UK and Germany: New restructuring tools and cross-border recognition post-Brexit

Introduction

2021 has brought monumental change to the restructuring and insolvency landscapes in the UK and Germany. On January 1, 2021, Germany implemented a new restructuring and insolvency law and the UK’s final exit from the EU resulted in a new regime for cross-border recognition of insolvency proceedings and judgments between the UK and the EU. This article considers the new debtor-friendly changes to the German and English restructuring regimes and the impact of Brexit on cross-border recognition of proceedings between these two countries.

The new tools

Germany 

On January 1, 2021 the law on the further development of restructuring and insolvency law (Sanierungsrechtsfortentwicklungsgesetz – “SanInsFoG”) entered into force. The core of this major legislative reform is the new Corporate Stabilization and Restructuring Act (‘Unternehmensstabilisierungs- und –restrukturierungsgesetz’ (“StaRUG”)) implementing the EU Restructuring Directive. The StaRUG offers companies in financial difficulties various options for a pre-insolvency restructuring, which do not require all-creditor consent. This modular system includes, amongst other things, judicial proceedings for the voting on, and confirmation of, a restructuring plan with the possibility for a cross-class cram-down and a court-imposed ban on enforcement and realisation measures. These measures are available to companies with their registered seat or centre of main economic activities in Germany, provided they are in a situation of imminent illiquidity (drohende Zahlungsunfähigkeit) and, therefore, not yet under an obligation to file for insolvency.

The StaRUG both complements the existing procedures under the German Insolvency Code (“InsO”), which already includes the possibility to restructure in self-administered proceedings on the basis of an insolvency plan, and “filled the gap” for pre-insolvency restructurings, since until the end of last year there was no legal framework in Germany for solutions outside formal insolvency proceedings. Some significant last minute changes were made in the course of the legislative procedure. In particular, the draft initially contained the possibility for a judicial termination of pending mutual agreements. This possibility was ultimately removed from the StaRUG.

The SanInsFoG also contains important amendments to the InsO. In particular, the existing provisions relating to self-administration proceedings will be further improved in response to the evaluation of the major insolvency law reform of 2012 and the legal definitions of the insolvency events ‘imminent illiquidity’ (drohende Zahlungsunfähigkeit) and ‘over-indebtedness’ (Überschuldung) have been refined.

In addition, the SanInsFOG provides for further temporary adjustments of the InsO in response to the continuing impact of the COVID-19 pandemic. This includes a further extension of the management’s duty for file for insolvency during the month of January 2021, but only to the extent that the companies in question meet certain additional requirements associated with the entitlement to November and December aid programs.

UK

In the UK, the Corporate Insolvency and Governance Act 2020 (“CIGA”) came into force on June 26, 2020. In addition to certain short-term measures, CIGA introduced two new restructuring procedures: a standalone moratorium that leaves existing management in control of the business throughout; and a “supercharged” scheme of arrangement (referred to as the “restructuring plan”), similar to the existing scheme of arrangement but with the ability to effect a “cross-class cram–down” of dissenting classes of creditors and an ability to disenfranchise out-of-the-money creditors. These tools supplement pre-existing restructuring procedures available in England, including the (traditional) scheme of arrangement, the company voluntary arrangement (CVA) and administration. All these procedures are available to foreign (i.e. non-English) companies, provided the company has: in the case of a scheme/plan, sufficient connection to England; and in the case of a CVA or administration, its centre of main interests in the EU.     

Pre-Brexit position on cross-border recognition

Jurisdiction, recognition and enforcement of insolvency procedures and civil (restructuring) judgments across EU borders is governed by the Recast Insolvency Regulation¹ and the Recast Brussels Regulation,² which provide for substantive automatic recognition of insolvency proceedings and civil and commercial judgments across member states, respectively. These regulations no longer apply to the UK.

