I INSOLVENCY LAW, POLICY AND PROCEDURE
i Statutory framework and substantive law
The cornerstones of UK insolvency law2 are the Insolvency Act 1986 (IA 1986) and the Insolvency Rules 2016 (IR 2016),3 which together form the legislative landscape that applies to both companies and individuals on their insolvency (or at the time when insolvency is a real possibility). A modified form also applies to certain forms of partnership, with special insolvency regimes applying to distinct categories of regulated entities (see Section I.vi).
Supplemental legislation, including the Companies Act 2006 (which formulates certain requirements for schemes of arrangement, often used to implement restructurings) (CA 2006), the Company Directors' Disqualification Act 1986 and the Law of Property Act 1925 (which, in some cases, governs the ability of a secured creditor to enforce its security or pursue other self-help remedies outside the insolvency framework), also serve to support the IA 1986 and the IR 2016.
Although the laws of the European Union have only limited effect on the UK's domestic insolvency framework,4 it regulates issues of jurisdiction and recognition in many EU cross-border cases. As discussed in more detail in Section V.i, there remains considerable uncertainty (and there is likely to be uncertainty for some time to come) as to the impact of the United Kingdom's withdrawal from the European Union (as notified on 29 March 2017 in accordance with Article 50 of the Treaty on European Union) on these cross-border cases (both in the European Union and the United Kingdom), and on the continued applicability of EU law in the United Kingdom. Much depends on the form that Brexit takes, which is as yet unclear. The existing legal framework is expected to remain until the United Kingdom withdraws, with the expectation that significant elements of the restructuring and insolvency framework will remain in place during any transitional period, and is therefore still addressed in detail in this chapter.
Regulation (EU) 2015/848 on insolvency proceedings (recast) (the Recast Insolvency Regulation) is currently the most significant piece of EU law in the restructuring and insolvency space – though the impact of the recently approved Directive (EU) 2019/1023 on Preventative Restructuring Frameworks (the Preventative Restructuring Directive) remains to be seen. The Directive provides for increased moratorium protection, prohibition of use of ipso facto termination clauses and the introduction of a restructuring plan that can be confirmed with cross-class cramdown. Proposed reforms to the UK legislative framework that incorporate these changes are discussed in Section V.iv.
The Recast Insolvency Regulation is directly applicable in all EU Member States except Denmark,5 in cases where the debtor's centre of main interests (COMI) is situated in an EU Member State. It imposes a framework of jurisdictional rules governing the opening of all proceedings that fall within its scope, overriding the national law of EU Member States where necessary, and thus limiting the jurisdiction of the English courts to open main insolvency proceedings in certain circumstances. Particular debtors fall outside the scope of the Recast Insolvency Regulation, the key examples being credit institutions and insurance undertakings, which are subject to separate regimes. The majority of the provisions in the Recast Insolvency Regulation came into force on 26 June 2017, following extensive review and revision of Council Regulation (EC) No. 1346/2000 (the original Insolvency Regulation). The original Insolvency Regulation continues to govern insolvency proceedings opened prior to that date. Throughout this chapter, we use the term 'Insolvency Regulation' where the position under the original Insolvency Regulation and the Recast Insolvency Regulation is the same.
Where the Insolvency Regulation applies, main proceedings6 may only be opened in the UK if the debtor company's COMI (which is presumed, in the absence of proof to the contrary, to be where the debtor's registered office is located)7 is in the UK. If the company's COMI is in another EU Member State, secondary proceedings8 may be opened in the UK if the company has an establishment9 in the UK. Insolvency proceedings opened in an EU Member State under the Insolvency Regulation will be automatically recognised without any formality in all EU Member States, including the UK, from the time the judgment opening the proceedings becomes effective in the EU Member State in which the proceedings are opened.
In instances where a company's COMI is outside the European Union, the Insolvency Regulation will not apply and the UK, in common with other EU Member States, will be free to act in accordance with its existing laws and practice when exercising jurisdiction, opening proceedings and recognising and enforcing proceedings opened within and outside the European Union.
The Enterprise Act 2002 overhauled the corporate insolvency regime in the United Kingdom to better facilitate corporate rescues. The administration regime was simplified and the circumstances in which the holder of a qualifying floating charge10 (QFC holder) may appoint an administrative receiver were significantly curtailed. These changes were intended to make the UK appear more rescue-orientated and debtor-friendly as a jurisdiction, where entrepreneurial activity is encouraged and where, in the absence of wrongdoing by a company's directors, business failure should not face the same stigma as previously. Although the government has been considering options for the reform of the corporate insolvency framework, including proposals intended to further facilitate restructurings and business rescue, it remains unclear at the time of writing whether the proposed reforms will be implemented. The proposed reforms are discussed in Section V.iv.
