Bankruptcy in France - Challenges to a Trustee in Bankruptcy Gaining Recognition in a Post-Brexit Landscape

This article is authored by Joanne Wright with contributions from Tim Cooper, Partner, and Rebecca O’Callaghan, Legal Director at Addleshaw Goddard.

Introduction

Once upon a time, the European courts were a maze for the intrepid UK cross-border recovery specialists to navigate, tracing assets of UK-based debtors into foreign lands. Then the UK agreed that it was a European country and signed up for the EU (originally EC; it goes that far back). Regulations on insolvency proceedings and all was much more convivial. But then the UK voted to exit, ultimately, leaving UK insolvency practitioners bereft of the happy mechanisms to capture EU assets laid out in the regulations.

Then, COVID-19 struck, and the impact of Brexit could not really be known until UK creditors were free once again to ask debtors for their money back and take action if they refused. This resulted in a case where we had to run back into the maze, this time within France, to see exactly what is known and not known about UK bankruptcy.

The Halcyon Days

Before the UK left the EU on January 31, 2020, dealing with cross-border insolvencies in Europe was largely reliant on the EU Regulation on Insolvency Proceedings (as Recast) (RIR). The key principles of the RIR were mutual recognition, coordination and cooperation. In simple terms, Article 3 of the RIR allocated jurisdiction to open main insolvency proceedings to the courts of the member state within which a debtor had a center of main interest, and Article 19 provided for the automatic recognition of these proceedings in all member states. Once main proceedings commenced, those proceedings had universal scope and encompassed all the debtor's assets and affected all creditors wherever located within the member states.

The Divorce

Following the end of the transition period (and absent any further agreement in relation to cross-border insolvencies), the recognition, cooperation and coordination enshrined by the RIR abruptly ended. Although the RIR continued to apply to any main proceedings already underway, from the date of the divorce, the UK was no longer treated as an EU member state for the purposes of the RIR. Instead (with the very small exception of European countries signed up to the United Nations Commission on International Trade Law and the Cross Border Insolvency Regulations 2006), an IP appointed in England and Wales (E&W) will now need to seek recognition under the relevant local law which, of course, varies from country to country both in terms of the application process and in respect of the specific assets in question.

Corporate insolvency has been largely untroubled by these matters, as it is more a question of authority of the administrator or liquidator to execute on behalf of a company, and in the main, the production of a court-stamped appointment or order is generally accepted by counterparts outside of the UK, possibly subject only to reliance on a legal opinion. Only exceptionally might “recognition” be required, most likely for the purposes of enforcement of investigative powers rather than asset realizations.

Unfortunately, this does not seem to be the case for bankruptcy, where the concept of vesting personally in a "trustee" might have been assumed during the life of the RIR to be commonplace and understood, but not so, following the departure from the EU.

Return to the Old Days

So, when presented with a requirement to obtain recognition of an E&W-appointed Trustee in Bankruptcy (TiB) to enforce over assets in France, although we expected some challenges, we did not expect to enter entirely unknown territory.

Although the opening of the UK insolvency proceedings automatically grants a limited degree of recognition in France, absent a court order recognizing the officeholder (the exequatur), the rights and powers of the Trustee cannot be enforced in France, leaving the debtor free to deal with its assets in France and for creditors to retain their rights to steal a march on those assets ahead of UK creditors. Clearly "limited recognition" is next to useless when there are assets at risk in France over which the UK-appointed officer has no power or control.

We did, ultimately, obtain an exequatur but to put this in context, the recognition proceedings commenced in March 2022 with the exequatur granted some 13 months later in April 2023. We outline below several challenges faced along the way:

Which application?

The exequatur procedure is generally launched through a writ of summons filed with the Public Prosecutor before the Tribunal judiciaire (civil first instance court). Due to the urgency of this matter and the high risk of dissipation, it was determined that extraordinary steps would be required in order to expedite a notoriously slow process.

We, therefore, submitted a petition to the President of the Judicial Court of Paris to obtain a hearing at short notice, putting forward the strong and substantiated argument of urgency/risk of dissipation. Unfortunately, the plan to expedite, in fact, cost time. After decades of RIR, the Paris Civil Court was rusty with traditional exequatur proceedings, let alone additional applications to hurry things along. Within the month, we were advised that the Court insisted that standard judicial procedure was followed and that there was no room for any attempts to buy time.

Who is protecting the property?

The main asset initially identified in France was a property in Pas-de-Calais, and we were concerned about the French creditors' ability to freely enforce against the French property while the exequatur proceedings rumbled on.

To combat this risk, we made an attachment application to the "Juge de l'exécution" (the enforcement judge) to register a temporary mortgage via an existing judgement creditor over the property. Although the process itself was not unfamiliar, it was not without its challenges and, ultimately, we hit the hurdle of needing to obtain recognition in France of the judgment against the bankrupts. Although this is still pending, as set out above, the property is protected by the provisional registration and once recognition of the judgment is obtained, the mortgage retains priority from the date of the initial request.

After nine separate hearings, we finally obtained our exequatur which expressly provides that the bankruptcy order and TiB are recognized and that all rights and powers are enforceable in France. You could be forgiven for thinking that this is enough. After all, what you have with an exequatur is (more or less) is the manual equivalent of automatic recognition under the RIR.
However, the RIR provides a detailed scheme in which the effects and limits of automatic recognition are dealt with, but this prescribed scheme does not apply to an exequatur. Any further questions may, it seems, have to be referred back to the French courts – not a prospect to be relished, considering the hearing history above.

When it comes to conveying a property in France, for example, it has never been necessary to explain the purpose, role and duties of a TiB. It now is, and it turns out France has never either in the "Halcyon Days" or in the "Old Days" had any similar concept of an independent Trustee who gathers in assets not as trustee for the debtor's benefit but for the creditors. The world of conveyancing in France is monopolized by notary publics, and on this new concept even once the exequatur has been granted, further legal opinions to persuade a notary and/or the applicable land registries of the right of a TiB to convey the asset will be required.

Summary/Conclusion

The obvious point is that following the loss of automatic recognition, UK practitioners, particularly in personal insolvency, face an uphill, long and costly struggle with EU member state courts to be able to complete such tasks as recovering the holiday home, carry out investigations, seek court assistance and gain control of assets and interests for the benefit of UK creditors.

More widely, the ramifications for UK personal insolvency practitioners are only now really beginning to emerge. Many EU jurisdictions may find UK bankruptcy to be an alien concept. Experience indicates that significant cost investment is required, as well as patience, and the best results require high quality and determined local support. Having a good quality international professional network to act quickly and robustly will be vital to the future success of UK personal insolvency practitioners' recovery of assets overseas.

Bonne chance!