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 (UK) experienced considerable political upheaval as a result of the unexpected and momentous decision of the British people to leave the European Union (EU) (Brexit). Decades of foundational assumptions in public policy and the making and administration of laws were thus overturned. Prior to the vote economic forecasts concerning the potential impact of Brexit ranged from a slide into a deep and immediate recession to robust economic growth in the medium to long term. One year on from the referendum, it is clear that the apocalyptic predictions of economic meltdown following a Brexit vote have not occurred. Despite an air of instability and concern in some quarters about the UK's prospects, the UK's economic growth has continued, although at a slower pace. Following the referendum, gross domestic product (GDP) grew by 0.5 per cent in Q3 2016, 0.7 per cent in Q4 2016 and 0.2 per cent in Q1 2017 (the lowest quarter for a year). At the same time the rate of unemployment decreased to 4.6 per cent, the lowest level since 1975. Economists consider the main reason for this development to be the sharp fall in the value of the pound sterling (sterling) since the EU referendum. In March 2017, the sterling exchange rate index (ERI) fell a further 1.5 per cent from the end of February 2017 and was 10.5 per cent lower compared with the end of March 2016. This decline in value meant British goods became considerably cheaper especially for countries from the European Union and the United States (US). As a result, the UK's export rate increased by almost 10 per cent to March 2017. However, the weakness of sterling has resulted in increased import costs that have resulted in some price rises and contributed to a reduction in consumption.
One important topic raised before the referendum for the City of London was the impact of Brexit for the role of London as the foremost European financial centre. Despite predictions that a multitude of firms and businesses would leave the UK for other European financial centres immediately following a vote to leave the EU, this has not come to fruition. In terms of contingency planning, a few banks based in London have rented new offices outside of the UK, primarily in Frankfurt. Three Japanese banks, namely Sumitomo Mitsui, Daiwa Securities and Nomura have announced plans to relocate their business seats from London to Frankfurt. However, as at the time of writing, none of these banks has disclosed how many employees will be transferred and the actions that have been taken to date seem to be more part of preparation for a range of scenarios concerning the outcome of the withdrawal negotiations rather than specific definitive measures to leave the UK.
It is too early to draw any conclusions as to the medium or long-term impact of Brexit on the economy and the finance industry. There are a number of complex considerations that will form part of the negotiations between the UK and the EU. Indeed, it also remains to be seen whether the UK's economic fate will depend solely on the outcome of these negotiations given the range of external global macro-economic factors that could affect global financial markets in the next decades as well as the British economy and financial sector. Much of the discussion relating to withdrawal negotiations has centred on the ‘model' that the UK will try to pursue. A so-called ‘hard' Brexit envisages the UK withdrawing from both the customs union and the single market, whereas a so-called ‘soft' Brexit envisages the UK remaining in either or both. Perhaps more significant for the UK's economic fortunes, certainly in the short to medium term, will be the extent and duration of the transitional arrangements adopted by the UK in order to cushion the impact of the UK's eventual withdrawal from the EU. In the event that the economy sours and business stagnates, the UK's restructuring and insolvency sector (as explained in more detail in this chapter) stands well prepared to respond to any negative economic consequences.
ii Market trends in restructuring procedures and techniques employed during this period
As explained below, most large restructurings in the UK continue to be effected on an informal, out-of-court basis. Insolvency Service statistics for activity in Q1 2017 show that company insolvencies rose for the third successive quarter and suggest that the trend of reduced insolvency activity observed over recent years might be reversing. After a historic decrease in the liquidation rate up to Q3 2016, where it was at its lowest rate since records began in 1984, the rate has increased to 0.47 per cent of all active registered companies a level last seen in mid-2015. However, compared to the long term average of 1.2 per cent over the past 25 years, the liquidation rate remains low.
There were 3,967 company insolvencies in England and Wales in the Q1 2017. This was an increase of 4.5 per cent compared to the underlying number in Q4 2016 and an increase of 5.3 per cent compared to Q1 2016. This figure comprised 2,693 creditors' voluntary liquidations (CVLs) (68 per cent of all insolvencies), 836 compulsory liquidations (21 per cent of all insolvencies), representing an increase of 3.3 per cent on the previous quarter and an increase of 2.8 per cent on Q1 2016. Further, there were 357 administrations and 81 company voluntary arrangements. These figures represent an increase of 13 per cent and a decrease of 3.6 per cent, respectively, on the equivalent figures for Q1 2016. The Insolvency Service recorded no administrative receiverships in the period.