When a business in the United Kingdom is in financial difficulties, the traditional approach to keep the business trading was to attempt to achieve a consensual solution. That said, the ever-increasing complexity of capital structures, diverse views of different stakeholders and the flexibility of implementation options (such as schemes of arrangement, company voluntary arrangements (CVAs) and pre-packaged administrations (discussed in Section I.iii)) have contributed to an increasing prevalence of solutions that are not fully consensual – either a 'stick' to encourage consensual negotiations and elicit compromises from creditor groups, or the implementation of a broadly consensual process with some dissenting creditors.
iii Insolvency and rescue procedures
Absent any jurisdictional limitations imposed by the Insolvency Regulation or any special insolvency regimes being relevant (see Section I.vi), the processes described below can be used either to rescue or to wind up a company in the UK. In brief, a company (including an overseas company if its COMI is in England or if the company is otherwise found to have sufficient connection with this jurisdiction)11 may be placed into voluntary or compulsory liquidation (unless it is subject to a special insolvency regime), or made the subject of any of three alternative statutory procedures: administration, CVA or receivership. In addition, a company may have its debts rescheduled or compromised by way of a creditors' scheme of arrangement (hereafter, a scheme). Unlike liquidation, administration, CVAs and schemes may each form part of a restructuring plan, or may offer a means to rescue a company. The IA 1986 also provides for receivership (including administrative receivership)12 – a self-help remedy allowing a secured creditor to realise charged assets to recover what it is owed, outside a formal insolvency process.
A company may be liquidated on a solvent basis by way of a members' voluntary liquidation (MVL) or on an insolvent basis through a creditors' voluntary liquidation (CVL). CVLs are also available for companies to exit administration. Creditors have greater power in a CVL than in an MVL, being able to appoint a liquidation committee to supervise certain aspects of the winding up. A company can also be wound up on an insolvent basis by the courts in a compulsory liquidation.
In both voluntary and compulsory liquidations, the liquidator's duties include collecting in and realising the assets of the company over which he or she has been appointed for distribution to the creditors. There is no prescribed time limit within which to complete this process – once concluded, the company will be dissolved. If the liquidator believes that he or she could achieve a better result for the creditors were the company to be placed in administration, then he or she may make an application to the courts for himself or herself or another person to be appointed as administrator.
To the extent that main proceedings are pending in another EU Member State (in which the company's COMI is located), a CVL can still be commenced in the UK where the company has an establishment in the UK. If, however, main proceedings have already been opened in another EU Member State, the English courts must stay the secondary proceedings in whole or in part if requested to do so by the officeholder in the main proceedings.13 The English courts also have the power to request the officeholder in the main proceedings to take any suitable measure to guarantee the interests of the creditors in the secondary proceedings and of individual classes of creditors.
If a company is incorporated outside the UK and the company's COMI is not located in an EU Member State, it may still be wound up as an unregistered company under the IA 1986 in certain circumstances, including when it is unable to pay its debts or if a court is of the opinion that it is just and equitable to wind it up. Statute does not provide guidance as to the criteria that an English court would rely on to assume jurisdiction; however, case law has identified the following further requirements that must be met for the courts to exercise their discretion to make a winding-up order:
- there must be a sufficient connection with England;
- there must be a reasonable possibility, if a winding-up order is made, of benefit to those applying for the winding-up order; and
- one or more persons interested in the distribution of assets of the company must be persons over whom the courts can exercise jurisdiction.
The sufficient connection test may be satisfied by, for example, the presence of assets within the jurisdiction or finance documents that are governed by English law. The courts may also assume jurisdiction if the insolvency procedures in the relevant foreign jurisdiction are found to be unsuitable or outmoded.14
An administrator can be appointed in instances where (1) a company is, or is likely to become, unable to pay its debts and (2) the purpose of administration is likely to be achieved. The 'purpose' of administration is set out as a hierarchy of three objectives. The primary objective is to rescue the company as a going concern, failing which the administrator must seek a better result for the company's creditors as a whole than would be likely in a winding up (this being the second objective). If the second objective is not achievable, the third objective is to realise the company's property for distribution to secured or preferential creditors.
