I OVERVIEW OF RESTRUCTURING AND INSOLVENCY ACTIVITY
i State of the economy and the finance industry
In the early summer of 2016, the United Kingdom experienced considerable political upheaval as a result of the unexpected and momentous decision of the British people to leave the European Union. Decades of foundational assumptions in public policy and the making and administration of laws were thus overturned. At the time of writing, some of the more apocalyptic predictions of economic meltdown following a vote for Brexit appeared wide of the mark, but a general sense of uncertainty was undeniable as the financial markets showed continuing volatility. In response to market conditions, the Chancellor of the Exchequer announced that the government would abandon its fiscal target of restoring government finances to a surplus by 2020 and the Bank of England’s Financial Policy Committee also responded by reducing the UK countercyclical capital buffer rate from 0.5 per cent to zero per cent, which is expected to provide lenders with the scope for approximately £150 billion of additional lending to borrowers. It was also anticipated that the Bank of England would further lower the current official bank interest rate to 0.25 per cent, or even zero per cent, in the months following the vote, in an attempt to stimulate inflation in line with the government’s annual target of 2 per cent. This ran counter to the widely held expectation before the referendum vote that interest rate rises were becoming more likely. It seemed, following the vote, that the historically unprecedented period of extremely low interest rates had some time yet to run.
It is too early to draw any conclusions as to the long-term impact of Brexit on the economy, the finance industry and insolvency and restructuring activity, but it is possible at this stage to make some preliminary observations. The UK’s relative economic success in recent decades has been widely attributed not only to a somewhat business-friendly tax and regulatory regime, but also to the UK’s openness to international trade and movement of labour. If, following its departure from the EU, the UK is either unable or unwilling to pursue a similar policy approach, it is possible that its future economic dynamism may be threatened. The financial industry plays a central role in the UK’s economy and if Brexit hinders this industry, the consequences for the UK could be profound. A central concern is the level of access that UK-based financial institutions will have to markets in euro-denominated financial products, and the continuing recognition by EU regulators of such institutions following Brexit. While some changes in the regulatory regime seem likely, the euro’s status as a global reserve currency and the mutual reliance of the UK and EU finance industries would seem to prevent, or at least discourage, any severe measures to prevent the UK dealing in euro-denominated financial products from outside the EU; also, the EU’s markets in financial instruments regime currently allows for recognition of financial institutions based outside the EU (for example, in the USA) on the principle of regulatory convergence, so unless the EU fundamentally changes its regime in this respect, leaving the EU would not seem to threaten the ability of UK-based financial institutions to remain recognised by the EU regulators, providing they maintain a similar financial markets regime to that applicable in the EU.
The impact of Brexit on the UK’s insolvency and restructuring industry is discussed in more detail below in Section VI of this chapter. At the outset, it is worth pointing out, however, that depending on the nature of the legal relationship between the UK and the EU following Brexit, it is possible that the UK’s status as a forum of choice for European cross-border restructurings may be affected, since the UK’s strength in this area is at least in part based on mutual recognition of insolvency procedures under the EU Insolvency Regulation. The procedural and cultural advantages that the UK’s insolvency and restructuring industry enjoys are expected, however, to remain in place regardless of the outcome of Brexit, and, in particular, the ability to implement restructurings for European companies by means of a UK scheme of arrangement is not expected to change. As for domestic insolvencies, activity is likely to correlate to general domestic economic conditions; there is no evidence at the time of writing that the relatively low level of domestic insolvency activity discussed below is set to change in the near-term, although this could change if the UK experiences the technical or actual recession forecast by some commentators.
ii Market trends in restructuring procedures and techniques employed during this period
As explained below, most large restructurings in the United Kingdom continue to be effected on an informal, out-of-court basis. Insolvency Service statistics for activity in the first quarter of 2016 (the latest date for which statistics were available at the time of writing) suggest that the trend of reduced insolvency activity that has been observed over several recent years has continued.
In relation to formal insolvency procedures, the official figures of the Insolvency Service indicate that in the 12 months ending with the first quarter of 2016, approximately 0.42 per cent of all active registered companies went into liquidation, down from 0.5 per cent during the same period to the first quarter of 2015. Interestingly enough, the liquidation rate was at its lowest rate since 1984, the earliest year for which such a calculation can be made, as compared with a peak of 2.6 per cent in 1993, and the average of 1.2 per cent seen over the past 25 years.
It should be noted that the number of active companies has grown considerably over this period – there were over 3.4 million active registered companies in May 2016, which compares with only about 900,000 in the early 1990s and fewer than 800,000 in 1986. The low liquidation rate by historic standards reflects the change of emphasis in the United Kingdom’s insolvency legislation towards the rescue and rehabilitation of financially distressed companies and the rise in popularity of pre-pack administrations (trends that are discussed further below). Further, market practice in the recent past has tended to favour amending and extending the terms of corporate debt rather than forcing financially distressed companies into insolvency, and this trend has been particularly pronounced since the onset of the financial crisis due to the persistence of historic lows in interest rates.
There were 3,694 company insolvencies in England and Wales in the first quarter of 2016. This was an increase of 5.4 per cent on the previous quarter and a decrease of 3.6 per cent on the first quarter of 2015. This figure comprised 804 compulsory liquidations (representing an increase of 36 per cent on the previous quarter and a decrease of 11.5 per cent on the first quarter of 2015), and 2,515 creditors’ voluntary liquidations (representing an increase of 0.8 per cent on the previous quarter and a 0.6 per cent increase compared to the first quarter of 2015).
Further, there were 376 other corporate insolvency procedures in the first quarter of 2016, including 301 administrations and 75 company voluntary arrangements. These figures represent decreases of 11.1 per cent and 12.8 per cent, respectively, on the equivalent figures for the first quarter of 2015. The Insolvency Service recorded no administrative receiverships in the period.
Much discussion in recent years has concerned the impact of possible rises in interest rates on business failures. An increase of base rates to a level closer to historic averages would expose many distressed businesses to the risk of failure. Research conducted by the Association of Business Recovery Professionals (R3) suggests that a rise in interest rates would have a major impact on highly geared businesses, typically hotels, catering and retail. However, for as long as interest rates and hence borrowing costs remain at the historic lows that have been seen in recent years, many distressed companies that, in any other period, would have been forced into insolvency procedures will probably be able to amend and extend their debt and therefore avoid insolvency. The uncertainties in relation to the UK’s departure from the EU make it appear likely, however, that UK interest rates will remain at very low levels for some time to come.
II GENERAL INTRODUCTION TO THE RESTRUCTURING AND INSOLVENCY LEGAL FRAMEWORK
i Secured creditors and the balance of power
The approach of the United Kingdom’s legal system to the insolvency of troubled businesses is, in part, a product of the secured credit markets in which it developed. The comprehensive security available to lenders in the United Kingdom and the rights afforded to them in the event of insolvency go some way to explaining the conventional categorisation of the United Kingdom as a ‘creditor-friendly’ jurisdiction, as opposed to one generally regarded as favouring debtors, such as the United States.
A bank lending money to a UK corporate enterprise will typically take fixed and floating charges2 over the company’s assets and undertaking as security for repayment of the debt. Until relatively recently, the holder of a floating charge over the whole (or substantially the whole) of an English company’s property was able to appoint an ‘administrative receiver’ to enforce its security in the event of a default under its credit agreement (or other specified event). Once appointed, an administrative receiver had wide powers to manage and dispose of the assets of the company and owed his or her principal duty to the secured creditor to seek repayment of the secured debt, typically by selling the assets or business as a going concern. Reforms in the United Kingdom have now restricted administrative receivership as a remedy for secured creditors, as explained in more detail below.
The holder of a valid floating charge is generally entitled to be repaid in priority to unsecured creditors,3 but ranks behind fixed charge holders and certain categories of preferential creditors in respect of its claim. The holder of a valid fixed charge is generally entitled to be repaid out of the proceeds of the realisation of its security in priority to all other claims on the company’s assets. The holder of a qualifying floating charge has the right to appoint its own administrator to enforce its security where the debtor is in default. Further, while a company may also be put into administration by court order or by an out-of-court procedure by another creditor, a floating charge holder will in most cases have the right to choose which administrator is appointed.
ii Statutory insolvency regimes
Corporate insolvency law in the United Kingdom has well-developed rules governing the collection and distribution of the assets of an insolvent company on a winding up. The main statutory sources of corporate insolvency law are the Insolvency Act 1986 (IA86) and the Insolvency Rules 1986 (IR86), which supplement the IA86 by providing the procedural framework for the insolvency regime. Part IV of the IA 1986 sets out the circumstances in which a company may be wound up on a compulsory or voluntary basis.