Despite the slight increase in the liquidation rate, it should be noted that the number of active companies has grown over this period as well. The number of active companies has reached more than 3.6 million, an increase of approximately 200,000 compared to May 2016. Compared to fewer than 800,000 active companies in 1986, the number of active companies is currently more than three times higher. The low liquidation rate by historic standards reflects the change of emphasis in the UK'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.
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 likely have been forced into insolvency procedures have been 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 UK'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 UK and the rights afforded to them in the event of insolvency go some way to explaining the conventional categorisation of the UK as a ‘creditor-friendly' jurisdiction, as opposed to one generally regarded as favouring debtors, such as the US.
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 UK 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 UK 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 2016 (IR 2016), which replaced the Insolvency Rules 1986, and supplement the IA86 by providing the procedural framework for the insolvency regime. Part IV of the IA86 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 UK.
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 (SBEEA 2015) and the Deregulation Act 2015 (DA 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. The IR 2016, which came into force on 6 April 2017 replaced the IR86 in its entirety with the express purposes of consolidating the IR86 with the 28 amending instruments made since the IR86 came into force, restructuring and updating the language of the IR86 and giving effect to the policy changes and changes to the IA 86 made by the SBEEA 2015 and the DA 2015. The revised rules provide, among other things, for: the abolition of creditors' meetings as the default method for decision making in insolvency procedures; the ability to communicate and file forms electronically; split voting rights; and a reduction in the burden of reporting and record keeping requirements for insolvency practitioners. Further minor clarifications to the IR 2016 have been made by the IR Amendment Rules (SI 2017/366) and the IR Consequential Amendments Rules (SI 2017/369).
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 UK.
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 multicreditor 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.5
The administrator may only perform his or her functions in pursuit of the objective stated in (b) above if he or she believes that it is not reasonably practicable to achieve the objective stated in (b), and to do so would achieve a better result for the creditors as a whole.6 The administrator may only, in turn, 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.7
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 UK. 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.
iv Role of directors
Modern insolvency law in the UK 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. In the same manner, in the case of a preference, the court will not generally intervene 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
i Modified universalism
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,8 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 UK 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).9 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 that, if that agreement is to arise through implication, then 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.
ii Cross-border protocols
The Judicial Insolvency Network (JIN) is a collaboration between judges from approximately 10 jurisdictions established at the initiative of the Chief Justice of Singapore, Sundaresh Menon. The JIN held its first meeting in October 2016, attended by judges from the US (Delaware and the Southern District of New York), Canada (Ontario), Australia (Federal Court and New South Wales), the British Virgin Islands, the Cayman Islands and England. Hong Kong sent an observer and the judiciaries of Bermuda, South Korea and Japan requested to be kept apprised of the discussions and the outcome. The meeting produced the Judicial Insolvency Network guidelines for judicial communication and co-operation on cross-border insolvency matters (the JIN Guidelines). The guidelines have been adopted by several important jurisdictions, including the Supreme Court of Singapore (via Registrar's Circular No. 1 of 2017), the US Bankruptcy Court for the District of Delaware (via Local Bankruptcy Rule 9029-2), the US Bankruptcy Court for the Southern District of New York (via General Order M-511), the Supreme Court of Bermuda (via Practice Direction, Circular No. 6 OF 2017), and the Eastern Caribbean Supreme Court for the British Virgin Islands (via Practice Direction 8 of the BVI's Insolvency Rules 2005). The English High Court adopted the guidelines on 5 May 2017 by adding a reference to the JIN Guidelines in Chapter 25 of the Chancery Guide.
The JIN Guidelines intend to improve communication and cooperation between courts involved in cross-border insolvency proceedings, including on substantive matters, and to make provision for joint hearings. The JIN Guidelines encourage courts to permit parties to be present when court-to-court communication takes place, although any court involved in the communication may direct otherwise. The court may also authorise a party to appear before and be heard by a foreign court, even if it is not a party to the foreign proceeding, and such an appearance will not render the party subject to the foreign jurisdiction. The guidelines require the mutual recognition of statutory law, regulations and rules of court applicable to the proceedings in other jurisdictions without further proof. Further, under the guidelines a court must generally recognise that orders made in the other proceedings were duly made for the purposes of the proceedings without further proof.