In terms of German procedures, Annex A of the Recast Insolvency Regulation currently applies to Insolvenzverfahren, i.e. the proceedings under the InsO. Therefore, German insolvency proceedings were subject to automatic recognition in the UK. The instruments under the new StaRUG are distinct from the proceedings under the InsO and are not (yet) listed in Annex A. Therefore, a recognition under the Recast Insolvency Regulation would be possible provided the instruments under the StaRUG would be included in Annex A and to the extent the company opts for publicity of such instruments. Until then, to the extent the judicial instruments involve a court judgment, they may fall within the scope of the Recast Brussels Regulation. This does not, however, impact the pre-Brexit position. 

In terms of UK procedures, administration, company voluntary arrangements and court-supervised winding-up proceedings were (pre-Brexit) subject to the Recast Insolvency Regulation; schemes of arrangement (and the new tools introduced by CIGA) were not. Prior to Brexit, the question of whether schemes (and restructuring plans) were subject to the Recast Brussels Regulation was subject to significant judicial debate in the UK and will likely now remain undecided.

What impact will Brexit have on UK/EU cross-border recognition

With effect from January 1, 2021, both the Recast Insolvency Regulation and the Recast Brussels Regulation ceased to apply in respect of new EU proceedings in the UK and in respect of new UK proceedings in the EU, and parties will need to look to individual states’ domestic law (including relevant EU law) for recognition.

The UK has acceded to the Hague Convention³ to which EU members are already a party. The Hague Convention provides for allocation of jurisdiction and enforcement of judgments given by a court designated by an exclusive jurisdiction clause. The UK has also applied to re-accede to the Lugano Convention⁴ as an independent contracting state. The Lugano Convention governs jurisdiction and the recognition and enforcement of judgments in civil and commercial matters between the EU and other contracting parties on terms similar to the Recast Brussels Regulation. However, unlike the Hague Convention, acceptance of accession to the Lugano Convention requires unanimous agreement of the contracting parties. Rome I and Rome II rules will continue to apply to the choice of law applicable to contractual and non-contractual obligations.  

Recognition of English proceedings in Germany

Recognition of English proceedings in Germany are now subject to the general rules either with respect to the recognition of foreign insolvency proceedings (Sec. 343 InsO) or, to the extent the proceedings qualify as court judgments in civil matters, to foreign court judgments (Sec. 328 German Code of Civil Procedure, ZPO).

As far as recognition under Sec. 343 InsO is concerned, the general principle is automatic recognition of foreign insolvency proceedings without separate exequatur proceedings. However, there are certain limitations. First, the foreign proceedings need to qualify as “insolvency proceedings”, which requires that they are functionally comparable to insolvency proceedings in the German sense. It is expected that this will apply to English insolvency proceedings currently listed in Annex A of the Recast Insolvency Regulation. However, according to case law of the German Federal Supreme Court, this is not the case for English schemes of arrangement⁵.

Second, there will be no recognition in Germany if the courts of the foreign opening state did not have jurisdiction based on German law principles (“mirror principle”). The mere assertion of jurisdiction by an English court (e.g. on the basis of “sufficient connection” rather than jurisdiction of incorporation of the debtor) would therefore no longer be sufficient per se. Third, the proceedings will not be recognised if the recognition leads to a result which is manifestly incompatible with basic principles of German law, in particular fundamental rights.

Recognition under Sec. 328 ZPO only applies to judgments of a foreign court in civil matters. A judgment in that sense requires that it is rendered by a court in an adversarial procedure pertaining to civil matters. As far as the judicial confirmation of an English scheme of arrangement is concerned, the German Federal Supreme Court has acknowledged the existence of adversarial elements⁶. The foreign judgment will, however, not be recognised if any of the exceptions set out in Sec. 328 para. 1 n° 1 to 5 ZPO are met. These exceptions include lack of jurisdiction of the foreign court based on the mirror principle and order public (see Sec.343 InsO). As a further exception, a foreign judgment will not be recognised if reciprocity is not guaranteed. On July 14, 1960, Germany and the UK entered into the German-British Convention⁷, but the scope of reciprocal recognition under the Convention is limited to monetary judgments. In 1964, the German Federal Supreme Court assumed reciprocity in relation to a judgment from a common law country⁸ and legal scholars used this as a reference-point for the UK, arguing that the legal systems are largely equal. However, uncertainties remain⁹. In sum, reciprocity will only be guaranteed under the condition that the UK would recognise an equivalent judgment if it were handed down by a German court. The UK’s accession to the Hague Convention could further facilitate recognition of UK scheme/plan judgments where parties have submitted to the exclusive jurisdiction of the English courts.

