UK Government moves to adopt new UNCITRAL Model Laws on Cross-Border Insolvency

Overview

• In May 2022 we marked the 25th anniversary of the UNCITRAL Model Law on Cross-Border Insolvency (the Model Law) with a series of articles reflecting on its impact on cross-border restructurings and insolvencies. As part of our analysis we commented on the present inability to recognise insolvency-related judgments (e.g. relating to claw back provisions under foreign insolvency laws or restructuring plans) under the Model Law in Great Britain.
• The UK Government has now announced its intention to introduce a new law to allow the recognition of foreign insolvency-related judgments. The intention is to achieve this by adopting a provision in the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments (the Judgments Model Law) known as Article X. This will give judges the discretion to recognise judgments, while still allowing English courts to refuse recognition of foreign judgments that seek to compromise English law-governed debt where the creditor has not submitted to the foreign insolvency proceedings (e.g. by voting or proving in them).
• The UK Government also intends to introduce a law to facilitate cross-border group insolvencies by adopting the UNCITRAL Model Law on Enterprise Group Insolvencies (the Group Model Law). This will provide a framework for greater administrative co-ordination and co-operation between courts in jurisdictions that adopt the Group Model Law.

You can read more about our 25th anniversary insights into the Model Law here. 

Why is the UK planning to adopt the new model laws?

The Model Law was launched in 1997 and adopted into English law in the form of the Cross-Border Insolvency Regulations 2006 (CBIRs). At the time, the UK was a member of the European Union and so, where a debtor had their centre of main interests (COMI) in an EU member state (other than Denmark), Council Regulation (EC) 1346/2000 on Insolvency Proceedings (later the Recast Regulation 2015/848)) (the EU Regulation) applied. The EU Regulation always permitted the recognition of insolvency-related judgments where they were made in main proceedings (i.e. the jurisdiction where the debtor had their COMI). 

A key feature of the Model Law is the power granted to courts to provide a range of discretionary assistance once foreign insolvency proceedings¹ have been recognised.  However, as the Model Law is essentially a template piece of legislation, it has been adopted – and interpreted – with differences. In the United States² for example, the courts have accepted that recognition of insolvency-related judgments is permitted under its enactment of the Model Law. 

In 2012 the UK Supreme Court ruled³ that the CBIRs do not allow for the recognition of insolvency-related judgments (nor could they be recognised under the common law unless strict criteria were met, or under the cross-border assistance provisions in the Insolvency Act 1986⁴). This meant that where a foreign court ordered a party to make a contribution to the insolvency proceedings, the English courts could only recognise and enforce that judgment under the so-called Dicey rule⁵. One of the following therefore must apply:

• the party was present in the foreign country
• the party was a claimant or counter-claimant in the foreign proceedings
• the party has submitted to the foreign proceedings (such as by voting or proving in them)
• the party, at the outset of the foreign proceedings, had agreed to be bound by them.

This has created mixed results. On the one hand, parties with foreign judgments against them who had not had any involvement in the foreign insolvency or jurisdiction could rest easy. On the other hand, cross-border co-operation – specifically the concept of ‘modified universalism⁶’ – had been dealt a severe blow. At present, where an insolvency-related judgment will need to be recognised and enforced in England, it will often be necessary to open parallel proceedings, which depletes finite resources in an already financially distressed context. 

Since the UK’s departure from the EU, any insolvency proceedings in an EU Member State commencing after 11pm on 31 December 2020 will not be recognised in the UK under the EU Regulation. Incorporating the Judgments Model Law therefore will bring significant benefits now that the EU Regulation no longer applies.

Why is the UK not looking to adopt the Judgments Model Law in full?

There is a rule of English common law known as the rule in Gibbs⁷. It is a nineteenth century decision of the Court of Appeal which provides that contracts and debts governed by English law cannot be discharged or compromised by insolvency proceedings in a foreign jurisdiction unless the parties were present in the foreign jurisdiction or otherwise submitted to them. 

The Gibbs rule has not been embraced by all common law jurisdictions (for example, Australia retains it, but Singapore does not). Despite being created more than 130 years ago, the rule is still good law in England because, as a Court of Appeal decision, only the Supreme Court or Parliament can overrule it. 