Courts are permitted to communicate in advance of joint hearings to establish procedures for the making of submissions and the rendering of decisions and to resolve any procedural, administrative or preparatory matters. During a joint hearing, each court retains sole and exclusive jurisdiction over its own proceedings but each court should be able to hear the other proceeding simultaneously. After the hearing, courts may communicate with or without counsel present, including on substantive matters. It is noted that, regardless of the legal framework, the scope for joint hearings between courts in different jurisdictions may be limited where the time zones, language or legal culture are significantly different.
IV Key Restructuring Tools, Significant DEVELOPMENTS AND MOST ACTIVE INDUSTRIES
i 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 IA 1986 by 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 was in effect between October 2012 and November 2015. 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,10 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.
It is clear from Wind Hellas and subsequent judgments that pre-packs have become an established and accepted feature of the English insolvency landscape, and that the English courts 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,11 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,12 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,13 and HHJ Purle QC in Aldersley Battery Chairs Limited (unreported).
In the more recent case of Capital for Enterprise Fund a LP and another v. Bibby Financial Services Ltd,14 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.
ii 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.
A scheme can be used to achieve anything that a company and its creditors or members may agree among themselves. Examples include, inter alia: a moratorium; the transfer of assets from the debtor to a new company; a release or compromise of secured debts; and a debt-to-equity swap. In recent cases, the most common arrangement or compromise for schemes has been a debt-to-equity swap. The main objective of a debt-to-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-to-equity swaps can be used both in consensual circumstances and in non-consensual circumstances as dissenting creditors can be ‘crammed down' by a scheme provided the requisite percentage and number have approved the scheme and it has been sanctioned by court. There will often be ‘out of the money' creditors when debt-to-equity swaps are being implemented by schemes, and in such situations it may be necessary to use a transfer scheme. In these circumstances a scheme is used to cram down any ‘in the money' creditors and a pre-pack is used to transfer the scheme company's assets to a new company, thereby leaving ‘out of the money' creditors with claims against the scheme company with no assets. This was the case with the 2009 IMO Carwash Group scheme,15 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-to-equity swaps in more complex, and high-profile transactions has become more apparent. The use of a court-sanctioned scheme to effect a debt-to-equity swap was a key part of the process in the Uniq restructuring,16 as was the acquiescence of the UK'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 UK due to the lack of a local equivalent that would enable them successfully to restructure their debts without the unanimous consent of their creditors.17 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,18 Rodenstock19 and Primacom,20 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 UK, as was done successfully in the restructuring of Wind Hellas and more recently in the restructuring of Magyar Telecom,21 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.
Establishing ‘sufficient connection' with England and Wales
In Privatbank22 the court was satisfied that there was a sufficient connection with England in relation to two subordinated loan notes (the 2016 notes and the 2021 notes) which contained English governing law and jurisdiction clauses, providing jurisdiction to the English courts and which submitted disputes to arbitration with a seat in London. The bank also had a representative office, albeit of an administrative nature, and assets in England.
In Re Codere,23 the court was satisfied that, despite the Spanish group's relatively recent acquisition of an English company for the purpose of assuming the group's liabilities in respect of loan notes in order to enter an English scheme, a number of factors existed to demonstrate a sufficient connection: the intercreditor agreement was governed by English law; 97 per cent of the creditors by value had submitted to the jurisdiction by virtue of signing a lock-up agreement; a significant percentage of noteholders were domiciled in England; and the note trustee and security trustee performed their functions from offices in London. Further, as the English company acquired was incorporated in England, its COMI was in England.
Amendment of the governing law and the test to establish ‘sufficient connection'
In order to benefit from the UK's scheme of arrangement, foreign companies have in recent years sought to amend their foreign-law governed finance and security documents to be governed by English law. The English courts have considered whether such a change in governing law provides jurisdiction to the English courts to sanction a scheme of arrangement. In Re Apcoa Parking Holdings GmbH and others,24 (the second of two related schemes relating to nine companies incorporated in England, Germany, Austria, Belgium, Norway and Denmark) the proponents of the scheme sought to demonstrate a sufficient connection with England following the amendment of governing law and jurisdiction clauses of the relevant facility agreements to English law and jurisdiction.
