The Impact of Brexit on UK Insolvency Legislation
The Impact of Brexit on UK Insolvency Legislation and Cross-Border Insolvency Proceedings
With 2019 fast approaching, one of the growing uncertainties of Brexit is the impact it will have on Insolvency Practitioners during pre-insolvency proceedings, as well as the changes in law to service of proceedings in other jurisdictions.
In June 2017 the European Parliament enacted the Recast EU Insolvency Regulation 2015 (‘the EIR’) replacing the then EU Regulation on insolvency proceedings. The EIR changed a significant portion of the rules governing cross border insolvency matters. One such change in particular was the EIR’s abolishment of restrictions on secondary proceedings in terminal procedures. By virtue of the EIR, insolvency proceedings are automatically recognised, provided that they meet the requirements established at Annex A to the EIR and are commenced within an EU Member State i.e. the debtor’s location of main interest. However post Brexit the EIR will cease to have direct effect in the U.K, leaving the insolvency sector, to a certain extent, in a state of disarray with respect to cross-border insolvency proceedings.
It is important for practitioners to note that other cross-border instruments will remain in effect post-Brexit such as the UNICTIRAL precedent and the UK Scheme of arrangement.
The UNICTIRAL Model Law on Cross Border Insolvency (‘the UNI’), provisions a set of international insolvency procedures distinguished, in its entirety, to that of the EIR. However the UNI comprises of 41 countries having signed up to it, only four of which are EU Member States. The UNI also overlaps with EU Regulations, particularly the requirement to recognise insolvency proceedings in a multi-jurisdictional capacity. Whilst the UNI may remain in effect, it cannot form a sustainable replacement to the EIR.
The UK scheme of arrangement can be used to reorganise a company or a group structure and is used as somewhat of a compromise or an arrangement between a company and its members or creditors, under Part 26 of the Companies Act 2006. In short, the scheme requires an approval of 75% in value of each creditor or class of members to become legally binding and is internationally utilised as a tool to restore UK and foreign companies. The scheme is not included in Annex A of the EIR and will therefore not be subjected to the same constraints, where applicability is concerned, as that of the EIR post-Brexit. Theoretically, the effects of a UK scheme of arrangement will remain, yet it must be noted, that the UK’s global economic position will impact the popularity of such a scheme in the eyes of an overseas entity, and may therefore require practitioners to venture alternative methods.
Upon completion of the Brexit transitional period, it is likely that UK practitioners will be required to rely on UK legislation in matters affecting cross border proceedings. This will result in practitioners also relying on legislation of individual EU Member States, under a scenario where UK insolvency proceedings are not recognised by individual Member States.
Brexit will also have an impact on practitioners of other EEA Member States with respect to professional liability insurance. On 12 December 2018 the European Parliament enacted the Provision of Service (Amendment etc.) (EU Exit) Regulations 2018 which will come into effect on the day of exit by virtue of s.8 of the European Union (withdrawal) Act 2018. The regulation will abolish the rights of insolvency practitioners of other EEA Member States to operate in the UK using their own professional liability insurance agreements if such agreements are analogous to UK requirements. Post-Brexit UK bonding requirements will apply to practitioners of EEA Member States as is the case for UK practitioners.
Whilst insolvency is an ever-evolving area of law, the impact of Brexit will, without a doubt, pose many unanswered questions as to the legal procedures of both cross border and domestic proceedings. Though at this point in time, the exact impact of Brexit on insolvency proceedings is unclear, it is important for practitioners to note the foreseeable changes in law, with respect to insolvency proceedings, and act accordingly to remedy any likely risks associated thereof.