Corporate Law after Brexit

Three months after the UK’s vote to leave the EU, the Prime Minister, Theresa May, has clarified the time line and mode of operation for the eventual exit. It is envisaged that Article 50 TFEU will be triggered by March 2017. Exit will be effectuated on the basis of a Great Repeal Act, revoking the European Communities Act 1972 in its current form, whilst at the same time keeping existing substantive EU law in place. Although there are some signs that the Government will be seeking a bespoke deal with the EU, whether and in what form such a deal may transpire is currently unpredictable. EEA and EFTA membership seems to be off the table: continued free movement of people is simply an unpalatable option, given the referendum’s anti-immigration undertones. This leaves the so-called ‘hard Brexit’ as the most likely scenario. What does a hard Brexit entail for company law and corporate insolvency law in the UK and at EU level?

The substantive EU company law contained in EU directives and implemented through the Companies Act 2006 will, at least initially, remain in place quite irrespective of the Great Repeal Act. Re-enactment is relevant, however, for EU regulations and statutory instruments based directly on the European Communities Act 1972. Given that UK company law underwent a comprehensive review in the run-up to the Companies Act 2006, it seems unlikely that there will be much appetite for significant repeals or amendments, at least for the short and medium term. Future EU law instruments and amendments no longer have to be implemented and CJEU case law will no longer be binding in the UK. For the EU it would make sense to push ahead and intensify work on corporate governance and capital market related reforms. For now, London remains the dominant financial centre in Europe. As such, it benefits from the ‘passport mechanism’ provided by the Prospectus Directive. However, as I argue in my recently published paper, even with the current implementing legislation remaining in place, London may still forgo some of its appeal which may allow other EU financial centres to emerge.

In the wake of the CJEU’s decisions in Centros, Überseering, and Inspire Art, the UK became the predominant destination for incorporations and a significant number of English private companies limited by shares with a minimal link to the UK still operate in various EU Member States. If a hard Brexit takes effect, the shareholders and directors of these companies may find themselves in an unenviable position. UK incorporated companies will no longer be able to rely on the right to freedom of establishment while the UK obtains third country status. Companies incorporated in third countries with their central administration in a Member State that adheres to the real seat theory may be treated as partnership-type entities, resulting in the personal liability of their members for corporate debt. The safest option for UK incorporated companies that have their central administration in real seat countries is to convert into a company form of another Member State prior to Brexit taking effect.

Under the EU Insolvency Regulation (and the 2015 recast), a debtor company may transfer its COMI to a different Member State prior to the lodging of an application to open insolvency proceedings. In recent years, a number of large European corporate groups have availed themselves of this option by transferring their COMI to the UK in order to benefit from the available restructuring options. When Brexit takes effect, a company can no longer be sure that, following a transfer of its COMI to the UK, any administration order obtained in the English courts will automatically be recognised and enforced in other Member States. Recognition will depend on the private international law of each Member State. This is likely to make the use of administration more expensive and undermine the attraction of the UK as a restructuring destination. This should be an incentive for the remaining Member States to modernise their national insolvency regimes, which many have already done, and perhaps for the EU to bring forward ambitious harmonisation proposals.

Michael Schillig is a Reader in International Commercial & Financial Law at The Dickson Poon School of Law, King’s College London.