As of today, it appears highly likely that the United Kingdom will leave the EU at the end of October without a withdrawal agreement. Such a disorderly withdrawal (“hard Brexit”) would have far-reaching consequences in many areas of law. This paper aims to provide an overview of the most significant changes in company law and contract law.

Company law

Because the European Court of Justice interpreted the freedom of establishment broadly in the Centros, Überseering, and Inspire Art cases,[1] the Member States must recognise the legal capacity and standing of all companies duly incorporated and domiciled in a Member State. In particular, the legal form of a “British Limited” (a shareholder company without minimum capital requirements, but with limited liability) has become popular in Austria. In recent years, an increasing number of British Limiteds have been established in Austria, with their formal registered office in the UK. However, their administrative headquarters are in Austria, and their business activities are developed from the outset almost exclusively in Austria.

If there is a hard Brexit, EU legislation, including freedom of establishment, will no longer apply to the UK. As a result, the “Austrian Limiteds” would lose their legal status. They would be assessed only under Austrian law and, according to the prevailing view, would qualify as a partnership under civil law. They would lose not only their legal capacity, but also the protection of limited liability for the shareholders.

In preparation for a hard Brexit, the Austrian legislature enacted the Brexit Accompanying Act 2019,[2] part of which provides a transitional period for British companies. Thus, the “Austrian Limited” will continue to be recognised as an independent legal form in Austria until the end of 2020, even if there is a “hard Brexit”. Because the period is merely transitional, shareholders of “Austrian Limiteds” are advised to take timely precautions and transfer their business activities to an Austrian corporation to prevent unlimited shareholder liability.

Here are some possibilities:

Cross-border transfer of domicile
This is a change of legal form into an Austrian company, which preserves the identity of the company, but which must meet the requirements of Austrian company law (for raising capital, etc.). However, it should be noted that while this procedure is recognised by both the Supreme Court and the European Court of Justice, there is no explicit legal basis for it under Austrian or EU law. Companies will need to coordinate with the commercial register courts and may expect proceedings to take longer than usual. There is also the practical question of whether and how the UK courts will process a departing company’s cross-border transfer of domicile following a “hard Brexit”.

Cross-border merger
Another possibility is to transfer by universal succession to a newly established Austrian company through a cross-border merger. However, this option is somewhat uncertain, as we cannot know whether UK authorities will continue to allow a cross-border merger after a hard Brexit (i.e. whether the UK’s national implementation rules will continue to apply).

Transfer the business to a new company
In order to avoid depending on the British authorities, shareholders can transfer the operation or branch to a newly established Austrian company by individual legal succession, or sell it to one through an asset deal. However, this option requires some administrative effort and could have negative tax consequences.

Contract law

The hard Brexit also would also affect existing contracts. The following two points are especially critical:

EU laws will no longer apply to contracts that are governed by British law pursuant to the choice-of-law provision. These contracts will be governed entirely by the precedent-based “common law” system. It is also not clear to what extent the UK will continue to observe EU provisions that have been implemented by directive into national law. Even if the national provisions technically remain in force, we do not know what bearing European caselaw will have on their interpretation.

Choice of venue will generally remain valid. However, since the Brussels Regime will no longer apply, the previous legal basis for mutual recognition and enforcement of court decisions no longer applies. The Hague Convention on Jurisdiction has the ability to remedy this situation. Both Austria and the EU are full contracting parties, and the UK recently ratified and adopted the Convention. It should be noted, however, that the Convention only applies to civil and commercial cases concerning contracts that are between entrepreneurs and contain an exclusive choice of venue provision. Contracts that do not fulfil these criteria (including consumer contracts, and contracts without an exclusive choice of venue provision), will have to be assessed under the 1962 bilateral agreement on the recognition and enforcement of judgments between Austria and the United Kingdom, moving forward.

 

[1] EuGH 09.03.1999, C-212/97 (Centros Ltd./Erhvervs- og Selskabsstyrelsen); EuGH 05.11.2002, C-208/00 (Überseering BV/Nordic Construction Company Baumanagement GmbH); EuGH 30.09.2003, C-167/01 (Kamer van Koophandel en Fabrieken voor Amsterdam/Inspire Art Ltd.).

[2] Brexit-Begleitgesetz 2019 (BreBeG 2019), BGBl. I Nr. 25/2019.