One of the group's creditors who had not consented to, but was bound by, the change in governing law and jurisdiction clauses strongly contested the schemes arguing that the changes in the governing law and jurisdiction clauses were only made to allow the scheme companies to avail themselves of the English courts' jurisdiction. The court held that there was a sufficient connection with England 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 and 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 court cautioned, however, that in some circumstances a change of governing law to English law in relevant documents would not give rise to a sufficient connection. This might be the case, for example, if there were no connection between the new governing law and the parties' previous arrangements or if the change in law had been solely to advantage the proponents at the expense of the dissenting parties.
Similarly, in Re DTEK Finance BV,25 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. 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.
Greater judicial scrutiny of the jurisdictional requirements under the EU Judgments Regulation (1215/2012)
Addressing jurisdictional issues is particularly important for schemes involving overseas companies that have a limited jurisdictional nexus with England and given that recognition of the scheme in other countries is a precondition of such scheme becoming effective. The jurisdiction of the English court to sanction a scheme of arrangement under Part 26 of the Companies Act 2006 extends to any company that is liable to be wound up under the IA86. This provides a very broad extraterritorial jurisdiction that covers foreign companies by virtue Sections 220 and 221(1) of the of IA86. 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. Whilst the courts are yet to resolve whether or not EU Judgments Regulation applies in scheme cases, on the assumption that it does, foreign scheme companies have relied on two routes to establish jurisdiction under this regulation: Articles 8 and 25.
Article 8 provides that a defendant may be sued in a Member State where at least one ‘defendant' (treating scheme creditors as defendants) is domiciled, provided that ‘the claims are so closely connected that it is expedient to hear and determine them together'. Two different approaches to the question of how many creditors must be domiciled in England and Wales to satisfy the ‘expediency' test have emerged in recent cases. On the one hand, the judgments in MetInvest,26 Hibu27 and DTEK suggest that only one scheme creditor must be domiciled in England and Wales for it to be expedient to bring the claim in England because of the desirability of binding all scheme creditors to the same restructuring. On the other hand, in the Van Gansewinkel case28 and in Re Global Garden Products Italy SpA29 (GGP), Snowden J has emphasised that although technically only one scheme creditor is required to be domiciled in England, the ‘expediency' test may require consideration of ‘the number and value of the creditors domiciled in the UK.'
Article 25 is potentially engaged where the relevant documents contain an exclusive jurisdiction clause pursuant to which parties have agreed that the courts of a particular Member State are to have jurisdiction to settle disputes. In Hibu, Warren J found that Article 25 can apply to asymmetric jurisdiction clauses despite such jurisdiction clauses only binding one of the parties to a particular jurisdiction rather than both parties. However, in GGP, Snowden J found that Article 25 did not confer jurisdiction in respect of ‘asymmetric' jurisdiction clauses. In CBR Fashion,30 the conflicting views in Hibu and GGP were noted but the position was not resolved as the judge found that the court had jurisdiction to sanction the scheme under Article 8, in any event.
It is expected that future scheme judgments will provide greater clarity on the jurisdictional requirements under the EU Judgments Regulation, specifically in relation to the jurisdiction of the English courts under Articles 8 and 25.
Greater judicial scrutiny of notice requirements and the scheme company's evidence and its proposed disclosure to scheme creditors
The Indah Kiat31 judgment reiterates the importance of providing scheme creditors with sufficient notice of the first scheme court hearing (the convening 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. What constitutes sufficient notice will depend upon the complexity and urgency of the scheme. In this instance, Snowden J found that 14 days' notice of the convening hearing for a bond scheme that was distributed to creditors via the clearing system was inadequate notice given the lack of justification for its urgency. Snowden J therefore adjourned the hearing for six weeks. In doing so, he 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 with inadequate notice.
Snowden J 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, he also 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 particularly when the court is considering a scheme for an overseas company where recognition of the scheme in other countries will be important.
Snowden J has also emphasised, in Van Gansewinkel and more recently, in Indah Kiat, the importance of scheme companies providing sufficient detail of the most likely alternative or ‘comparator' to the scheme in the explanatory statement and in other evidence. The comparator will most often be a formal insolvency or liquidation but the court needs to be satisfied that the evidence provided is sufficient to justify the comparator chosen and any evidence to substantiate it, such as financial analysis and valuations. The provision of this information is likely to be essential if the scheme is challenged by dissenting creditors. In Indah Kiat, the court criticised the scheme company on the grounds that the draft explanatory statement and the fairness opinion relied on by the company did not contain a full analysis of all of the alternatives to the scheme, such as the discharge of the debts by the parent, which appeared, in fact, to be in a strong financial position.
