A referendum on whether the UK should leave or remain within the EU will take place on 23 June 2016. This briefing considers what the legal consequences of a vote to leave the EU (Brexit) might be for the UK restructuring and insolvency market. Its purpose is not to influence readers towards either the “Leave” or “Remain” camp; rather, it is intended to illustrate the legal changes that Brexit would cause and to consider how the UK might respond to those changes.
English and EU law are so closely entwined that Brexit would have a significant impact of almost all areas of the law, and many of those changes will affect restructuring and insolvency. 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.
What do we mean by Brexit?
One of the difficulties with the Brexit debate is that no-one knows what type of relationship the UK would have with the EU if it left. As there is no comparable precedent to provide guidance, most commentators agree that a bespoke arrangement would be negotiated to provide for the terms of the UK’s continuing relationship with the EU. As a minimum, this might include a free trade agreement providing for the free movement of goods between the UK and the EU, but all would depend on what the EU would require in return as part of the negotiation.
The media has presented the Swiss and Norwegian EU arrangements as possible model examples for a future UK/EU relationship. However, neither is attractive; the UK Government has indicated that the Norwegian model is not favoured (although a post-Brexit government might take a different view), and the EU seems unlikely to offer the Swiss model given its complex and cumbersome nature.
For a more in-depth discussion of the current relationship between the UK and the EU, and of the possible models for a post-Brexit relationship, please see our briefing “Making Sense of Brexit”.
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.
If the UK were to leave the EU, the EC Regulation would cease to apply to it. The result would be that EU insolvency proceedings would no longer benefit from automatic recognition in the UK, and UK insolvency proceedings would 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) would cease to apply to English law.
The detrimental impact upon the administration of cross-border insolvencies would be significant, and would 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 wished to be recognised in the UK could therefore apply for recognition under CBIR 2006 which, although not automatic, would 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 would have to rely either on obtaining recognition under local law (which may be difficult or even impossible) or to seek the opening of territorial insolvency proceedings; neither is likely to be particularly attractive.
In the circumstances, in the event of Brexit 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 would 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) might 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.
If the UK were to leave the EU, and thus the Judgments Regulation, the question of whether schemes are subject to that regulation would 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. If the Judgments Regulation did not apply, 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. 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).
As the legislation relating to insurers and credit institutions is in the form of directives (and is therefore not directly effective in the UK), it has been incorporated into English law by statutory instruments, namely the Insurers (Reorganisation and Winding-up) Regulations 2004 and the Credit Institutions (Reorganisation and Winding-up) Regulations 2004 (together, the Insurer and Bank Regulations). In the event of a Brexit, the Insurer and Bank 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.
Our view is that any post-Brexit discussions regarding the recognition of insolvency proceedings relating to banks and insurance companies would inevitably take place as part of much wider discussions regarding regulation (including, in particular, capital adequacy and bank rescue) and that insolvency would not be at the top of the agenda. 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 it seems probable that, in the event of Brexit, UK banks which intended to conduct retail business in the EU would 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 was 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 would 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 that a vote to leave the EU would be unlikely to precipitate immediate and major employment law policy change in the UK and many EU laws would 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. For more information, see our UK HR e-briefing – Brexit and UK employment law: implications for the workplace.
- Financial services law: European financial markets are governed by an extensive body of EU legislation, much of which is relevant to insolvency. Examples include 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). Much of this legislation is, however, derived from other sources (such as the OECD and the Basel Committee), and it seems likely that the UK would retain much of it.
- State aid: The Treaty on the Functioning of the European Union prohibits member states providing financial assistance to companies in a way that could distort competition. In the event of a Brexit these rules would cease to apply, leaving the UK government free (in principle) 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) would 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 would 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, making recognition less certain.
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, would be limited. A vote to leave the EU would, however, create considerable uncertainty regarding the future landscape for multi-jurisdictional insolvencies. Whereas, in other areas, the Leave campaign argues that the leaving the EU would deliver advantages to 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. In the event of a Brexit vote, 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 even if the UK votes to remain in the EU. Under the European Commission’s Capital Markets Union initiative, the Commission has made clear its intention to commence a process of harmonisation of EU insolvency laws, with the first legislative proposal to be issued during 2016. Due to the sophistication of the UK’s restructuring and insolvency market, such harmonisation is likely to bring greater change to other member states, but the UK will undoubtedly face changes too.
Whatever the outcome of the Brexit vote, practitioners cannot simply assume the continuation of the status quo.