Gibbs gives parties contracting under English law certainty, but it also creates some curiosities:

• under the CBIRs, an English court may recognise a foreign insolvency process and impose an interim enforcement moratorium while a foreign restructuring plan is negotiated, but cannot recognise a final restructuring plan endorsed under that foreign insolvency process which would extinguish or modify debts of creditors whose contracts are governed by English law⁸
• at the same time, English courts can sanction English schemes of arrangement in respect of foreign companies, even where the debts are governed by a foreign law
• there is precedent for English courts recognising foreign judgments compromising English-law governed debts under the EU Regulation. While that no longer applies in the UK, for two decades creditors of debtors with their COMI in another EU Member State⁹ had to accept the risk that English law-governed debts may be compromised by a proceeding in that other Member State 

At present, the UK Government is keen to avoid adopting the Judgments Model Law in full because doing so would abolish the rule in Gibbs. The UK wants to avoid unintended consequences of scrapping the rule and so is proposing to launch a future consultation by way of a call for evidence to determine the rule’s future.

In the meantime the plan is to adopt a single provision of the Judgments Model Law: 'Article X'. This will add another tool to the court’s insolvency toolbox and allow English courts to recognise insolvency-related judgments as part of the discretionary assistance available under the CBIRs¹⁰. That discretionary assistance is subject to grounds for refusal, including where the rule in Gibbs applies.

When will an English court be able to refuse recognition of an insolvency-related judgment?

The proposed grounds for refusal are based on UK public policy and include:

• the defending party did not submit to the foreign jurisdiction and the originating court did not otherwise exercise jurisdiction on a basis that is compatible with UK law
• creditors’ rights were not adequately protected
• a defending party was not given sufficient notice to arrange their defence
• the judgment was obtained by fraud
• the judgment is inconsistent with a UK court’s judgment in respect of the same parties
• the judgment is inconsistent with an earlier judgment in another foreign jurisdiction that would also be recognised in the UK
• the enforcement of the judgment would interfere with the administration of the debtor’s insolvency proceedings

How will the Judgments Model Law affect international finance and trade?

Where an insolvency process is taking place overseas, English courts in many cases will be able to recognise insolvency-related judgments in those proceedings - including judgments sanctioning insolvency plans - without the need to open parallel insolvency proceedings in England. This will reduce costs, in principle allowing for a greater return to creditors.

At the same time, English law continues to be the law of choice for a great number of financial contracts in international trade. The Judgments Model law will mean that creditors who choose to contract under English law can continue to have confidence that their debts will not be compromised in a foreign process unless they submit to that process or jurisdiction. 

If adopted, the Judgments Model Law and the Group Model Law will have effect in England, Wales, and Scotland. Post-Brexit the adoption of Article X will be an important development in cross-border insolvency co-operation. However, it will only assist foreign office-holders seeking assistance in Great Britain: British office-holders seeking recognition of judgments in other jurisdictions will continue to depend on existing treaties and rules of private international law. 

When will the new laws be introduced?

Adoption of both Article X of the Judgments Model Law and the Group Model Law are subject to a consultation period which expires on 29 September 2022. As the Government has indicated its intention to adopt both provisions as soon as possible, we anticipate that draft legislation will be introduced relatively quickly. 

Will adoption of the Group Model Law change cross-border insolvencies?

The Group Model Law provides for greater procedural co-operation between courts. It also provides for a single, voluntary ‘planning proceeding’ in which group companies can participate in order to co-ordinate their insolvencies. 

Co-ordinated group proceedings (but with each group company retaining its own separate identity, assets, and creditors) are already possible either by informal agreement or under the Recast EU Regulation. As the EU Regulation no longer applies to the UK, adoption of the Group Model Law will be a positive development. The Group Model Law will apply to administrations, liquidations, and voluntary arrangements. Schemes of arrangement would not fall within its scope, although potentially restructuring plans¹¹ would qualify¹². 

Ultimately the success of the Group Model Law will depend on countries adopting it. To date, 55 jurisdictions have adopted the Model Law, albeit only four of those are EU countries¹³. While the Group Model Law therefore will not provide a like-for-like replacement of the regime under the Recast EU Regulation, it is hoped that in time many of those countries who have adopted the Model Law will also implement the new Group Model Law.