Class issues: an unwillingness to fracture classes despite challenges
The comparator analysis has also played a role in recent cases in relation to the constitution of classes. The English courts have shown an unwillingness to fracture classes where creditors who have different rights prior to the scheme would rank pari passu in an insolvent liquidation, where liquidation is the relevant comparator to a scheme. In Privatbank, although creditors held notes maturing at different dates, the relevant comparator to the scheme was insolvency in which noteholders of both the 2016 notes and 2021 notes would rank parri passu. Similarly, in Indah Kiat, although the point was not decided, Snowden J's provisional view was that the dissenting creditor, APPIO, should not be in a separate class from other scheme creditors by virtue of it having taken an assignment of rights under a US judgment that it argued it was entitled to directly enforce against the scheme company.
Another issue relating to the constitution of classes which has featured in recent cases is lock-up fees, (also known as ‘consent fees' or ‘work fees'). Such fees are often offered to consenting creditors who enter into a binding agreement to support the restructuring. The courts have considered the question whether such fees, which are not paid to creditors who do not consent or consent later, fracture the class. In Privatbank, the consent fee of 2 per cent of the principal amount outstanding on the notes, did not give rise to any fairness or class issues given that it had been offered to all noteholders and was available until five days before the meeting. Richards J proposed that the test that may be applied in relation to consent fees is whether it will have a material effect on the decision of a creditor to support the scheme. In this instance, the 2 per cent fee was not considered to breach the ‘materiality' threshold.
iii Hot industries
The retail industry experienced continued restructuring activity in the second half of 2016 and first half of 2017. Several factors affected British retail companies in an unfavourable manner. The changes in the political landscape following the Brexit referendum result in June 2016 and the election result in June 2017, when the Conservative Party retained its position as the largest party in Parliament but failed to achieve a working majority in its own right, has generated uncertainty that, combined with surging consumer debt levels, contributed to the weakening of the value of sterling. This depreciation has subsequently increased operating and importing costs for UK retailers. The political uncertainty may also have reduced consumer confidence, which, in turn, has further increased economic uncertainty and caused discretionary consumer spending to shift away from retail. This was evidenced by a decline in retail sales by 1.4 per cent in the first quarter of 2017, the largest quarterly fall since 2010. These factors will likely continue to impact British retail stores in the third quarter of 2017 and beyond.
The shipping industry also saw continued restructuring activity in 2016, and such activity is expected to continue through the end of 2017. Sluggish demand for shipping has caused industry capacity to far outweigh demand, resulting in downward price pressures. Shipping companies are now experiencing increased operating costs, low freight rates and deteriorating asset values. These factors, coupled with diminished returns for investors, have caused lenders to tighten access to new finance, resulting in liquidity issues for shipping companies. In the absence of positive market indicators in the short to medium term, it is likely that such liquidity issues will persist. Even top performing companies may experience financial hardship due to depleting cash reserves and may need to restructure. The global shipping industry continues to face a bleak environment, as evidenced by Hanjin Shipping entering into insolvency proceedings and ultimately being liquidated in February 2017. This was one of the largest insolvencies in the history of the shipping industry, and has caused severe disruptions to many of the UK's businesses that operate within, or are reliant upon, the worldwide shipping industry.
The oil and gas sector experienced significant restructuring activity throughout 2016. Despite the recent upsurge in commodity prices, the reduced oil prices this past year resulted in a slowdown in offshore capital expenditure and negatively affected the financial health of several businesses in the oil and gas sector. The weakened oil price environment, dropping to as low as US$45/bbl in June, and increasing field costs associated with drilling, production and transportation have exacerbated the financial difficulties experienced by industry incumbents. Corporates with restricted access to production and transportation infrastructure remain particularly vulnerable to restructuring pressure, as revenues have dropped below the break-even point. These market challenges have also added additional pressure on oil servicing companies that are expected to continue to suffer as a result of the slowdown in offshore capital expenditure.
The construction and industrials sector has been significantly affected by Brexit-driven uncertainty. Although 2017 will see the completion of a number of large infrastructure projects, restructuring activity is predicted to remain widespread throughout the sector. This can be attributed in part to subdued business confidence and mounting costs across the supply chain, which is likely to contribute to project delays and ongoing challenges for construction companies. In accordance with the trend seen in previous years, the construction industry was the sector responsible for the most administration appointments in 2016, totalling 277 appointments across all four quarters. Ongoing difficulties indicate that restructuring activity will remain rife in the short to medium-term.