The second objective may be achieved by disposing of the company's business or its assets by way of a pre-packaged sale (pre-pack), the terms of which are agreed before the appointment of an administrator. In the case of a pre-pack, the sale is effected immediately (or soon after) the administrator takes the appointment (neither notification to the unsecured creditors nor their prior consent is required). Although the pre-pack is the subject of some controversy, it has proven to be a useful restructuring tool that has, on occasion and subject to the approval of the courts, been used by foreign companies following a shift of their COMI to England (see Section I.vii). In the Hellas Telecommunications case,15 the court held that the industry guidance on the use of pre-packs provided by Statement of Insolvency Practice 1616 had been complied with and expressly gave the administrators liberty to proceed with the pre-pack as, on the evidence, there was no realistic alternative to realising better value for creditors.17 In addition, since November 2015, an independent pre-pack pool of experienced business people has been available to scrutinise proposed deals involving connected parties, set up to address concerns about the fairness and transparency of pre-packs involving connected parties. This has not been extensively used to date, but its use is encouraged in these connected party cases.
An administrator cannot be appointed to a company whose COMI is located outside the European Union unless it is either registered under the Companies Act 2006 or incorporated in a European Economic Area state other than the UK.18 The English courts' jurisdiction is, for this purpose, narrower than that for liquidations (as discussed earlier in this Section, an overseas company can be wound up if it has sufficient connection with this jurisdiction). Annex A of the Recast Insolvency Regulation lists administration as a 'collective insolvency proceeding'.19
The administration will end automatically after one year, save when extended by court order or with the consent of the creditors. Complex administrations often necessitate extensions.
Company voluntary arrangement
A CVA constitutes a binding agreement between a company and its unsecured creditors to compromise the company's debts, made with the aim of allowing companies in financial difficulties to avoid liquidation. If the proposal advanced by a CVA is (1) approved by 75 per cent or more (by value) of the company's creditors and (2) not rejected by more than 50 per cent (by value) of the company's creditors admitted for voting who are 'unconnected creditors',20 it will bind all creditors who were entitled to vote in the decision-making process, regardless of whether they were notified about it.21 Dissenting creditors and creditors whose votes are required to be left out of account are therefore bound by a resolution of the requisite majorities. Secured and preferential creditors will not be bound unless they have given their consent and, therefore, CVAs are less commonly used by companies to compromise large amounts of secured debt.
A CVA may be used alongside, or to obviate the need for, other insolvency procedures, such as administration or liquidation, where the moratorium against creditor action can be advantageous. An optional moratorium in a CVA is otherwise available for certain small companies. The advantage of a CVA is that it is quick to implement,22 offering a flexible tool that requires minimal court involvement. CVAs have proven to be a fashionable tool for the retail sector, both at the height of the global financial crisis and more recently, as a way for a company to reach agreement with its landlords and other unsecured creditors. The most recent trends are discussed in Section III.i.
Annex A of the Recast Insolvency Regulation lists a CVA as a collective insolvency proceeding, and it can therefore be proposed by any company, wherever incorporated, provided the company's COMI is situated in the UK. If approved, the CVA will be binding throughout the European Union and will have the same effect in other EU Member States as it does under English law.23
Creditors' scheme of arrangement
Although a scheme of arrangement is not an insolvency process per se (the court's authority to approve a scheme of arrangement is contained in the Companies Act 2006),24 it offers a court-sanctioned compromise or arrangement between a company and its creditors, or any class of them, to reorganise or reschedule the company's debts. It can be implemented with or without formal insolvency proceedings – a scheme alone does not benefit from a moratorium, so administration or liquidation would be required if this is necessary.25 A scheme may be used to vary a class of creditors' rights and can bind dissenting creditors if the requisite majority or majorities of each class (being 50 per cent in number and at least 75 per cent by value) vote in favour of the scheme. Uses have included amendments and extensions to maturity of outstanding loans, or implementation of debt-for-equity swaps, where the underlying loan facility requires higher levels of consent that are not forthcoming. It may provide valuable breathing space ahead of a wider restructuring26 or as a threat to encourage consensus in restructuring negotiations.
The process of obtaining sanction for a scheme takes time but it may be possible to complete the procedure in approximately six weeks, subject to court availability, once the scheme document has been finalised and circulated. In contrast to a CVA (in which the creditors effectively vote as a single class), debates regarding the appropriate composition of creditors are common and will be considered at the convening hearing. However, the scheme does retain the critical advantage over a CVA in that it is binding on all members of the relevant class (or classes) of secured creditors once it has been approved by the requisite majorities, received court sanction and is filed with the Registrar of Companies – in contrast, a CVA can only bind secured creditors to the extent that the relevant creditor gives its consent to be so bound.
Schemes of arrangement have become popular with overseas companies as restructuring tools. They are available to companies capable of being wound up under the IA 1986,27 including an unregistered company that has 'sufficient connection' to the jurisdiction;28 English governing law and jurisdiction clauses in financing documents have been held to give sufficient connection to the jurisdiction,29 including where the relevant clauses have been amended to English law in anticipation of the scheme.30 Whether a procedure that is equivalent to a scheme is available in the relevant overseas jurisdiction will be a factor that the courts take into account: the courts will also want to be satisfied that recognition of the effects of the scheme will be given in other jurisdictions. This concern is often heightened when local creditors that are known to oppose the scheme may attempt to ignore its terms and bring claims against the debtor or its assets (if located outside the UK) on the basis of the original (pre-scheme) finance documents (see Section I.vii for further details).
