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UK Corporate Restructuring After Brexit: an uncertain future

  • United Kingdom
  • Europe
  • Brexit
  • Corporate
  • Restructuring and insolvency

04-08-2016

Introduction

It is likely to be some time before we know what form the future relationship between the UK and the EU will take. What is certain, however, is that the process of separation will lead to legal changes of unprecedented scope and complexity. English and EU law are so closely entwined that Brexit will have a significant impact of almost all areas of the law, and many of those changes will have implications for restructuring and insolvency practice. In this briefing, however, we consider the following areas:

  • the recognition of cross border insolvency proceedings;
  • the use of English schemes of arrangement to restructure European companies;
  • the restructuring and insolvency of credit institutions and insurers; and
  • other EU laws which directly or indirectly impact restructuring and insolvency.

Brexit and the legal implications for businesses

Recognition of cross border insolvency proceedings

Currently, insolvency proceedings commenced in any member state of the EU (with the exception of Denmark) are subject to the EC Regulation on Insolvency Proceedings (the EC Regulation). The EC Regulation does not harmonise European insolvency laws; rather it imposes a clear framework of rules governing where insolvency proceedings may be opened, the laws applicable to matters arising in such proceedings (e.g. security, set off and antecedent transactions) and the recognition of the proceedings in other member states.

When the UK leaves the EU, the EC Regulation will cease to apply to it. The result will be that EU insolvency proceedings will no longer benefit from automatic recognition in the UK, and UK insolvency proceedings will no longer benefit from automatic recognition in the EU. Furthermore, those provisions of the Regulation that apply the parties' choice of governing law in priority to any rules of local insolvency law (e.g. in relation to employment contracts under article 10 or detrimental acts under article 13) will cease to apply to English law.

The detrimental impact upon the administration of cross border insolvencies is likely to be significant, and will create more difficulties for the UK than the EU. That is because, unlike most member states, the UK has implemented the UNCITRAL Model Law on Insolvency, in the form of the Cross-Border Insolvency Regulations 2006 (CBIR 2006). Insolvency office holders from the EU who wish to be recognised in the UK will therefore be able to apply for recognition under CBIR 2006 which, although not automatic, will bring many of the benefits of recognition under the EC Regulation. By contrast, the only other EU member states that have implemented the UNCITRAL Model Law are Greece, Poland, Romania and Slovenia. In any other member state, UK office-holders seeking recognition will have to seek recognition under local law (which may be difficult or even impossible).

In the circumstances, it would be in the interests of both the UK and the EU to reach an agreement whereby UK proceedings would benefit from some recognition under the EC Regulation, and vice versa. The precise form that such an agreement could take is, however, a matter of conjecture. Extending the application of the EC Regulation to a third party state would represent a significant departure from its current structure and other member states (some of which have long been suspicious of certain aspects of English law, such as out of court appointments and schemes of arrangement) may see a Brexit as another opportunity to recast the regulation in a form more sympathetic to their own national interests. In general, in view of the asymmetric recognition landscape in the event that the UK leaves the EC Regulation, the EU might feel that the UK had more to lose than it did in any negotiation.

Schemes of Arrangement

Schemes of arrangement occupy a unique position: although used for some of the most significant restructurings of European companies, schemes do not fall within the ambit of the EC Regulation. Indeed, the fact that the EC Regulation does not apply to schemes gives them an unrivalled flexibility and has been a crucial factor in their development. That is not, however, to say that schemes are not subject to EU jurisdictional rules at all: judicial opinion is divided regarding whether they are covered by the Judgments Regulation. Although the point remains undecided, in recent schemes the English court has considered it necessary to establish that, if the Judgments Regulation did apply, the particular scheme before the court would be recognised abroad under it.

When the UK leaves the EU, and thus the Judgments Regulation, the question of whether schemes are subject to that regulation will naturally fall away – with the result that it should, in principle, become easier to persuade an English court that it has jurisdiction to sanction a scheme in relation to a foreign company. Jurisdiction alone is insufficient, however; it is also well-established that, before it will exercise its discretion to sanction a scheme, the English court must be satisfied that the scheme will be recognised in those jurisdictions where creditors might challenge it. Without the Judgments Regulation, it might become harder for such companies to satisfy the court that such recognition will be granted: in effect, the applicant company will need to show that the scheme would be recognised under the rules of private international law of the countries in question. The Lugano Convention, which provides for mutual recognition of judgments between EU and EFTA countries, may be of assistance in this respect if the UK joins the EEA.

In any event, the existing authorities suggest that, in many cases, it is likely to be possible for the scheme company to satisfy the court that the scheme will be recognised even if the Judgments Regulation does not apply, so that Brexit would not seem to threaten a knock out blow to the use of schemes for restructuring EU companies.

Restructuring and insolvency of credit institutions and insurers

Certain classes of entity are expressly excluded from the EC Regulation: insurance undertakings, credit institutions and certain investment undertakings. In place of the EC Regulation, insurance undertakings and credit institutions are subject to specific EU directives (there is no equivalent for investment undertakings which, from an insolvency point of view, therefore fall outside the EU jurisdictional framework altogether).

