EU courts are not bound to recognise English Schemes of Arrangement or Restructuring Plans and there is no obvious successor in sight. There are some potential avenues being touted by law firms (which we will go through later in this article) - but it will take time and require the express approval of the EU and/or member states – who may decide to oppose on political and commercial grounds.

The debacle could have far reaching implications not just for restructuring but also in a wider legal context for civil jurisdiction and judgments recognition. The mutual recognition from both sides has now ended. There is also confusion on what happens with the no-deal statutory instruments, as this has not been given effect, said one prominent insolvency lawyer.

Some practitioners retain hope that London can retain its pre-eminence for global restructuring citing the sheer number of experienced professionals here, tried and tested court processes and the preference for English Law contracts in finance documentation.

The latter is reinforced by one of the oldest and most contentious pieces of case law ‘The Rule in Gibbs’ which dates back to 1890 and says that “a foreign proceeding designed to bring about the cancellation of a debtor’s obligations will discharge only those liabilities governed by the law in the country in which those proceedings took place.” An English court will likely not recognize the discharge of an English law loan agreement or contract by a court in a foreign insolvency proceeding, notes Stephen Phillips from Temple Bright.

Gibbs is a huge problem, said the restructuring lawyer, who expects at some point a challenge to it could end up at the Supreme Court. “If Gibbs goes, we [The UK] have nothing.” The last time Gibbs was tested it was for OJSC International Bank of Azerbaijan in 2018. Ukraine’s high-profile case against Russia in its disputed Eurobond deal also touched on aspects related to Gibbs.

Trip to Hague, Lugano or Rome?

UK lawyers are hopeful that the Hague Convention on Choice of Court Agreements (2005), Lugano Convention (2007) and the Rome 1 Regulation could be used for similar effect for recognition.

States that are signatories to the Hague Convention undertake to recognize contractual exclusive jurisdiction clauses and are required to enforce judgments issued by the courts selected by the parties, explains Phillips. The convention does not include insolvency matters – but as schemes of arrangement are under company law not insolvency law, they should be covered. The UK Restructuring Plan, however, may not. There is some dispute on when this would apply to contracts – the UK thinks it applies to those entered into from the inception of the treaty in 2015, whereas the EU thinks this only applies from 1 January 2021. 

The Lugano Convention governs the jurisdiction and judgments recognition and enforcement. It clarifies which court has jurisdiction in cross-border cases (civil and commercial) and ensures their enforcement. Current signatories are the EU, Switzerland, Norway and Iceland, which would all need to approve the UK’s application which was made on 8 April 2020. The omission of the use of the Lugano convention in the TCA between the UK and the EU could prove to be calamitous.

I don't think Lugano will provide the solution, with no updates since last April, said the first restructuring lawyer. “It must be agreed by all, I don’t think there is political will in the EU to do so.”

Finally, there is the much older Rome 1 Regulation to cling to, which at a stretch could help and reinforce Gibbs. Under this regulation a contracting parties’ choice of governing law should govern their contractual relations, says Freshfields in a client note. “As such the choice of English law to govern contractual relationships and by extension to vary them or extinguish them by scheme of arrangement or restructuring plan should be recognised by courts in EU member states.”

Time for a global solution?

But as America’s second President John Adams famously said, “every problem is an opportunity in disguise.”

It could be the right time to revisit UNCITRAL model law, suggests Mark Phillips QC from South Square. The 1997 model law on cross-border insolvency evolved out of frustrations on court cooperation from BCCI and Maxwell Corporation was adopted by the UK by the Cross Border Insolvency Regulations in 2006 (CBIR). But the EU is not a signatory, with just Poland, Greece, Romania and Slovenia adopting the Model Law.

Under the Model Law recognition of a foreign main proceeding gives an automatic stay on enforcement against a debtor and the court may as a matter of discretion give other forms of relief. 

The Model Law conveniently allowed the US to use the UK as a springboard to Europe via the RIR and Chapter 15, explained Mark Phillips. There is a lot of anger and frustration from the US that this wasn’t dealt with under the TCA. The EU signing up to Model Law would mean that the UK is not subject to EU regulations but would still provide the necessary recognition. 

A first step could be the EU agreeing to the law for UK insolvencies and then look to adopt the model law more globally, Phillips continued. Germany and the Netherlands may be difficult to win over, given their preference to promote their new processes, he said. The key is to agree a global solution. 

What is likely to happen in the meantime?

Lawyers will be frantically working on creative solutions to gain recognition effects while broader measures are attempted at governmental level. Parallel processes are likely to mitigate the lack of recognition, but there is also a big risk that COMI shifts away from the UK for many cross-border deals. 

This is a reversal of restructuring trends seen since 2008, with increasingly creative ways being used to move deals to the UK and establish a ‘sufficient connection’, such as the ‘deed of contribution’ first seen in Swissport. Other options could be changes in jurisdiction clauses and governing law. 

With new Dutch and German processes now in effect from 1 January, many will be keeping an eye on the progress of the first few deals. If they go smoothly, it could be game on. 

Spotted in Steinhoff’s update on 14 January could be the first under WHOA. A request has been made by a creditor to appoint a restructuring expert to Steinhoff International NV – with a hearing scheduled on 8 February. 

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