Compulsory liquidation involves the company being wound up by an order of the court following the petition of an interested party. There are a number of grounds on which a court may make a winding-up order, with the most usual being an ‘inability to pay debts’. The company is ‘unable to pay its debts’ for these purposes under certain statutory criteria, including under the ‘cash-flow’ test (i.e., where the company is unable to pay its debts as and when they fall due) and the ‘balance sheet’ test (i.e., where the company’s assets are less than its liabilities, taking into account contingent and prospective liabilities). There is no stay or moratorium on the enforcement of security, but it is not possible to commence or continue proceedings against the company without the leave of the court.
Voluntary liquidation is commenced by a resolution of the company and does not generally involve the court. The procedure will be a members’ voluntary liquidation where the directors are prepared to make a statutory declaration that the company will be able to pay its debts in full, together with interest at the official rate, within a period of 12 months from the commencement of the liquidation. Where the directors are not prepared to make such a declaration, the liquidation will proceed as a creditors’ voluntary liquidation. In a members’ voluntary liquidation, the members of the company appoint the liquidator, whereas in a creditors’ voluntary liquidation, both the members of the company and its creditors nominate their choice of liquidator, with the creditors’ choice prevailing in cases of disagreement. Introduced by the IA86 in response to a recommendation that insolvency law should provide mechanisms to rescue potentially viable businesses, administration is the principal corporate recovery procedure in the United Kingdom.
As described in more detail below, administration is a mechanism to enable external management, the administrator, to take control of the company for the benefit of all creditors, while steps are taken under the protection of a statutory moratorium to formulate a strategy to address the company’s insolvency. An administrator may propose an arrangement under Part 1 of the IA86 (a company voluntary arrangement or ‘CVA’) or Section 895 of the Companies Act 2006 (a scheme of arrangement or ‘scheme’), under which a reorganisation or compromise may be effected; these procedures also exist independently of administration. A scheme or a CVA may be invoked whether or not the company is in fact insolvent, and can be used in conjunction with or to avoid administration or liquidation. In each case, the arrangement will be binding on the company’s relevant creditors if the requisite majorities of the appropriate classes vote in favour of the proposals at duly convened meetings4 and, in the case of a scheme, it is sanctioned by the court.
The Small Business Enterprise and Employment Act 2015 and the Deregulation Act 2015 have introduced a number of amendments to the IA86 that have been brought into effect, with further contemplated amendments partially in force purely for the purpose of enabling subordinate legislation to be passed. It is anticipated that such changes, including the abolition of the statutory requirements for creditor meetings to be held, will come into force at the same time as the proposed Insolvency Rules 2016 (IR2016). The revised rules, which will replace the existing IR86 in its entirety, will, among other things, provide for increased consistency between insolvency procedures, allow for electronic communication and filing of forms and reduce the burden of reporting and record-keeping requirements for insolvency practitioners. It is not currently clear when the IR2016 will be enacted or come into force, with the anticipated timetable that it would be published in spring 2016 and would enter into force on 1 October 2016 already having slipped.
iii The ‘rescue culture’ and the demise of administrative receivership
Although the statutory framework does not yet provide a single comprehensive procedure under which a distressed company can seek to reorganise its obligations or capital structure, a ‘rescue culture’ has nevertheless developed in recent decades in the United Kingdom.
The introduction of the administration and CVA procedures in 1986 provided impetus for a culture of supporting financially distressed companies pending a reorganisation. Banks in the 1990s began to recognise enterprise value in distressed businesses, which, with much-needed influence from the Bank of England, led to the development of established principles for multi-creditor workouts (London Approach). These principles were based on consensual contractual out-of-court arrangements, and developed as much as a result of the shortcomings of the CVA and administration regimes as of their introduction. Recognition that the employment of both procedures was disappointingly low led to significant reforms under the Insolvency Act 2000 and a reshaping of corporate rescue law under the Enterprise Act 2002 (EA02).
Designed to facilitate company rescue and to produce better returns for creditors as a whole, the EA02, inter alia, restricted the ability of secured creditors to appoint administrative receivers to a limited number of circumstances. It was widely acknowledged that the administrative receivership remedy gave too much power to secured parties who, as a result of their security, lacked sufficient incentive to rescue failing companies. Administrative receivership was, therefore, effectively replaced by a substantially revised administration regime, under which the administrator is now required to act in the interests of creditors as a whole. Following the EA02, an administrator may be appointed to manage the company with a view to achieving one of three statutory purposes, arranged hierarchically as follows:
a rescuing the company as a going concern;
b achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration); or
c realising property in order to make a distribution to one or more secured or preferential creditors.
The administrator may only perform his or her functions in pursuit of the objective stated in (c) above if he or she believes that it is not reasonably practicable to achieve the objectives stated in (a) or (b), and to do so would not unnecessarily harm the interests of the creditors of the company as a whole. Therefore, the administrator’s primary objective is now the rescue of the company as a going concern.
In recent years, however, the increasing popularity of pre-pack administrations (discussed in more detail below) has to some extent undermined the aims of the revised administration regime and shifted the focus back to the protection of secured and major creditors that was such a feature of administrative receivership. Concerns continue to be expressed that the policy aims behind the reforms to administration made in the EA02 are being frustrated. The pre-pack debate is summarised in more detail below, but it is worth noting here that the market appears to demand a restructuring remedy that allows key creditors to play a central role and that, despite the government’s attempts to enforce equality between creditors, the market is likely to continue to find a way to meet this demand.
The EA02 also made a number of other amendments to the corporate recovery laws of the United Kingdom. In particular, the Crown’s preferential status in insolvency proceedings has been abolished, and in its place a proportion of floating charge recoveries are ‘ring-fenced’ for the general unsecured creditors.5
iv Role of directors
Modern insolvency law in the United Kingdom is founded on the premise that the function of corporate insolvency law is not merely to distribute the estate to creditors, but to encourage debt recovery and scrutinise the actions of the directors in order to ‘meet the demands of commercial morality’. Although administration was introduced by the IA86 to facilitate the rescue of viable businesses, it was done at a time when corporate failure was generally associated with mismanagement and concerns over director misconduct led Parliament to take a strict approach with regard to errant directors. Accordingly, it was decided that the powers of the directors should effectively cease on the appointment of an administrator, who in turn would be given wide powers to carry on the company’s business. Although the directors may remain in control of the company during proposals for a scheme or CVA if those proposals are made outside of administration, the company will not benefit from a statutory moratorium on debt enforcement, unless the company is a ‘small’ company (as defined in the IA86), in which case it may benefit from a limited CVA moratorium.
As a result of reforms introduced at the same time as the CVA and administration procedures, directors of insolvent companies may also face disqualification from holding office in future and find themselves personally liable for ‘wrongful trading’ in circumstances where they continued to trade their business despite it being in the twilight of insolvency. This test is set out in Section 214 of the IA86, and provides that a director may be held personally liable for a company’s debts where, knowing there was no reasonable prospect of the company avoiding insolvent liquidation, he or she failed to take every step that he or she ought to have taken with a view to minimising losses to creditors. Directors may also face personal liability in circumstances where they have been found guilty of fraudulent trading under Section 213 of the IA86 or misfeasance under Section 212. In addition, although the codification of directors’ duties under the Companies Act 2006 did not include a specific duty to creditors, directors of a UK company owe common law duties to creditors where the company is insolvent or nearly insolvent, and can also be held personally liable where a breach of those duties is established.
v Clawback actions
In addition to taking action against errant directors, the liquidator or administrator of a UK company may apply to the court to unwind certain transactions entered into by the company prior to the commencement of formal insolvency proceedings. A transaction entered into within a particular time frame before the onset of insolvency could be unwound, for example, if it constituted a ‘transaction at an undervalue’ or a ‘preference’.