The main sources of cross-border insolvency law in the UK are the Regulation on Insolvency Proceedings (recast) (Recast Insolvency Regulation),32 the Cross-Border Insolvency Regulations 2006,33 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 Recast Regulation
After a lengthy process of negotiation, on 20 May 2015, the European Parliament and the Council of the EU officially adopted the Recast Regulation, replacing the EU Regulation on Insolvency Proceedings (Insolvency Regulation).34 The Recast Insolvency Regulation entered into force on 25 June 2015, although the majority of its provisions came into effect from 26 June 2017.35
Under the former Insolvency Regulation, any main proceedings opened in a Member State of the EU were required to be generally recognised without any further formality in all other Member States from the time of the opening of such proceedings. The Insolvency Regulation stipulated that main proceedings could only be opened in the jurisdiction where the company has its COMI; a rebuttable presumption was included that the location of the company's COMI would be the jurisdiction in which the company is incorporated.
The fundamental premise that insolvency law is a matter for each EU Member State has remained embedded within the Recast Regulation, which seeks to strengthen the framework of recognition and cooperation that the Insolvency Regulation introduced upon its entry to force in 2002. The amendments in the Recast Regulation 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. The Recast Regulation introduces the following measures:
- a Measures have been introduced to discourage abusive forum shopping, namely by changing the presumptions applied in relation to the location of COMI. The Recast 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 is genuine and not abusive. The period of investigation has been set at three months for business professionals and six months for individuals.36
- 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. The Recast Regulation further provides for a flexible framework for cooperation between officeholders and courts dealing with the insolvency of a group of companies.37
- 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.38
- 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.39 Various other mechanisms have been 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).40
In relation to the determination of a company's COMI, the leading authorities under the Insolvency Regulation are the rulings of the European Court of Justice in Re Eurofood IFSC41 and Interedil Srl (in liquidation) v. Fallimento Interedil Srl and another.42 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.43
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,44 the English Court of Appeal held that a company not conducting economic activity has no establishment in the UK, and hence the Court has no jurisdiction to commence secondary proceedings in such cases.
In the context of European cross-border insolvencies involving proceedings in multiple jurisdictions, and given the focus on group coordination proceedings in the Recast Regulation, the English High Court's decision in Re Nortel Networks SA & Ors45 is of interest. 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, as evidenced by the Recast Regulation.
ii Cross-Border Regulations
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.46 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. DEF47 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 UK.
In subsequent cases, the Cross-Border Regulations have been successfully used to obtain recognition from the English courts of insolvency proceedings in the BVI,48 Denmark,49 Switzerland50 and Antigua.51 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 UK.
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',52 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'.53 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'.54
The court in Re Bernard L Madoff Investment Securities LLC, between Picard v. Fim Advisers LLP and others55 interpreted these articles to mean that 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)56 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 cases of Nordic Trustee ASA and another v. OGX Petróleo e Gós SA (Em Recuperação Judicial) and another,57 and Ronelp Marine Ltd v. STX Offshore & Shipping Co Ltd.58 In Nordic Trustee v. OGX Petróleo, 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. In Ronelp Marine v. STX Offshore, the High Court considered the ‘exceptional' circumstances in which it should lift a stay made under the Cross-Border Regulations to allow English litigation proceedings against STX Offshore for recovery of an unsecured monetary claim to be continued, rehabilitation proceedings in South Korea relating to STX Offshore notwithstanding. The identified factors of ‘sufficient weight' that persuaded the High Court to lift the stay included: the complexity of the legal issues involved (the High Court felt it more appropriate for it to make a determination on an English law governed illegality argument than the Korean court before which STX Offshore had entered rehabilitation proceedings); the reasonably well advanced stage of the English litigation together with the costs involved in preparation for trial; the adjudication and quantification of the claim more speedily in the English proceedings would allow the claimants to vote on the rehabilitation plan in the Korean proceedings; the lifting of the stay would not impede the rehabilitation plan, and could potentially assist it; and allowing the English litigation to proceed would not unduly advance the interests of the claimants over the interests of STX Offshore's creditors as a whole.
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,59 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,60 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,61 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 UK 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.
