English law restructuring and insolvency tools are used to implement financial restructurings and the external administration of foreign companies. The attractiveness of the English tools and legal system is highlighted by the prevalence of companies incorporated abroad, especially companies incorporated in the EU, which avail themselves of those tools. English law in this area is impacted by much European law. While there remains uncertainty surrounding the nature of any Brexit deal, the UK Government has issued a technical notice1 outlining its proposed legislative response if there is no deal. In this note we highlight the likely implications on each of the established English restructuring and insolvency tools.
The Summary Impact of the 'No Deal' Technical Notice
The no deal technical notice, if implemented, would remove the automatic reciprocal effect and simple enforcement procedures that exist between UK and EU restructuring and insolvency procedures. However, the availability and desirability of the UK as a restructuring hub for foreign companies would, in our view, remain largely unchanged. In summary, our view is that the no deal technical notice will have the following principal impacts on English restructuring and insolvency tools:
- Schemes of arrangement of foreign companies including EU companies will continue, and we expect those compromising English law-governed debt will be largely unaffected.
- Administration and Company Voluntary Arrangements ("CVAs") will continue to be available for foreign companies, including EU companies, but potential conflicts with local laws for all foreign companies will need to be managed, which is a change only in respect of EU companies.
- Administration and Liquidation as terminal proceedings will continue to be available for foreign companies, but will need to be coordinated with dissolution measures in the company's home jurisdiction.
- Restructuring of UK-incorporated companies will of course continue, but new enforcement issues may need to be addressed if the restructuring needs to be enforced in an EU member state.
This alert is relevant to lenders, borrowers, shareholders and any other stakeholders of companies that are contemplating or may contemplate restructuring in the UK.
Changes to the Existing Legal Framework if There Is No Deal
Despite the expectation created by the importing of European law into English law by the Withdrawal Act2, the no deal technical notice indicates that:
- the whole of the EU Judgments Regulation; and
- the majority of the EU Insolvency Regulation,
would be repealed. Given these EU regulations make provision for reciprocal arrangements between the EU and the UK, we expect that a Minister of the Crown may effect the repeal by way of regulation under s. 8(1) of the Withdrawal Act. Our expectation is that the EU would reciprocate and remove references to British restructuring and insolvency tools from the Insolvency Regulation.
Schemes of Arrangement Will Continue, With Some Tweaks
In summary: When used by foreign companies, schemes of arrangement are mostly used to compromise financial indebtedness governed by English law. In some cases, schemes are used to compromise financial indebtedness governed by New York (or other) law. In our view, the implementation of the no deal technical notice should have limited substantive impact to the availability of the scheme of arrangement to compromise financial indebtedness governed by English law. For financial indebtedness owed by EU companies governed by other law, the position becomes less certain and would require case-by-case analysis.
In detail: When an English court is moved to sanction a scheme of arrangement, the English court must be satisfied that the scheme, if sanctioned, will have substantive effect. Where a foreign company has proposed the scheme of arrangement, it is customary to provide expert evidence that the scheme will, if sanctioned, be recognised and enforced in the foreign company's home jurisdiction. Where there is significant doubt about the position, then the foreign company will usually propose an equivalent procedure in its home jurisdiction (often a scheme of arrangement if the home jurisdiction provides for such procedure) the effect of which is conditional on the English scheme of arrangement being sanctioned.
The change that a no deal Brexit may bring about to schemes arises from an argument run in many recent cases that the scheme of arrangement, once sanctioned by the English court, is subject to mandatory recognition and enforcement across EU Member States under the Recast Judgments Regulation.3 As we note above, the no deal technical notice presages the repeal of the Recast Judgments Regulation in the event there is no Brexit deal. To determine whether this will impact on the availability of schemes of arrangement for companies incorporated in EU Member States, the question that arises is whether, and in what circumstances, a scheme will be recognised in the EU Member State without relying on the Recast Judgments Regulation?
The reason for consternation on this issue is that the position at present is thought to be consistent across the EU Member States in all of those where the Recast Judgments Regulation applies. Once the UK leaves the EU, however, UK judgments will no longer attract automatic recognition and enforcement across EU Member States under the Recast Judgments Regulation. The matter will then fall to be determined according to the private international law of the jurisdiction of the company proposing the scheme of arrangement. As there is no uniform private international law among EU Member States, it is conceivable, therefore, that the outcome in, by way of random example, Greece may differ from the outcome in Croatia.