A transaction at an undervalue involves a gift by a company, or a company entering into a transaction where it receives no consideration or consideration of significantly less value than the consideration given by the company. A preference involves putting a creditor (or a surety or guarantor for any of the company’s debts or liabilities) in a better position than the creditor would otherwise have enjoyed on an insolvent winding up. A court will not generally intervene, however, in the case of a transaction at an undervalue, if the company entered into the transaction in good faith for the purpose of carrying on its business and at the time it did so there were reasonable grounds for believing the transaction would benefit the company, or, in the case of a preference, if the company was not influenced by a desire to prefer the creditor, surety or guarantor in question. In the absence of fraud, a transaction will also not normally be unwound if the company was not insolvent at the time of the transaction and did not become so as a result of it.
The court also has the ability to make an order to unwind a transaction if it is satisfied that the transaction was entered into to defraud creditors by putting assets beyond the reach of claimants against the company or otherwise prejudicing their interests. No time limit applies for unwinding such a transaction.
Floating charges created by an insolvent company in the year before the insolvency are invalid, except to the extent of any fresh consideration, namely the value of the consideration given to the company by the lender when the charge was created. This period is extended to two years where the charge was created in favour of a connected person.
III RECENT LEGAL DEVELOPMENTS
A significant trend in English restructuring law in recent years has been the concept of modified universalism, which holds that in cross-border insolvency matters, it is inherently desirable for all claims against the insolvent entity to be dealt with in the same process and in one jurisdiction, and hence that under the common law (i.e., where statute law is silent on the subject), courts should be ready to assist foreign insolvency officeholders where appropriate in the conduct of the insolvency. Modified universalism is therefore both a consequence of the increasingly international nature of insolvency law, and a facilitator of the trend for cross-border restructurings.
In the case of Rubin and Another v. Eurofinance SA and others,6 the Supreme Court held that no special common-law rules apply permitting judgments in respect of avoidance actions in foreign insolvency proceedings to be recognised where foreign judgments would not be recognised or enforced outside of an insolvency context. It was decided that the English courts and many Commonwealth courts applying English common law will enforce a foreign judgment in personam only if at least one of the conditions summarised in Dicey, Morris & Collins, Conflict of Laws, 15th ed, 2012 (Dicey), as r 43, is satisfied. One of those conditions is described in Dicey as follows:
a court of a foreign country outside the United Kingdom has jurisdiction to give a judgment in personam capable of enforcement or recognition as against the person against whom it was given […] if the person against whom the judgment was given had before the commencement of the proceedings agreed, in respect of the subject matter of the proceedings, to submit to the jurisdiction of the court or of the courts of that country.
The question of whether submission to a jurisdiction under the common law can be implied was examined in the recent case of Vizcaya Partners Limited (Appellant) v. Picard and another (Respondent) (Gibraltar).7 In Vizcaya, the contract before the court was a customer agreement in a standard form entered into between a company owned by the convicted fraudster Bernard Madoff and a genuine investor, Vizcaya Partners Limited. Madoff’s trustee in bankruptcy had obtained a judgment in default in the New York Bankruptcy Court against the investor that the partial repayment of an investment to Vizcaya had been a statutory fraudulent preference. It was argued that because the agreement specified that it should be construed, and the rights and liabilities of the parties determined, in accordance with New York law, then the parties had impliedly agreed to submit to the jurisdiction of the New York courts, as according to the laws of the State of New York, the New York court had jurisdiction.
The Privy Council decided that submission to a jurisdiction could, in certain circumstances, be implied; however, it was not implied in the instant case. The court stated that whether there had been a submission to the jurisdiction of the foreign court for the purposes of enforcement of foreign judgments depended on English law and if that agreement is to arise through implication, under English law, it can be a matter of fact or be implied by law. On the expert evidence on which the trustee relied, Lord Collins noted that, even as a matter of New York law, the evidence did not state that the choice of New York law carried with it an agreement to the jurisdiction of the New York court. For a term to be implied as a matter of fact, the liquidation trustee would have to adduce evidence to the effect that in New York law there is a rule of contractual interpretation or construction, on the basis of which the Gibraltar court could conclude that the agreement, in the context of the choice of law and the deemed place of contracting, amounted to a choice of jurisdiction (in addition to the main contractual obligations). For a term to be implied as a matter of law, the expert would have had to show what relevant terms are implied under New York law. There was no relevant evidence under either head.
The decision clarifies the previous uncertainty on the scope of Dicey’s fourth case. An agreement to submit to the jurisdiction of a foreign court can be implied. Implying such a term in a foreign law governed contract in any given case will be assessed by reference to common-law principles, informed by expert evidence. The decision also confirmed that in the field of insolvency-related judgments, specifically those in avoidance actions, the increasingly applicable principle of ‘modified universalism’ does not mean that insolvency proceedings are exempt from the application of general principles.
IV SIGNIFICANT TRANSACTIONS, KEY DEVELOPMENTS AND MOST ACTIVE INDUSTRIES
i The Bank Recovery and Resolution Directive and the Special Resolution Regime
Since the advent of the financial crisis, the banking industry has been under intense scrutiny, and with the failure of Lehman Brothers and several British banks suffering from liquidity constraints (including Northern Rock, Bradford & Bingley and others), it was thought that new legislation was needed to address the problems facing the finance industry and to safeguard the public from any fallout that these problems could engender. While it was always a certainty that such interventionist legislation would likely erode, to a certain degree, the rights of stakeholders and creditors of UK banks facing financial difficulties, the need for a clear legal framework within which the authorities could exercise recovery and resolution powers when a bank found itself in distress overrode this consideration.
After extensive consultation and review and refinement of the emergency Banking (Special Provisions) Act 2008, the Banking Act 2009 (Banking Act) was passed, which gave public authorities a number of powers to be used for the resolution of British banks encountering financial difficulties, with the aim of protecting the systemic stability (Special Resolution Regime) of the UK. This was among the first such regimes to be put into place globally. Subsequently, the European Union enacted the Bank Recovery and Resolution Directive,8 which has resulted in a number of changes to the Banking Act and consequently to the Special Resolution Regime being made in order to ensure compliance with the Bank Recovery and Resolution Directive. In the event that the UK leaves the EU, it will of course no longer be subject to the requirements of the Bank Recovery and Resolution Directive, but there is, at the time of writing, no indication that the Special Resolution Regime is likely to be subject to significant alterations following Brexit.
The Special Resolution Regime powers under the Banking Act can be used where the Bank of England is satisfied that a bank is failing, or is likely to fail in the absence of the exercise of the powers under the Banking Act. The ‘stabilisation options’ available to public authorities (the lead resolution authority being the Bank of England) in such cases, and where relevant capital instruments have been written down, are:
a the sale of all or part of the bank’s business to a private purchaser;
b the transfer of all or part of the business to a company that is wholly owned by the Bank of England (known as a ‘bridge bank’);
c the transfer of assets, rights and liabilities of a failing bank to an asset management vehicle;
d the provision of public equity support to the failing bank; or
e taking the failing bank into temporary public ownership.
The stabilisation options outlined above are to be achieved through share transfer instruments or orders (i.e., instruments or orders that provide for securities issued by a particular bank to be transferred), or property transfer instruments or orders. Based on the wide definition of ‘security’ under the Banking Act, share transfer instruments and orders may also cover debt securities. Furthermore, the Banking Act also gives specific power to vary trusts, as well as contracts.
Where a transfer of part of a bank’s business is made (a partial property transfer) in connection with either a share or property transfer, the Banking Act gives powers to HM Treasury to make provision for compensation to be paid to those who were creditors of the bank or financial institution before the transfer.
In addition to the stabilisation options, the Banking Act also contains a bank insolvency procedure (essentially a modified form of liquidation) and a bank administration procedure (a modified form of the administration procedure). Pursuant to the Banking Act 2009 (Exclusion of Insurers) Order 2010, insurers are excluded from the scope of the Special Resolution Regime and bank insolvency procedure.
ii The importance of the ‘pre-pack’
The term ‘pre-pack’ is typically used in UK insolvencies to describe the sale of a distressed business where all the arrangements of the sale are negotiated, and agreed before the company enters a formal insolvency procedure and concluded by the insolvency practitioner very shortly thereafter. This allows the business to survive relatively intact while allowing it to jettison a proportion of its debts. Pre-packs emerged in the 1980s in the context of administrative receivership but, following the reforms of the EA02, and in particular the possibility of a company being placed into administration without a court order, the practice is now prevalent in administrations. The increase in popularity of pre-packs, despite the government’s attempts to enforce equality between creditors by means of legislation such as the EA02, appears to reflect a market demand for a restructuring remedy that allows key creditors to play a central role.