The EA directives relating to insurers and credit institutions have also been adopted by the European Economic Area (a grouping which includes Iceland, Liechtenstein and Norway in addition to the Member States of the EU: EEA). As a result, if the UK joins the EEA then UK insurers and credit institutions will still benefit from them and the UK will be obliged to retain the provisions of English law which implement them: the Insurers (Reorganisation and Winding-up) Regulations 2004 and the Credit Institutions (Reorganisation and Winding-up) Regulations 2004.

If the UK leaves the EEA as well as the EU, those regulations (as provisions of English domestic law) would not automatically cease to have effect; it would be a matter for the UK government to decide whether to repeal, amend or retain them - whereas the equivalent legislation in the remaining member states of the EU would cease to apply to UK banks and insurers automatically.

If the UK chooses a total break from Europe, and does not join the EEA, it seems unlikely that European regimes for recognition of the insolvency of banks and insurers would be a priority in the negotiations. In contrast to many other sectors, the international operations of the UK’s banks and insurers are, to a great extent, not conducted in the EU and UK banks which intend to conduct retail business in the EU may well, in any case, hive the relevant business down to subsidiaries based in Frankfurt or elsewhere (leaving UK retail and investment banking in London). If, therefore, the regulatory “price” sought by the EU for mutual recognition of bank and insurer insolvency is perceived to be too high, the UK government might conclude that it would be preferable to “go it alone” or to seek agreements with other key international markets, rather than with the EU.

For that reason, we consider it to be less from certain that any new arrangements in relation to the insolvency of credit institutions and insurers will be made between the UK and the EU.

Other EU law relevant to restructuring and insolvency

It is, of course, not only the law specifically relating to insolvency that affects restructuring and insolvency practice; many other areas of law have a significant impact on how and whether a business can be restructured and many of those other laws could be affected by a Brexit. For example:

  • Employment law: Our opinion is Brexit is unlikely to precipitate immediate and major employment law policy change in the UK and many EU laws will be retained. Perhaps of greatest relevance to restructuring and insolvency are the Transfer of Undertakings (Protection of Employment) Regulations (TUPE). Our view is that TUPE is now such an accepted part of UK employment law that it would be politically unattractive for any government to abolish it, although minor changes might be made.
  • Financial services law: European financial markets are governed by an extensive body of EU legislation, much of which is relevant to insolvency. Perhaps most important are the measures which aim to avoid the smooth operation of the financial markets being interrupted by rules relating to insolvency, such as the Settlement Finality Directive and Financial Collateral Arrangements Directive (although the practical significance of the latter to UK professionals is currently limited by the way it has been implemented into domestic law – see Gray v. GTP Group Ltd [2010] EWHC 1772). Much of this legislation applies to the EEA, and so would continue to apply to the UK if we re-join the EEA. Even if we do not, however, it seems unlikely that there will be any significant political will to abandon these rules, because of the unobjectionable policy aims behind them and because many are ultimately derived from non-EU sources in any event.
  • State aid: EU law prohibits Member States providing financial assistance to companies in a way that could distort competition. When the UK leaves the EU these rules would cease to apply. However, the World Trade Organisation also has rules barring state aid so that, despite Brexit, it seems unlikely that the UK government will be free to provide rescue finance to distressed British companies or industries.
  • CJEU case law: Absent legislation to the contrary, pre-Brexit decisions of the Court of Justice of the European Union relating to the concept of “centre of main interest” (COMI) will remain binding on the English courts when considering COMI (whether for the purpose of an extended and amended EC Regulation or of CBIR 2006). After Brexit, however, the UK courts will be free to take their own course, and US decisions as to COMI might become more persuasive, leading to a possible divergence between the UK and EU interpretation of COMI, and making recognition less certain.

Conclusion

As UK insolvency legislation is not derived from EU law, the effect of Brexit on the insolvency of entities domiciled and trading only in the UK, and upon domestic insolvency case law, will be less significant than in some other areas of law. However, the decision to leave the EU creates considerable uncertainty regarding the future landscape for multi-jurisdictional insolvencies. Whereas, in other areas, leaving the EU may deliver advantages for the UK, it is not obvious how such advantages could arise in the narrow field of cross-border restructuring and insolvency; although the current system is certainly not perfect, it does generally deliver clarity and predictability and thus reduces costs and maximises value for creditors. The UK’s priority in this area (at least as regards “ordinary” insolvencies, i.e. those not relating to banks and insurers) should therefore be to retain as much of the current system as it can.

It is also important to note that the future of European cross-border restructuring and insolvency is uncertain in any case. Under the European Commission’s Capital Markets Union initiative (“CMU”), the Commission has made clear its intention to commence a process of harmonisation of EU insolvency laws, with the first legislative proposal likely to be issued on 26 October 2016. It is not yet clear to what extent CMU will seek to harmonise insolvency law (rather than imposing minimum standards). It does seem likely, however, that these changes will play a part in any negotiation of the insolvency aspects of the post-Brexit relationship with the EU.

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