Source: Brexit – initial views on some likely impacts for R&I professionals

On 23 June 2016, the UK voted to leave the EU, sending shock waves across the markets and economies worldwide. While it will be several months before the full implications can begin to be understood, we look at some of the likely impacts on R&I lawyers and professionals.

The UK has voted to leave the European Union by 52% to 48%, with a turnout of 72%. The full impact of the referendum result will become apparent in the coming days, weeks and months (see LNB News 24/06/2016 1).

When will the UK actually exit the European Union?

Following the vote for withdrawal on 23 June 2016, the next step is for the UK to notify the European Council of its intention to withdraw (this could be done immediately, but there is no specified time limit).

Article 50 of the Treaty on the European Union (TFEU) sets out a mechanism for a Member State to withdraw from the EU. The UK would give notice to leave and a period of negotiation would then follow to agree the terms of its withdrawal. Exit would occur at the earlier of either an exit agreement being signed or two years after notice is given.

The withdrawal agreement will set out the UK’s future relationship with the EU. Unless the withdrawal agreement comes into force on an earlier date, the earliest date by which the UK leaves the EU automatically under the TFEU, art 50.3 is 24 June 2018 (if the UK were to give notice to leave the EU on 24 June 2016) . At that point, as the UK will no longer be a Member State EU, prima facie, EU regulations will no longer have any direct effect in the UK, unless specific withdrawal provisions are agreed.

What about the EU insolvency related regulations and directives?

It remains to be seen whether the withdrawal agreement will cover any of the following insolvency related EU regulations and directives:

the EC Regulation on Insolvency (EC) 1346/2000 (the EC Regulation on Insolvency)
the Recast Regulation on Insolvency (EU) 848/2015 (the Recast Regulation on Insolvency)
Credit Institutions (Reorganisation and Winding Up) Directive (Directive 2001/24/EC)
Financial Collateral Directive 2002/47
European Union Bank Recovery and Resolution Directive (2014/59/EU) (BRRD)
EU Directive on the Reorganisation and Winding-up of Insurance Undertakings (SI 2001/17/EC)
Solvency II Directive

If the UK exits the EU without negotiating any insolvency terms, the EU regulations listed above prima facie will no longer have any direct effect on the UK. EU directives require national adoption to be effective in each Member State, so it remains to be seen what will happen with the domestic UK legislation which has enacted EU directives.

Most importantly, the UK would not benefit from the EC Regulation on Insolvency (nor the Recast Regulation on Insolvency—effective from 26 June 2017), so insolvency proceedings opened in the UK would no longer benefit from automatic recognition in other Member States and insolvency proceedings opened in Member States would no longer benefit from automatic recognition in the UK. It seems likely this would damage the UK’s current status as being a destination of choice for cross-border insolvencies as other Member States will still benefit from the EU regulations.

Possible surge in schemes of foreign companies

Recently, there has been a surge in the use of English scheme of arrangement for foreign companies. Thankfully, schemes are carved out of the EC Regulation on Insolvency and Recast Regulation on Insolvency, so arguably Brexit should not impact their continued use, and may even prompt an increase in their use as a flexible tool to restructure foreign companies.

Increased use of UNCITRAL Model law

The UNCITRAL Model Law on insolvency has been enacted in England under the Cross Border Insolvency Regulations 2006 and is unaffected by Brexit. We may see an increased use in its provisions, although they are not as comprehensive as the recognition afforded under the EC Regulation on Insolvency.

Further Reading

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Brexit—implications for the UK restructuring and insolvency market

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First published on LexisPSL Restructuring and Insolvency