UK may not be allowed to accede to Lugano Convention

The UK's accession to the Lugano Convention has become somewhat politicised, with the EU stating that it is not minded to allow the UK to accede, as that will then set a precedent for other third party states.

This will impact certain UK restructuring tools.

For insolvency proceedings, for example liquidation, administration, CVAs and according to recent case law, restructuring plans under Part 26A Companies Act, those proceedings would have been carved out from the Lugano Convention which does not apply to insolvency proceedings but rather civil and commercial matters.

The recognition of such insolvency proceedings in third party states would depend on that state's own laws (including whether any relevant treaty or convention applied to that state). For EU Member States except Denmark, this would include the EU Regulation on Insolvency Proceedings (the "EU Regulations") which continues to apply in the EU. Some EU Member States (Greece, Poland, Romania and Slovenia) have adopted the UNCITRAL Model Law on Cross-Border Insolvency and may recognise foreign office holders under that Model Law. For others, it will depend on their own local laws (including their private international laws, ie conflict of laws).

As the market knows, the EU Regulations no longer applies in full force and effect to the UK so the UK does not benefit from automatic recognition and application of its insolvency proceedings in the EU. Concomitantly, EU Member States have to apply the EU Regulations, so if a company's COMI is in an EU Member State, the EU has to recognise the main insolvency proceeding in that EU Member State and not the UK.

For schemes under Part 26 Companies Act (and assuming that the view that schemes are civil and commercial matters is correct), the fact that the UK is not bound by the Lugano Convention means that the UK court will not be bound by the jurisdictional conditions thereunder (for example, a need to determine whether scheme creditors have "agreed" to the UK court's jurisdiction), but will be able to exercise jurisdiction based simply on whether the company is "liable to be wound up". However, that means any scheme judgment does not benefit from automatic recognition under the Lugano Convention.

Without the Lugano Convention, recognition in other states will now depend on other tools. For the EU, this may include the following:

• Hague Convention - provided that the law of the obligations being compromised can be said to be subject to an exclusive jurisdiction clause in favour of the UK courts – then such a scheme may be entitled to recognition in contracting states
• UNCITRAL Model Law – it seems clear that schemes are treated as foreign proceedings in a number of jurisdictions applying the Model Law (see eg Chapter 15 in the US which implements the Model Law), so recognition may be possible in states applying the Model Law, although there may be local variations in terms of how far that recognition may go – eg Chapter 15 would give substantive recognition to the scheme in contrast to other jurisdictions which may give recognition limited to local remedies and which may not include a permanent stay. Proposals have been made to enhance the Model Law to allow it to be used to recognise and apply substantive foreign insolvency judgments, rather than simply recognise the office holder. For the EU, only Greece, Poland, Romania and Slovenia have adopted the Model Law.
• Rome Regulation – under the Rome Regulation, contracting states are required to give effect to the relevant applicable law to a contractual obligation, including the law chosen by the parties. A scheme is of course part of English law and so if the parties have chosen English law as the governing law of the obligation that is being schemed, then the scheme should be imported as part of the bundle of the law that applies to that obligation. This is therefore the application of the scheme in a foreign state as a matter of applicable law. The EU Member States and the UK are contracting parties to the Rome Regulation which continues to apply.
• State's private international law – schemes may be capable of recognition under a foreign state's private international law either as a matter of recognition of foreign judgments (in which case, those local jurisdictional conditions to recognition may be relevant when structuring the scheme) or application of foreign law (where a scheme compromises English law debt). This would need to be reviewed on a case by case basis and will be particularly important if a scheme sought to affect a company with assets in a foreign country (where creditors may otherwise seek to take action in that country). Some states (in particular, certain common law states outside the EU) may also have specific legislation recognising English proceedings, for example the equivalent to section 426 of the Insolvency Act 1986, which allows the UK to give substantive effect to certain state's insolvency laws and to provide relevant assistance.

Way forward

Given the absence of the EU Regulations for insolvency proceedings and now potentially the Lugano Convention for schemes, it seems clear that the insolvency market should be pushing for another unified set of rules which are applied consistently across as many contracting states as possible. The application of the UNCITRAL Model Law is now more important than ever.

The UK has adopted the UNCITRAL Model Law under the Cross-Border Insolvency Regulations 2006, without requirement of reciprocity. This means that foreign representatives of relevant foreign proceedings in EU member states can have access to the UK courts and seek recognition. Unfortunately, representatives of relevant UK proceedings do not have that reciprocal right across the whole of the EU or EEA. The EU/EEA should now be encouraged to adopt the UNCITRAL Model Law across the whole of the EU and EEA.