Forty-second Report of Session 2017–19 Contents

Instruments reported

At its meeting on 19 December 2018 the Committee scrutinised a number of Instruments in accordance with Standing Orders. It was agreed that the special attention of both Houses should be drawn to one of those considered. The Instrument and the ground for reporting it is given below. The relevant Departmental memorandum, is published as an appendix to this report.

1Draft S.I.: Reported for requiring elucidation, for defective drafting and for unexpected use of powers

Insolvency (Amendment) (EU Exit) Regulations 2018

1.1The Committee draws the special attention of both Houses to these draft Regulations on the grounds that they require elucidation in one respect, that they are defectively drafted in one respect and that they make an unexpected use of the enabling power.

1.2These Regulations are made under the European Union (Withdrawal) Act 2018 (“the 2018 Act”). The purpose of the Regulations is to address deficiencies in legislation in the field of cross-border insolvency that would arise if the UK were to leave the EU without a deal. In particular, they amend Regulation (EU) 2015/848 on insolvency proceedings (“the EU Insolvency Regulation”). Under the 2018 Act, that Regulation will become part of UK domestic law on exit day.

1.3The EU Insolvency Regulation currently deals with cross-border jurisdiction, co-operation, recognition and enforcement in insolvency proceedings in the EU. It imposes restrictions on the jurisdiction of the courts of an EU member State in respect of insolvency in cases where the debtor has assets and liabilities in more than one member State. It also provides for insolvency proceedings commenced in one member State to be automatically recognised in the other member States.

1.4According to the Explanatory Memorandum—

1.5Most of the EU Insolvency Regulation is repealed by the draft Regulations with effect from exit day. Consequently, insolvency proceedings commenced in an EU member State will no longer be automatically recognised in the UK and current restrictions on the jurisdiction of UK courts in cross-border insolvency cases will be removed.

1.6However, regulation 4 provides that these changes to the EU Insolvency Regulation only apply to insolvency proceedings opened on or after exit day. For insolvency proceedings “opened before exit day”,4 the pre-exit day law is to continue to apply, unless the court dealing with those proceedings considers that the conditions for operating the “safeguard mechanism”5 in regulation 5 are met. That mechanism gives the courts power to disapply the pre-exit day law.

1.7The Committee was unsure about the intended effect of regulations 4 and 5 and how they would operate in practice. It therefore asked the Department for Business, Energy and Industrial Strategy to explain this by reference to examples.

1.8In parts 1 and 2 of its memorandum in response (printed as an Appendix), the Department gives the detailed explanation requested by the Committee, together with some helpful examples, for which the Committee is grateful. It accordingly reports regulations 4 and 5 as requiring elucidation, provided by the Department’s memorandum.

1.9The Committee was also uncertain about the circumstances in which the “safeguard mechanism” in regulation 5 would apply. It therefore asked the Department to explain the pre-conditions for its operation. These are set out in regulation 5(1), which provides—

“(1) [The safeguard mechanism applies] where in any particular case [the EU Insolvency Regulation] applies in the UK by virtue of regulation 4 and the court considers that the effect is or would be different to what would be the effect had a member State treated the United Kingdom as a member State under the [EU Insolvency] Regulation, and either—

a) the court considers that one or more of the following would be materially prejudiced—

i. the interests of a creditor…,

ii. the interests of the debtor,

iii. where the debtor is a body corporate, the interests of a member… of the debtor; or

b) the court considers it would be manifestly contrary to public policy to apply the [EU Insolvency] Regulation.”

1.10The Committee has struggled to understand this provision. It is not at all clear what is meant by “the effect is or would be different to what would be the effect had a member State treated the United Kingdom as a member State under the [EU Insolvency] Regulation” and the undefined terms “materially prejudiced” and “manifestly contrary to public policy”.6

1.11The Department’s explanation is given in part 3 of the memorandum, and the Annex to the memorandum sets out some helpful scenarios which illustrate how the application of the EU Insolvency Regulation in its pre-exit day form in the UK could produce effects that would materially prejudice the interests of creditors or others if courts in EU member States do not treat the UK in the same way as a member State.

1.12Although the Committee considers that it is more likely than not that courts and other readers will interpret regulation 5(1) in accordance with the Department’s policy intention, it would have been better to avoid ambiguity by spelling out in the draft instrument the intended meaning of the vague concepts italicised above. The Committee accordingly reports regulation 5(1) for defective drafting.

1.13The “safeguard mechanism” itself is in regulation 5(2), which provides—

“(2) The Court may—

a) apply any other relevant law of the part of the United Kingdom in which the matter is being determined…;

b) make any other order that it thinks fit.”

1.14This appears to give very wide powers to “the Court”7 to decide the law that is to apply in any particular case. The Committee therefore asked the Department to explain what law a court is to apply instead of the pre-exit day law if it chooses to invoke the safeguard mechanism.

1.15The Committee thanks the Department for the detailed explanation provided in the memorandum, and for the helpful examples in the Annex. However, the Committee remains concerned at the breadth of the discretion conferred on a court by regulation 5(2).

1.16The absence of legal certainty that this may give rise to seems obvious. Rather than dealing explicitly and in any detail with a range of scenarios that it can be anticipated could arise during the transition from the existing legal regime to the new legal regime, regulation 5(2) instead leaves it entirely to the courts to determine—on a case-by-case basis—what law they should apply in any particular case. The Committee is concerned that this provision could result in extensive and costly litigation to establish how regulation 5(2) should be interpreted and applied.

1.17The Committee doubts whether Parliament contemplated that the regulation-making powers conferred by the 2018 Act would be exercised in the way provided for in regulation 5. The Committee accordingly reports regulation 5(2) on the grounds that it appears to make an unexpected use of the enabling power.

1 Paragraph 2.15 of the Explanatory Memorandum.

2 Paragraph 7.2 of the Explanatory Memorandum.

3 Paragraph 2.13 of the Explanatory Memorandum.

4 See regulation 4(2) of the draft Regulations.

5 This is the term used in paragraph 3.8 of the Explanatory Memorandum.

6 In regulation 5(1)(a) and (b).

7 “The Court” is undefined. The Department explains its intended meaning in part 4 of the memorandum.

Published: 21 December 2018