Brexit: What does it Mean for Restructuring and Insolvency?
This post comes to us from Freshfields Bruckhaus Deringer LLP. It has been co-authored by the following Partners at Freshfields Bruckhaus Deringer: Ken Baird, Richard Tett, Catherine Balmond, Ryan Beckwith, Adam Gallagher, Craig Montgomery, Neil Golding, and Nick Segal.
The post examines restructuring and insolvency matters in the UK following the Brexit vote. The following points must be highlighted from the outset:
- The leave vote does not immediately change the legal backdrop of the restructuring market. No sudden change to the status of EU-derived law in the UK results from the leave vote or from the service of the Article 50 TEU notification. The UK will remain a member state until it concludes an agreement in relation to its withdrawal from the EU or the two year Article 50 notification period expires (whichever occurs first).
- Recognition of insolvency proceedings. Unless replacement legislation is given effect before Brexit, we expect that there will no longer be automatic recognition of UK insolvency proceedings in other EU member states. Reliance will need to be had on each member state’s domestic law – as was the case before the EC Regulation on Insolvency Proceedings (‘EIR’) came into existence in 2002. As regards recognising foreign insolvency proceedings, the UK already has avenues which foreign officeholders can use to obtain recognition.
- Schemes of arrangement. Whilst the impact of Brexit on the use of schemes is difficult to predict, we believe these are unlikely to be impacted by Brexit in a material way. This is on the assumption that schemes continue to be enforceable in any relevant EU member states.
- Watch this space. The details of Brexit consequences for the legal framework of the restructuring and insolvency sphere will be analysed once the specific terms of Brexit are known. In the short term, consequences are most likely to be felt on a commercial level.
Recognition of Insolvency Proceedings
The EIR is the cornerstone for recognition of insolvency proceedings across EU member states. It was adopted in 2000, came into force in 2002 and has just undergone a major recast (to come into effect in June 2017). While the EIR fundamentally reformed the way cross border insolvencies are conducted, it is a fairly recent development to cross border insolvency law. As the EIR applies to all member states (except for Denmark), an insolvency proceeding listed in Annex A to the EIR and commenced in a member state where the debtor has its centre of main interests (or an establishment) is automatically recognised and – to a certain extent – has exclusivity in any other EU member state (except Denmark).
The EIR is directly applicable in all member states (except Denmark) and, until Brexit, this includes the UK.
What would this mean?
If there is no replacement arrangement before Brexit, the EIR will cease to be binding on the UK. While it will continue to apply to the other EU member states, we would expect references to UK insolvency proceedings to be removed from Annex A.
Outbound: any insolvency process commenced in the UK would cease to be automatically recognised in any EU member state. The insolvency officeholder would need to rely on domestic law of the member state in which recognition is sought. This would be piecemeal and the outcome would likely differ between each member state. In Germany, for example there are provisions which would enable such recognition as a matter of German law. The only member states to have adopted the UNCITRAL Model Law on Cross Border Insolvency are Greece, Poland, Romania and Slovenia.
Inbound: insolvency proceedings commenced in EU member states would need to rely on the UK’s domestic rules of recognition, such as Section 426 of the Insolvency Act 1986 (in the case of the Republic of Ireland), or the Cross Border Insolvency Regulations 2006 (which incorporate the UNCITRAL Model Law on Cross Border Insolvency).
What else could happen?
The UK and the EU could seek to avoid the above outcome by agreeing that the EIR would continue to apply as between the UK and the EU member states. If such an agreement is to be reached, UK insolvency proceedings would be the only non-EU insolvency proceedings automatically recognised across the bloc. This outcome seems unlikely. Alternatively, on a more piecemeal basis, the UK could enter into bilateral treaties on the recognition of insolvency proceedings with as many EU member states as possible.
Schemes of Arrangement
Overall, we believe that the impact on the availability of schemes of arrangement as a restructuring tool for both domestic and foreign incorporated companies will not be material.
English courts have been willing to sanction schemes affecting companies incorporated outside of England and Wales where it can be established that the company has a ‘sufficient connection’ with England and Wales. Further, the court needs to be satisfied that the scheme is capable of being enforced in the jurisdiction in which the company’s assets are situated. It is current practice to provide the court with an opinion given by a local expert stating that the scheme would be recognised in that jurisdiction. In relation to the requirement of ‘sufficient connection’, this has been demonstrated in a number of cases because the debt documents were governed by English law and contained a clause granting (exclusive and non-exclusive) jurisdiction in favour of the English courts.
