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01/02/2019

Brexit and insolvency: an update

Amid all of the high profile goings-on in parliament regarding the UK’s fast-approaching departure from the European Union, an overlooked area is the considerable amount of Brexit work taking place at a technical level.

One aspect of that technical work which is of key importance to the insolvency and restructuring profession – and the most recent relevant development in this area – is the Insolvency (Amendment) (EU Exit) Regulations 2018. This is a statutory instrument (SI) tabled by the Government to address some of the impact Brexit will have on the UK’s insolvency framework.
 
R3 was pleased to see this SI approved by parliamentarians earlier this week following debate in at a Delegated Legislation Committee session (you can read the full transcript here). As we set out below, the SI gives the Government the means to bring in to effect a post-Brexit agreement on the UK’s insolvency arrangements with the EU, and to ensure a level playing field for the UK insolvency and restructuring profession and its EU counterparts should such an agreement prove too difficult to secure.
 
Background
 
At the moment, EU regulations allow automatic recognition of UK insolvency procedures and judgments across the EU, and vice versa, and form a vital part of the UK’s insolvency and restructuring environment. However, the Government’s September 2018 Brexit technical notes confirmed that UK insolvency proceedings may not be recognised in the EU in a ‘no deal’ scenario.
 
As part of the process of incorporating EU law in to domestic UK law, the European Union (Withdrawal) Act 2018 gives ministers of the Crown a power to make secondary legislation to deal with problems in retained EU law that would arise on leaving the EU, as well as to bring in to effect any future trading arrangements between the UK and the EU. The Government brought forward the Insolvency (Amendment) (EU Exit) Regulations 2018, to this end.
 
Due to the way that the EU (Withdrawal) Act incorporates EU law in to UK law, if the SI was not available, on leaving the EU, the UK would have continued to recognise EU insolvency appointments and judgments with no guarantee that UK appointments and judgments would be recognised in return.
 
This would put UK insolvency practitioners at a significant disadvantage compared to their EU counterparts: UK insolvency practitioners would face new costs and uncertainty when dealing with cross-border insolvency and restructuring proceedings, while EU insolvency practitioners would not.
 
Until a reciprocal recognition deal is in place, the Government can use the SI to turn ‘off’ automatic recognition of EU insolvency procedures and appointments. The SI could also be used to ensure a reciprocal recognition deal can be put in to place once one is agreed.
 
The SI also addresses deficiencies created by the UK’s exit from the EU in relation to the Employment Rights Act 1996, Pension Schemes Act 1993, Employment Rights (Northern Ireland) Act 1993, which set out certain guaranteed employee protections that arise on the insolvency of an employer. It also sets out transitional provisions for insolvency proceedings that are opened under the European Insolvency Regulation.
 
R3 briefed parliamentarians ahead of the debate on the SI last week, and we were pleased to hear parliamentarians speak positively about the UK insolvency and restructuring profession’s work. Shadow Insolvency Minister Bill Esterson MP said: “we have an extremely well regarded, strong and economically successful insolvency regime in the UK and it is important that we continue to do so.” Those taking part in the debate agreed, approving the SI without calling for a vote which could have hampered the SI’s journey through parliament and on to the statute book.
 
Next steps
 
Now that the SI has been approved by parliament, the Government has the tools it needs to create a level playing field for the UK profession in the event that there isn’t a mutual recognition deal on insolvency. That said, as we set out in our 2016 policy paper, the profession is clear that it wants to see the Government secure a deal which replicates the current framework of mutual recognition in respect of judgments and appointments – rather than having to use the powers set out in the SI.
 
We were pleased that the Government has adopted this position (see the July 2018 White Paper on the future relationship between the UK and the EU, which sets out the Government’s ambition to secure a post-Brexit agreement in respect of insolvency and other areas of civil judicial cooperation). Indeed, during last week’s debate, the Insolvency Minister Kelly Tolhurst MP noted that “it is in the interests of both the UK and the EU to retain that system, and the Government have been clear, with the support of the insolvency sector, that we wish to continue it.”
 
It is now for UK Ministers and their EU counterparts to finalise and secure such an arrangement. R3 hopes that such an agreement can be found, which would be highly beneficial to businesses, creditors and the insolvency and restructuring profession both in the UK and the EU.

Notes to editors:

  • R3 is the trade body for Insolvency Professionals and represents the UK’s Insolvency Practitioners.

  • R3 comments on a wide variety of personal and corporate insolvency issues. Contact the press office, or see www.r3.org.uk for further information.

  • R3 promotes best practice for professionals working with financially troubled individuals and businesses; all R3 members are regulated by recognised professional bodies
     
  • R3 stands for 'Rescue, Recovery, and Renewal' and is also known as the Association of Business Recovery Professionals.