Brexit & Insolvency – Where Are We Now?

As with every other part of the UK economy, leaving the EU could potentially have a significant impact on the UK’s insolvency and restructuring framework. This, in turn, will have an impact on the UK economy’s competitiveness and attractiveness as a place to do business.

 

As we’ve explained on R3 Thinks before, the very basic parts of the UK’s insolvency and restructuring framework – such as the rules on how bankruptcies, liquidations, and other procedures work – are governed by domestic UK law and won’t be affected by Brexit. However, the success of the UK’s framework depends, partly at least, on its pan-European effect.

 

Currently, the UK benefits from a number of EU regulations which mean UK insolvency appointments and judgments are recognised across the EU (in particular, the European Insolvency Regulation and the Recast Brussels – or ‘Judgments’ – Regulation). This means a UK insolvency practitioner appointed as the office holder of the insolvent estate of a UK company or individual can act to trace, take control of, or sell the assets of that estate (for the benefit of creditors) wherever those assets are in the EU without having to seek recognition in a local court first. Court judgments on restructuring and insolvency matters made in the UK have an effect across the EU, too.

 

The certainty of automatic recognition makes resolving cross-border insolvency procedures much simpler and cheaper – helping boost creditor returns. Treating a multinational company’s insolvency as ‘one’ insolvency procedure also increases the chance of business – and job – rescue, which, in turn, further benefits creditors.

 

Seeking recognition in a different country’s court can be time-consuming, costly, and there is no guarantee of success. There might also be a local insolvency practitioner seeking the appointment, while competing judgments from different countries’ courts about the same assets can lead to a legal quagmire and indecision about who can do what. The longer it takes to take control of an asset, the more its value might diminish; and in some cases, the more likely it is that assets might simply disappear. A lack of recognition can put assets out of reach for creditors.

 

With multinational companies, where teams might be spread across different countries, the chances of rescue and re-sale value diminish when they are broken up by borders: the UK part of a team might be worthless without, for example, the Belgian or German parts of the same team. If the different teams are handled by three separate insolvency practitioners, each of whom will be working with different insolvency procedures, a successful rescue or sale is very difficult. Alone, each part of the team is not worth as much as it would be combined with the others.

 

This automatic recognition goes both ways: European insolvency appointments and judgments are automatically recognised in the UK, too. Some case studies of how automatic recognition works in practice can be found in our December 2016 Brexit paper.

 

Losing automatic recognition, then, would be a problem for the UK.

 

If it is more difficult to rescue your multinational company if it is based in the UK, then that’s one reason not to base your company here. If it is more difficult to get your money back if you’re investing in, lending to, or trading with a UK-based multinational company, then that’s one less reason to lend to, trade with, or invest in a UK company. And if you’re worried that others might be worried about lending to, trading with, or investing in your company, that’s another reason not to base your company in the UK.

 

Essentially then, the loss of automatic recognition would risk undermining the UK’s reputation as a place to do business. It would threaten business and job rescue, make investment riskier, and increase the cost of lending.

 

Indeed, with various Government papers on the UK’s post-Brexit economy, such as Preparing for our future UK trade policy, emphasising the importance of international trade, it’s crucial that the UK’s insolvency and restructuring framework is able to easily resolve cross-border insolvency cases that are an inevitable consequence of cross-border trade.

 

Thankfully, this is a risk the Government is aware of. Its August 2016 paper on post-Brexit civil justice cooperation makes frequent mentions of the importance of the cross-border nature of insolvency procedures and states that the Government will “seek an agreement with the EU that allows for close and comprehensive cross-border civil judicial cooperation on a reciprocal basis, which reflects closely the substantive principles of cooperation under the current EU framework.”

 

The problem is – as with the rest of the Brexit negotiations – that the EU has to agree to continue automatic reciprocal recognition, too. Whether it will or not is an unknown. From our perspective, however, continued automatic reciprocal recognition would be a win-win for the EU and UK.

 

 

One potential wrinkle in the event of a ‘no-deal’ on automatic recognition is the way that the Government is preparing the UK’s statute books for Brexit.

 

The European Union (Withdrawal) Bill will effectively transpose EU-based law wholesale into domestic UK law. In some areas, such as insolvency, this could lead to unintended consequences: as the existing legislation makes provisions for automatically recognising EU insolvency appointments and procedures, the Withdrawal Bill means the UK could be in a situation where it continues to offer automatic recognition to the EU while the UK, no longer a member of the EU, would not enjoy the same privilege in return. This would put the UK’s insolvency and restructuring framework at a serious disadvantage compared to its EU counterparts.

