Summary – the key things you need to know
- The Brexit vote is likely to have little immediate legal impact on most current finance agreements. It would be unlikely, for example, that a lender could call a typical "material adverse change" event of default purely based on the Brexit vote.
- The most obvious immediate impact of the Brexit vote for lenders will be on how economic uncertainty arising from it affects their borrowers' businesses, and therefore their risk of default.
These are likely to be the key points for parties to loan agreements (current and future) to consider following the Brexit vote:
Compliance with existing representations, undertakings and covenants
Any changes which the Brexit vote (and the uncertainties around it) causes to a borrower's business will bring the package of representations, undertakings and covenants which bind it under scrutiny. Most obviously, a decline in financial performance could affect its compliance with financial covenants. A borrower may also wish to address potential difficulties that would arise as a result of Brexit by making significant changes to its business operations. However, its facility agreement may restrict these. For example, in a facility agreement a borrower may have agreed not to move its "centre of main interests" (a concept derived from the European Insolvency Regulation) away from its jurisdiction of incorporation. This may be a problem if it wished to move its headquarters and operations to another jurisdiction due to actual or potential Brexit.
Increased costs clauses
Brexit would almost certainly herald the introduction of new laws or regulations. If these resulted in a lender incurring increased costs in connection with its lending activities, it might seek to recover these costs using the increased costs provisions in its facility agreements.
Events of default
Few existing facility agreements contain specific Brexit-related events of default. Those that do should be assessed individually. By contrast, most facility agreements contain a "material adverse change" event of default. Could Brexit, or even the Brexit referendum vote itself, trigger these? Material adverse change events of default in facility agreements usually relate to the position of the borrower and its business, rather than to increased political or economic risk generally. So Brexit of itself would seem unlikely to trigger this type of clause (and the referendum vote on Brexit seems even less likely to). But of course the analysis will always depend on the drafting of the particular clause by reference to the particular circumstances. Whether a Brexit-related event leads to a substantial deterioration in the financial position of the borrower such that a material adverse change occurs is a separate question. However, in those circumstances it would be likely to also cause breach of a financial covenant or a non-payment event of default.
Contractual recognition of bail-in
We do not know if the UK would remain within the EEA post-Brexit. If it did not, and no other solution were found (such as recognition at state level), EEA financial institutions would have to start including contractual "bail-in" clauses in certain new English law documents they enter into, or existing English law documents they materially amend, to comply with Article 55 of the EU Bank Resolution and Recovery Directive (BRRD). A bail-in clause recognises that the institution's obligations under the relevant document are subject to an EEA regulator's exercise of its write-down and conversion powers under BRRD implementation legislation.
References to EU and EU legislation in contractual terms
It is not uncommon for agreements to define "EU" as the members of the European Union from time to time. If the UK was intended to be included in such a definition, parties should check the significance of this potentially not being the case. References in existing finance documents to EU legislation will also need to be considered in light of the Interpretation Act 1978 and other interpretative provisions.
Conflicts of laws
EU legislation currently sets out the rules which a court within the EU would apply to decide what law governs contractual or non-contractual obligations, or which court has jurisdiction to hear a dispute between parties. EU legislation also sets out a framework for mutual recognition of judgments across the courts of the EU.
Following Brexit, the courts of the EU would no longer have to play to the same rules so far as the UK is concerned. For example, the courts of an EU member state might refuse to accept the parties' choice of English jurisdiction following Brexit. However, in practice, it is unlikely that Brexit will spell complete uncertainty for parties in dispute. It will benefit all jurisdictions to agree a sensible way forward – particularly for matters of jurisdiction and enforcement of judgments.
For further guidance on governing law and jurisdiction issues that arise from Brexit, see our separate note in this series "Brexit: Impact on governing law and jurisdiction clauses".
Law stated as at 5 July 2016