BRR E-alert: Oh no, not another article on Brexit?
Business Recovery & Reconstruction E-alert: News & Views from The Bridge
Following the referendum result a forest of trees has been sacrificed by lawyers opining on the potential consequences of the vote. However, the two year period of negotiation that will follow notice being given by the UK of its intention to leave the European Union, pursuant to Article 50 of the Lisbon Treaty, and the uncertain timing of that notice, have created what Donald Rumsfeld would have termed 'a known unknown'; we know we will be leaving the EU but we don’t know what will happen. So, why another article?
On 10 August, Howard Kennedy was delighted to host an event organised by the Commercial Litigation Association dealing expressly with the Brexit and the impact that this has on the insolvency sector. The key note speaker was Lexa Hilliard Q.C who eloquently and entertainingly explained the legal, constitutional and practical challenges and opportunities that Brexit presents to the insolvency profession. The debate engendered by the presentation convinced me that there remains genuine interest, perhaps better described as concern, within our industry as to what lies ahead. Now that the dust has settled, and despite some predictions, the sky did not fall in, it is the right time to reflect on what vote leave means to the insolvency profession.
'It's the Economy, Stupid'
The phrase coined by James Carville, Bill Clinton's campaign strategist, has become a mantra for politicians focusing on the consequences of policy decision making. In short it will boil down to whether policy making will or will not prompt economic prosperity and the overriding importance of that consideration.
There are potentially two very different economic consequences of Brexit for the insolvency profession.
1. The first is a growth in insolvency numbers caused by a potential fall in investment in corporates due to the uncertainty pending a successful negotiation on exit, possibly interweaved with a fall in consumer confidence. There are certainly some early indicators that the economy is slowing and a cut to the already 300 year old low interest rate is an indication that The Bank of England believes difficult economic conditions may lie ahead.
2. The second economic consequence is the decrease in work that may result from the difficulties in carrying out cross-border insolvencies in the absence of the EU Regulation on Insolvency Proceedings, and in the longer term the possibilities that international companies may be discouraged from investing in or establishing business and operations in the UK. In an increasingly globalised economy a fall in international investment will have considerably more impact on the health of the UK economy than at any time previously in our history.
'This Sceptred Isle'
In 1592 Shakespeare expressed a confidence in 'this other Eden….this fortress built by nature…against the envy of less happier lands', this quotation evokes thoughts of an Island race independent and self-sufficient. Indeed the first point to note on the legal consequences for the insolvency industry is that by and large the legislation is domestic in origin and designed to deal with the socio-economic conditions that are unique to this country. Brexit will have little effect on the majority of work carried out day to day.
The UK has however become a leading restructuring jurisdiction; known to be creditor friendly, with certainty as to enforceable rights and a flexible cost effective insolvency regime, a consequence of the EC Regulation has been the location of businesses (and individuals) in the UK to utilise our insolvency regime.
An interesting legal debate ensued at the August event as to whether EC Regulation would immediately cease to have effect to the UK post-Brexit or whether repeal or amendment of the European Communities Act 1972 is first required. Undoubtedly, even if it were to remain of direct effect on the UK, the practical consequence of Brexit would mean that no European Member state will recognise a UK insolvency office holder, thus making European cross-border restructuring centred in the UK nigh on impossible.
The UK's adoption of the UNCITRAL model law (and continued co-operation by Insolvency Act 1986 Section 426 between former 'Colonial territories' generally being common law jurisdictions) will not leave the UK entirely without some ability to conduct cross-border work. The UNCITRAL model law has however been adopted by only 42 countries of which only four other EU Members States are signatories. A perhaps unintended consequence of UNCITRAL is that insolvency office holders from EU Members States would be recognised by the UK Courts but that the UK office holder would not enjoy reciprocal rights.
Unless replaced by some form of agreement (and suggestions have included being bound to the EC Regulation but with no power to influence its development) the UK's insolvency industry's role in cross-border work will be hindered.
'Jaw Jaw is always better than War War'
No article is ever complete without a quotation from Churchill and this expression was used in 1952 to show that our wartime leader was one who fully recognised the importance of negotiation.
A post Brexit settlement with EU Member states will be required. It is difficult to imagine the UK being able to conduct international tariff free trade effectively without some form of agreements with the EU. The huge volume of agreement that will require negotiation is daunting but must include consideration of insolvency law and practice.
Although often considered at the end of corporate life, or at the end of commercial relationship, the certainty as to outcome from any enforcement proceedings, the fairness and equality of treatment of creditors and other stakeholders where there liabilities exceed assets, are central considerations in the provision of credit, investment or trade. Insolvency law and practice play a central role in the regulation of trading and commercial relationships; this cannot be ignored when the UK begins its negotiations with the EU.
Such negotiation will not however be easy. Our European cousins have at times been extremely critical at the way our Judiciary has shown a willingness to 'grab' jurisdiction and how our flexible system, which has minimal court involvement, runs contrary to the thinking behind many civil based jurisdictions. Administrations and schemes of arrangement have been scrutinised and criticised and it is not inconceivable that in return for office holder recognition the UK insolvency profession will find its wings clipped.