In relation to enforcement in the jurisdiction in which the company’s assets are situated, for as long as the UK remains a member state of the EU, the EU Judgments Regulation (on recognition of judgments) and the EU Rome I Regulation (on choice of law) apply to the UK. While there is some doubt as to whether the EU Judgments Regulation technically applies to schemes at all, if it does (as is often argued) then it ensures the (almost) automatic recognition of schemes in other EU member states. Arguments based on the EU Rome I Regulation are regularly made to support the English court’s jurisdiction to sanction a scheme of arrangement of a foreign company where the parties have chosen English law and have submitted to the English courts in their debt documents.
What would this mean?
On Brexit, absent any alternative arrangements, the EU Judgments Regulation and the EU Rome I Regulation will cease to be directly applicable in the UK. As regards choice of law, the English courts are still likely to respect provisions in contracts that confer jurisdiction by agreement on the English courts regardless of what replaces the EU Rome I Regulation. The courts in EU member states will also still recognise a choice of English law as they will continue to apply the EU Rome I Regulation.
As regards the EU Judgments Regulation, the English courts will no longer need to grapple with the question of whether this applies to schemes of arrangement. Instead, the English courts will need to consider other bases for recognition in EU member states, including those based on private international law. Therefore, recognition opinions are likely to still be necessary. This is also the position where recognition of a scheme is sought in a non-EU country (eg the USA) or Denmark (which has opted out of various pieces of EU legislation). While the route to recognition here may not be as straightforward and is more piecemeal, it certainly can be done-and is done (see, eg, Danish company Torm’s scheme of arrangement in 2015).
What else could happen?
As regards recognition of judgments, it is possible that the UK could sign up to the Lugano Convention which is similar to the current EU regime. It could also sign up to the Hague Convention on Choice of Court Agreements. In the absence of any international agreement, arrangements in respect of jurisdiction and enforcement of judgments with the EU are likely to be much more complex.
Credit Institutions and Insurers
The position is slightly different in relation to credit institutions, insurance undertakings, investment undertakings that provide services involving the holding of funds or securities for third parties, and collective investment undertakings (collectively referred to as the financial institutions).
These are not covered by the EIR but by two separate EU directives which apply to both EU and EEA member states; namely, the Credit Institutions Winding Up Directive (‘CIWUD’) and the Insurers Winding Up Directive (‘IWUD’). Under EU law, directives are not directly binding on member states. Instead, they have to be implemented by each member state into national law in order to have effect. In England, the CIWUD and the IWUD were implemented by the Credit Institutions (Reorganisation and Winding Up) Regulations 2004 and the Insurers (Reorganisation and Winding Up) Regulations 2004 respectively. Both pieces of legislation operate on the basis of providing recognition to insolvency and reorganisation measures commenced in financial institutions’ and insurers’ home (member) state, without any further requirements and without the opportunity to open territorially limited proceedings.
What would this mean?
On a Brexit (assuming that the UK does not join the EEA), both domestic pieces of legislation would – without any further legislative act – remain on the UK’s statute books. This seems an unlikely outcome as the legislation would then operate to recognise the insolvency or reorganisation of EEA financial institutions and insurers without requiring any EEA member state to recognise insolvency or reorganisation measures commenced in the UK.
What else could happen?
If the UK leaves the EU but joins the EEA, then the status quo would seem to be maintained.
If the UK does not join the EEA, then it would fall to the UK and the EU to agree the replacement of the CIWUD and the IWUD by instrument(s) which cause recognition of UK insolvency or reorganisation measures of financial institutions and insurers, even though the UK would have left the bloc. This would form part of broader discussions concerning the regulation of financial institutions post-Brexit.
Financial Collateral Arrangements
The UK has implemented the EU Directive on Financial Collateral Arrangements of 2002 with the Financial Collateral Arrangements (No. 2) Regulations 2003. Being domestic legislation, the Regulations will continue to be in force following Brexit. The UK will need to decide whether to keep this legislation in its current form, revoke it, or reform it. If the EU makes any amendments to the underlying Directive, the UK will not be required to adopt these and it will be for the UK Parliament to decide whether to amend this legislation. As regards UK financial institutions lending into EU member states, they will continue to benefit from the Financial Collateral Directive, as implemented in each member state.
Reform of Insolvency Law
The European Commission published a consultation on an effective insolvency framework within the EU which closed on 14 June 2016. The consultation asked about the key barriers to insolvency resolution and focused on the efficient organisation of debt restructuring procedures. The consultation responses will be used by the Commission to identify which aspects should form part of a legislative initiative at an EU level. Following the leave vote, it is unlikely that the views of the UK government and of the UK trade associations will receive much, if any, weight.
On a domestic level, the UK government conducted a review of its corporate insolvency framework, which closed on 6 July 2016). Further changes to domestic legislation may be on the horizon where, for example, current UK insolvency legislation is available for companies incorporated in the EEA, or for companies with their centre of main interests in an EU member state – such as administration or the company voluntary arrangement.
Given the leave vote, there must now be a question mark as to whether there will be sufficient Parliamentary time to consider these proposals.
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