Brexit is now a reality; what lies ahead for restructuring and insolvency law? These views are limited to English law and do not apply to credit institutions and insurance undertakings, which are subject to their own regimes in the UK and across the EU.
What, when, how? No change in the short term
It currently appears that ‘Article 50’ (the mechanism by which Brexit is formally started) will not be invoked until October 2016 at the earliest, following election of a new Conservative Party leader (and Prime Minister). The two year time period for the exit negotiations can be increased by agreement, but is unlikely to be shortened given the complexity of the issues. Therefore, the status quo will probably be maintained, and probably at least for 2.5 years.
What is the impact on restructuring and insolvency law?
Domestic restructurings and insolvencies will remain largely untouched unless UK legislation enacted to give effect to EU legislation is repealed e.g. the Financial Collateral Arrangements (No 2) Regulations 2003, which allow the enforcement of security taken over a financial collateral arrangement (such as cash and shares) to be enforced in spite of any statutory moratorium. We note in passing that the market believes these Regulations are likely to remain in place.
Cross-border cases will be affected as the European Insolvency Regulation (EIR) will no longer apply and UK cases will not receive automatic recognition and other benefits of the EIR from EU Member States, unless bilateral treaties are now agreed with each State.
On the other hand, foreign insolvency procedures seeking recognition in the UK would be able to rely on s 426 of the Insolvency Act 1986 (for Ireland) and the Cross Border Insolvency Regulations 2006 (which enacted the UNCITRAL Model Law into English legislation) and the common law to seek the recognition and assistance of the English court. However, the breadth of matters dealt with under these heads of law is narrower than those covered by the EIR.
Schemes of Arrangement under the Companies Act 2006 (Schemes) are unlikely to be affected as Schemes are not covered by the EIR or recast EIR.
The laws on enforcement of judgments across borders may, however, have an impact. As the European Judgments Regulation applies to the UK, current thinking is that in order to sanction a Scheme, the English court must not only be satisfied that it has jurisdiction over the company proposing the Scheme, but also over scheme creditors. Once the Judgments Regulation no longer has effect, it could be argued that the English court has a wider discretion to accept jurisdiction in relation to Schemes, because only the English law test would continue to apply – the debtor must have sufficient connection to the jurisdiction. However, the English court would want to be satisfied that any order it makes will have effect in any relevant foreign jurisdictions. Without the use of the Judgments Regulation or other arrangements being made (for example, the UK could remain a party to the Lugano Convention on jurisdiction and the enforcement of judgments in its own right (it is currently a party as a member of the EU)), this could prove more difficult, though not impossible.
Should I be taking any action now?
- Keep a watching brief. The analysis may change dependent on the exit negotiations and models adopted by the UK for business and legal interaction across borders
- In addition, the European Commission intends to issue a consultation document later this year seeking views on harmonisation of restructuring legislation across Member States
- Other Member States are also reviewing their insolvency and restructuring regimes
- All these changes may mean that forum shopping to make use of English restructuring and insolvency processes, particularly in cross-border cases, may dwindle. However, if adequate mirroring provisions are put in place, the impact could be minimal.