On the one hand, the pre-pack can be seen as an effective way of preserving the business of an insolvent company and realising value for creditors in situations where time is of critical importance. Pre-pack sales provide for a relatively rapid and straightforward business transfer without the damaging publicity and consequent harm to reputation caused by a standard insolvency process. They can also be used as an effective restructuring tool, giving effect to an agreed deal between stakeholders. On the other hand, critics argue that the process lacks transparency, is controlled by senior lenders, sidesteps procedural safeguards inherent in the administration process and offers no guarantees that the interests of all creditors will be properly taken into account; the Insolvency Service recently estimated that approximately 85 per cent of all pre-packs result in sales to connected parties such as management (known as ‘phoenix’ sales). The fact that the insolvent company may often move straight to dissolution following the sale (without a separate liquidator being appointed) has also attracted suggestions that the actions of the administrator and senior creditors are not subject to adequate checks and balances.
The most important consideration is, however, that in many cases, particularly when a company has no cash available, there is simply no third way between an insolvent liquidation, with the loss of all the company’s goodwill and employees, and a quick pre-pack asset sale from administration, which will probably save most of the business and allow employees to keep working. It is for this reason that the use of pre-packs is likely to continue to grow. Knowledge and use of pre-packs are now widespread. Dozens of high street names have been resurrected under pre-pack deals in the past few years, including MFI (the furniture chain), Karen Millen and Oasis (both fashion retailers), the Laurel Pub Company and Cobra Beer.
In an attempt to address some of the concerns surrounding the use of pre-packs, the Insolvency Service published Statement of Insolvency Practice 16 (SIP 16) in January 2009. A revised version has been in effect since October 2012. Following the publication of the government-commissioned Graham Review into Pre-pack Administration in June 2014, an independent report by Teresa Graham that made a number of recommendations for the better regulation of pre-pack sales, the latest version of SIP 16 was published with effect from 1 November 2015. The revised SIP 16 is designed to improve the transparency and proprietary of pre-packs, introducing six principles for good marketing with which administrators must comply. Administrators must give a full account in their SIP 16 statement of all steps that were taken and all alternatives to the pre-pack that were considered, to show that it was appropriate to implement the restructuring by means of a pre-pack. Any deviation from the specific essential steps must be explained in the statement. The key principle of the revised SIP 16 is that the SIP 16 statement must contain sufficient information for the company’s creditors, such that a reasonable and informed third party would conclude that the pre-pack is appropriate and that the administrator has acted with due regard for the creditors’ interests.
Pre-pack sales to connected parties of the company are accorded greater scrutiny, with the administrator required to refer the potential purchaser to the pre-pack pool, a body of experienced independent business practitioners, to review the proposed deal and issue a statement on its reasonableness, and request a viability review statement of the SIP 16 statement, explaining what operational and financing changes the purchasing entity will make so that the acquired business will be viable.
Further to SIP 16, the licensing bodies for insolvency practitioners have jointly adopted an Insolvency Code of Ethics for England and Wales, which is intended to help insolvency practitioners meet the standards of conduct expected of them by providing professional and ethical guidance. The government has no current proposals to legislate for the regulation or reform of the pre-pack process but does have a backstop power to do so under the IA86, as amended by the SBEEA 2015, if the voluntary self-regulatory regulation does not alleviate concerns.
In terms of the case law treatment of pre-packs, the use of a pre-pack was explicitly approved in the case of Re Hellas Telecommunications (Luxembourg) II SCA,9 where the High Court granted an administration order in respect of the Greek telecommunications company Wind Hellas (which was incorporated in Luxembourg) and expressly granted the company’s administrators liberty to complete a pre-pack sale of the company’s assets. The judgment is significant as it was the first case where the court expressly supported a pre-pack sale. The judgment makes it clear that the English courts are beginning to consider the pre-pack as an established feature of the English insolvency landscape, and will continue to consider the merits of such a sale where an administration order is sought, on the proviso that the SIP 16 guidelines are followed when negotiating and agreeing the terms of such a sale. Pre-packs have been implicitly approved by the courts in other recent decisions. In the case of DKLL Solicitors,10 despite the fact that HM Revenue & Customs (in its position as a major creditor of the company) opposed the proposed sale of assets to existing management, the court nevertheless decided to make the order in light of all the circumstances, including the interests of other stakeholders. The use of a pre-pack sale prior to the creditors’ meeting was again approved in Re Kayley,11 thereby further entrenching the position of pre-packs in the UK insolvency landscape. In that case, it is also interesting to note that HHJ David Cooke ruled that the administrators’ pre-appointment costs were to be treated as an expense of the administration. In so doing, he followed the approaches of HHJ Norris QC in Re SE Services Ltd,12 and HHJ Purle QC in Aldersley Battery Chairs Limited (unreported).
In the case of Capital for Enterprise Fund a LP and another v. Bibby Financial Services Ltd,13 the High Court considered whether the circumstances of a pre-pack sale showed that the insolvent company’s director had conspired by unlawful means to transfer the company’s business and assets to another company in which the director was interested, in breach of his fiduciary duties. Though the High Court ordered, in the circumstances, that the claimants had not established that the unlawful conduct had caused them the loss and damage that they alleged, it was nevertheless held that the director, in not informing the other directors of the proposed pre-pack sale, had breached his duties to the company by putting the preservation of the company’s business above the interests of the company and its creditors. The case thus serves as a useful reminder of the need for a director of a company in financial difficulties to distinguish between the interests of the business of the company and that of the company and its creditors.
iii Schemes and debt-equity swaps
Schemes have become the restructuring tool of choice for UK practitioners and are increasingly competitive on an international scale for restructuring foreign as well as domestic companies, standing alongside the US Chapter 11 procedure as the pre-eminent tool for implementing complex international restructurings of multinational companies, often involving a debt-equity swap.
The main objective of a debt-equity swap is to provide a struggling company with a strengthened balance sheet and improved liquidity. This in turn improves cash flow and relieves pressure from creditors, thereby addressing concerns that directors may have about their duties and potential personal liability issues. Creditors benefit from the greater chance of their debt being repaid, preserved enterprise value and a potential for equity upside if the company returns to profitability or is sold. Key customers and suppliers are placed on a sounder footing, encouraging suppliers to provide or restore essential credit terms and credit issuers to keep lines in place, while reassuring customers that long-term or further orders will be fulfilled.
Debt-equity swaps can be used in consensual circumstances; if there are hold-out creditors, such creditors can be crammed down by a scheme. There will often be ‘out of the money’ creditors when debt-equity swaps are being implemented by schemes, and in such situations it may be necessary to use a transfer scheme. This was the case with the 2009 IMO Carwash Group scheme, where the junior lenders were excluded from the scheme on the basis that the value broke in the senior debt on a going concern valuation and that they consequently had no economic interest in the company. It was therefore equitable to exclude them from the restructuring. The court followed the approach adopted in the earlier Countrywide and McCarthy & Stone schemes, noting in particular that the courts should be slow to reject a scheme that, in the absence of any manifest error or irregularity, the participants generally regarded as being in their commercial interests, especially where the scheme properly constituted the classes of participant creditors, complied with the requirements of company law and did not display any other manifest irregularity.
The implementation of debt-for-equity swaps in more complex, and high-profile transactions has become more apparent. The use of a court-sanctioned scheme to effect a debt-equity swap was a key part of the process in the Uniq restructuring,14 as was the acquiescence of the United Kingdom’s Pensions Regulator and Pension Protection Fund, which was achieved only after protracted negotiations.
Schemes have become a popular tool in large restructurings, and are increasingly being considered by foreign companies that can establish a connection to the United Kingdom due to the lack of a local equivalent that would enable them successfully to restructure their debts without the unanimous consent of their creditors. Foreign companies have been allowed to avail themselves of English law schemes where they can demonstrate both a ‘sufficient connection’ with England and Wales, and that the scheme order would be effective in the jurisdiction in which the company would otherwise be wound up. Following schemes in relation to TeleColumbus, Rodenstock15 and Primacom,16 it has become a well-trodden path for the English courts to exercise their scheme jurisdiction over foreign companies on the basis that there is a sufficient connection resulting from the subject matter of the scheme compromise involving English law-governed finance documents that provide for submission to the jurisdiction of the English court. For foreign companies that do not have English law-governed debt, it may be possible to use the amendment provisions in the financing documents to amend the governing law to English law (often this type of amendment will require the support of two-thirds of the lenders) and thereby establish a sufficient connection (see the case summary below for further information about this approach). Another means of establishing jurisdiction is to shift the centre of main interests (COMI) of the company to the United Kingdom, as was done successfully in the restructuring of Wind Hellas17 and more recently in the restructuring of Magyar Telecom, which successfully implemented the restructuring of New York law-governed bonds through a scheme supported by US chapter 15 recognition.
