BREXIT and the impact on Northern Ireland Cross Border Insolvency

September 20, 2016

The 23rd June 2016 was not only a historic day in terms of European and UK politics- it also heralded the beginning of a potential momentous change to daily insolvency practice within Northern Ireland (and indeed the UK as a whole) when dealing with cross border insolvency matters.

The primary governing insolvency legislation in NI is the Insolvency (Northern Ireland) Order 1989 (“the Order”) and the EC Council Regulation 1346/2000 on Insolvency Proceedings (“the EC Regulation”). The UNCITRAL Model Law on Cross-Border Insolvency also applies but is not focused on in this article.

The EC Regulation applies to “collective insolvency proceedings” which are listed in Annex A of the EC Regulation as being Administrations, Compulsory and Creditors’ Voluntary Liquidations, Voluntary Arrangements and Bankruptcies.

Recital 12 of the EC Regulation states that “Main” insolvency proceedings can be opened in the Member State in which a debtor has their Centre of Main Interests (“COMI”). The EC Regulation requires all Member States (except for Denmark) to automatically recognise Main insolvency proceedings that have been opened in another Member State, without the need for secondary or territorial proceedings to be opened in that Member State.

On 20 May 2015 the European Parliament and the Council of the European Union adopted EU Regulation 2015/848 on Insolvency Proceedings (recast). The majority of the provisions of the 2015 Regulation are due to come into force on 26 June 2017 and will apply insolvency proceedings which are opened after that date. The 2015 Regulation makes a number of positive amendments to the EC Regulation which reflects the changing shift in the nature of insolvency cases since the EC Regulation’s initial introduction in 2002, and focuses largely on COMI and forum shopping.

Forum shopping has been a hot topic in NI personal insolvency cases in recent years and has been subject to intense judicial scrutiny. Despite being located on the same island, the NI and ROI insolvency legislation were historically very different- the ROI regime was more costly and the sanctions more onerous*. This resulted in many debtors trying to obtain the benefit of the favourable insolvency provisions in NI by trying to establish that they had relocated their COMI to NI.

There is no specific definition of COMI included within the EC Regulation other than at Recital 13 which states that “the COMI should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties”. Article 3 of the EC Regulation 2015/848 dealing with “International Jurisdiction” sets out further guidance in relation to determining a debtor’s COMI.

The principle of COMI has evolved considerably over the years via judgments handed down from the European Court of Justice, the English Courts and the High Court of Justice in NI. The case of Irish Bank Resolution Corporation Limited v John Ignatius Quinn also known as Sean Quinn [2012] NICh1 attracted substantial media attention in 2011 when Mr Quinn was made bankrupt on foot of his own Debtor’s petition. One of Mr Quinn’s main creditors, the Irish Bank Resolution Corporation Limited challenged the validity of the Bankruptcy Order. The Bank argued that Mr Quinn’s COMI was not in NI and thus the court did not have the jurisdiction to grant the Order, and further that the original Order had been obtained through “misrepresentation and/or non disclosure”. The Bankruptcy Order was annulled.

Master Kelly recently gave written judgment in a cross border COMI case, In the Matter of Maurice Muldoon a Petitioning Debtor [2016 NI Master 5].  In January 2015 the debtor petitioned for his own bankruptcy in NI on the basis that he had relocated his COMI to NI from the ROI. After reviewing his affidavit evidence the Court concluded that it was “not of a sufficient weight to support his claim that he is habitually resident in this jurisdiction for the purposes of the Regulation”. Please see our related Article “Centre of Main Interests COMI-NI Case Law Update” for further details on this case.

Despite the fact that considerable jurisprudence has developed on the applicability of COMI and the provisions of the EC Regulation in general, the Brexit decision presently leaves office holders, debtors and creditors and potentially the Courts in a state of unwelcome anticipation.

Once the Article 50 Notice is served and Brexit is complete the EC Regulation will no longer apply to the UK, unless negotiations are entered into to allow the UK to retain the benefits of the “mutual recognition” clauses set out in the EC Regulation and its 2015 successor. It remains to be seen whether these negotiations will have to take place with each individual Member State or the EU as a whole.  Irrespective of whatever deal the UK is able to make in relation to retaining any/all benefits of the EC Regulation, domestic legislation may also have to be amended and/or introduced.

Subject to whatever Agreements may be made, on a practical basis we can foresee an incredible amount of administrative time having to be spent on amending the current insolvency precedent forms set out in the Order and the Insolvency Rules, which have been used for over a decade. For example, the Debtor’s Bankruptcy Petition Form 6.30 includes a statement that the EC Regulation applies.  The Notice of Appointment of an Administrator by a Company/Director Form 2.09 requires the party signing to confirm whether the EC Regulation will or will not apply and if so, whether the proceedings are main, territorial or secondary proceedings.

Office precedents may have to be updated and many text books and research resources may be redundant. All of the persuasive and binding case law from the ECJ, England & Wales, and NI dealing with COMI may no longer be relevant.

It appears that there are substantial negotiations that will have to take place on behalf of the UK if there is any hope or desire to try and retain as much benefit from the EC Regulation as possible notwithstanding the exit from the EU. There are undoubtedly a wide range of legal and practical issues that will arise if the EC Regulation no longer applies. The negotiations and decisions made in the next year will be crucial and set the stage for how the future of cross border insolvency will be applied in NI.

*On 29 January 2016 the provisions of the Bankruptcy (Amendment) Act 2015 came into force in ROI. One of the main features of this legislation is that the period of automatic discharge in the ROI has now been reduced to 1 year which is the same as NI and England and Wales. We may therefore see a decline in debtors seeking to adjudicate themselves bankrupt in NI but this remains to be seen.

 

This Article was prepared by Caitriona Morgan, Associate.

Please note that this article is for information purposes only. Should you require any specific legal advice please contact a member of our Insolvency Team.