Preparing for Brexit - Insolvency Update

In a continuation of our series of articles on the impact of Brexit, Anna Thompson considers how insolvency practitioners and others in the industry may be affected.

The reputation of the UK's insolvency regime is well established in Europe and beyond as providing a stable, trustworthy and flexible forum within which creditors, insolvent entities and insolvency professionals can operate. The integration of the EU Insolvency Regulation (Recast) and associated legislation into the UK regime further facilitates pan-European insolvency proceedings.

This update focuses on English insolvency practice and what integration with European regimes might look like after Brexit.

Domestic implications

For insolvencies solely concerning debtors, entities and assets solely within the UK, the immediate future is likely to hold few surprises. The UK has a very well established and comprehensive insolvency regime which can simply carry on much as before.

In the short term, certain aspects of EU insolvency law will be brought into UK domestic law under the EU Withdrawal Bill. However, the EU Insolvency Regulation (Recast) will eventually cease to apply to the UK, as will the Brussels Regulation (Recast). If no deal to replace or continue the application of the EU Insolvency Regulation (Recast) can be reached, European practitioners seeking assistance in the UK will need to apply to the UK Courts for recognition of overseas proceedings. This will undoubtedly add a layer of difficulty, delay, unpredictability and cost to multi-jurisdictional insolvencies.

UK insolvency in Europe

The difficulties faced by UK insolvency practitioners dealing with overseas assets from a politically isolated environment are significant – additional cost, risk and uncertainty, working with local laws and lawyers, with no guarantee of automatic recognition and/or the level of assistance that might be provided. It may prove extremely difficult to take the prompt action necessary to stabilise or pull a struggling business from the water.

The Association of Business Recovery Professionals (known as R3) says that 'the UK's insolvency regime is one of the best in the world… [with] one of the highest rates of returns to creditors'. At present, schemes of arrangement under the Companies Act 2006 are very appealing to multinational groups and England is often selected as the preferred forum for these processes. Following Brexit, the UK Courts may be reluctant to approve schemes that may be unenforceable in Europe (until now, such schemes have relied upon the Brussels Regulation (Recast) for recognition), particularly if there is a risk of simultaneous proceedings being commenced in other jurisdictions.

Reforms to the Insolvency Regulation (Recast) are under discussion, and newly competitive offerings from other Member States (akin to schemes of arrangement and Chapter 11 proceedings) may fill any gap the UK leaves.

However, it would be wrong to be entirely pessimistic. The UK Insolvency Service's consultation 'Reviewing the Corporate Insolvency Framework', published in May 2016, gave an indication that more versatile, rescue-focused processes may be introduced in the UK in the near future. Provided that a means of recognition in Europe is negotiated, the insolvency industry should be equipped to continue competing internationally.

After Brexit

One of the few reassuring features of the post-Brexit landscape is the Cross-Border Insolvency Regulations 2006 (CBIR), based on the UNCITRAL Model Law. The recent case of Re Agrokor DD and in the matter of the Cross-Border Insolvency Regulations 2006 [2017] All ER (D) 83 (Nov) demonstrates how the CBIR can be used as a viable alternative route to recognition in the UK. However, readers should note that most EU Member States have not adopted the UNCITRAL Model Law (the CBIR is an asymmetric regime, in that it does not require the requesting Member State to have implemented the Model Law itself to avail itself of the Regulation in the UK). Any enforceability gap in respect of UK insolvency proceedings will diminish the UK's insolvency offering. The desirability of a negotiated replacement to the existing legislation (which ensures automatic recognition) therefore remains undiminished.

Of course, the requirement for cross-Europe recognition is especially important at present because of the ease with which businesses can operate across multiple Member States thanks to the fundamental European principles of free movement of goods, capital, services, and labour. We may see businesses in other Member States drawing back from the UK market following Brexit. Alternatively they may decide to conduct their trading relations with the UK from within the remaining Member States, rather than establishing a formal presence here. In either case, it may be that there are fewer cross-border insolvencies with a UK element.

How different the post-Brexit environment will be is, at this stage, difficult to foresee. The feeling in the industry is that, putting aside the headline arguments for and against Brexit, the existing position is workable and should be preserved in some form. Entry into a treaty granting mutual recognition equivalent to the EU Insolvency Regulation (Recast) would help maintain the status quo. As an improvised fix, it has been proposed that the UK might sign up to the 2007 Lugano Convention, which ensures mutual recognition of judgments (excluding insolvency proceedings) involving certain non-Member States; Iceland, Norway, Switzerland and Denmark. This might solve the scheme of arrangement problem (to date schemes of arrangement have tended to rely on the Brussels Regulation (Recast) to secure recognition in the EU).

Preparation for Brexit in the UK insolvency industry is, as in so many other areas, a watching brief. The insolvency industry has always been a beacon for integration with mainland Europe and we remain hopeful this will continue to be the case after Brexit.

If you would like more information on this topic, please contact Anna Thompson, Senior Associate in Michelmores' Restructuring & Insolvency team.

Please click here for the previous article on Preparing for Brexit - Insolvency.

This article is for general information only and does not, and is not intended to, amount to legal advice and should not be relied upon as such. If you have any questions relating to your particular circumstances, you should seek independent legal advice.