 

The Government has included a fix for this in the Bill: Clause 7. This clause would allow the Government to use Statutory Instruments to correct any parts of the Bill which would lead to the unintended consequences described above. As such, Statutory Instruments could be used to first ‘turn off’ automatic recognition of EU insolvency appointments and judgments if needed (assuming there is a ‘no-deal’) or could be used to put into effect any reciprocal recognition which was agreed.

 

Whether this part of the Bill survives is another matter (there are concerns about the potentially sweeping powers the clause grants to the Government), but the salient point for the insolvency and restructuring profession – whatever form of the final Bill – is that the UK should not automatically grant the privilege of automatic recognition unless it is given the same privilege in return.

 

This shouldn’t be seen as an isolationist move. On the one hand, this would simply be removing from the statute book parts of an agreement which had ceased to exist. On the other, the UK has already taken the lead in adopting a collaborative approach to cross-border insolvencies: even if the UK drops automatic recognition of other countries’ insolvency procedures, it would still, as one of the few European countries to have signed up to the UN’s UNCITRAL Model Law on Cross-Border Insolvency, offer a smoother route to recognition here for ‘third country’ insolvency practitioners than is available elsewhere.

 

Although it does not provide automatic recognition, the Model Law has at least embedded the principle of recognising overseas insolvency procedures in the UK. Other EU members to have signed up include Poland, Romania, Greece, and Slovenia (the US, Australia, Canada, and Japan have also implemented the Model Law).

 

If there is ‘no deal’, at the very least, the Model Law will help UK insolvency practitioners in the countries where it is in effect, while there are alternative legal conventions for the recognition of judgments which the UK could join, such as the Lugano Convention. These options would be a distinct ‘second-best’ to automatic recognition, however.

 

Within all this, R3’s role has been to pull together the profession’s views and ensure concerns are listened to by government and parliamentarians. So far, this has been successful: the Government’s position on insolvency and Brexit matches what we and our members have been calling for. R3’s work on Brexit doesn’t end there, however. Following our DLA Piper-sponsored roundtable for the profession, stakeholders, and government, in December 2016, we’ve been meeting and briefing parliamentarians, government officials, and journalists to keep them up-to-date on the profession’s view of developments. The more we hear from members, the more we can pass on to policy-makers.

 

 

As set out above, leaving the EU presents some serious risks for the effectiveness and attractiveness of the UK’s insolvency and restructuring framework (and through that, the wider UK economy).

 

But, even if the UK was to leave the EU with a deal on reciprocal automatic recognition (or something close to it), there are still challenges to the competitiveness of the UK’s insolvency and restructuring framework. Most importantly, other countries, inside and outside the EU, are embarking on a series of ambitious insolvency reforms.

 

As the UK leaves the EU, the remaining member states will be busy implementing a new directive on “preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures”; R3 members have mentioned Spain and the Netherlands as countries which have improved their frameworks recently; Singapore is often given as an example, too.

 

In contrast, the UK has not introduced significant insolvency reforms for a while. Having been 13^th in the World Bank’s rankings for insolvency frameworks for a number of years, the UK’s ‘resolving insolvency’ rank slipped to 14^th in the most recent World Bank list. The Netherlands, meanwhile, moved from 11^th to 8^th; Canada and Iceland overtook the UK. This is not a helpful direction of travel to have ahead of the changes which Brexit may bring.

 

Positively, the UK government did propose a package of reforms in May 2016. These reforms, welcomed by the profession and discussed in some detail here, would update the corporate insolvency framework with procedures already in use elsewhere, which, combined with existing advantages, would help make our insolvency framework even more competitive.

 

Less positively, the last public announcement from the Government on its reforms came over a year ago in September 2016.

 

Ironically, given their importance for preparing the UK’s insolvency and restructuring framework for the post-Brexit world, it is the need to focus on Brexit legislation which has denied the reforms the chance to make progress through parliament.

 

The lack of progress made is deeply disappointing. Reform would be needed even if the UK was not leaving the EU. With the risks posed by Brexit, reform is imperative. The sooner the Government proceeds with its corporate insolvency reforms, the better.

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