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What impact will the draft European Union (Withdrawal) Bill (the Repeal Bill) have on restructuring and insolvency professionals? Chris Laughton, partner at Mercer & Hole, Chartered Accountants, explains that the Repeal Bill adversely affects practitioners, particularly in relation to cross-border matters and says, absent a ‘cliff-edge’ Brexit, any transition appears unlikely to be much more than a time-limited continuation of the status quo.
The Repeal Bill is said on its title page to be intended ‘to repeal the European Communities Act 1972 and make other provision in connection with the withdrawal of the United Kingdom from the EU’. A general discussion of the legal issues arising from the Bill is set out in blog post: The Repeal Bill—examining the legal issues.
In essence, the Repeal Bill seeks in section 1 to stop EU law applying in the UK by repealing the European Communities Act 1972 (ECA 1972).
It then seeks in section 3 to import into UK law any EU law that applies in the UK immediately before the UK leaves the EU. The EU law to be imported is that which has direct effect (eg an EU Regulation or Treaty). EU Directives will not be imported, but any UK law made pursuant to an EU Directive (such as the Transfer of Undertakings (Protection of Employment) Regulations 2006, SI 2006/246, which was made pursuant to the Acquired Rights Directive 77/187/EEC) will be retained.
Unfortunately the EU laws being imported or retained are not listed, merely defined, producing a degree of uncertainty that will inevitably lead to litigation in due course.
Commentators have suggested (wrongly) that the Repeal Bill means that the law will be the same immediately after the UK leaves the EU as it was immediately beforehand. No EU law that affects relationships between laws of Member States will be recognised in the EU27 as applying to the UK once the UK leaves the EU unless new arrangements are made. The recast European Insolvency Regulation (EU) 2015/848 (EIR), which governs the scope and effects of and the interrelationship between insolvency proceedings opened under it, is a good example of EU law that cannot unilaterally be brought into effect by a non-Member State.
The other key relevant provision of the Repeal Bill is section 7, which seeks to introduce controversial ‘Henry VIII powers’ enabling government ministers to amend primary legislation by regulation, potentially avoiding or at least minimising parliamentary scrutiny of law making. This is said to be the only way (as a result of the time limit set by the Prime Minister’s Article 50 notification) to remedy the ‘failures and deficiencies’ that the Repeal Bill’s explanatory notes acknowledge will arise from the mechanism it adopts to import EU law.
Section 6 of the Repeal Bill provides that UK courts are not bound by principles laid down or decisions made by the Court of Justice on or after ‘exit day’. It also provides that UK courts need not have regard to anything done on or after exit day by the Court of Justice, but may do so if they consider it appropriate to do so. Lord Neuberger has made clear recently that the latter provision is inadequate—how parliament expects judges to approach that sort of issue should be spelt out in a statute.
Section 6 goes on to set out, among other things, that UK courts are to decide questions about imported EU law in accordance with Court of Justice and domestic case law as it was immediately before exit day. However, the Supreme Court is not bound by Court of Justice decisions but should apply the same test as if it were deciding whether to depart from its own decision.
As the Repeal Bill stands, on leaving the EU, the UK would give automatic recognition to insolvency proceedings opened (both in the past and in the future) in EU Member States—a useful benefit to the EU.
On the other hand, previously opened or future UK insolvency proceedings would not be recognised automatically in the EU, because the UK would no longer be a Member State. The effect of the Repeal Bill is that it benefits the EU in that respect, but it cannot deliver cross-border insolvency benefits to the UK. For the avoidance of doubt, the EIR will no longer work for the UK, whatever legislation the UK government introduces to try to correct that failure.
Automatic recognition of insolvency proceedings is important because it allows insolvency practitioners to operate effectively across borders, realising assets for the benefit of creditors without the cost and delay—often significant—of bringing local recognition proceedings, if indeed such proceedings are possible for the countries in question.
A solution to the problem of the one-sided, anti-UK effect of importing the EIR into UK law is for it not to be imported. The EIR could, by a simple amendment to the Repeal Bill, be left out of UK law.