Even if the English proceedings were not recognised as such, the substantive effects with regard to English law-governed claims of a scheme of arrangement (or restructuring plan) should still be recognised in Germany under the conflict of law rules set forth in the Rome I Regulation, which applies universally (Art. 2 Rome I).

Recognition of German proceedings in England

With automatic recognition of German insolvency proceedings falling away post-Brexit, German representatives will need to make an application to court in England for recognition under either the Cross-Border Insolvency Regulations 2006 ( “CBIR”) (Great Britain’s enactment of the UNCITRAL Model Law on Cross-Border Insolvency) or English common law.

CBIR provides for certain mandatory effects on recognition of foreign main proceedings (i.e. insolvency proceedings where a debtor has its COMI), including a stay on enforcement action. Additional, discretionary relief can also be sought in the case of recognition of foreign main proceedings or non-main proceedings.

CBIR is, however, a procedural instrument; it cannot be used to recognise the purported discharge of English law-governed debts pursuant to a German proceeding (as per the rule in Gibbs¹⁰), as occurred between the UK and other (continuing) EU member states under the Recast Insolvency Regulation.

In order to benefit from the relief available upon recognition, the relevant proceedings must fall within the definition of “foreign proceeding”, being “a collective judicial or administrative proceeding in a foreign State, including an interim proceeding, pursuant to a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganisation or liquidation” (emphasis added). As can be seen, there are a number of issues to be considered in the context of recognition of German proceedings, in particular recognition of a restructuring plan or other judicial measures under the new StaRUG.

In this regard, the use of the term “collective” does not necessarily require all assets and liabilities to be dealt with in the proceeding (though that is a key consideration); a proceeding should not be considered to fail the test of collectivity purely because a class of creditors’ rights is unaffected by it. Likewise, a broad interpretation can be given to the phrase “pursuant to a law related to insolvency”, such that proceedings under companies legislation may be included where such proceedings deal with or address severe financial distress. Finally, “control or supervision by a foreign court” is not a high threshold; the control may be actual or potential, direct or indirect; and may even include supervision by an insolvency representative who is, in turn, subject to control or supervision by the court.

If recognition is not available under CBIR, a German representative can look to the English common law for assistance. English common law recognises a form of “modified universalism”; the power of an English court to assist a foreign (German) representative is discretionary and will be subject to the relief being sought being available in the local (German) proceeding and within the limits of the English court’s own powers.

To the extent the German proceedings produce a judgment, it may be possible to recognise that judgment in England under the Hague Convention, where the parties have submitted to the exclusive jurisdiction of the German courts. Failing recognition under the Hague Convention, enforcement of a German judgment would fall to English common law which requires the judgment creditor to commence a fresh cause of action against the judgment debtor in the English courts with the foreign judgment being the cause of action. This should not be problematic in practice but will be slower than enforcement under the Recast Brussels Regulation. Rome I and Rome II rules will apply.   

Conclusion

Notwithstanding the loss of automatic recognition post-Brexit, there will be a legal basis for cross-border recognition of proceedings between Germany and the UK (including in respect of schemes and restructuring plans), albeit with the potential requirement for court applications and additional requirements to be met, resulting in – potentially, at least – attendant costs, delays and uncertainties. It is hoped that legislators will act swiftly to restore the benefits of the pre-Brexit regime.