Practitioners should also note the case of Re DP Holding SA (In Provisional Liquidation): Hellard and another v. Chen and others,62 in which the High Court refused an application by the respondents to set aside a Section 426 order granted by the High Court permitting the provisional liquidators of DP Holding SA, a company incorporated in Switzerland, to issue an application under section 236 of the IA86 to seek the private examination of the respondents in aid of proceedings taking place in the British Virgin Islands. The High Court dismissed the respondents' arguments that the Section 426 order should be set aside on the basis that: there had not been any intention or attempt to mislead the BVI court in relation to the provisional liquidators' failure to act in accordance with commitments made to the court in the British Virgin Islands and their delay in serving the order, meaning that it would be disproportionate to discharge the order and compel the applicants to start afresh; and while the fee arrangement between the applicants and their solicitors was highly unusual, the applicant's solicitors had made proposals that disposed of the respondents' justified concern.
Vi FUTURE DEVELOPMENTS
i The UK as a forum of choice for international restructurings
The UK 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.
Two main methods may be used by foreign companies to benefit from a UK insolvency process. First, the Recast 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.63
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 noting the continuing utilisation of the scheme jurisdiction by foreign companies where the governing law of the relevant finance documents is English law or where the governing law is changed to English law in order to avail the company of the UK scheme jurisdiction to implement a restructuring. While the English courts, and in particular, Snowden J, have sought to increase the threshold for acceptability of schemes and the level of scrutiny on scheme evidence, these developments are aimed at strengthening the quality, and therefore desirability, of the UK's scheme of arrangement.
ii The impact of Brexit
The UK's relationship with the EU appears likely to change significantly 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) European Economic Area (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 World Trade Organization (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 Recast Regulation would continue to apply to the UK, although this would be unprecedented as the Recast Regulation does not currently apply to any non-EU members. The continuation of the Recast 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 Recast 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 Recast 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 Recast 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 Recast Regulation. Nevertheless, when sanctioning a scheme, the scheme company must satisfy the English court that the scheme will have a substantial effect that, 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.64 As with the Recast 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,65 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.
iii The EU's proposal for a directive on preventive restructuring frameworks
On 22 November 2016, the European Commission released a proposal for a directive on preventive restructuring frameworks, second chances and measures to increase the efficiency of restructuring, insolvency and discharge procedures, amending Directive 2012/30/EU.66 Among others, one main objective of the proposal is to ensure that Member States implement key principles of preventive restructuring frameworks. The EU has recognised that the current differences between the insolvency regimes of the different Member States translate into additional costs for investors in cross-border restructurings. The scheme of arrangement is widely used in this context and was used as a template for the preventive restructuring frameworks presented in the proposal. The main points of the proposal are summarised below:
- a debtors accessing restructuring procedures should remain in control of their assets and existing management should have day-to-day operation of the business;
- b appointment by court of an insolvency practitioner should be limited to exceptional cases;
- c preventive restructuring frameworks should be available on the application of debtors, or of creditors with the agreement of debtors;
- d a debtor should be able to initiate a temporary moratorium for up to four months through a court application;
- e the stay should cover individual enforcement actions and the opening of insolvency proceedings where they may adversely affect a restructuring and the obligation of a debtor to file for insolvency would be suspended for the duration of the stay; and
- f if complex restructurings require more time Member States may allow courts to grant a longer stay up to a maximum of 12 months.
The proposal further provides that the Member States should determine a framework for the adoption of restructuring plans. Any affected creditors should have the right to vote on the adoption of a restructuring plan. Member States may also grant such voting rights to affected equity holders. For voting purposes, the affected creditors should be separated in classes that should be formed in such a way that each class comprises claims or interests with rights that are sufficiently similar to justify considering the members of the class a homogenous group with commonality of interest and as a minimum secured and unsecured claims should be treated in separate classes. A restructuring plan shall be deemed to be adopted if a majority in the amount of claims is obtained in every class. The level of majority may be determined by Member States but may not be higher than 75 per cent of the claims in the class. Where the necessary majority is not reached in one or more voting classes, the plan may still be confirmed by a cross-class cramdown procedure, whereby if the plan has been approved by at least one class of affected creditors other than an equity-holder class and any other class that, upon a liquidation of the enterprise, would not receive any payment or other consideration, the court may approve the plan.
It remains to be seen if and how the proposal will be implemented by the European Parliament, the Council and ultimately the Member States. It is already apparent that the proposal has been welcomed by many practitioners in Europe. The proposed frameworks have considerable similarities with the scheme of arrangement procedure as well as restructuring under US Chapter 11. Therefore, if the frameworks proposed become widely adopted in the EU, the UK's position as the forum of choice for European cross-border restructurings may in time be adversely affected, although no legislation can provide for the institutional and cultural advantages that form a large part of the UK's attractiveness in this area.