The jurisdictional reach of the scheme to implement complex international restructurings is an area of continued development as it increasingly becomes the restructuring tool of choice for balance sheet restructurings of both domestic and foreign companies. The development of schemes of arrangement as a tool for international restructurings has come about through judicial decision-making, and it is anticipated that the English law scheme jurisdiction will continue to thrive in the coming years. The judiciary has generally expressed strong support for the use of schemes for international restructurings, and there has been a trend in recent years for decisions to add further flexibility to the scheme process, which is expected generally to continue; courts have, however, begun to apply greater scrutiny to jurisdictional requirements and information supplied to creditors during the scheme process to ensure that creditors are able to reach a fully informed decision. Some of the recent judicial decisions of note in this area are summarised below.
Amendment of the governing law and the test to establish ‘sufficient connection’
In Re Apcoa Parking Holdings GmbH and others,18 the High Court had been asked to decide whether the English court had jurisdiction to sanction a proposed scheme of arrangement in respect of a group of foreign companies where sufficient connection was established following the amendment of governing law and jurisdiction clauses of the relevant agreements to English law and jurisdiction.
In the second half of 2014, Apcoa proposed another more complex scheme of arrangement that sought to impose new obligations on its creditors in respect of its existing financing documentation, the governing law of which had already been changed from German to English law for the purpose of effecting the prior scheme referred to above. However, one of the group’s creditors who had not consented to but was bound by the change in governing law and jurisdiction clauses repeatedly contested the schemes. The scheme creditor argued that there was insufficient connection to the jurisdiction, and that the changes in the governing law and jurisdiction clauses were only made to allow the scheme companies to prove that they had such sufficient connection and that the English court had no jurisdiction to decide on whether new obligations should be imposed on certain of the companies’ creditors.
The court considered the test of sufficient connection achieved solely on the basis of amending the relevant governing law and jurisdiction clauses and noted that, when sanctioning such a scheme, the court should have regard to whether there was a previous connection between the parties and the choice of new governing law, whether the change in law had as its sole purpose to advantage one group of creditors over another and whether exercising the court’s jurisdiction to sanction a scheme altering the rights of parties that had not consented thereto was considered ‘a step too far’.
In this first instance decision, the court held that there was a sufficient connection with the jurisdiction for a number of reasons including that creditors had been made aware at the outset that the change in governing law and jurisdiction clauses would be used to persuade an English court to exercise its jurisdiction to sanction a scheme, that the amendment to the governing law was not arbitrary and that it had been provided for in the original debt documentation. Furthermore, a majority of creditors who did not gain from the change in law and jurisdiction consented to the amendment.
The decision in Apcoa serves as a reminder that relying on changes in governing law and jurisdiction to prove sufficient connection may not be enough and that, in order to exercise its jurisdiction, the court may require further evidence before sanctioning schemes proposed by foreign companies.
Sufficient connection and governing law clauses: does timing matter?
The decision in Apcoa was revisited in Re DTEK Finance BV,19 where a Dutch company amended the governing law clause of its high-yield bonds to English law in order to implement a restructuring by way of an English scheme of arrangement.
In 2010, the company issued loan notes that were governed by New York law, and in April 2015 amended this provision to English law following an exchange offer and consent solicitation made to noteholders in March 2015. The amendment to the governing law clause occurred in the same month that the company submitted its application to sanction the scheme. The question for the court was whether the connection was truly sufficient given that the amendment had occurred a mere two weeks prior to the scheme sanction hearing. The court held that a change in governing law should by itself establish sufficient connection, and followed the judgment in Apcoa that the original documentation had provided for a change in governing law and was therefore a prospect of which the noteholders should have been aware when purchasing the notes.
The decision in DTEK confirmed the decision in Apcoa that changing the governing law and jurisdiction of relevant debt to English law and the English courts is on its own sufficient to establish a connection with the jurisdiction and underlines the English courts’ willingness to assist foreign companies in restructuring their debt obligations.
Scheme of arrangement for a Danish company where the governing law and jurisdiction terms of debt had been amended to English law and jurisdiction
In Re TORM A/S,20 a scheme of arrangement was proposed by a shipping company incorporated in Denmark (TORM).
TORM was the borrower under four facility agreements, two of which had been governed by English law from the outset, and two of which had been originally governed by Danish law and jurisdiction. The latter facility agreements were amended to render them subject to English law and the jurisdiction of the English courts in order to facilitate an English law scheme of arrangement to restructure TORM’s liabilities under the four facility agreements.
The High Court held that there was sufficient connection with the jurisdiction to sanction the scheme of arrangement based on the English governing law and jurisdiction provisions of the four facility agreements, and the scheme was duly sanctioned. Following Apcoa, the TORM scheme is another example of how English courts are prepared to take a flexible and pragmatic approach to jurisdictional issues so as to allow companies and their stakeholders to benefit from the restructuring opportunities offered by schemes of arrangement.
Greater judicial scrutiny of the jurisdictional requirements under the EU Judgments Regulation (1215/2012)21
Addressing jurisdictional issues is particularly important for schemes involving overseas companies that have a limited jurisdictional nexus with England and where recognition of the scheme in other countries is, therefore, an important factor. The jurisdiction of the English court to sanction a scheme of arrangement under the Companies Act 2006, Pt 26 extends to any company that is liable to be wound up under the Insolvency Act 1986 (IA 1986). This provides a very broad extra-territorial jurisdiction that covers foreign companies by virtue of IA 1986, Sections 220 and 221(1). However, when considering its scheme jurisdiction, the court must consider any restrictions imposed by the EU Judgments Regulation, which, broadly speaking, provides for jurisdiction based on the defendant’s domicile, which in the case of a scheme is arguably the domicile of the company’s creditors. The Van Gansewinkel judgment, like a number of scheme cases before it, does not decide the point on whether or not the EU Judgments Regulation applies. Nevertheless, in light of the possibility that Brussels I (recast) does apply in scheme cases, the judgment provides important guidance on the application of two alternative routes to establish jurisdiction under this regulation through Articles 8 or 25 where there are scheme creditors who are not domiciled in England and Wales.
Article 8 provides that a defendant may be sued in a Member State where another defendant is domiciled, provided that ‘the claims are so closely connected that it is expedient to hear and determine them together.’ This judgment provides that this Article may be engaged on the basis that scheme creditors are akin to defendants and that where the number and value of the scheme creditors domiciled in England and Wales is not immaterial (in this case around 14 per cent by number and 12 per cent by value) then the test for expediency could be satisfied so as to engage Article 8. Article 25 is potentially engaged where the relevant documents contain a jurisdiction clause, pursuant to which, parties have agreed that the courts of a particular Member State are to have jurisdiction to settle disputes. This judgment provides that an exclusive, but not a one-way, jurisdiction clause can be relied upon to establish jurisdiction for the purposes of Article 25. A one-way jurisdiction clause is for the benefit of the scheme creditors and only provides for the scheme company, and not the scheme creditors, to submit exclusively to the jurisdiction of the English court.
Greater judicial scrutiny of notice requirements and the scheme company’s evidence and its proposed disclosure to scheme creditors22
The Indah Kiat judgment reiterates the importance of providing scheme creditors with notice of the first scheme court hearing; this should include appropriate disclosure and give sufficient time to enable scheme creditors to consider the matter, take advice and, if desired, participate at the hearing. In this instance, the judge did not grant the relevant scheme order, but instead provided for a six-week adjournment, having found that 14 days was inadequate notice for a bond scheme involving communications with scheme creditors through the clearing system where the scheme company had not made out a case for the need for urgency. In doing so, the judge cautioned that the court must be astute to detect any attempt to ‘bounce’ creditors into a convening hearing in relation to a complex or novel scheme on inadequate notice.
