Article 50 was triggered on 29 March 2017, beginning what will inevitably be a protracted time of negotiation and uncertainty for all aspects of life in the UK.

At the time of writing, the rate of inflation is at a three and a half year high and the pound had slumped against the dollar and the euro upon the announcement of the Article 50 trigger date.

So what does this mean for insolvency law and the corporate marketplace in general?  Obviously those are questions which no one can answer with certainty at present but this article will address some of the main areas of concern and interest.

What does this mean for insolvency law once the UK has left the EU?

Automatic recognition of insolvency proceedings

As things currently stand, the EC Council Regulation 1346/2000 (“the EC Regulation”) provides that all insolvency proceedings listed in the Annex to the EC Regulations, and where such proceedings have been commenced in a member state where the debtor has its centre of main interests, are automatically recognised and may have exclusivity in all other member states (except Denmark).  This EC Regulation, which came into force in 2002, transformed cross border insolvency and has given clarity as to which law and which proceeding applies to multi jurisdictional restructurings and insolvencies.  The EC Regulation is due to be recast and the new version will apply to insolvency proceedings commenced in all member states from 26 June 2017 onwards, thus enabling more rescue strategies to have automatic recognition. The aim behind including rescue strategies in the recast is, in part, to avoid the break-up of potentially salvageable businesses by an insolvency proceeding.

Given that the UK will no longer be a member state, the automatic recognition afforded by the EC Regulation will no longer apply to UK insolvency proceedings such as compulsory liquidation, administration, and voluntary arrangements.  This of course also works with the equal and opposite effect for remaining member states - i.e. their insolvency proceedings would not have automatic recognition in the UK courts.  There is the possibility in some very limited cases that reliance could be placed upon the UNCITRAL Model Law on Cross Border Insolvency.  However R3, the UK’s insolvency and restructuring trade body, is lobbying the government to ensure that the issue of the recognition of insolvency proceedings is included within the exit negotiations between the UK and the remaining member states. It is unlikely to be high on the government’s list of priorities and so another solution may be sought.  It is perhaps more conceivable that the UK will have to enter into side agreements with each of the remaining member states to allow the overall effect of the EC Regulation to continue. Alternatively greater emphasis may be placed on section 426 of the Insolvency Act 1986 which enables a UK court to apply comparable insolvency law to other countries, for example Ireland and Commonwealth jurisdictions. However this again is limited in scope and is by no means a like for like substitute for the EC Regulation.

Schemes of Arrangement

It should be noted that schemes of arrangement are not part of the recast EC Regulation and therefore fall outside its scope.  This remains then a useful restructuring tool to UK and foreign companies which have a “sufficient connection” where the court can be convinced that the scheme can be enforced where the company’s assets are located.

What is the impact of the trigger date on for insolvency law for now?

While the exit negotiations take place, there is unlikely to be a noticeable change to current insolvency law practice (save for changes to the Insolvency Law rules which will come into force in April 2017). R3 argue that without certainty regarding the recognition of insolvency proceedings in other countries, the position of the UK as an efficient and predictable place to conduct cross border restructurings and insolvencies is under threat.   R3 cite recent World Bank reports that the UK insolvency regime enables a faster return to creditors than other countries such as Germany and the USA.  The uncertainty ahead may lead to a mass moving of businesses’ centres of main interests to stable EU member states to secure the recognition of insolvency proceedings.  UBS bank have announced recently that they will begin moving some jobs to other EU member states (albeit not for insolvency reasons) but the lack of clarity in respect of  insolvency proceedings may have the same effect on UK jobs.

Conclusion

As we are all aware, no one can foresee what effect Brexit will have until such time as a deal is agreed.  If the UK’s continued participation in the principles outlined in the EC Regulation cannot be agreed with the remaining member states, then one certain consequence is an increase in the cost, complexity and inefficiency of UK insolvency proceedings and a resulting decrease in returns to creditors.  This cannot be a satisfactory outcome for anyone.