Recognition of schemes by the courts of certain EU Member States has been made challenging owing to the fact that a scheme falls outside the scope of the Insolvency Regulation and is neither an informal out-of-court procedure nor a formal court-based procedure. Although Regulation (EU) No. 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the Judgments Regulation) may provide for recognition, the courts have not conclusively determined whether schemes fall within its scope (see Section I.vii for further details). If an overseas court refuses to recognise a scheme under the Judgments Regulation (or recognition has been sought in jurisdictions where the Regulation does not apply), that court may be able, typically with the benefit of expert evidence, to recognise the scheme under private international law. Recognition of schemes remains a divisive topic and robust expert evidence on recognition is almost certain to be required if, for example, there are foreign borrowers or guarantors, or if some or all of the debt is foreign-law governed. In addition, depending on the terms upon which the UK withdraws from the European Union, the position regarding recognition of schemes involving companies incorporated within the European Union, or with assets located in the European Union, may be further complicated and uncertain.
Schemes may also be afforded recognition in countries outside the European Union that have implemented the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency (the UNCITRAL Model Law) in a form allowing for recognition of such processes.31
iv Starting proceedings
A voluntary liquidation (whether an MVL or a CVL) is initiated by members of the company passing a special resolution that must state either, in the case of an MVL, that they are in favour of a voluntary liquidation, or, in the case of a CVL, that the company cannot continue its business by reason of its liabilities and that it is advisable to wind it up. Prior notice must be given by the directors to any QFC holder of their intention to propose a resolution for voluntary liquidation.32 The liquidation commences on the date the resolution is passed. In an MVL, the liquidator is appointed by the members, while in a CVL they are appointed by the creditors. An MVL will be converted to a CVL if, during the MVL, the liquidator forms the opinion that the company will be unable to pay its debts (and any interest) in full.
A compulsory liquidation is typically initiated on presentation of a winding-up petition to the court, generally by the company, the directors or (more often) a creditor. A court can make a winding-up order on the grounds that the company is unable to pay its debts or if the court believes it is just and equitable that the company be wound up. The petition must be advertised, either through publication in the London Gazette, or in another manner deemed suitable by the court, at least seven days before the hearing. This provides notice to creditors and other interested parties who may then attend the hearing and bring the court's attention to material relevant to whether a winding-up order should be made.
If the court is satisfied that the grounds for winding up are met, it will make a winding-up order. The role of liquidator will be automatically assumed by the official receiver (who is an officer of the court) until another liquidator is appointed. Receivers and administrators may also present petitions, and any QFC holder entitled to appoint an administrator may apply to the court to have the winding-up order discharged and an administrator appointed.
After the presentation of the winding-up petition but before a winding-up order is made, the court has the power to appoint a provisional liquidator to a company. This is similar in effect to compulsory liquidation, though the court can limit the powers of the provisional liquidator. Although relatively uncommon, provisional liquidation may be useful in certain circumstances, including when there are concerns that the directors will dissipate the company's assets between the presentation of the winding-up petition and the making of the winding-up order.
A company is placed in administration through either the in-court route (filing an application to the court for the appointment of an administrator) or the out-of-court-route (filing documents with the court to document the appointment of an administrator). The company, its directors or a QFC holder have the power to appoint an administrator out of court; however, a QFC holder may prefer the directors to make an application for reputational reasons, while also being able to influence the selection of the administrator.
An application for a court-based appointment may be made by the company, its directors or any creditor. This form of application might be the only route available – if, for instance, a creditor has presented a winding-up petition against the company, or if there are other reasons why a court-based appointment is expedient. It may be preferable to seek a court-based appointment to give a proposed administrator comfort in instances where a pre-pack sale of the company or its assets is proposed which is otherwise at risk of being challenged, or when there is a cross-border element and there is a concern that an out-of-court appointment might not readily be recognised by a foreign court. A court-based application can also avoid the risk of a subsequent challenge as to the validity of an out-of-court appointment on the basis of a procedural irregularity.
The QFC holder may seek an in-court or out-of-court appointment if an event has occurred permitting it to enforce its security – typically a default under the relevant finance documents. Although this right of appointment can arise when a company is not insolvent, in all other circumstances it will be necessary to demonstrate that the company is, or is likely to become, unable to pay its debts, and to obtain an opinion from the proposed administrator that the purpose of the administration is capable of being achieved.
