Brexit Negotiations Series: ‘What is at Stake Upon Brexit for Corporate Activity – a Restructuring & Insolvency Perspective’
The UK provides important legal and and financial infrastructures for corporate activity in Europe. With respect to the type of corporate activity that may be impacted by a ‘hard Brexit,’ financial restructuring and corporate insolvency are very prominent topics that should be – and actually are very actively – addressed. As a major hub for financial activities, corporates all over Europe turn regularly to England when their finances are concerned. This preference includes companies in distress that seek to restructure their financial liabilities and to compromise with their creditors – either within or outside of formal insolvency processes. In short: London currently is beyond doubt and not without reason the center for financial restructurings in Europe; so what's at stake with Brexit?
In my opinion, any discussions regarding the impact on restructuring and insolvency must address three major aspects:
- With 'hard Brexit', it will be difficult – if achievable at all again in the reasonably near future – to have an integrated cross-border conflicts regime for formal insolvency proceedings that is comparable to the current status quo.
- The practical impact of such procedural disintegration on financial restructurings may be limited if the UK succeeds in maintaining a certain level of recognition for the Scheme of Arrangement, arguably its most successful and well-known out-of-court restructuring tool.
- If English law remains the preferred jurisdiction for banking and finance contracts, contractual work-out arrangements typically included in standard intercreditor agreements can be expected to adapt quickly to the changed circumstances and provide for practical work-arounds on most issues, even when continuously under English law.
Ad 1. The expected procedural disintegration: The current insolvency framework within the EU primarily is governed by the EU’s Insolvency Regulation (‘EUIR’). Given that the regulation largely is a conflicts-of-law regime, it determines the applicable law, the competent courts and the automatic EU-wide recognition of court actions. Initial weaknesses and drawbacks inherent in the regulation recently have been addressed in its recast version for proceedings starting mid of this year. The regulation also has been expanded to govern cross-border insolvency of corporate groups by means of coordination rules. Once Brexit occurs with EUIR ceasing to be applicable to the UK, neither the opening of English insolvency proceedings nor court decisions rendered therein will automatically and consistently be recognized throughout the EU. Instead, the national regimes of the remaining Member States will have authority to make determinations and issue decisions on recognition of English decisions case by case. The result likely will be a fragmented situation that potentially will deter, or significantly increase transaction costs for, COMI shifts or other structures and/or transactions using English insolvency proceedings for pan-European cross-border matters. Any such result potentially may be capable of being mitigated by eg treaty accession to the Insolvency Regulation. However – unlike the Lugano Convention for the civil forum with EFTA states – to date, this has not been tested outside EU membership. Thus, there is a fair chance that the procedural disintegration for insolvency proceedings cannot be effectively addressed within the near future, unless it becomes a central issue and concern in the Brexit negotiations.
Ad 2. The competitive challenge for out-of-court restructurings: The tool that has most prominently shaped the European restructuring landscape is the English Scheme of Arrangement (‘Scheme’). Situated in the English Companies Act rather than in England’s insolvency laws, a wide array of applications was developed during the last years for restructuring debt of companies domiciled all over Europe (and beyond). Its success in my view is based on a unique combination of English law as a preeminent jurisdiction for finance contracts and the common perception of predictable and commercially savvy courts. Interestingly, under the current EU framework, recognition of Schemes is not achieved under the EUIR. Instead, the Scheme's recognition is based on (i) the validity as a contractual arrangement under private international law following English choice of law and (ii) the recognition of the civil court decision sanctioning the Scheme with reference to the Brussels I Regulation. After Brexit, the recognition test under private international law should remain unchanged, as the Rome I Regulation continues to determine the test for the application of English law in the remaining Member States. Without the Brussels I Regulation however, recognizing the Scheme as a civil court decision will be up to the laws and courts of the Member State concerned.
An aspect that may create a more challenging environment is the EU Commission’s recently established agenda to develop and harmonize the out-of-court restructuring regimes in the Member States in the interest of the common capital market. A draft directive was issued in November 2016. It is doubtful that this agenda will be fully completed and effective by the time the United Kingdom formally leaves the European Union. English courts applying the Scheme of Arrangement will thus continue to be in an advantageous position, in particular if the level of recognition also under the civil procedure regime may be maintained such as under Lugano. If not, continental competitors as eg Germany, Italy or the Netherlands may try to step up and to wrest restructuring cases away from England with their own enhanced and EU-wide recognized restructuring processes.
Ad 3. Market adaptation: Relying on general freedom of contracts rather than on a special statutory restructuring framework, the financial community has developed a very elaborate contractual regime for restructuring companies in distress, which in Europe regularly is governed by English law. Such arrangements are typically included in intercreditor agreements between the various lenders and lender groups, and address the usual issues of financial restructuring on a contractual basis: to name a few, waterfall distribution to give effect to priority ranking, majority creditor decisions for efficiently deploying the debtor’s assets, debt relief and release of collateral and guarantees. We expect parties in the financing markets to continue to make use of such contractual arrangements in connection with and in contemplation of financial restructurings; whether or not English courts, which already have a track record in ruling on disputes thereunder, remain the preferred forum may mostly be driven by whether or not English law in general remains the preeminent jurisdiction for finance contracts. Given the flexibility of contracts, one would expect that any practical roadblocks preventing full effect of such arrangements after Brexit will be resolved in a rapid, evolutionary manner – which can happen in real time over the Brexit negotiations as its anticipated results become apparent even before they become effective.
This post is part of the ‘Brexit Negotiations Series’, a series of posts based on contributions at the ‘Negotiating Brexit’ conference that took place in Oxford on 17 March 2017.
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