Impact of Brexit on restructuring and insolvency

Impact of Brexit on restructuring and insolvency

What impact will Brexit have on current insolvency legislation, the UK insolvency sector and cross-border insolvency proceedings?

On 26 June 2017, the Recast EU Insolvency Regulation (recast EIR) entered into force, replacing the EU Regulation on Insolvency proceedings (EIR), which had been in place since May 2002.

The new legislation set out new provisions for cross-border insolvencies. It broadened the scope of the original regulation to pre-insolvency proceedings and introduced a significant change in no longer restricting secondary proceedings to terminal procedures.

In addition, the recast EIR amended the definition of centre of main interests, introduced a number of measures to ensure effective administration of insolvency proceedings relating to different companies forming part of a group, and standardised a number of forms for use across all EU Member States.

But with the UK having voted to leave the EU and with Article 50 having been triggered in March 2017, what impact will Brexit have on current insolvency legislation, the UK insolvency sector and cross-border insolvency proceedings?

Current position

Under the recast EIR, insolvency proceedings are automatically recognised if they are listed in Annex A to the EIR and are commenced in the EU Member State where the debtor’s centre of main interests is located. The legislation currently applies to all EU member states with the exception of Denmark, but post-Brexit, the regulation will no longer have direct effect in the UK, unless arrangements are put in place before the UK’s exit.

How might cross-border insolvency proceedings operate post-Brexit?

Automatic recognition of insolvency proceedings

The EU’s draft withdrawal agreement released in February 2018 indicated that for outbound and inbound insolvencies, recast EIR provisions would apply in cases where the insolvency proceedings had commenced ahead of the end of the transition period.

Once the transition period has come to a close, the recast EIR will no longer apply, with the UK having to refer instead to domestic legislation on points covered by the EU legislation. Domestic legislation of EU Member States will also be referred to, as UK insolvency proceedings will no longer be recognised by member states.

Whether the UK would be able to agree with the EU that the EIR would apply to the UK post-Brexit, therefore continuing automatic recognition, or sign bilateral treaties with each member state to ensure insolvency proceeding are recognised, remains to be seen.

R3, the association of business recovery professionals, has previously called on the government to protect the benefits of the European Insolvency Regulation, which it said had provided “speed, clarity and predictability in cross-border work”, as well as significantly reducing the cost of pan-European insolvency proceedings and helping to maximise value for creditors.

The body warned that prior to the EIR, insolvency practitioners needed to “make a court application (or a series of applications) in each jurisdiction where assets belonging to the insolvent’s party were situated, asking the court to recognise their authority to act and to represent the insolvent company or individual in question, and then had to apply for permission to repatriate their assets. Such recognition applications were costly and slow”. Failure to put provisions in place for the EIR to apply post-Brexit would mean a return to the same expensive procedures, said R3, potentially leading to a deterrent in investment in UK companies and a deterrent to companies having their European centre of main interest in the UK.

A member survey conducted by R3 in 2016 revealed that 83% of members thought that there would be a “negative impact” on how quickly insolvency procedures involving European work would be resolved, and 79% thought that there would be a negative impact on cost.

Automatic recognition of court judgments

The Recast Brussels Regulation allows for the automatic recognition of cross-border civil and commercial judgments, enabling the insolvency and restructuring sector to collect debts from insolvent parties as well as deal with cross-border fraud.

R3 has warned that without the regulation, the UK insolvency profession would have to “rely on local law opinions and principles of private international law to determine whether they are entitled to exercise their powers to recover debts due from creditors in other EU Member States”. As a result, procedures would be slower and costs would increase. The body also said that the legislation would be important for the UK scheme of arrangement procedure.

UK scheme of arrangement

Scheme of arrangement is put in place when a company is in need of a debt restructure in a bid to support the company through financial pressures. Proposals for a scheme of arrangement are discussed by the company itself, administrators, and creditors or members. The scheme will be become legally binding if 75% of creditors or members in value are in favour of the scheme and more than 50% in number. A company need not be insolvent for schemes of arrangement procedures to be agreed.

The procedure is currently used internationally as a mechanism by which to restructure UK and foreign companies. However, schemes of arrangement are not included in the Annex A list of procedures under the recast EIR. Therefore, the procedure remains separate from the EIR and will not be subject to the same potential impact of Brexit.

Industry body R3 has said that without the Recast Brussels Regulation, the UK would lose the benefits of the regulation, which could make the Scheme of Arrangement “a less attractive restructuring tool for international companies”, with 62% of members having said that Brexit “diminishes the UK’s status as a centre for international restructuring work”.

What’s next?

Until the government agrees on the exit terms for the UK’s withdrawal from the EU, the application of insolvency regulations post-Brexit cannot be guaranteed. While a case has been made for the benefits of continuing application of the legislation, the question will be whether an agreement can be reached between the EU and the UK government. But the case for maintaining the regulations is strong and, if found to be mutually beneficial for both negotiating parties, the UK insolvency and restructuring sector could find itself able to protect its current regime and stave off competition from other European cities as leading centres of international restructuring.

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