Brexit and no “Deal” in sight – what to do now

The “Brexit”, i.e. the formal withdrawal of Great Britain from the European Union, due to take place at midnight on 29 March 2019, is not only casting its shadows in company and insolvency law. In view of the current, rather confused situation, companies can no longer wait for the outcome of the negotiations between the United Kingdom and the European Union. The time needed to implement measures that have been identified as relevant means that they must act now – and actually they act, as the example of the car manufacturer Honda shows, who wants to close down his English plant completely – probably also against the background of a free trade agreement between the EU and Japan (here).

The following article examines the current political/economic situation in order to derive general recommendations and concrete consequences for the (resilient) preparation of companies in the area of company and insolvency law.

Current situation

Until the disastrous outcome of the Parliamentary votes on the “deal” between the UK the EU to regulate coexistence after withdrawal, the author of these lines was of the opinion that Brexit would simply not come. In my (perhaps somewhat naive) opinion, I assumed that Mrs. May would withdraw the resignation request under Article 50 of the EU Treaty by 28 March 2018 at the latest – which, according to the case law of the European Court of Justice, is at least theoretically possible. After Mrs May was allowed to suffer a renewed (albeit legally non-binding) defeat in the House of Commons in a further vote on 14 February, probably because she expressly accepted Parliament’s previous position to rule out a “no-deal scenario” (and thus a “hard Brexit”), such a scenario appears even more unrealistic.

For further consideration, it is therefore assumed that Great Britain will not sign an agreement with the EU until the end of March 2019 “on the details of the resignation and [the] framework for future relations” in the sense of Art. 50 (2) EU Treaty (“Hard Brexit”). This means that Great Britain will be treated as a genuine “third country” after withdrawal and, in particular, the five fundamental freedoms of the EU (free movement of goods, services, establishment and capital as well as the free movement of workers) will apply just as little in relation to Great Britain as European primary and secondary law and the case law of the European courts.

General Recommendations

In situations like this which cannot be accurately assessed, the general recommendations tend to be limited to commonplaces: At the very least, companies and merchants should first check whether and what relationships they and any partners have with the United Kingdom. If, for example, a German supplier is organised in the form of a Ltd., one should already ask oneself (and also him) how he envisages the further relationship after the Brexit.

Companies which generate a significant proportion of their turnover through direct or indirect business with the United Kingdom should also at least review their business planning for the coming years, if not even adjust it in the sense of worst case planning. The companies should also ask themselves to what extent they or their contractual partners might be affected by a possible interruption of supply chains at least directly after the Brexit.

Company Law

So far, the approximately 10,000 British “Limiteds” or “plc’s” with administrative headquarters in Germany have been recognised because of the European freedom of establishment. If the freedom of establishment becomes not applicable after Brexit, the so-called “domicile theory” (“Sitztheorie“) prevailing under German law applies to such companies again, with the consequence that they are generally regarded as mere “Offene Handelsgesellschaften“, (OHG) or “Gesellschaften Bürgerlichen Rechts” (GbR) (in the case of actually several shareholders) or as (unregistered) sole traders – with the corresponding shareholders’ unlimited personal liability.

British “Limiteds” with German administrative headquarters should therefore be converted into a company form recognised in Germany prior to Brexit. The German legislator supports such plans with two simplifications in the form of an amendment to the German Transformation Act (“Umwandlungsgesetz“, “UmwG“) – once again pushed through at record pace: On the one hand, a cross-border merger should in future also be possible with a commercial partnership (e.g. GmbH & Co. KG). On the other hand, it is provided that a cross-border merger must only be notarised before Brexit, but not yet completed in its entirety (by entry in the commercial register), in order to be regarded as effective in the sense of the transformation law – and thus to minimise the aforementioned personal liability risks. The regulation will procure time – but not too much if the required notarisation is to be carried out by 29 March 2019.