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. Further, if the EU were to develop more attractive restructuring procedures as set out in the proposed directive discussed above, European businesses may choose to pursue cross-border restructurings in other jurisdictions. 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.
5 Paragraph 3(1), Schedule B1 to the IA86.
6 Paragraph 3(3), Schedule B1 to the IA86.
7 Paragraph 3(4), Schedule B1 to the IA86.
8  EWCA Civ 895.
9  UKPC 5.
10  EWHC 3199 (Ch).
11  EWHC 2067 (Ch).
12  EWHC 904 (Ch).
13 9 August 2006 (unreported).
14  EWHC 2593 (Ch).
15 In the matter of IMO (UK) Ltd  EWHC 2114 (Ch) (reported as Re Bluebrook Ltd  1 BCLC 338).
16 Re Uniq plc  EWHC 749 (Ch).
17 Following the success of schemes of arrangement in the UK, a number of jurisdictions (such as the Netherlands and Singapore) have recently implemented reforms to their restructuring frameworks. Such reforms have included the adoption of a procedure similar or identical to the UK's scheme of arrangement in part or in full in order to benefit from the increasing global demand by companies for this popular and flexible restructuring tool. However, the UK remains the most popular forum to effect a scheme as it has been well-tested in the English courts and the case-law continues to evolve to meet the practical and commercial needs of distressed companies.
18 Re Tele Columbus GmbH  EWHC 249 (Ch).
19 Re Rodenstock GmbH  EWHC 1104 (Ch).
20 Primacom Holding GmbH v. A Group of the Senior Lenders & Credit Agricole  EWHC 164 (Ch).
21 Re Magyar Telecom BV  EWHC 3800 (Ch).
22 Re Public Joint-Stock Company Commercial Bank ‘Privatbank'  EWHC 3299 (Ch).
23 Re Codere Finance (UK) Limited  EWHC 3778 (Ch).
24  EWHC 3849 (Ch).
25  EWHC 1164 (Ch).
26  EWHC 79 (Ch).
27  EWHC 370 (Ch).
28 Re Van Gansewinkel Groep BV and others  EWHC 2151 (Ch),  All ER (D) 241 (July).
29  EWHC 1884 (Ch).
30  EWHC 2808 (Ch).
31 Re Indah Kiat International Finance Company BV  EWHC 246 (Ch).
32 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).
33 SI 2006/1030.
34 Council Regulation (EC) 1346/2000 on insolvency proceedings (OJ 2000 L 160/1).
35 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015, Article 92.
36 Ibid, Article 3.
37 Ibid, Chapter V.
38 Ibid, Articles 1 and 3.
39 Ibid, Article 36.
40 Ibid, Articles 25-30.
41 Case C-341/04.
42 Case C-396/09.
43  EWHC 1441 (Ch).
44  EWCA Civ 643 (6 June 2013).
45  EWHC 206 (Ch).
46  BPIR 99.
47  EWHC 576.
48 Akers and McDonald v. Deutsche Bank AG (Re Chesterfield United Inc. and Partridge Management Group SA)  EWHC 244 (Ch).
49 Larsen and others v. Navios International Inc. (Re Atlas Bulk Shipping A/S)  EWHC (Ch) 878.
50 Cosco Bulk Carrier Co Ltd v. Armada Shipping SA and another  EWHC 216 (Ch).
51 Re Stanford International Bank Ltd (in liquidation)  EWCA Civ 137.
52 Article 21(1)(d), Schedule 1 of the Cross-Border Regulations.
53 Article 21(1)(g), Schedule 1 of the Cross-Border Regulations.
54 Article 22(1), Schedule 1 of the Cross-Border Regulations.
55  EWHC 1299 (Ch).
56  EWHC 244 (Ch).
57  EWHC 25 (Ch).
58  EWHC 2228 (Ch).
59 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.
60  EWCA Civ 576 (22 May 2013).
61  UKSC 46.
62  All ER (D) 21 (March).
63 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.
64 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.
65 Convention on jurisdiction and the enforcement of judgments in civil and commercial matters signed in Lugano on 30 October 2007.
66 Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards that, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 54 of the Treaty on the Functioning of the European Union, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent Text with EEA relevance.