Vol 13 (2016) - Issue 4

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The Effect of Brexit on UK Restructuring and Insolvency Processes

Whatever the nature of the relationship which is eventually formed between the UK and the EU in the wake of the EU referendum on 23 June 2016, the changes will have profound consequences for UK law. The task of disentangling over 40 years’ worth of domestic and EU law is hugely complex and subject to numerous opposing policy pressures. In the confusion and uncertainty of the immediate aftermath of the referendum, it is too soon to gauge the overall impact on the UK restructuring and insolvency environment. It is, however, possible to consider the immediate legal effect of Brexit on the insolvency frameworks of EU law, and the implications for stakeholders in cross-border restructuring and insolvency cases.

The EU framework for insolvency
Although the position may change as a result of the European Commission’s current Capital Markets Union initiative, insolvency law and policy within the EU remains fundamentally a matter for each member state. As a result, insolvency proceedings that are entirely domestic (i.e. where the debtor’s asset base and operations are located only in the member state in which it is incorporated) are governed purely by national law.
EU law is engaged only in cases with a cross-border element; the legislation creates rules which are intended to minimise conflicts of laws and create certainty as to how different questions arising in an international insolvency will be determined. The most important provision is Council Regulation (EC) 1346/2000 on Insolvency Proceedings (the 'Insolvency Regulation'), which applies to all debtors other than insurance undertakings, credit institutions and certain investment undertakings.
Insurance undertakings and credit institutions are subject to specific EU directives (which have been implemented in English law by statutory instrument). No equivalent EU framework currently exists for investment undertakings. When the UK leaves the EU, the Insolvency Regulation will cease to apply automatically. The position in relation to insurance undertakings and credit institutions will depend on the form of the post-Brexit relationship and, in particular, whether the UK re-joins the European Economic Area ('EEA'). These points are considered in more detail below.

Domestic law
As noted above, UK insolvency law is not derived from the EU. As far as domestic restructurings and insolvencies are concerned, EU law ceasing to apply will not therefore result in radical change. It is possible that a UK government could take advantage of Brexit to make changes to other areas of law relevant to insolvencies: for example, the abolition of the Transfer of Undertakings (Protection of Employment) Regulations 2006 would have a significant impact on insolvent business sales. However, those rules (and others like them) have become such a well-established part of English law that such action is unlikely to be politically attractive.
That is not to say, however, that Brexit should not assist in informing domestic policy on insolvency. Greater separation from the EU makes it even more important that the UK should work to retain its place as a leading jurisdiction in which global companies can finance and conduct business, and in which international businesses can be effectively restructured.

Cross-border considerations
As already noted, unless other arrangements are made, the Insolvency Regulation will cease to apply automatically when the UK formally leaves the EU. As a result, EU insolvency proceedings will no longer obtain automatic recognition in UK courts, and UK proceedings will no longer benefit from such recognition in the EU.
From the perspective of EU office holders, the impact of that change will be mitigated by the fact that the UK has implemented the UNCITRAL Model Law on Insolvency (through the Cross-Border Insolvency Regulations 2006: 'CBIR 2006'). Under CBIR 2006 a foreign office holder may apply for recognition in UK courts and, whilst such recognition is not automatic, it does bring with it many of the benefits of recognition under the Insolvency Regulation. In contrast, UK officeholders would face greater challenges; other than in those few EU jurisdictions where the UNCITRAL Model Law has been enacted (currently Greece, Poland, Romania and Slovenia), they will have to seek recognition under local law (often with little certainty as to whether it will be granted), or work with parallel proceedings commenced in those jurisdictions.