The judge also found that the scheme company’s application did not adduce evidence of sufficient quality and credibility to persuade the court to convene scheme meetings. In doing so, the judge cautioned that whether or not there is any opposition, a scheme company has a duty to make full and frank disclosure to the court of all material facts and matters that may be relevant to any decision that the court is asked to make. These remarks echo the remarks made by the same judge in the scheme of the Van Gansewinkel Group, namely that whether or not a scheme is opposed, the court requires those presenting the scheme to bring to its attention all matters that are relevant to the jurisdiction and to the exercise of its discretion. This is particularly the case when the court is considering a scheme for an overseas company where recognition of the scheme in other countries will be important.
A key point of contention between the parties was whether or not insolvency was the appropriate alternative for scheme creditors to consider in light of the groups balance sheet, which showed a net asset position of over US$2.5 billion and gross profits over a nine-month period up to September 2015 of US$440.9 million. In the Van Gansewinkel Group scheme, the same judge had advised that information on alternatives was likely to be very important in circumstances where a scheme was being proposed as a better alternative than potential recoveries in the scheme company’s insolvency. In the present case, FTI had been commissioned to provide a fairness opinion, which contained an analysis of the likely returns to scheme creditors if the scheme company and the parent were to go into liquidation. However, neither the opinion nor the explanatory statement contained any definitive conclusion around whether the scheme company and the parent would have to file for insolvency in the event that the scheme was not successful and in light of the parent’s apparent financial health, insolvency did not appear to be the most credible alternative. As such, the judge found that the explanatory statement had not appropriately addressed all of the alternatives to the scheme.
iv Hot industries
In the first half of 2016, there were a number of noteworthy retail failures, most notably with BHS’s and Austin Reed’s respective filings for administration in April, resulting in the closure of all 120 Austin Reed stores and all 164 BHS stores, and a combined loss of over 12,000 jobs. Underlying problems have also been exposed in the British steel industry as a drop in international demand for steel, combined with increasing growth in production, has resulted in a huge surplus available on the international market, causing the price of steel to plummet. In October 2015, Sahaviriya Steel Industries UK went into liquidation, having accumulated debts worth US$1.4 billion, the corollary of which was that 1,700 employees were made redundant. Tata Steel declared its intention in March 2016 to sell its UK steel business, before planning instead to merge its European operations, likely resulting in its several UK plants continuing under Tata’s ownership.
Moving into the second half of 2016 and beyond, a number of global and regional economic factors will likely have an impact on a number of British companies, which may, in turn, cause financial stress and distress. In particular, in the immediate aftermath of the recent referendum decision for the United Kingdom to leave the European Union, the uncertainty surrounding the UK’s ongoing relationship with the European Union has created significant market volatility, resulting in a weakening of the value of the sterling and fluctuating share prices; financial institutions and retailers importing goods from overseas have, in particular, seen significant drops in their share prices. Consumer confidence may also have declined following the referendum, with sectors such as travel, fashion and lifestyle, home, living, DIY and grocery particularly vulnerable to any cutbacks on discretionary consumer spending. In addition, a number of commercial property funds halted redemptions by retail investors causing a degree of market panic and share price collapse, and dampening investor confidence, resulting in many investors putting their money into secure credit sovereign debt, pushing yields down to record-low levels.
The shipping industry is expected to remain an active source of restructuring work around the world, as demand for shipping continues to lag far behind industry capacity, with time charter rates having collapsed to a fraction of the rates seen in previous years. Further, liquidity problems in major European shipping banks have caused restrictions on access to shipping finance, which have in turn led to sharp declines in vessel values and in orders for the construction of new vessels. The outlook for the global shipping industry, therefore, remains poor, and the United Kingdom’s many businesses that operate in, or are dependent on, the shipping industry are expected to suffer several insolvencies in future years.
Notwithstanding a rally in commodity prices in the first half of 2016, the current oil price (in the region of US$50/bbl), is significantly lower than the recent peak of over US$100/bbl in 2014, and continues to have an adverse impact on many businesses in the oil and gas sector. The high cost of production for offshore UK oil and gas companies in the North Sea (with UK offshore oil companies estimated to require the oil price to be US$67/bbl to break even) means that production economics have been undermined, while analysts consider that the UK Continental Shelf is entering into a phase of ‘super maturity’, with discovery and production rates significantly down on corresponding measures seen 30 years ago, and further poor revenue streams on account of the depressed oil price, notwithstanding improved production driven by greater production efficiency.
The main sources of cross-border insolvency law in the United Kingdom are the EU Regulation on Insolvency Proceedings (Insolvency Regulation),23 the Cross-Border Insolvency Regulations 2006,24 which implement the UNCITRAL Model Law on Cross-Border Insolvency (Model Law), Section 426 of the IA86 and the underlying common law. As discussed elsewhere in this chapter, the framework applicable to cross-border insolvencies may be subject to significant change in the coming years as a result of the UK’s decision to leave the EU.
i Insolvency Regulation
As is now widely known, pursuant to the Insolvency Regulation, in general any main proceedings opened in a Member State of the EU must be recognised without any further formality in all other Member States from the time of the opening of such proceedings. The main proceedings may only be opened in the jurisdiction where the company has its COMI; there is a rebuttable presumption that the location of the company’s COMI will be the jurisdiction in which the company is incorporated.
The leading authorities on COMI under the Insolvency Regulation are the rulings of the European Court of Justice in Re Eurofood IFSC25 and Interedil Srl (in liquidation) v. Fallimento Interedil Srl and another.26 In Eurofood, it was held that in the case of a company whose registered office and that of its parent company are situated in two different Member States, the presumption that its COMI is in the jurisdiction in which it is incorporated can be rebutted only if there are factors, objective and ascertainable by third parties, which enable this to be established to the contrary. The mere fact, however, that a parent company controls, or can control, the economic choices of its subsidiary, where the subsidiary has a registered office and carries on its business in another jurisdiction, is not enough to rebut this presumption. The Eurofood test was subsequently applied by the English High Court in Re Stanford International Bank Limited and others.27
Interedil established the principle that in determining a company’s COMI under the Insolvency Regulation, more weight must be given to the location of the company’s central administration in accordance with Recital 13 of the Insolvency Regulation (which states that a debtor’s COMI must correspond to the place where it regularly conducts the administration of its interests). If the company’s management and supervision take place in the location of the company’s registered office, this will be the location of the company’s COMI. If the company’s central administration takes place elsewhere, the presumption regarding the jurisdiction of incorporation will be rebutted. Consistent with Interedil, in Olympic Airlines SA Pension and Life Assurance Scheme v. Olympic Airlines SA,28 the English Court of Appeal held that a company not conducting economic activity had no establishment in the UK, and hence the Court has no jurisdiction to commence secondary proceedings in such cases.
The English High Court’s decision in Re Nortel Networks SA & Ors29 is of interest in the context of European cross-border insolvencies involving proceedings in multiple jurisdictions. In this case, an application was made by the UK administrators of certain companies in the distressed Nortel Networks group to send letters of request to the courts in a number of other European jurisdictions, asking those courts to notify the administrators of any application to open secondary insolvency proceedings in respect of any companies in the Nortel Networks group. The High Court made it clear that a duty of cooperation between insolvency officeholders existed and that it extended to the courts that exercised control of secondary insolvency proceedings in their respective jurisdictions, particularly in cases where foreign insolvency proceedings could potentially impede a successful restructuring of the group as a whole. On this basis, the High Court ruled in favour of the administrators, stating that it was highly desirable that the requested assistance from the foreign courts be sought. The Court authorised the sending of the letters of request. This decision is important for insolvency practitioners as the ability of courts to cooperate with each other has been a critical factor in recent European cross-border insolvency reform.
