What a no-deal Brexit would mean for insolvency

With every day seemingly bringing a new Brexit-related headline, it’s hard to keep up with the potential impacts of Brexit on individual, technical sectors. One crucial sector where Brexit could have a significant impact is insolvency: ‘no deal’ would mean it would become much harder to resolve cross-border insolvency cases from the UK.

R3, the UK’s insolvency and restructuring trade body, has been keeping a close eye on how Brexit will affect the UK’s insolvency framework, and we’ve been making sure ‘insolvency’ is on the Government’s radar in negotiations with the EU. Here, we’ll set out why insolvency matters, the impact Brexit could have, and where the Government stands.

Why insolvency matters

The UK’s insolvency and restructuring framework provides businesses, lenders, and investors with the confidence that, in the event of an insolvency, they will see at least some of their money back. Its strength and responsiveness is recognised by the World Bank, which lists the UK 14^th overall for ‘resolving insolvency’, helping to attract investment to the UK.

London is an internationally recognised centre of excellence in restructuring, with multinational companies choosing the capital as the best place to reorganise themselves, thanks to the dense nexus of expertise, access to funding, and robust court judgments it offers. We would very much like to see these benefits continue to exist post-Brexit, while working with the Government to make our insolvency and restructuring framework even more resilient and responsive.

The current situation

Cross-border insolvency and restructuring within the EU is underpinned by two key directives. Together they help to reduce the costs and time taken to resolve insolvency situations:

• The European Insolvency Regulation ensures that the appointment of an administrator, liquidator, or trustee in bankruptcy in one EU member state is automatically recognised in other EU jurisdictions.
• The Recast Brussels Regulation allows for court judgments made in one EU country to be automatically recognised – and therefore enforceable – in other parts of the European Union.

Together, these directives mean that cross-border insolvencies can be dealt with as if they were taking place in one jurisdiction – rather than several. A UK insolvency practitioner can take control of assets spread across EU in one go or sell business units in one piece, while the set-up stops insolvency procedures in different countries competing for the same assets on behalf of local creditors.

Likewise, when somebody from the UK with a holiday home in an EU country becomes bankrupt, the overseas property which forms part of their estate can be realised by a UK-based trustee in bankruptcy, for the benefit of all creditors. This also makes it harder for fraudsters to attempt to hide assets in another country, to avoid paying what they rightfully owe.

All this keeps down costs – there’s no need for multiple applications for recognition in local courts – while UK-based creditors such as suppliers and staff can be certain that they will be treated fairly, with money that is owed to them repaid with a minimum of fuss and delay.

What could happen post-Brexit

If the UK leaves the EU without a deal, these two key directives will no longer apply. A UK insolvency practitioner who is appointed as the administrator of a company with cross-border operations will have to initiate insolvency proceedings in all of the other countries where the company has staff, subsidiaries, or other assets. This will add layers of extra time and expense, reducing the returns available to creditors, and making it harder to investigate any suspected wrongdoing or fraud.

UK practitioners will also be worse off compared to their EU counterparts. While the Government has taken steps to ensure the UK won’t continue to automatically recognise EU appointments and judgments in the absence of automatic recognition for UK appointments and judgments, EU-based insolvency professionals will have a pathway to recognition thanks to the UK’s adoption of the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments, and the Model Law on Cross-Border Insolvency.

Unfortunately, the UK is one of the only EU states to have adopted these laws: only Greece, Poland, Romania, and Slovenia are other EU adopters – important trading partners, of course, but not on the same scale as Germany, France, Italy, or Spain.

The Government’s position

At R3, we’ve been working hard to make sure that the insolvency and restructuring profession’s concerns are clearly spelled out to the Government, and we’ve had some success. It is now the Government’s stated policy to seek a post-Brexit agreement which closely reflects the existing framework of mutual recognition and cooperation on civil judicial matters, including, specifically, insolvency. While this is positive, it takes two – or 27 – to tango, and the shape of the future relationship remains to be decided. R3 will continue to argue for reciprocal automatic recognition, as it presents the best outcomes for all stakeholders in cross-border insolvency and restructuring cases, and for the economy overall.