Cross-border restructurings and insolvencies in a post-Brexit world

September 2021  |  FEATURE | RESTRUCTURING & INSOLVENCY

Financier Worldwide Magazine

September 2021 Issue

Debated almost ad infinitum, Brexit has been a hot potato since the UK chose to leave the European Union (EU) in 2016. Its departure has far-reaching implications for many spheres of activity – cross-border restructurings and insolvencies among them.

“The restructuring and insolvency market is going through a period of substantial change,” says Emilie Delacave, an associate at Taylor Wessing. “The global economy is facing an unprecedented crisis because of the coronavirus (COVID-19) pandemic and, as various temporary measures introduced by governments to assist businesses facing financial difficulty come to an end, it is likely that we will see a significant increase in the number of insolvencies.”

In this arena, the UK’s departure from the EU has certainly proved disruptive. Indeed, recently introduced EU restructuring and insolvency legislation, while increasing efficiencies and maximising stakeholder value across member states, has undoubtedly been tempered by the impact of Brexit.

Specifically, the key legislative development is the 2019 ‘EU Directive on restructuring and insolvency’. Its aim is to harmonise the differences between member states on the range of procedures available to debtors in financial difficulties. Shortly after, and independent of the Directive, the UK brought in its ‘Corporate Insolvency and Governance Act 2020’, which introduced a new restructuring plan procedure for directors facing financial distress.

“The UK’s new restructuring plan is proving popular as a tool to implement cross-border restructurings,” affirms Ms Delacave. “In contrast to schemes of arrangement, restructuring plans can be sanctioned where one or more classes of creditors dissent, and there is no requirement for a majority in number to vote in favour of the plan within each class of creditors.

“However, contrary to the generally held view in relation to schemes, English courts have recently held that restructuring plans are insolvency proceedings and fall outside the Lugano Convention, such that it cannot be relied on for recognition in a member state, even if the UK is permitted to accede,” she continues. “This means recognition will need to be sought under the domestic laws of each member state, including under the UNCITRAL Model Law, where implemented, or under the Rome I Regulation, where the debt compromised under the plan is governed by English law.”

According to Greg Campbell, a partner at Gibson Dunn, such legislative developments make the EU a competitive marketplace for insolvency jurisdiction. “With Brexit denying the UK the benefit of the mutual recognition and mandatory choice of law rules under the recast EU Insolvency Regulation, other EU states are updating their insolvency and restructuring toolkits to attract cross-border cases,” he observes. “The EU Directive is adding impetus to the evolution of the restructuring laws and tools available to European member states, potentially at the expense of the UK.

“England remains a key financing jurisdiction and the restructuring of English-law debt, irrespective of the jurisdiction of the debtors, remains a vital role for English courts and the London restructuring market in general,” contends Mr Campbell. “London also benefits from a deep and wide bench of restructuring expertise, in both the financial and legal spheres.”

Improving efficiencies

With key differences remaining between pre- and post-legislative reform, the extent to which EU member states will see increased efficiencies and a wider menu of cross-border restructuring and insolvency options for stakeholders varies.

“A ‘one size fits all’ solution for cross-border cases is difficult for European member states to create – particularly as the restructuring, as opposed to the pure insolvency, tools available in continental European jurisdictions has been pretty limited at best, and primitive and not fit for purpose at worst,” believes Mr Campbell. “France is making significant strides, however, with the increased use of the ‘fiducie’ concept. The Netherlands is also pushing a restructuring-friendly agenda.

“Ireland, which shares many similarities with the English legal system, remains well-placed for cross-border work,” he continues. “However, the restructuring of English-law debt necessitates the involvement of UK-based professionals and lawyers and potentially courts, suggesting reports that the Brexit-driven death of the UK cross-border restructuring market are somewhat premature.”

UK status

Despite the impact of legislative changes across the EU, alongside the challenges presented by Brexit, it seems that the UK’s status as an attractive and competitive jurisdiction for international cross-border restructuring is set to continue.

In the view of Ms Delacave, there will certainly need to be more planning to ensure a pan-European group is managed effectively. “There will be a timing and cost implication to this, particularly if parallel proceedings need to be considered,” she contends. “While the most effective routes to recognition in the EU become more clearly determined, the UK’s ability to offer expert advice, flexible restructuring tools and a world-renowned judiciary is likely to continue to instil confidence in stakeholders.”

Likewise, for Mr Campbell, the UK restructuring and insolvency market is extremely adaptable and pragmatic. “The UK is home to some of the deepest and best restructuring experience in all of Europe,” he concludes. “With the ability of UK courts to administer restructurings of debt, irrespective of the jurisdiction of incorporation of the debtors, the UK is likely to prove potent in the post-Brexit environment.”

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Fraser Tennant