If an administrative receiver is in office, the appointment of an administrator can only be made by an application to the court. The court will only appoint an administrator with the consent of the appointor of the administrative receiver or when the court regards the security under which the administrative receiver was appointed as liable to be released or discharged (whether as a preference or a transaction at an undervalue) or that the floating charge is voidable for want of new consideration at the time of its creation.
If a secured creditor retains the right to appoint an administrative receiver, it may seek to block the appointment of an administrator by pre-emptively exercising its rights to appoint an administrative receiver, prior to the appointment of an administrator. If appointing an administrator, notice of his or her intention to appoint an administrator must be given to certain persons, including a QFC holder. During the notice period, a secured creditor who is entitled to appoint an administrative receiver may do so, or may substitute its choice of insolvency practitioner as administrator. A QFC holder who does not have the power to appoint an administrative receiver cannot block the appointment of an administrator, but may (provided the appointment is not being made by a prior ranking QFC holder) substitute its choice of insolvency practitioner as administrator.
If there is a delay between the applicant filing for administration and the order taking effect (when the in-court procedure is used) or if the applicant is required to give advance notice of its notice of intention to appoint an administrator (when the out-of-court procedure is used), an interim moratorium shields the company from creditor action, with the full moratorium taking effect on appointment.
Company voluntary arrangement
After the terms of a CVA have been proposed to a company's shareholders and unsecured creditors, an insolvency specialist (generally an accountant) will be appointed as nominee by the directors (or, if the company is in administration or liquidation, the administrator or liquidator) to implement the CVA.33 The nominee reports to the court whether, in his or her opinion, the proposal should be put to members and creditors.34 If the nominee believes it should, he or she will seek the approval of the members at a meeting, and of the creditors by way of a qualifying decision procedure.
A creditor or member can challenge the CVA in court only on the grounds of unfair prejudice or material irregularity (or both). Any challenge must be made within 28 days of filing of the notice of approval with the courts or, if the applicant did not receive notice, within 28 days of the day on which he or she became aware that the qualifying decision procedure had taken place. The CVA process is unlikely to be favoured if there is uncertainty regarding identification of the company's creditors, because of the risk of a late challenge from 'hidden creditors'.
Creditors' scheme of arrangement
A scheme is typically initiated by the company (or, if the company is in administration or liquidation, the administrator or liquidator). The first step is generally the issuance of a creditors' issues letter or 'practice statement' letter to outline the key terms of the scheme and set out the company's views on class and other issues,35 following which the company will make an application to court for an order granting permission to convene a meeting (or meetings) of the affected creditors to vote on the scheme. The company can exclude from the scheme any creditors that are unaffected by it (e.g., those being paid in full or whose debts are not required to be compromised). Creditors whose rights are affected by the scheme vote as a class but if the requisite majority has been achieved, that class will be bound, the minority view can be disregarded and dissenting creditors' claims will face the same treatment as creditors voting in favour of the scheme. If the voting majorities are obtained at the meeting, or meetings, the company will apply to the court for an order sanctioning the scheme. The scheme becomes effective and binding on all affected creditors when filed with the Registrar of Companies.
Affected creditors have the opportunity at the convening hearing to challenge class composition, and other creditor issues, including the fairness of the scheme.36 If the proposed scheme relates to an overseas company, although jurisdiction issues are considered more fully at the sanction hearing, the court may give some preliminary consideration regarding whether it will ultimately have jurisdiction to sanction the scheme.
Further objections may be raised by scheme creditors at the sanction hearing (although any objections regarding class composition should have been heard at the convening hearing so any issues to be raised should go to fairness); the court may reject them and refuse to grant leave to appeal. It is unusual for a scheme to be appealed; however, in the event that the court considers that an appeal has a reasonable prospect of success, a short-term stay may be granted prior to the sanction order being made (thus preventing an order being delivered to the Registrar of Companies for registration, and the scheme becoming effective),37 allowing that creditor time to seek permission to appeal. If the creditor wishes to appeal a scheme in instances where an order sanctioning the scheme has already been granted and given statutory effect through registration with the Registrar of Companies, that scheme cannot be altered or terminated other than as provided for by the scheme itself, or by an application to court for a further scheme.
v Control of insolvency proceedings
Insolvency proceedings are managed by the insolvency office holder appointed to the company in relation to the insolvency process. In general, and as required by the IA 1986, this will be a qualified insolvency practitioner who is required to act in accordance with the regulatory regime governing their professional conduct.38
As regards the directors of a company in the UK, while the company is solvent, the directors owe their duties to the company for the benefit of present and future shareholders and are not under a duty to consider creditors' interests. To the extent that there is doubt as to a company's solvency, or as a company approaches a 'zone of insolvency', its directors become obliged to consider the interests of the company's creditors, so as to minimise the potential loss to them. In instances where a director continues to trade a business after the time that he or she has realised, or ought to have concluded, that the company has no reasonable prospect of avoiding an insolvent liquidation or administration, and do not thereafter take every step to minimise loss to each creditor, he or she may be liable for the offence of wrongful trading. A director may be liable for fraudulent trading if he or she allows a company to incur debt in circumstances where there are no good reasons for believing that funds would be available to repay the amount owed at the time, or shortly after, it became due and payable.
