Brexit passporting rights

Brexit impact on debt financing transactions

Since the UK’s vote to leave the EU on 23 June 2016, the debate around the impact of Brexit on the financial services industry has largely centred around ‘passporting rights’. Financial institutions and banks, amongst others, are rightfully concerned as Brexit poses a threat to their current ability to sell financial services and products across Europe with minimal additional authorisations.

As the 29th March 2019 deadline looms, Brexit continues to cause market volatility and uncertainty. In light of this, I believe that it is important to examine how Brexit and the events leading up to it will affect debt financing transactions governed by English law.

Under English law, a contract can only be frustrated where performance is illegal, impossible or radically different to what was previously agreed by the parties. In other words, frustration typically happens when an unforeseen event or circumstance outside of the parties’ control occurs. In the context of debt financing transactions, it is unlikely that Brexit or any event leading up to it would constitute an unforeseen event or circumstance. It would be very difficult for contracting parties to claim that Brexit or any of the events leading up to it were unforeseen at the time of the transaction, particularly in respect of new transactions. However, in existing transactions with ‘unusual’ characteristics, parties may be able to rely on frustration if they can demonstrate that its requirements have been met, and Brexit has directly or indirectly frustrated the contract. Even in these ‘special’ cases, it is difficult to see how parties can successfully demonstrate that Brexit or any event leading up to it has frustrated their transaction. Therefore, what constitutes an ‘unusual’ characteristic becomes a question for the courts with the outcome decided on a case-by-case basis.
In debt finance transactions, lenders can demand full repayment of an outstanding balance before its due date if an ‘event of default’ occurs or continues. Events of default typically include: non-payment, breaches of financial covenants, breaches of warranties, material adverse changes (MACs) and insolvency. Brexit is likely to trigger MACs for borrowers whose businesses, for example, rely on free movement of goods, capital or people. Since June 2016, it has been made clear by both Juncker and May that these freedoms will be affected. Therefore, in these scenarios debt finance lawyers acting for either borrowers or lenders will need to carefully draft and incorporate Brexit provisions into finance documents to protect their clients. Where it is clear that special Brexit provisions must be included in a debt finance document, lawyers need to ensure that an adequate definition is provided for Brexit, and its provision trigger is carefully constructed.
There are currently no ‘standard’ Brexit provisions and I anticipate that the businesses which will be greatly affected will need provisions which cater to their specific commercial needs. Nevertheless, in the absence of an agreed political exit agreement, I believe that it is commercially unsound for parties to anticipate the form Brexit may take in debt finance documents. More importantly, it will be difficult for either contracting party to rely on a MAC it knows about when it enters into a debt finance transaction. MACs are generally very difficult for lenders to rely on, and given the significant number of debates surrounding Brexit and the long lead up to the event itself, it will be difficult for lenders and borrowers directly or indirectly affected by Brexit to feign ignorance and attempt to rely on it as a MAC.
Despite the political and economic uncertainty caused by Brexit, English law remains a viable choice for contracting parties. English contract law is largely unaffected by EU law, therefore the rights and obligations it confers upon contracting parties should remain the same. In other words, Brexit is unlikely to affect existing and new transactions governed by English law. Also, I doubt that there will be much need to change the current approach to governing law and jurisdiction clauses in debt finance documents as the UK’s exit from the EU will not erode the long-standing history, transparency and familiarity of the English common law system.
Brexit and the events leading up to it are unlikely, in themselves, to directly impact new or existing debt financing transactions. However, Brexit and the events leading up to it have the potential to indirectly impact debt financing transactions, but these scenarios are likely to be ‘standalone’ with ‘unusual’ characteristics. In these ‘unusual’ circumstances, documents may need to be altered to incorporate carefully drafted Brexit provisions. However, legal advisers should proceed with caution, particularly in the absence of an agreed political exit arrangement between the UK and the EU.

Estelle is a member of TCLA's writing team. She graduated from the University of Bristol in 2016 with a Law degree. She now works as a Banking and Finance paralegal at Addleshaw Goddard LLP, while studying the Legal Practice Course (LPC) LLM part-time study programme at BPP Law School.

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