After a lengthy process of negotiation, on 20 May 2015, the European Parliament and the Council of the European Union officially adopted the Regulation on Insolvency Proceedings (recast) (the Recast Insolvency Regulation)30, which is to replace the Insolvency Regulation. The Recast Insolvency Regulation entered into force in principle on 25 June 2015, although the majority of provisions will apply from 26 June 2017.31 The existing Insolvency Regulation will continue to govern insolvency proceedings that are opened in the EU before 26 June 2017.32
The Recast Insolvency Regulation seeks to strengthen and broaden the framework of recognition and cooperation of the Insolvency Regulation. There are five key changes envisaged to the current form of the Insolvency Regulation:
a Measures are introduced to discourage abusive forum shopping, namely by changing the presumptions applied in relation to the location of COMI. The amending regulation introduces a formal definition of the term ‘COMI’ that allows courts to investigate and identify if a debtor’s move to a new jurisdiction before filing for insolvency was genuine and not abusive. The period of investigation has been set at three months for business professionals and six months for individuals.33
b A new procedure, to be known as a group coordination proceeding, will allow for coordination on insolvencies of groups of companies, in which group members can choose to participate. There is due to be a flexible framework for cooperation between officeholders and courts dealing with the insolvency of a group of companies.34
c Pre-insolvency rescue proceedings will be included in the definition of main proceedings, as the scope of proceedings is broadened. Secondary proceedings will no longer be limited to winding-up proceedings. For the UK, however, schemes of arrangement under Part 26 of the Companies Act 2006 will remain outside the scope of the Recast Insolvency Regulation.35
d Provision is made for a court to be able to postpone or refuse a request to open secondary proceedings. In certain situations, an officeholder of the main proceedings may, with the support of local creditors, give an undertaking as to the treatment of creditors in other Member States in order to avoid secondary proceedings in those jurisdictions.36 Various other mechanisms are introduced to minimise the need to open secondary proceedings.
e EU-wide insolvency registers will be established so that they are searchable in all official languages of the EU (although these provisions will not come into force at the same time as the majority of the new provisions).37
The fundamental premise that insolvency law is a matter for each EU Member State has remained embedded within the Recast Insolvency Regulation, which seeks to strengthen the framework of recognition and cooperation that the Insolvency Regulation set up over a decade ago. The amendments extend the scope of the Insolvency Regulation to cover ‘preventative’ insolvency proceedings, clarify the criteria for jurisdiction and establish a system to increase transparency for debtors, thereby bringing it into line with developments in national insolvency laws introduced since its entry into force in 2002.
ii The Model Law
The Cross-Border Regulations enacted the Model Law in the law of Great Britain (i.e., England, Wales and Scotland) in April 2006. The Cross-Border Regulations provide, inter alia, for the recognition of a foreign proceeding commenced or officeholder appointed in any foreign jurisdiction, regardless of whether that foreign jurisdiction has enacted a version of the Model Law.
The High Court heard its first reported case for recognition and relief under the Cross-Border Regulations in November 2006 in the case of Re Rajapakse.38 The Registrar heard an application for recognition by a US Chapter 7 trustee. In granting a recognition order, the Registrar also produced a note of helpful observations for practitioners when making such applications (including what documents must be filed, process for doing so, how to effect service).
Earlier in 2009, the High Court heard the case of Samsun Logix Corporation v. DEF39 under the Cross-Border Regulations, in which it recognised the primacy of the rehabilitation proceedings commenced by Samsun in its home jurisdiction of Korea, together with the order that the Korean court granted, imposing a moratorium on the commencement and continuation of creditor actions and proceedings against Samsun in the United Kingdom.
In subsequent cases, the Cross-Border Regulations have been successfully used to obtain recognition from the English courts of insolvency proceedings in the BVI,40 Denmark,41 Switzerland42 and Antigua.43 In light of the introduction of the Cross-Border Regulations and the above cases, it is expected that there will be an increased number of overseas office holders who will seek recognition of overseas proceedings and their domestic powers in the United Kingdom.
The Cross-Border Regulations provide that, on the recognition of a foreign proceeding, the court may order ‘the delivery of information concerning the debtor’s assets, affairs, rights, obligations or liabilities’,44 and may grant ‘any additional relief that may be available to a British insolvency office holder under the law of Great Britain, including any relief provided under Paragraph 43 of Schedule B1 to the Insolvency Act 1986’.45 In granting such relief, the court must be satisfied that ‘the interests of creditors […] and other interested persons, if appropriate, including the debtor, are adequately protected’.46
The court in Re Bernard L Madoff Investment Securities LLC, between Picard v. Fim Advisers LLP and others47 interpreted these articles to mean it only had jurisdiction to make an order under Article 21 if the information sought by a US corporate trustee in bankruptcy concerned the assets, affairs, rights, obligations or liabilities of the insolvent US company. The subsequent case of Akers and McDonald v. Deutsche Bank AG (Re Chesterfield United Inc and Partridge Management Group SA)48 saw a departure from this restrictive approach. In Chesterfield, the court held that the power of general assistance contained in Article 21(1)(g) was not to be construed narrowly with reference to the categories of discretionary assistance specifically listed elsewhere in Article 21(1). Accordingly, the court made an order under Section 236 of the IA86 (an information disclosure provision) that required Deutsche Bank to make substantial disclosure to the liquidators of two BVI companies.
Practitioners should also note the case of Nordic Trustee ASA and another v. OGX Petroleo e Gas SA (Em Recuperacao Judicial) and another,49 where the High Court held that, when a foreign insolvency office holder makes an application to the English court for recognition under the Cross-Border Regulations, the office holder must disclose to the court the possible impacts of recognition on third parties not represented before the court, for example, as a result of a stay order made following recognition.
iii Judicial assistance to proceedings commenced in another jurisdiction
Section 426 of the IA86 provides for the UK courts to give assistance upon request to the courts of other designated jurisdictions, which are mainly Commonwealth countries. Where Section 426 applies, it provides an alternative means of relief and assistance to the Insolvency Regulation and the Cross-Border Regulations, and the UK courts can apply the insolvency law of either jurisdiction in relation to the assistance requested. For example, in the case concerning the Australian-based insurance group, HIH,50 the House of Lords allowed the repatriation of funds to the Australian liquidators pursuant to a letter of request from the Australian court under Section 426. In HSBC Bank plc v. Tambrook Jersey Ltd,51 pursuant to a letter of request from the Royal Court of Jersey, the English Court of Appeal confirmed that a company with its COMI in Jersey could commence administration proceedings in England in a case where there are no extant or anticipated formal insolvency proceedings in Jersey.
In the important case of Rubin v. Eurofinance SA,52 the Supreme Court confirmed that English courts have a common law power to recognise and grant assistance to foreign insolvency proceedings. On the question of enforcing foreign insolvency judgments, however, the Supreme Court held that the English courts will only enforce a foreign judgment against a party that was present in the foreign jurisdiction when the proceedings were commenced, or that made a claim or counterclaim in the foreign proceedings, or that appeared voluntarily in the foreign proceedings, or that otherwise agreed to submit to the foreign jurisdiction. See Section III, supra, for a discussion of a further recent case of note in this area.
Further, although they are becoming increasingly rare, there are also examples of insolvency protocols being used in cross-border insolvencies involving the United Kingdom in order to harmonise the separate proceedings commenced in different jurisdictions. For example, protocols were used in the Maxwell Communications case in 1991, and more recently in the case of the UK shipping business, Cenargo.
Vi FUTURE DEVELOPMENTS
i The UK as a forum of choice for international restructurings
The United Kingdom is an attractive jurisdiction for restructuring because of the flexible and business-friendly legal procedures available, and because of the expertise shared by its specialist insolvency judges and practitioners. Companies from other countries, and in particular other EU Member States, have frequently used UK insolvency processes for successful restructurings and the UK has become a forum of choice for international restructurings, with the UK scheme of arrangement serving as the principal competitor to US Chapter 11 proceedings in the international restructuring market. Several EU states have made business-friendly insolvency law reforms in recent years, especially France, Italy, the Netherlands and Spain. Nevertheless, the new restructuring procedures adopted have, in many cases, not been widely used in the context of major restructurings. Possible reasons for this are continuing uncertainty about the effects of new legislation that is yet to be subject to court scrutiny, a lack of sufficient expertise among practitioners and judiciary, and the availability of well-established alternatives, such as schemes of arrangement.