The liquidator or administrator is empowered, under the IA 1986, to seek a court order against directors for contributions to the company's assets if their investigations reveal instances of wrongful or fraudulent trading, and to set aside transactions at an undervalue, preferences and transactions defrauding creditors. They may also assign certain of these claims to third parties, including creditors. They are further required under the Company Directors' Disqualification Act 1986 to submit a report to the relevant secretary of state on the conduct of the directors and former directors of the company. That report may lead to a director being disqualified from acting as a director, or being involved in the management of a company, for a defined period, in addition to a disqualified director being required to pay compensation.
The court has minimal involvement in the conduct of a voluntary liquidation, whereas in a compulsory liquidation the court hears the application for a winding-up order. In contrast, in an administration the court will have varying levels of involvement, depending on whether the process is commenced by way of an in-court or out-of-court application and whether the administrator is likely to need directions, owing to the complexity of the company's affairs. The court's involvement in an out-of-court and simple application may be limited to receipt and processing of the documents required to be filed at court.
Court involvement in a CVA (other than in instances where creditors challenge the CVA) is limited to receiving a report from the nominee as to whether, in his or her opinion, the CVA proposed has a reasonable prospect of being approved and implemented and whether it should be put to the creditors and shareholders. The approval (or rejection) of the proposal must then be notified to the court through a filing within four business days of the meeting of shareholders.
Creditors wishing to challenge a CVA have 28 days following filing with the court of the CVA (or, if the creditor did not receive notice of the CVA, within 28 days of the day on which the creditor became aware of the decision procedure having taken place)39 in which to raise their appeal. This can be brought on the grounds of unfair prejudice or material irregularity. Whether there are grounds to challenge a CVA on the basis of unfair prejudice is ultimately a question of fact; for instance, a CVA that treats different unsecured creditors in different ways may be prejudicial to those creditors, but the question of fairness depends on the overall effect of the CVA.40 As to material irregularity, this is also a question of fact, but relates to how the decision procedure used to consider the CVA proposal was conducted. Issues that the courts have considered include valuation of creditor claims41 and whether creditors with claims likely to be settled by a third party can vote in favour of a CVA.42
vi Special regimes
The nature of certain businesses means that entities operating in those areas are excluded from general insolvency regimes and subject instead to special insolvency regimes that, depending on the type of business, may be based on the administration procedure in the IA 1986.
It is beyond the remit of this chapter to set out in detail the scope of each special regime; however, it should be noted that particular rules apply to certain banks and analogous bodies (both from a national and broader European standpoint),43 insurance companies,44 postal services, water or sewerage companies, certain railway companies, air traffic control companies, London Underground public-private partnership companies, building societies and bodies licensed under the Energy Act 2004.
Under English law, each company is treated as a separate legal entity45 and there are no special regimes applicable to corporate groups. The original Insolvency Regulation did not address insolvency of corporate groups, but the Recast Insolvency Regulation formalises the historic practice under the original Regulation of streamlining insolvencies of corporate groups by opening main proceedings in one jurisdiction and effectively preventing the opening of secondary proceedings in other EU Member States by agreeing to respect local priorities (thereby achieving the same outcome for local creditors)46 or by postponing the opening of secondary proceedings until a global sale has been completed.47 The Recast Insolvency Regulation has expanded the framework for coordination of insolvency proceedings concerning corporate groups by obliging insolvency practitioners and courts involved in the different proceedings to cooperate and communicate, with insolvency practitioners afforded procedural tools to request a stay of other proceedings, facilitating the opening of group coordination proceedings.
Group coordination proceedings involve appointing an insolvency practitioner to act as group coordinator. This practitionery proposes a coordination plan setting out an integrated solution for insolvent group companies or those that are restructuring. That said, participation is not required, nor are participating insolvency practitioners obliged to follow the group coordinator's recommendations or the group coordination plan. These provisions are not sufficiently embedded to assess the effectiveness of these provisions in practice and the frequency with which these tools will be used.
