UK lawyers and restructuring professionals have been highlighting their concerns for British business and Financial Markets if the Government is unable to negotiate a bespoke treaty between the UK and the EU to preserve the mutual and reciprocal recognition provisions written into the Recast EU Insolvency Regulation (Recast EIR) and the Recast Brussels Regulation (the Judgements Regulation) after Brexit in 2019.
The Recast EIR currently provides for the automatic recognition of UK insolvency appointments and proceedings in each of the other 27 Member States. The Judgments Regulation facilitates the automatic recognition and enforcement of court judgments across the EU. This applies to all types of cross-border civil and commercial judgments, including insolvency. It is particularly important for the enforcement of English schemes of arrangement (which are not insolvency proceedings and so not covered by the Recast EIR) within the EU.
R3 (the UK’s Insolvency and Restructuring trade body) published a paper outlining the importance of a strong insolvency and restructuring regime for the UK economy entitled Brexit and the UK’s insolvency and restructuring regime: The impact on the wider economy pointing out that a strong insolvency regime:
• Encourages cross border investment and increases the overall efficiency and attractiveness of a country as a place ‘to do business’;
• Encourages the timely restructuring of viable companies in financial difficulties;
• Encourages entrepreneurship; and
• Improves access to credit.
R3 has called on the Government to seek to reflect closely the current EU framework of cooperation which it described as a “win-win” for the UK and Brussels.
The Financial Markets Law Committee (FMLC) has evaluated issues of legal uncertainty with regards to cross-border insolvency proceedings, which may follow Brexit. The FMLC is particularly concerned about the financial markets operating in London, due to loss of the mutual and reciprocal recognition provisions written into the Recast EIR, which cannot be resolved by means of simply incorporating the body of EU legislation into UK law. They have identified a plethora of issues that may still occur, despite the government’s plan to implement the European Union (Withdrawal) Bill, if no agreement is made between the EU and the UK.
The FMLC paper considers this and other complexities relating to cross-border corporate insolvency—including the effect of restructuring tools such as schemes of arrangement or related financial services measures such as the Settlement Finality Directive and the Financial Collateral Arrangements Directive. To address these uncertainties, the FMLC has made recommendations that include a strong preference for preserving the mutual effect of the Recast EIR via negotiation of transitional arrangements and/or a bespoke treaty between the UK and the EU.
The City of London Law Society (CLLS) insolvency law committee has written a letter to the Insolvency Service on the implications of Brexit. The background to the CLLS letter is the Government’s service of its Article 50 notice, the Brexit White Paper and the Withdrawal Bill. The letter notes that whilst the Withdrawal Bill suggests that existing EU regulations will be incorporated into English law, a ‘hard’ Brexit would mean that the UK would lose the benefit across the EU of the mutual recognition provisions in the Recast EIR.
Despite the Government’s plans to incorporate EU law into UK law through the Withdrawal Bill, on withdrawal from the EU the UK will cease to be a Member State and UK creditors will lose the benefit of reciprocity currently enjoyed through the Recast EIR. As the FMLC paper points out
this loss cannot be rectified by receiving or transposing key EU legislation into domestic legislation because it is the UK’s status as a Member State which gives rise to the obligation on other Member States’ courts to enforce insolvency judgments of the UK courts and to recognise their proceedings.
In other words, the Government can agree that the UK will continue to recognise insolvency proceedings from other EU countries but it cannot force the other EU countries to recognise UK insolvency proceedings once the UK voluntarily comes out of the Recast EIR and Judgment Regulation through the Brexit process. These papers seek to highlight the concerns of experts in this area who are calling on the Government to negotiate a position to preserve the status quo.