As  the  result  of  the  Brexit  referendum  sinks  in,  we  now  need  to  focus  more  clearly  on  its  likely  practical  results  for  restructuring  and  insolvency,  while  remembering  that  nothing  changes  for  at  least two years.  At the same time we need to take account of the possibility of a second Scottish independence  referendum,  in  light  of  the  marked  difference  in  attitude  to  EU  membership  shown  north and south of the border in the Brexit referendum and the subsequent announcements made by  the  Scottish  National  Party.  There  are  a  number  of  issues  to  be  addressed  here  both  for  the   highly effective UK cross-border restructuring industry and for the smooth operation of insolvency and restructuring regimes within the UK.

As  indicated  in  our  more  general   Brexit  Briefing  on  restructuring  and  insolvency,  Brexit  issues relate more to cross-border recognition of proceedings than substantive laws, although the current rescue harmonisation project under development by the EU Commission as part of Capital Markets Union will remain of interest to the UK along with the current UK-only discussions on extension of our current moratorium provisions.

Post-Brexit recognition of UK procedures
Restructuring and insolvency of financial institutions raise special issues in a cross-border context, as reflected in the existing EU directives and implementing legislation regarding their cross-border resolution, recovery, reorganisation and winding up, with reference to their regulator. Given the inter-relationship of the City of London with other EU financial centres, the economic arguments for post-Brexit recognition of UK procedures throughout the EU (and indeed broader EEA) and vice versa are strong. The approach taken more broadly to post-Brexit regulation and trading of financial institutions across the UK and EU will be of great significance here given its potential influence on the operations and on the distribution of assets, liabilities and other risks of financial institutions. Accordingly, if some form of UK/EU passporting is agreed post-Brexit, continuing UK/EU cross-border recognition of relevant restructuring and insolvency proceedings appears more likely.

EU-wide  effect of  other  insolvencies  and  restructurings  is  supported  by  the  general  EU  insolvency  regulation and, to some extent, the Brussels regulation on jurisdiction and recognition of judgments. While  the  UK  may  be  able  to  replicate  the  effects  of  the  Brussels  regulation  to  some  extent  by  acceding to the Lugano Convention, continuing the effects of the general EU insolvency regulation may be less straightforward. The UNCITRAL model law on cross-border insolvency has been adopted in  the  UK  and  would  provide  some  lesser  effects  within  the  UK  for  EU  insolvencies  and  for  UK   insolvencies in Greece, Poland, Romania and Slovenia, which have also adopted the the model law.

Stronger  mutual  insolvency  assistance  provisions  are  in  place  between  the  UK  and  Ireland  and  UK  insolvencies would be recognised in other member states on a more ad hoc basis. Unless broader general recognition of restructuring and insolvency between the UK and ongoing EU states is agreed, the current strong position of the UK in European cross-border insolvency will be weakened to some extent and advantageous UK insolvency procedures less readily available to EU companies.

The  possibility  of  Scottish  independence  and  continuing  Scottish  EU  membership  adds  further   dimensions here. Continuing Scottish EU membership would preserve the current reciprocal effects of  the  general  EU  insolvency  regulation  and  Brussels  regulation  between  Scotland  and  other  EU   member states, but would raise issues of continuing mutual recognition of insolvencies within the former UK. Currently broad direct mutual recognition takes place by virtue of s.426 of the InsolvencyAct 1986 for most types of insolvency proceedings - and while that is likely to continue under what would likely become parallel Scottish and English Insolvency Acts, some detailed adjustment may be required to prevent arrangements within the former UK undermining Scottish/EU arrangements, in addition to further technical or policy changes required. By way of back-up, the lesser effects of the UNCITRAL model law would probably come into effect between the constituent parts of the former UK through what would likely become parallel Scottish and English implementing regulations. Unless the Lugano Convention could be applied within the former UK, as is currently argued for recognition under  the  Brussels  regulation  of  UK  schemes  in  other  EU  member  states,  parallel  schemes  of   arrangement  may,  however,  be  required  north  and  south  of  the  border  as  a  scheme  in  England   currently  appears  to  take  direct  effect  in  the  Scotland  and  vice  versa  simply  by  virtue  of  a  single  Companies Act applying in both - which will not be the case if it turns into two parallel Companies Acts.

The position should be similar regarding financial institutions to that applicable more generally if Scotland becomes independent and remains an EU member, though any special ongoing intra-UK arrangements regarding regulation of financial institutions would be likely to be reflected in special intra-UK arrangements regarding insolvency recognition - while bearing in mind the particular focus of the EU on this sector, leading to possible concerns about special direct effects within Scotland as an EU member state of actions taken in England as a non-member state. Clearly much remains to be resolved both at the UK/EU level and at the Scottish level. The various options are interdependent and we will be keeping a close eye on developments.

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