Also, a model is also conceivable which takes advantage of the above-mentioned legal consequence – namely the so-called “accrual” of the assets previously held in the (then no longer recognised) company to the shareholder(s) – and consists in the transfer of the shares in the English company to a legal form under German law (GmbH, AG or similar). With the Brexit, these assets then “accrue” (from a German law perspective) into the German company without further intermediate steps. In England, in case of doubt, a proper liquidation process should be commenced in order to get out “clean” from an English point of view as well.

Restructuring and Insolvency Law

Since the European Insolvency Regulation (EuIR) came into force, England and especially London had developed into a “Mecca” of (allegedly) debtor-friendly relief both for companies (also via scheme of arrangement) and for private individuals (via (shorter) bankruptcy procedures). However, after the Brexit the EU legal framework will be decisive for the recognition of such then foreign restructuring and insolvency proceedings.

In general, so-called “main proceedings” (with their annex proceedings and effects attributed in the country of opening) are automatically recognised in all other EU member states in accordance with Art. 16 of the EuIR. Until now, the jurisdictional provision of Art. 3 EuIR in conjunction with the liberal views of the ECJ and the English courts on the “Center of Main Interest” (COMI), which is the decisive connecting factor, make it relatively easy to transfer these very centers from Germany to England and thus to initiate such proceedings quickly in many cases. So far, both private individuals and companies have been able to take advantage of the English insolvency law, which is regarded as more advantageous than German law. With the withdrawal of the United Kingdom from the EU, this possibility no longer applies.

The future legal situation for the so-called “schemes of arrangement“, which makes it possible to restructure companies in accordance with English law, is likely to be somewhat more complicated. The schemes of arrangement- procedure is not an insolvency procedure, but a procedure under English company law. Even companies which do not have their registered office in England but whose case has a “sufficient connection” to England may restructure using the scheme, most recently Rodenstock, PrimaCom and Tele Columbus from Germany. Already under the current regime, however, higher German courts are already questioning the recognition of such restructurings in Germany (see Celle Higher Regional Court (OLG Celle) in the so-called “Equitable Life” decision, here). And even if the German Federal Supreme Court (BGH) has signalled in a later decision that the decision of the OLG Celle was capable of recognition in a by-note to the reasoning of its judgment (which did not support the decision of that time and was therefore not material), the legal recognition of a scheme remains uncertain even under the current legal status. Possibly a reason why the scheme seems to have gone out of fashion since the aforementioned cases – which were already some time ago.

Even if, after the United Kingdom’s withdrawal from the EU, a further recognition of the scheme in Germany were to be assumed – which does not appear to be ruled out by the so-called “Rome I-Regulation” or a particular German provision on the recognition of foreign court decisions – the more far-reaching cross-border application to the restructuring of German companies would meet with several reservations: On the one hand, the English courts link their assumption of jurisdiction to the preliminary question of whether a later decision would also be recognised in Germany. Against the background of the above explanations, English courts could therefore reject their jurisdiction already based on these doubts. On the other hand, a refusal to recognise a scheme by German courts cannot be ruled out. Against this background alone, a restructuring of German companies via a scheme is – after the Brexit – not to be recommended.

Bottom Line

The political, legal and economic distortions that Brexit will lead to are already becoming clear. Irrespective of the unforeseeable concrete form of the withdrawal, companies no longer have much time to prepare for Brexit. In addition to general steps, such as determining to what extent their own company could be affected by the consequences of the Brexit, managing directors and shareholders of English companies domiciled in Germany should hurry to achieve a corresponding German legal form before the Brexit.

The much-cited “insolvency tourism” of German private individuals and companies to England to use the regime there for rapid debt relief will also decrease drastically. Even the execution of a scheme is currently not recommended. It remains to be seen whether the planned “European Restructuring Framework” (see more details here, in German) will be able to satisfy the corresponding need for simple restructuring solutions outside insolvency on an equal footing.

Forth Bill for the Amendment of the German Transformation Act (“Viertes Gesetz zur Änderung des Umwandlungsgesetzes vom 19. Dezember 2018“), in German

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