For decades, interrelated financial processes have developed across Europe on the assumption that if enforcement action becomes necessary, it will be recognised and take effect throughout EU Member States. Following the UK's vote to leave the European Union, unless the Government negotiates continued participation in the reciprocal recognition provisions of the EC Regulation on Insolvency Proceedings and the Brussels Regulation (recast) (also known as the Judgments Regulation) (or alternative recognition treaties), the implications for corporate recovery and insolvency work, as well as the knock-on effect for lending and pricing, could be significant.
- The UK has some of the world's most flexible and cost-effective restructuring and insolvency solutions. The combination of those regimes with highly skilled, specialist judges, regulated insolvency practitioners and the prevalence of English-law governed finance documents, has resulted in England becoming a world-wide hub for specialist restructuring services. England is perceived to be the solutions gateway for distressed corporates with operations in Europe. Pan-European recognition is key.
- All EU Member States, except Denmark, are subject to the EC Regulation on Insolvency Proceedings (Insolvency Regulation). The Insolvency Regulation requires that without any formality, each member state must recognise insolvency proceedings commenced in another member state. It thus facilitates the realisation of assets of insolvent companies spread across Europe.
- Unless the negotiations determine otherwise, the UK’s departure from the EU (after the period of negotiations) would remove this automatic recognition and introduce new hurdles to be overcome before assets located in another member state could be realised.
- The Judgments Regulation also plays an important role in restructuring work, by facilitating the collection of debts due to financially distressed and insolvent companies throughout Europe and by providing a potential avenue for cross-border recognition of UK schemes of arrangement. As with the Insolvency Regulation, unless otherwise agreed, it will, cease to apply to the UK and alternative recognition approaches will need to be considered.
- Consequently, as with many other areas of law, in the finance community and particularly by those operating in the restructuring arena, it is widely perceived to be important for the UK to negotiate new parameters for recognition of UK-initiated proceedings in Europe – and vice versa.
- The UK Credit Institutions Reorganisation and Winding Up Regulations (2004) and Insurance (Reorganisation and Winding Up) Regulations (2004) were introduced to implement EU directives intended to alleviate the disruption caused when financial institutions and insurance companies become insolvent. They both apply not only to EU Member States but also to EEA member states. Membership of the EEA (whether permanently or for a transitional period) is likely to be key therefore, not only for passporting rights but also for containing the potential turmoil that arises when businesses operating in these important sectors become insolvent.
- Nothing will change legally until the UK formally leaves the EU and, in the case of credit and insurance institutions, unless the UK does not become an EEA member state. In the meantime, the danger lies in the perception of risk and uncertainty and the precipitate consequences that could flow from that perception.
- The Insolvency Regulation provides for reciprocal recognition of insolvency proceedings commenced throughout Europe. It thus facilitates the swift and efficient recovery and repatriation of assets spread across European member states in cross- border insolvencies.
- Without the Insolvency Regulation (or equivalent treaties) liquidators, administrators and other UK insolvency office holders would need to apply to the courts of each member state in which relevant assets may be located for recognition of their appointment and to seek assistance in recovering or realising those assets. Historically such applications were cumbersome, time-consuming and costly and the willingness of foreign courts to grant recognition orders was inconsistent.
- European office holders would similarly lose automatic recognition in the UK. They would need to apply to the UK courts to recognise their powers and authority, putting considerable potential strain on the UK courts system and judiciary.
- Lenders, particularly those based outside Europe, have called for greater consistency of approach to the commencement and conduct of insolvency proceedings and the realisation of distressed assets across Europe. The European Regulation has been recast and will soon introduce, for the first time, a consistent proof of debt form for creditors to use in every European country's insolvency proceedings. This is just the first step that the European Commission intends to take to bring greater harmony to pan-European insolvency, primarily with a view to encouraging investment in Europe. It has recently consulted on other areas that could be brought in line between member states such as the definition of insolvency (every European member state approaches this in a slightly different way), the time limits during which transactions entered into in the run up to insolvency might be challenged and the priority afforded to each category of creditor - which should be preferential and for how much.
- Most of the changes set out in the recast Insolvency Regulation have been welcomed in the UK, not least because UK representatives were able to consider, debate and influence the drafting process. There is concern that even if the UK manages to retain the benefits afforded by the Insolvency Regulation, once it formally leaves the EU, it will no longer have a seat at the table to debate future changes. The price of automatic recognition of insolvency proceedings throughout Europe could ultimately include the need to make unpalatable changes to the UK's domestic legislation.
- Cash flow is critical for financially distressed companies. Unless the recognition afforded by the Judgments Regulation is replicated in the post-Brexit era, another impediment may arise for UK insolvency practitioners seeking to maximise realisations for creditors. Without the threat of readily enforceable judgments across Europe, there is likely to be less incentive for overseas debtors promptly to pay debts due to UK corporates.
- The UK's Companies Act 2006 scheme of arrangement procedure provides such attractive, cost-effective solutions that in the past few years distressed corporates from all around the World have applied in England to compromise their (often English law governed) debts by using a scheme. As the legislation giving rise to the scheme procedure applies to both solvent and insolvent companies, schemes fall outside the scope of the Insolvency Regulation and from that perspective, will not be affected by the UK ceasing to be a party to it.
- However, the English courts will only sanction a scheme of arrangement if satisfied that its provisions will be effective in relevant jurisdictions (including, usually, the countries in which the applicant company is registered and those jurisdictions in which its assets and affected creditors are located).
- Recently the courts have accepted that the Judgments Regulation should provide such recognition.
- Ceasing to be a party to the Judgments Regulation could therefore not only remove the incentive for overseas debtors promptly to pay debts due to distressed UK corporates but also affect the scope for approval by the English courts of cross-border schemes of arrangement.
- It is to be hoped, however, that matters would not come to that. Even without the Judgments Regulation, the compromise of debts effected by a scheme might be capable of recognition in various member states pursuant to private international law or if the UK becomes a party (in its own right) to the Lugano Convention, thus gaining recognition of UK judgments throughout Europe, Switzerland, Norway and Iceland.
- As nothing has changed, and will not change until the UK's formal departure from the EU, no immediate action needs to be taken.
- Insolvency and Restructuring professionals will lobby UK Government to bring these important issues to the Government's attention to try to encourage it to pursue appropriate solutions.
Insolvency matters tend to attract little attention, yet the consequences of the UK not being able to negotiate wide-spread, reciprocal recognition of its insolvency proceedings are extensive. Unless these issues are resolved at an early stage in the negotiations, there could be a detrimental effect on lending to cross-border groups of companies with English operations - and creditors' willingness to choose English governing law and jurisdiction clauses when lending to European corporates could diminish. It is to be hoped, therefore, that the Government appreciates and will take steps to protect the important benefits which inure from the UK's participation in Europe's restructuring and insolvency legislation.
For a more detailed analysis of the issues, please contact the authors or your usual DLA Piper contact.