The UK financial sector thrives on confidence, underpinned by a well-developed and respected legal system. Brexit has knocked global confidence in the UK market, but businesses can still rely on the predictability of the English law system.
Amidst the many uncertainties surrounding Brexit, the potential loss of passporting rights has arguably received the most attention.
"Passporting" permits a financial services firm authorised in the United Kingdom to operate throughout the European Economic Area (EEA), without having to obtain operating licences in other EEA Member States. If the United Kingdom leaves the single market, UK financial institutions will lose their passporting rights, unless they are replicated in a bespoke agreement. This could have a major impact on lending activities throughout the European Union.
The European Banking Authorities' recent opinion on relocating to another EU Member State illustrates the gravity of the issue and how seriously it is being taken. The financial sector is exerting pressure to achieve a solution, including a transition agreement to alleviate some of the uncertainty.
The impact of Brexit on the UK insolvency regime has received less attention, but this may change when the current economic cycle turns and the country actually exits the European Union.
THE INSOLVENCY REGIME
The United Kingdom has traditionally been dominant in the restructuring and insolvency market, partly because of its reliable and well-developed insolvency laws and sophisticated court system.
There is a concern, however, that restructuring and insolvency procedures conducted under English law will be less certain in outcome, and more complex and costly as a result of Brexit. This would mean that businesses could become harder to rescue from financial difficulty, potentially increasing the rate of company failure.
Post-Brexit, the United Kingdom will no longer be a Member State for the purposes of the European Insolvency Regulation (EIR) or European Regulation 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the Brussels Regulation). Unless alternative solutions are found, there are implications for two key areas that will come into effect immediately upon Brexit.
Automatic Recognition of Insolvency Proceedings and Judgments
The most important implication is that UK insolvency proceedings, office-holders and judgments will cease to be automatically recognised under the EIR in EU Member States.
Recognition is vital for successful cross-border insolvencies and restructurings. In general, a UK officeholder will have to seek recognition under local laws, which is likely to be burdensome and to reduce certainty that a UK insolvency will be effective throughout the European Union.
The UK and EU position papers on judicial co-operation in civil and commercial matters address only limited aspects of co-operation on insolvency matters, most likely because of the complexity of this issue. The EIR was negotiated for over 10 years before it became effective, and co-operation on cross border insolvency laws is notoriously difficult to achieve. It seems unlikely that there will be a quick resolution of this issue.
Recognition of UK Schemes of Arrangement
The second implication concerns the basis on which UK schemes of arrangement are recognised in the European Union.
Companies incorporated outside the United Kingdom often choose English law schemes of arrangement to restructure their debts because the process is well-understood and predictable.
An English court, when determining whether or not to sanction a scheme, will consider whether or not the order will be recognised in other jurisdictions where creditors might challenge it. The Brussels Regulation is commonly relied on as the basis for recognition. Post-Brexit, companies will need to demonstrate that the scheme will be recognised under the rules of private international law of the jurisdictions in question. This is again likely to be burdensome.
There is much speculation about the solutions for these two issues. The following are just some of the possibilities, and there is no obvious front runner:
- The application of the EIR application could be extended to the United Kingdom post-Brexit, but this seems unlikely.
- The United Kingdom could seek to negotiate bilateral agreements with each EU Member State.
- If the United Kingdom acceded to the European Free Trade Association the Lugano Convention would apply.
Even before the Brexit referendum, other countries were improving their restructuring and insolvency regimes, which in itself posed a threat to the United Kingdom's dominance. As in so many sectors, the UK's own review of its national restructuring and insolvency regime is likely to be put on hold until the Brexit negotiations move forward.
Whatever happens post-Brexit, market participants can take comfort in the efficacy and efficiency of the English insolvency regime and the creativity and expertise of the English legal system, notably its courts. These will remain a significant advantage and will undoubtedly adapt to whatever emerges over the next two years.
For companies experiencing financial distress post-Brexit, it will be vital to identify which jurisdictions and laws will best suit their needs. There will be opportunities to review this as the Brexit uncertainty lifts, as long as companies plan in advance.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.