UNCITRAL has broadly endorsed the group coordination provisions, but has also produced a framework for legislation in relation to the insolvency of enterprise groups.48 UNCITRAL also encourages the use of cross-border protocols to facilitate cooperation between courts and practitioners.49 An early example of this approach is the Maxwell Communications Corporation case, in which the administrators appointed in the UK agreed a protocol with the examiners in the US Chapter 11 proceedings. More recently, attempts have been made to use cross-border protocols (which provide guidelines for cooperation rather than legal requirements) in certain insolvency situations, such as the Lehman and Madoff insolvencies, with mixed success.
vii Cross-border issues
This section considers the framework for cross-border cooperation and recognition as at the time of writing. The UK's withdrawal from the European Union, which may have a significant effect on this framework, is discussed in Section V.i.
The English courts' jurisdiction in cross-border insolvency cases derives from four sources: the Insolvency Regulation, the Cross-Border Insolvency Regulations 2006 (CBIR), Section 426 of the IA 1986 and the common law.50 As discussed in Section I.i, the English courts' jurisdiction may be fettered by the Insolvency Regulation if a company's COMI is situated in another EU Member State, in which case the court of that state will have jurisdiction to open main insolvency proceedings. Prior to the original Insolvency Regulation coming into effect, if a foreign company was found to have sufficient connection with England, an English court could exercise its discretion to wind up that company as an unregistered company under Section 221 of the IA 1986 (see Section I.iii). The Insolvency Regulation now prevents such steps being taken, although the test remains in place for companies that fall outside the Insolvency Regulation's scope. An example of this is Re Arena Corporation Ltd,51 in which the English court found that a company incorporated in the Isle of Man but with its COMI in Denmark52 had sufficient connection with England (in the form of location of assets) to enable the court to exercise its jurisdiction under Section 221 of the IA 1986 to wind up the company. Cases such as these, which fall outside the purview of the Insolvency Regulation, will be subject to the relevant national law, and recognised by EU Member States and non-Member States alike in accordance with the rules of private international law.
If the debtor's COMI is outside the European Union, the Insolvency Regulation will not apply and the English courts, like those of other EU Member States, will be free to act in accordance with the UK's existing laws and practice when exercising jurisdiction, opening proceedings and recognising and enforcing proceedings opened within and outside the European Union. However, the associated provisions under the Insolvency Regulation, including automatic recognition in all EU Member States, which are available when main proceedings are opened, will not be available. This could prove an impediment to group restructurings in which some of the debtor companies have substantial connections with one or more EU Member States but fall outside the scope of the Insolvency Regulation because their COMIs are not located in an EU Member State.
The CBIR offer another means whereby English courts may otherwise be required to recognise foreign main proceedings and foreign non-main proceedings (the equivalent of main and secondary proceedings under the Insolvency Regulation). The CBIR implement the UNCITRAL Model Law and apply it regardless of whether the relevant foreign country has enacted the Model Law.53 Relief by way of a moratorium on creditor action is automatically granted on recognition; other relief may be obtained at the court's discretion. The English courts are required to cooperate 'to the maximum extent possible' when recognition is granted.54
The English courts can also offer assistance and relief under Section 426 of the IA 1986, which provides for cooperation both between jurisdictions within the UK and between the UK and other designated (mainly Commonwealth) jurisdictions.
If the Insolvency Regulation, the CBIR and Section 426 of the IA 1986 do not apply, the English courts have inherent jurisdiction to cooperate with foreign insolvency representatives and recognise foreign proceedings, in instances where the relevant foreign office holder has satisfied the common law principles developed by the English courts. The Supreme Court considered the principles in detail in Rubin v. Eurofinance.55
Some foreign companies have taken steps in recent years to shift their COMIs to the UK to take advantage of the UK's established insolvency and restructuring processes. Forum shopping in this manner has received judicial support at EU level56 with clear delineation between 'good forum shopping', when a COMI is shifted to the best place to reorganise the company and its group for the benefit of creditors (and, possibly, other stakeholders),57 in contrast to 'bad forum shopping', when the company acts for selfish motives to benefit itself, or its shareholders or directors, at the expense of creditors.