Further injustice arises in this field on the UK leaving the EU through the Cross-Border Insolvency Regulations 2006, SI 2006/1030 (CBIR). The CBIR were designed to implement the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency. The CBIR have hitherto been overridden in EU situations by the EIR, but this would no longer be the case on the UK leaving the EU.
What the CBIR provide is that foreign insolvency proceedings can be recognised in the UK on application to and by order of the High Court. However, most EU Member States do not have similar provisions as they have not implemented the UNCITRAL Model Law (the exceptions being Ireland, Poland, Slovenia and Greece). The result post-Brexit would be that insolvency practitioners in countries such as Germany, France, Spain and Italy would be able to apply simply in the UK for recognition of their proceedings, but practitioners here would not necessarily be able to do the same in those countries.
A solution would be for the CBIR to be amended, as permitted under the Model Law and as it is implemented in some of the countries that have adopted it, so they only apply to countries that have themselves adopted the Model Law. This, together with not importing the EIR, would stop UK practitioners and the cross-border proceedings for which they are responsible being at a disadvantage to those of EU Member States.
R3 and INSOL Europe, the UK and European restructuring and insolvency trade associations, both support the establishment on the UK leaving the EU of a bilateral treaty enabling the UK to participate fully in the EIR and to be recognised as doing so. Any such treaty would need to incorporate a dispute resolution mechanism beyond reference to the Court of Justice—various arbitration or independent tribunal models may be acceptable.
The recast Brussels I Regulation (EU) 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast) (Brussels I) provides for the automatic recognition and enforcement of court judgments across the EU. Without Brussels I, the UK’s restructuring and insolvency profession will need to rely on local law opinions and principles of private international law to determine whether they are entitled to exercise their powers and to recover debts due from creditors in other EU Member States. This will slow down restructuring and insolvency procedures and increase costs. Schemes of Arrangement under the Companies Act 2006 would become a less attractive restructuring tool for international companies.
To address this deficiency, the UK government could enter into a bilateral treaty with the EU in a similar way to that proposed above for the EIR. Alternatively, it could subscribe to the Lugano Convention, which imposes a similar regime to Brussels I in relation to enforcement of judgments between EU Member States, Switzerland, Iceland, and Norway.
It would appear sensible and straightforward for the Repeal Bill to be amended to exclude the EIR. Alternatively, the same result might be achieved by ministerial regulation—subject, one hopes, to proper parliamentary scrutiny. Without more, in the event of a ‘cliff-edge Brexit’, the UK would be a ‘third country’ to the EU27.
From a UK perspective there would be twenty-seven new cross-border regimes, each dependent on the domestic law of a different EU counterparty state. From an EU perspective, unless the CBIR were to be amended as discussed above, recognition of EU insolvency proceedings could be sought under the CBIR.
Bilateral UK-EU treaties covering the EIR and Brussels I may be possible, but unless and until the UK government sets out sufficiently detailed objectives in this area (and others), the likely outcome of the political negotiations cannot be foreseen and how things will work after the UK leaves the EU will remain uncertain.
Absent a ‘cliff-edge Brexit’, where the UK crashes out of the EU on 29 March 2019 with no agreement, any transition appears unlikely to be much more than a time-limited continuation of the status quo. The EU could rationally offer little else before reaching agreement on the substantive issues, which will be extraordinarily difficult to achieve in the time the UK government has left itself.
Chris Laughton is a corporate advisory partner at Mercer & Hole. With over 30 years’ restructuring experience and a problem solving approach, his emphasis is on practical action and advice. He leads Mercer & Hole’s international restructuring practice and, having particular knowledge and experience of European insolvency regimes, including the EIR, he is one of the few UK insolvency officeholders well-positioned to bridge the gulf in understanding and expectations between stakeholders in cross-border restructurings. He is a past president and honorary member of INSOL Europe and he is the editor of ‘Recovery’, R3’s quarterly journal.
Interviewed by Barbara Bergin.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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Brexit: Restructuring & Insolvency—overview
Recognition and other applications under the Cross-Border Insolvency Regulations
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