In our view, however, we think there is less cause for concern than other commentators. This is because of a number of discussions we have had with lawyers across various European jurisdictions and the ongoing effect of the Rome I Regulation. The Rome I Regulation4 is an EU regulation that governs the choice of law in contracts. Its principal effect is to provide freedom of choice (Article 3) when parties incur contractual obligations. The Rome I Regulation further provides that the scope of the applicable law shall govern "the various ways of extinguishing obligations" (Article 12 1. (d)). An English scheme of arrangement that compromises obligations under finance documents governed by English law would seem to be extinguishing contractual obligations. In principle, therefore, English schemes of arrangement should continue to be given effect in EU Member States as a result of the Rome I Regulation.
The Rome I Regulation will seemingly continue to apply in all EU Member States after Brexit. While there is some room for courts in Member States to take differing views of the effect of the Rome I Regulation, lawyers across many EU Member States see much force in this. The prevalence of English law in finance documents suggests, therefore, that schemes of arrangement will continue for companies incorporated in EU Member States for some time yet.
However, that is not to say that the no deal technical notice would not bring about significant change to negotiating restructurings in Europe. Discussions surrounding plan B, C, etc. implementation routes may be significantly changed, as we note below.
A Backward Step for Recognition and Enforcement of Insolvency Proceedings
At present, the Recast European Insolvency Regulation ("EIR") provides a regime for the automatic recognition and enforcement of insolvency (and many restructuring) proceedings within EU Member States (excluding Denmark): the insolvency proceeding of a company commenced in an EIR Court in either its home jurisdiction, or that jurisdiction where it has its centre of main interests ("COMI"), is automatically recognised throughout EU member states (excluding Denmark).
There are many examples of companies incorporated in EU member states shifting their COMI to the UK to benefit from the reciprocal automatic recognition that arises for administration, CVAs and liquidation. This permits those companies to avail themselves of pre-packaged administrations (pre-packs) and CVAs to implement financial restructurings.
If the EIR is repealed in the UK, then we expect reciprocal action to be taken in the EU. This will mean that:
- UK courts will no longer automatically recognise and enforce EU Member State insolvency proceedings; and
- EIR courts will no longer automatically recognise and enforce UK insolvency proceedings.
Is This the End for the Use of UK Insolvency Proceedings for EU Member State Companies?
As a matter of law, each EIR Court would be free to apply its own law to determine whether to recognise UK insolvency proceedings. So there may well be different results in different jurisdictions.
Some EU Member States (including the UK, Greece and Poland) have adopted the UNICTRAL Model Law on Cross-Border Insolvency. That text provides an avenue for the recognition of insolvency proceedings including through the application of the COMI principle (which the UK will continue to apply for the opening of insolvency proceedings going forwards). However, the majority of EU Member States have not. In those jurisdictions, therefore, detailed analysis will be required to determine whether and to what extent:
- the UK proceedings will be adequately recognised and enforced; or
- the extent to which parallel local proceedings may need to be used within the EU Member State.
And What of the Recognition of EU Member State Insolvency Proceedings in the UK?
EU Member State insolvency proceedings would immediately become foreign proceedings. As there are no EU Member States designated for special assistance under section 426 of the Insolvency Act, the sole statutory avenue for recognition of foreign insolvency proceedings will be the UNCITRAL Model Law on Cross-Border Insolvency as enacted in the UK in the Cross-Border Insolvency Regulations 2006.
There is a sound body of law concerning the recognition of foreign proceedings under the Cross-Border Insolvency Regulations. Recognition imports an automatic stay on proceedings against the insolvent company within the UK. There is also the option to apply for discretionary relief, which is the likely path to be followed if a foreign insolvency plan is to be recognised and enforced in the UK. However, on this there is much less case law.
In Summary, Where Would the Implementation of the 'No Deal' Technical Notice Put Us?
On a less certain footing. Many of the existing paths used to achieve cross-border restructurings involve automatic recognition and enforcement. With those paths changed, or removed altogether, the UK restructuring and insolvency landscape for European companies will certainly become less certain and, seemingly, less predictable. In that eventuality, there will be further analysis required from lawyers on every restructuring, especially from within Europe, to negotiate and implement restructurings in the UK.
MoFo Brexit Taskforce
The process of Brexit will take many years, and the implications for our clients' businesses will unfold over time. Our MoFo Brexit Task Force is coordinating Brexit-related legal analysis across all of our offices and working with clients on key concerns and issues, now and in the coming weeks and months. We will also continue to provide MoFo Brexit Briefings on a range of key issues. We are here to support you in any and every way that we can.
1 Handling civil legal cases that involve EU countries if there's no Brexit deal, UK Department of Business, Energy & Industrial Strategy and Ministry of Justice, Published 13 September 2018
2 European Union (Withdrawal) Act 2018
3 REGULATION (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast)
4 Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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