Recast European Insolvency Regulation introduces new jurisdiction rules for insolvency-related claims

As a result of the Recast European Insolvency Regulation ("REIR"), which applies to insolvency proceedings commenced since 26 June this year, insolvency practitioners in EU Member States have been given more freedom to commence insolvency-related claims in jurisdictions other than the jurisdiction of the insolvency proceedings (ie the court proceedings by which the affairs of the insolvent company are administered – eg liquidation or administration). In certain circumstances, the REIR permits the insolvency practitioner to commence an insolvency-related claim in any Member State in which a defendant is domiciled.

Andrew Cooke, a senior associate in our contentious restructuring, turnarounds and insolvency team, explains in more detail below.

Article 6 of the REIR

The European Insolvency Regulation ("EIR") was introduced in 2002 to govern the administration of insolvent corporations or individuals within EU Member States. The REIR replaced and superseded the EIR in relation to insolvency proceedings commenced in a Member State on or after 26 June 2017.

In terms of contentious insolvency practice, one of the most important amendments to the EU insolvency regime is contained in article 6 of the REIR. This article governs jurisdiction for insolvency actions, being actions deriving directly from insolvency proceedings and closely linked with them. Under the terminology of the EIR and REIR, insolvency proceedings are the court proceedings by which the affairs of an insolvent company are administered (eg liquidation or administration).

Jurisdiction of the courts of the insolvency proceedings

Under the EIR, there was one jurisdictional regime. The courts of the Member State in which an entity had its centre of main interests would have jurisdiction to open main insolvency proceedings. There was then a rule relating to secondary insolvency proceedings, providing that the courts of another Member State could open insolvency proceedings in relation to the same debtor in a place where it did not have its centre of main interests, but only in relation to the winding up of assets situated in that jurisdiction.

This regime did not deal expressly with insolvency actions. However, case law had filled this gap. Assisted by recital (6) of the EIR, which provided that the EIR "should be confined to provisions governing jurisdiction for opening insolvency proceedings and judgments which are delivered directly on the basis of the insolvency proceedings and are closely connected to it", courts held that actions which were closely connected to the insolvency proceedings could be brought in the jurisdiction in which insolvency proceedings had been opened.

The scope of this "closely connected" test could be important because the courts treated the EIR jurisdiction regime and the jurisdiction regime in civil and commercial matters (under the Brussels Regulations, ie Regulation (EC) No 44/2001, now recast as Regulation (EU) No 1215/2012) as mutually exclusive but complementary – if the EIR governed jurisdiction, the Brussels Regulations (which expressly do not apply to "bankruptcy, proceedings relating to the winding-up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous proceedings") did not, and vice versa.

In the English courts, claims by a liquidator to set aside a vulnerable transaction were generally treated as sufficiently closely connected to the insolvency proceedings to be governed by the EIR. Claims in relation to pre-insolvency debts were not sufficiently closely connected, so fell under the Brussels Regulations.

Generally, therefore, an action to set aside a transaction entered into at an undervalue under (in England) s.238 of the Insolvency Act 1986 would be subject to the jurisdictional regime of the EIR so would need to be brought in the place of the insolvency proceedings. It was less clear which jurisdictional regime governed any claim against the directors for breach of duty in relation to the relevant transaction. If it was the EIR, the claim would have to be brought in the place of the insolvency proceedings. If the Brussels Regulations applied, factors such as the defendant director's place of domicile and the place in which the damage occurred would determine jurisdiction. Different causes of action arising out of the same facts might therefore have to be brought in different courts.

Under the REIR, there is a new jurisdictional regime. The old regime in relation to insolvency proceedings has been maintained but a new rule governs insolvency actions. Article 6(1) of the REIR provides that any action which "derives directly from the insolvency proceedings and is closely linked with them, such as avoidance actions" may be heard in the courts in which insolvency proceedings have been opened.

This article appears to codify, to a large extent, the practice which the courts had developed, though the language of a "close connection" which was previously contained in recital (6) to the EIR has been modified so that the new operative article in the REIR refers instead to a close link.

There is little guidance as to how "derives directly" and "closely linked" will be interpreted by the English courts or the CJEU. Article 6(1) of the REIR does suggest, by way of example, that "avoidance actions" (ie actions to set aside a transaction) will derive directly from and be closely linked to insolvency proceedings, but this example is not exhaustive. The wording appears to suggest a broad, case-by-case consideration of whether any action that may be commenced by an insolvency practitioner derives directly from and is closely linked to the insolvency proceedings.

Recital 35 to the REIR gives some clue as it draws a distinction between an action for director's liability on the basis of insolvency law, which would be an insolvency action, and an action based on company or general tort law, which would be a civil and commercial action governed by the Brussels Regulations. Early guidance from the courts on this distinction and its application to other causes of action will be welcomed by practitioners.

Additional jurisdiction

Article 6(2) of the REIR is a new jurisdictional provision which did not previously have any equivalent. It states that where an insolvency action is related to a civil and commercial matter against the same defendant, the insolvency practitioner may bring both the civil action and the insolvency action before the courts of the Member State where the defendant is domiciled (or where the action is brought against several defendants, before the courts of the Member State where any of them is domiciled), provided that the courts of the domicile would have jurisdiction under the Brussels Regulations.

It remains to be seen whether insolvency practitioners will take advantage of the new regime to bring related actions before the courts of a defendant's domicile; insolvency practitioners may feel more comfortable in the court in which insolvency proceedings have been commenced, not least as those courts will be familiar with applying local insolvency law, and may seek judgment in that court before seeking to rely on findings made in the course of that judgment to support a foreign civil action if necessary.

It will likely take months, if not years, for a practice amongst insolvency officeholders to develop. It could take even longer for disputes in relation to jurisdictional aspects of the REIR to reach the English courts or the CJEU. In the meantime, the new jurisdiction regime for insolvency actions gives the insolvency practitioner options. If nothing else, the flexibility to run insolvency actions and civil and commercial actions that are related in the jurisdiction in which any defendant is domiciled may assist in reducing the costs of cross-border insolvency litigation in an appropriate case.

Finally, while the effect of Brexit on the REIR remains to be seen, it should be noted that there are a number of other international instruments in effect in England which impact on jurisdiction in insolvency matters, including for example the Cross-Border Insolvency Regulations 2006 (which give effect in England to the UNCITRAL Model Law on Cross-Border Insolvency). In relation to Brexit itself, the UK position regarding any regime which will apply in place of the REIR has not yet been set out but in relation to civil and commercial actions, the UK government has stated that it will seek to reflect closely the substantive principles of cooperation under the current EU framework.  Insolvency and restructuring groups such as R3 have suggested that the same approach should be adopted in relation to cross-border insolvency matters.