Brexit – What next for the insolvency and restructuring framework?

29 March 2017

After almost a year of predictions and uncertainty around the direction of Brexit, Theresa May has finally fired the starting gun to begin the UK’s negotiations to leave the European Union. The government will spend the next two years carving out the country’s future relationship with the 27 EU member states, with a strong focus resting on the new arrangements for trade and businesses operating across borders.

Brexit is an important fork in the road for the UK economy and the government faces months of difficult negotiations as it seeks a deal that will ensure the UK remains attractive to investors and a good place to do business. The UK’s insolvency and restructuring profession plays a vital role in keeping the economy running on top form by encouraging international investment through rescuing businesses, saving jobs and returning money to creditors. The ability of the profession to perform could however be at risk when the nature of our relationship with the EU changes, potentially causing harm to the UK economy.

R3 has been working hard since the referendum to tackle the wealth of questions and uncertainties surrounding the future of the insolvency and restructuring framework, engaging with our members and wider stakeholders (including hosting a roundtable event with insolvency practitioners, insolvency lawyers, government officials and the business community) to uncover their perspective on the road ahead.

R3 has called on the government to preserve the benefits of the European Insolvency Regulation (EIR) and Recast Brussels Regulation (RBR). We have also been working closely with the Insolvency Service, and sent our recommendations to the Ministry of Justice, HM Treasury and Department for Exiting the EU. The Brexit challenges confronting the insolvency and restructuring framework have also been raised in parliament by Labour’s Shadow Brexit Minister, Baroness Hayter, and SNP Treasury spokesperson, Roger Mullin MP.

The regulations

Both of the regulations are vital in encouraging cross-border investment.

The EIR allows for the automatic recognition across the EU of UK insolvency proceedings. It means that insolvency practitioners can quickly and easily take control of and realise an insolvent company’s assets situated in another Member State, providing speed, clarity and predictability to proceedings. The regulation also significantly reduces cost and maximises the value to creditors; an important aspect when funds are limited and time is short.

The RBR facilitates the automatic recognition and enforcement of court judgments across the EU, helping to tackle cross-border fraud and collect debt.

What the regulations mean in practice

In 2011, Alkor-Venilia (AV), a German self-adhesive manufacturer with a pan-European presence, entered into insolvency procedures under German jurisdiction. At the time, its 80 Northumberland-based UK staff had not been paid for two months.

Without the benefits provided by the EIR, the German insolvency practitioner would have had no power other than to petition to have AV’s UK operations liquidated as a foreign company, leaving the employees in a period of uncertainty, limiting the possibility of job rescue and reducing the value of assets available to creditors.

However, with the regulation in place, the insolvency practitioner secured an urgent appointment of UK administrators, who were then able to help those 80 employees to start claiming redundancy payments, all within 24 hours of their appointment.

Further down the line, it was necessary for AV to liquidate its UK operations. Once again the regulation aided the employees, this time by ensuring their preferential claims were paid out by distributions taken from AV’s Italian operations.

For how things work on a larger scale, it is worth looking at the example of Nortel and when it entered into insolvency proceedings in 2009. At the time, although 80% of the company was based in the US and Canada, its centre of main interest was located in the UK.

Without the regulations, there would have been up to 19 overlapping insolvency processes. Clearly this would have been far more disjointed, costlier and less beneficial to creditors, especially taking into account that creditors could have been left facing the cost of 19 separate insolvency proceedings.

In reality, the proceedings fell under the banner of one European vendor, making the entire process far simpler. The single point of contact for suppliers and customers helped to maintain confidence in Nortel, allowing its operations to continue and to be wound down or sold in an orderly fashion.

Moving forward

Both the EIR and the RBR are an intrinsic part of why the UK is perceived as an attractive place to do business. Losing these powers in our exit from the EU would act as a deterrent for businesses to invest in UK companies, potentially harming the UK economy.

From an insolvency and restructuring perspective, there should be two key aims for the UK government. Firstly, it is important that we preserve the benefits of the EIR by negotiating an equivalent treaty. Secondly, R3 would like to see the government negotiate an alternative arrangement which maintains the RBR’s benefits, or alternatively join the Lugano Convention 2007 which imposes a similar regime to the Judgments Regulation in relation to enforcement of judgments between EU Member States, Switzerland, Iceland and Norway.

With Article 50 now enforced, with luck we will have a clearer picture sooner rather than later of the UK’s future relationship with the EU, along with the new rules and regulations governing cross-border insolvency proceedings. In the meantime, R3 will continue to engage with its members, representing the concerns of the profession and ensuring that key parliamentarians and decision makers are well informed.