Two main methods may be used by foreign companies to benefit from a UK insolvency process. First, the Insolvency Regulation and the Cross-Border Regulations allow a foreign company to enter a UK insolvency process, which in most cases would be administration, if it can be established that the COMI of the business is in the UK. Given sufficient time and resources, a COMI shift may be achieved, through which enough factors pertaining to the central management and control of the business are moved to the UK to satisfy a court that the COMI is located in the jurisdiction.53
Second, a scheme of arrangement in relation to a foreign company may be sanctioned by the English court if it is satisfied that there is a sufficient connection with the jurisdiction. The sufficient connection test and some significant jurisprudence in this area are discussed in more detail above, but in terms of international restructurings it is worth highlighting encouraging trends for ever greater flexibility in the utilisation of the scheme jurisdiction as represented by the decisions in Apcoa Parking Holdings and TORM A/S (discussed above), where the court sanctioned schemes relating to foreign companies where the governing law of the relevant finance documents had been changed to English law in order to avail the company of the UK scheme jurisdiction to implement a restructuring.
ii The impact of Brexit
The UK’s relationship with the EU appears likely to change in the coming years as a result of the recent UK referendum decision to leave the EU, and this may have an impact on the recognition and enforcement of schemes of arrangement (as well as UK insolvency processes such as administration) in EU jurisdictions. It is not possible at this stage to predict with any certainty the form of relationship that will exist between the UK and the EU in the future, and it is, of course, possible that the UK will not in fact leave the EU. If the UK does leave the EU, there is a range of possible outcomes, from (at one extreme) EEA membership, which would put the UK in a similar position to that of Norway, to (at the other extreme) no trade agreement, which would place relations between the UK and the EU on a WTO basis. It is possible that a unique arrangement will be reached that does not reflect any current precedents, but considering the possible position under these two extremes provides an indication of the issues that are likely to arise.
If the UK were to retain EEA status, it would be open for the UK to seek to agree with the EU that the Insolvency Regulation would continue to apply to the UK, although this would be unprecedented as the Insolvency Regulation does not currently apply to any non-EU members. The continuation of the Insolvency Regulation would be essential for the automatic recognition of UK insolvency processes in the EU. Where Member States have passed laws based on the Model Law, this may help UK insolvency office holders seeking recognition, but as at the time of writing, the only other EU Member States that have done so are Greece, Poland, Romania and Slovenia. The Insolvency Regulation is not relevant to the recognition and enforcement of schemes in the EU, although the option of shifting COMI to the UK to establish jurisdiction for a scheme could be more difficult if the Insolvency Regulation were no longer in force. In a situation where there is no trade agreement between the UK and the EU, the continuation of the Insolvency Regulation with regard to the UK appears very unlikely, which would mean that recognition of UK insolvency processes in the EU would depend on judicial comity, as decided by courts on a case-by-case basis.
Importantly, in the context of the UK’s possible departure from the EU, the scheme jurisdiction over foreign companies does not depend on the Insolvency Regulation. Nevertheless, when sanctioning a scheme, the scheme company must satisfy the English Court that the scheme will have a substantial effect which, for a foreign company, involves establishing that it is likely to be recognised in any key jurisdictions where it could be challenged, such as the jurisdiction where the scheme company is incorporated or where it has significant assets. Arguments for the recognition and enforcement of schemes of arrangement in the EU are usually based on private international law and the Brussels Regulation.54 As with the Insolvency Regulation, the Brussels Regulation does not currently apply to any non-EU members, and so its continuation with regard to the UK after the UK’s departure from the EU would be unprecedented. A more viable option is, however, presented by the existence of the Lugano Convention,55 which currently applies to the EU, Switzerland, Norway and Iceland and is similar to the EU Judgments Regulation. As an EEA member, therefore, it seems likely that the UK could accede to the Lugano Convention, which would support the continuing recognition and enforcement of schemes in the EU. If the UK had no trade agreement with the EU, Lugano Convention membership would appear to be unlikely, and recognition and enforcement of schemes of arrangement in the EU would be a matter entirely for the private international laws of EU Member States; nevertheless, it is likely that in these circumstances EU Member States would not have a problem with continuing to recognise and enforce the effect of schemes of arrangement in accordance with their own private international laws and without the added assistance of the Brussels Regulation.
The possibility of the UK’s departure from the EU may have an adverse impact on the ability of EU companies to benefit from UK insolvency processes, as discussed above. It is anticipated, however, that the factors that make the UK an attractive forum for international restructurings, and the structural and cultural shortcomings that make many foreign companies, both within and beyond the EU, reluctant to pursue complex restructurings in their home jurisdictions, will continue regardless of the political events to come.
1 Christopher Mallon is a partner and Alex Rogan and Sebastian Way are associates at Skadden, Arps, Slate, Meagher & Flom (UK) LLP.
2 While a fixed charge attaches to a particular asset and allows its disposal only with consent of the secured creditor or on repayment of the debt, a floating charge is created over a class of assets, present and future, and allows the debtor to carry on its business and deal with such assets until a default under the relevant loan agreement (or other defined event), upon which the charge ‘crystallises’ and attaches to the secured assets, preventing the debtor dealing with the assets without repayment of the debt or consent of the creditor.
3 However, where assets are subject to a floating charge created on or after 15 September 2003, a liquidator, receiver or administrator must in general make a ‘prescribed part’ of the floating charge realisations (currently 50 per cent of the first £10,000 and 20 per cent of the remainder, capped at £600,000) available for the satisfaction of unsecured debts in priority to the claim of the floating charge holder.
4 CVA proposals must be approved by a simple majority in value of the members and three-quarters in value of the company’s creditors present and voting. A scheme requires approval by a majority in number representing three-quarters in value of the members or creditors (or of each class of members or creditors) who vote at a meeting convened by the court for the purpose of considering the scheme. The scheme must subsequently be approved by the court.
6  EWCA Civ 895.
7  UKPC 5.
8 Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No. 1093/2010 and (EU) No. 648/2012, of the European Parliament and of the Council.
9  EWHC 3199 (Ch).
10  EWHC 2067 (Ch).
11  EWHC 904 (Ch).
12 9 August 2006 (unreported).
13  EWHC 2593 (Ch).
14 Re Uniq plc  EWHC 749 (Ch).
15 Re Rodenstock GmbH  EWHC 1104 (Ch).
16 Primacom Holding GmbH v. A Group of the Senior Lenders & Credit Agricole  EWHC 164 (Ch).
17 Re Hellas Telecommunications (Luxembourg) II SCA  EWHC 3199 (Ch).
18  EWHC 3849 (Ch).
19  EWHC 1164 (Ch).
20  EWHC 1749 (Ch) (9 June 2015), unreported;  EWHC 1916 (Ch) (30 June 2015), unreported.
21 Re Van Gansewinkel Groep BV and others  EWHC 2151 (Ch),  All ER (D) 241 (Jul).
22 Re Indah Kiat International Finance Company BV  EWHC 246 (Ch).
23 Council Regulation (EC) 1346/2000 on insolvency proceedings (OJ 2000 L 160/1).
24 SI 2006/1030.
25 Case C-341/04.
26 Case C-396/09.
27  EWHC 1441 (Ch).
28  EWCA Civ 643 (6 June 2013).
29  EWHC 206 (Ch).
30 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 (OJ L 141, 5.6.2015, p. 19–72).
31 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015, Article 92.
32 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015, Article 84(2).
33 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015, Article 3.
34 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015, Chapter V.
35 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015, Articles 1 and 3.
36 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015, Article 36.
37 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015, Articles 25-30.
38  BPIR 99.
39  EWHC 576.
40 Akers and McDonald v. Deutsche Bank AG (Re Chesterfield United Inc and Partridge Management Group SA)  EWHC 244 (Ch).
41 Larsen and others v. Navios International Inc (Re Atlas Bulk Shipping A/S)  EWHC (Ch) 878.
42 Cosco Bulk Carrier Co Ltd v. Armada Shipping SA and another  EWHC 216 (Ch).
43 Re Stanford International Bank Ltd (in liquidation)  EWCA Civ 137.
44 Article 21(1)(d), Schedule 1 of the Cross-Border Regulations.
45 Article 21(1)(g), Schedule 1 of the Cross-Border Regulations.
46 Article 22(1), Schedule 1 of the Cross-Border Regulations.
47  EWHC 1299 (Ch).
48  EWHC 244 (Ch).
49  EWHC 25 (Ch).
50 Re HIH Casualty and General Insurance Limited; McGrath & Anor & Ors v. Riddell & Ors  UKHL 21. See also Rubin v. Eurofinance SA; New Cap Reinsurance Corporation (in liquidation) and another v. Grant and others  UKSC 46.
51  EWCA Civ 576 (22 May 2013).
52  UKSC 46.
53 Note that judicial endorsement for the practice of COMI shifting has been expressed in UK cases such as Re Hellas Telecommunications (Luxembourg) II SCA  EWHC 3199 (Ch) and TXU Europe German Finance BV  BCC 90.
54 Council Regulation (EU) 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast) (also known as the Recast Brussels Regulation), which has applied from 10 January 2015, superseding the 2001 Brussels Regulation.
55 Convention on jurisdiction and the enforcement of judgments in civil and commercial matters signed in Lugano on 30 October 2007.