The post-referendum landscape for restructuring and insolvency

In the aftermath of the referendum vote, Chris Laughton, restructuring and insolvency partner at Mercer & Hole, and Helen Kavanagh of Squire Patton Boggs, explain the potential impact for restructuring and insolvency practitioners.

When will the UK actually exit from the EU?

Chris Laughton (CL): It will take at least two years for the UK to exit the EU. The article 50 clock hasn’t started ticking yet and, practically, we will need as much time as politics allows to arrange an orderly exit. Only 37% of the UK electorate voted to leave, while 35% voted to remain and 28% did not vote in the referendum. The government has a great deal to do now, acting properly in accordance with the referendum’s non-legally binding mandate, and much of what has to be done will be extremely difficult to achieve.

Helen Kavanagh (HK): Article 50 of the Treaty on European Union sets out the procedure to be followed if a Member State decides to leave the EU. It was signed by the EU Member States on 13 December 2007, and entered into force on 1 December 2009. That procedure has never been implemented before so we are in uncharted territory. In particular, article 50 does not set out any procedural requirements as to the format that the notice should take.

It does say that the decision must be made in accordance with a Member State’s own constitutional requirements and then the decision communicated to the European Council. It is silent on the method and timing of such communication. Already there has been debate in Brussels and Germany as to whether the referendum itself could be automatic notice, or if David Cameron’s attendance at the EU Summit (on Tuesday 28 June) when he informs the other Prime Ministers of the outcome of the referendum would trigger the article 50 notice period to begin running. However, George Osborne has stated that the UK’s position is that it will serve notice under article 50 when it is good and ready.

There is now debate among constitutional lawyers whether the right to trigger article 50 can be exercised by the Prime Minister alone or needs to be authorised by a decision of Parliament. If that is correct, it also raises the spectre of whether it could be vetoed by the Scottish Parliament. This is an argument which is likely to run for at least the next three months and may ultimately have to be decided by the courts.

What is the effect on English insolvency practitioners and lawyers?

CL: The referendum result will make insolvency practitioners and lawyers busier. At least two years of political and economic uncertainty will be destabilising, as the financial markets are already indicating. Such uncertainty will offer opportunity to some businesses, but it will cause problems, some of them severe, for others (especially those already facing challenges). There will be a great deal of change to face and many will need professional advice to help them do so.

HK: Domestic insolvency will not be affected by the decision, apart from the expectation that the restructuring and turnaround profession will become busier over the next couple of years, given that business distress is likely to increase as a result of difficult trading conditions resulting from the Brexit decision, such as falling exchange rates and share prices.

It is cross-border insolvency practice which will be affected. There will be no immediate effect because all EU Regulations will continue to apply until the UK ceases to be a member of the EU, either when it enters into a withdrawal agreement or at the end of the two-year period (or longer if extended by unanimous agreement) triggered by article 50.

What about the Regulation on Insolvency Proceedings and the Recast Regulation on Insolvency Proceedings?

CL: The European Insolvency Regulation on Insolvency Proceedings (EC) 1346/2000 remains in place and will continue to apply in the UK until 26 June 2017, when the Recast Regulation on Insolvency Proceedings (EU) 848/2015 takes effect. Subject to any arrangements made as part of the UK’s exit, the Recast Regulation will then apply until the UK leaves the EU.

HK: The Regulation on Insolvency Proceedings will continue to apply until 26 June 2017 when the Recast Insolvency Regulation comes into effect. The Recast Regulation will cease to apply to cross border restructurings in the UK once the UK leaves the EU. However, we do not yet know what will replace the current EU cross-border insolvency regulations.

What about the Cross-Border Insolvency Regulations?

CL: The Cross-Border Insolvency Regulations 2006, SI 2006/1030 are not European law and will themselves be unaffected. They will, however, have a part to play in cross-border insolvency once the UK leaves the EU—particularly in Poland, Greece, Romania and Slovenia, which have signed up to the UNCITRAL Model Law and would therefore recognise UK insolvency proceedings.

HK: The UNCITRAL Model Law on insolvency has been enacted in England under the Cross Border Insolvency Regulations 2006 and is unaffected by Brexit. We may see an increased use in its provisions, although they are not as comprehensive as the recognition afforded under the Regulation on Insolvency Proceedings. One option open to the UK would be to widen the Cross-Border Insolvency Regulations to apply to the 27 EU Member States.

Do you think it likely that the UK will be able to negotiate equivalent provisions with the EU under the terms of its withdrawal?

CL: It would be good if a way could be found for the UK to continue to participate in the Regulation on Insolvency Proceedings and its successors as it is good for UK restructuring and those who practise in that field. Such an outcome does not seem particularly likely though given the priorities one might anticipate for the exit negotiations, or indeed the prospect of the EU itself undergoing further change.

HK: Regulation on Insolvency Proceedings works well to deal with European cross-border insolvency and it is likely to work even better after the Recast Regulation comes into effect. It would make sense for the UK and the remaining 27 EU Member States to acknowledge that is the case and for the UK to agree a multi-lateral treaty with 27 Member States as a block, for continued recognition of UK insolvencies in Europe. The alternative would mean the UK having to negotiate 27 bilateral agreements with each of the Member States and it will depend on how difficult the remaining EU Member States chose to be.

If not, how will it affect the UK's status as a destination of choice for cross-border restructurings?

CL: Bearing in mind the skill and creativity that the UK restructuring and insolvency profession has always brought to bear in cross-border situations, I have no doubt that the UK will remain in the vanguard of such activity.

HK: The English scheme of arrangement has become a popular tool for European companies wanting to restructure. It is not an insolvency procedure and so is not subject to the Regulation on Insolvency Proceedings. The English courts decide whether to allow a non-English company to propose a scheme to its creditors, depending if it considers the company has ‘sufficient connection’ with England and whether the scheme will be recognised and given effect in the company’s state of incorporation. To date, English courts have generally been satisfied that the scheme will be given effect under the Brussels Regulation on the Enforcement of Judgments (EC) 44/2001, which will also go on Brexit. A new civil and commercial recognition agreement would then be required to ensure scheme of arrangements continue to be available to foreign debtors.

What do you think the immediate impact will be on the British economy?

CL: The immediate impact of the referendum result on the economy has already shown itself to be seriously negative in the short term. How quickly global markets and the UK economy recover will depend on how quickly political stability in the UK and Europe can be restored and the extent to which this reduces uncertainty. The divisions opened in UK society run deep and Europe has been severely shocked, but the wounds will heal in time—with a little care and attention.

HK: The only thing that is certain at the moment is uncertainty and the markets don’t like uncertainty. It appears unlikely that the article 50 notice will be served until the Conservatives have chosen a new Prime Minister. Even then, there is talk of an early general election taking place, if two thirds of MPs vote in favour. It is not clear if the new Prime Minister would wait until after a general election before triggering article 50.

I think both the markets and the economy are likely to be fragile throughout the next couple of years until the terms of the withdrawal agreement become clear.

Interviewed by Nicola Laver.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

If you are a LexisPSL subscriber, click the links below for further information:

Brexit—implications for the UK restructuring and insolvency market

Not a subscriber? Find out more about how LexisPSL can help you and click here for a free trial of LexisPSL Restructuring and Insolvency.

First published on LexisPSL Restructuring and Insolvency

Relevant Articles
Area of Interest