they will find themselves navigating different legal systems and even more different insolvency regimes. Professionals they encounter will have different codes of conduct and be subject to different regulations (if any). Our recent blog on why insolvency systems vary round the world sets out the background.
How do IPs tackle cross-border cases? What arrangements are there to assist them?
The mirage of harmonisation
The idea of harmonising insolvency systems around the world has long been a dream of the business rescue world, but it has turned out to be more of an illusion or at least only achievable on a very limited basis. Even within apparently coherent trading blocs such as the European Union, the task of recognising the very different business cultures and practices within one over-arching regime has proved to be extremely difficult. The level of compromise needed has been found to be at risk from vested interests in each local business and political community.
The European Commission did publish in 2022 a draft directive harmonising certain aspects of insolvency law with the aim of facilitating distressed M&A and reducing legal uncertainties for investors in cross-border investments. The proposal is now undergoing legislative procedure, but the only objective of this initiative is to restrict creditor avoidance tactics by unscrupulous corporates by harmonising law on this specific aspect across the EU.
The reality of recognition
Instead of meaningful harmonisation, the concept of recognising foreign insolvency proceedings and the IPs concerned has developed, allowing those IPs to interact with local professionals and courts and access local legal remedies, which had previously been denied to overseas applicants.
Cooperation and assistance
Once foreign proceedings and foreign IPs have been recognised, it facilitates the granting of support and giving of assistance to them by foreign states and, in particular, overseas courts.
What are the mechanisms for cross-border cooperation?
Uncitral Model Law
The start of this process was the UNCITRAL Model Law on Cross-Border Insolvency, which was adopted in 1997 to create some order in the chaotic world that insolvency professionals faced when working on multi-jurisdictional failures or restructurings.
This is all about recognition, nothing more. The purpose was to provide a starting point for individual jurisdictions to enact their own recognition and cooperation laws. So far, a little over 50 nations have adopted their own version of the Model Law, a relatively small number but crucially including the US (through its Chapter 15 Bankruptcy process), Canada (its Part IV), Australia (its Cross Border Insolvency Act 2008) and the UK (in its Insolvency Act S.426 and Cross Border Insolvency Regulations 2006).
EU Insolvency Regulation
Notable absentees among the adopters are almost all European jurisdictions, except Greece and Slovenia. That is because the EU has its own cross-border arrangements under the EU Insolvency Regulation, which came into force in 2002. This operates along very similar lines to the Uncitral Model Law. It was updated in 2015.
Group proceedings
Both the Uncitral Model Law and the EU Insolvency Regulation applied originally only to single entity insolvency, which created practical difficulties in many situations where a failure involved groups of companies either in one foreign jurisdiction or cross-border in several or more. The result has been further cross-border legislation, this time governing the failure of groups of corporate entities.
Other locations
Other countries not covered by the EU Regulation and which have not followed the Uncitral Model Law have nevertheless developed mechanisms for cross border recognition and cooperation, either on a formal legal basis or through informal arrangements.
How are these legal tools used on live insolvency cases?
Typically, there are three possible approaches nowadays to cross-border insolvencies:
Main & secondary proceedings
This is the traditional route involving a main restructuring process, which is then recognised in another jurisdiction. The classic example is a UK Scheme of Arrangement or Restructuring Plan, coupled with Chapter 15 recognition in the US. One of the best known recent examples was the Virgin Atlantic airline restructuring in 2020.
Proceedings in parallel
This is where totally separate restructuring processes are deployed in two or more jurisdictions with similar legal systems. An example was the 2022 Hong Kong Airlines restructuring, in which an English Scheme of Arrangement ran alongside a Hong Kong Scheme of Arrangement.
Interlocking proceedings
This is the latest innovation, when separate restructuring procedures are implemented in two or more jurisdictions with different legal systems and where each process is inter-conditional upon the other. A recent example is Cimolai, where an Italian Concordato procedure was paired with a UK Restructuring Plan.
What next for cross-border insolvency?
History tells us that new techniques for effective cross-border workouts are developed as and when required to deal with changing business landscapes. Where this evolutionary process will lead in the future is anybody’s guess. One area well worth watching is new world of crypto currency, which is generating not just cross-border issues but also supra-global cyber challenges.
If you are seeking professional advice for your business, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.