Issues will arise upon a UK exit in relation to restructuring tools such as schemes of arrangement and in relation to insolvency processes; there are also special EU insolvency rules for financial institutions which will be affected. Finally there are elements of EU financial services laws which impinge on insolvencies and remove uncertainties, such as settlement finality and financial collateral.
Schemes of arrangement have been used in the UK in recent years to restructure the financial indebtedness of a significant number of overseas companies, including those incorporated in other Member States. In order for the English court to accept jurisdiction to sanction a scheme of arrangement proposed by a foreign company, it must be satisfied that there is a sufficient connection with England; and that the scheme will be recognised in the relevant foreign jurisdiction. It has not yet been necessary for the English court to determine whether the Recast Judgments Regulation has the effect of limiting its jurisdiction to sanction a scheme proposed by a foreign company; therefore, in the event that the Recast Judgments Regulation no longer applies to the UK, the debate as to whether it curtails the jurisdiction of the English court falls away. However, the English court will still need to be satisfied that any order it makes will have effect in the relevant jurisdiction (enforcement of judgments is discussed in more detail in the Disputes section below). If the Recast Judgments Regulation is no longer an available avenue, recognition would have to be established based on national rules of private international law. Ultimately, non-UK companies with English law liabilities seeking to establish scheme jurisdiction in the UK based on a centre of main interests shift may become more open to challenge in their EU state of incorporation, increasing the risk of a competing process in the EU.
In relation to insolvency proceedings, the Insolvency Regulation aims to establish procedural rules on jurisdiction and applicable law and to aid the mutual recognition of cross-border insolvency proceedings commenced in a Member State, where the debtor has its centre of main interests. It does not further seek to harmonise substantive insolvency law. It has direct effect in all Member States other than Denmark. Upon a UK exit, there would no longer be automatic recognition of UK insolvency proceedings in EU Member States pursuant to the Insolvency Regulation. The UK has already adopted the UNCITRAL Model Law on Cross-Border Insolvency, which has been adopted in jurisdictions such as Australia, the US, and in some EU Member States (Greece, Poland, Romania and Slovenia), but elsewhere in the EU the UK insolvency office holder would be left to rely on older cross-border insolvency rules in the jurisdiction where recognition is sought. It may be that, following a UK exit, other EU Member States will adopt this law. Absent that, or other steps being taken in the EU, there is, at worst, a risk of competing insolvency proceedings taking place, at best, scope for delays and uncertainty.
Through its adoption of the Model Law, the UK does provide for recognition of foreign insolvency proceedings (regardless of whether the foreign company is in a jurisdiction which has itself adopted the Model Law), albeit on a more limited basis than under the Insolvency Regulation.
Financial institutions (insurance undertakings, credit institutions and certain investment undertakings) are excluded from the Insolvency Regulation. These institutions are covered by two separate EU Directives which, in England, have been implemented as the Credit Institutions (Reorganisation and Winding Up) Regulations 2004 and the Insurers (Reorganisation and Winding Up) Regulations 2004. Both provide for recognition in the UK of insolvency and reorganisation measures commenced in the country of the financial institution or insurer without any further requirements. Upon a UK exit, even assuming this UK legislation remained in place, reciprocity would be lost, as EU Member States would not be required to recognise insolvency or reorganisation measures commenced in the UK, unless there is an agreement between the UK and the EU providing for this.
The regime for cross-border resolution of banks (the EU Bank Recovery and Resolution Directive (BRRD)) is also relevant. The UK’s implementation through the Banking Act 2009 would likely remain in place, giving discretion to the UK to recognise EU Member States’ resolution proceedings. It is expected however that the UK would seek reciprocity as part of the exit arrangements, requiring EU Member States to give recognition to UK resolution proceedings as “third country resolution proceedings” under BRRD. Until any such recognition is obtained, EU financial institutions may have to include contractual recognition of bail-in clauses in English law contracts under which they incur liabilities.
Finally, financial services law with aspects relevant to insolvency will be impacted. UK payment and securities settlement systems will lose the protections from the impact of insolvency proceedings on the finality of settlement and on the enforcement of collateral afforded to such systems in EU Member States under the Settlement Finality Directive. The Financial Collateral Regulations are likely to be preserved in the UK however, for the ease they afford to realisation of collateral in a variety of finance transactions in the event of insolvency.