Hellas Telecommunications58 and the more recent cases of Algeco Scotsman59 and Noble Group60 contain instructive judgments about the requirements for shifting a COMI and rebutting the presumption that a company's COMI is in the state of registration. Factors that the courts considered relevant to the migration of COMI include: moving the company's head office and principal operating address to England; notifying creditors of the change in address and that the company was shifting its activities to England; opening a bank account, from and to which payments were made; and registration of the company as a foreign company at Companies House. The courts in these three cases also considered it relevant that negotiations between the company and its creditors took place in England, with the court in Hellas noting that this factor was 'one of the most important features of the evidence' given that the 'purpose of the COMI is to enable creditors in particular to know where the company is and where it may deal with the company'.61 However, it should also be noted that the court in Re Videology Ltd62 has cast doubt on the importance of this factor during a restructuring. While finding that the company's dealings with customers, trade creditors and finance creditors generally was relevant to establishing the COMI, the court found that the location of restructuring meetings and negotiations 'provide very little guidance as to where the company conducts the administration of its interests on a regular basis'.63
Foreign companies may also seek to make use of an English law scheme of arrangement to compromise or amend the terms of their debt documents without first migrating their COMIs, giving rise to different cross-border issues to be determined by the English courts. They will need to determine matters such as whether the English courts have jurisdiction over the foreign company, and whether the scheme will be recognised in the foreign jurisdiction. In respect of jurisdiction, there remains some uncertainty as to the extent to which the Judgments Regulation may affect the English courts' jurisdiction to sanction the scheme. Judges have generally avoided reaching a firm conclusion as to whether the Regulation applies to schemes, instead proceeding on the basis that even if it were to apply, one or more of the exceptions to the general rule that persons should be sued in the Member State in which they are domiciled would apply in each respective case, and so the English courts do have jurisdiction.
Finance documents, in most cases, do contain clauses conferring jurisdiction (typically one-way exclusive jurisdiction clauses) on the English courts. In the Van Gansewinkel case,64 Mr Justice Snowden took the view that if the jurisdiction provisions of the Judgments Regulation were to apply to schemes (a point that was not decided) then, in that particular case, it would not limit the court's jurisdiction to sanction the scheme. If the provisions did apply, he was entitled to regard all scheme creditors as coming within the jurisdiction of the English court under Article 8(1) of Chapter II, which provides that a party may be made a party to proceedings in another EU Member State in instances where one or more of the co-defendants are domiciled in that Member State and it is expedient to hear the claims against all the defendants in a single court.65 However, Snowden J noted that a one-sided exclusive jurisdiction clause for the benefit of the scheme creditors did not amount to submission by those creditors to the jurisdiction of the English court. As such, if the jurisdiction provisions of the Judgments Regulation apply to schemes, absent a migration of a COMI or other connecting factors, a one-way exclusive jurisdiction clause alone would not be sufficient to bring a company within the jurisdiction of the English court by virtue of Article 25(1) of Chapter II.
The meaning of the term 'judgment' in Article 32 of the Judgments Regulation also continues to be debated in relation to schemes. Some commentators have argued that, albeit that the term is given broad scope by Article 32, the procedure for implementing an English scheme is not adversarial in nature and so the sanction order cannot be considered a judgment and cannot not be granted recognition under that regulation. Further English and European case law on this topic is likely, particularly as the approach with regard to recognition following Brexit becomes clear, as schemes remain a popular and flexible implementation tool.
II INSOLVENCY METRICS
In the first quarter of 2019, the underlying number of companies entering insolvency proceedings increased, rising by 5.1 per cent compared with the same quarter in 2018 and 6.3 per cent higher than the previous quarter. The main increase was in CVLs and administrations, with the latter increasing by 21.8 per cent on the previous quarter. In the 12 months ending in the first quarter of 2018, the estimated liquidation rate was 0.42 per cent of all active registered companies (or one in 238 of all active companies), up slightly from 0.41 per cent in the 12 months ending in the fourth quarter of 2018. The highest number of insolvencies in the 12 months ending in the first quarter of 2019 was in the construction sector, and the second highest66 was in the 'wholesale and retail trade; repair of vehicles' industrial grouping, the grouping in which there was also the greatest increase in insolvencies for that period.67
The common view among commentators is that the economy continues to be adversely affected by the continued uncertainty regarding Brexit. UK gross domestic product (GDP) was estimated to have increased by just 0.5 per cent in the first quarter of 2019, driven by strong growth in manufacturing output of 1.9 per cent. Production increased by 1.1 per cent, widely regarded to be consistent with increased activity ahead of the UK's originally intended departure date from the European Union, as businesses seek to build stocks of raw materials and other inputs in anticipation of delays at border crossings; however, it is not possible to discern the extent of the influence of these uncertainties. The July average of independent forecasts for GDP growth (compiled by HM Treasury) was 1.3 per cent for 2019, increasing to 1.4 per cent for 2020.68
The labour market remains robust, with data from April to June 2019 demonstrating an employment rate (the proportion of people aged between 16 and 64 in work) of 76.1 per cent, the joint highest level since comparable records began in 1971. The unemployment rate remained stable at 3.9 per cent, down from 4 per cent a year earlier.69
The 12-month inflation rate was 2 per cent in June 2019, unchanged from May 2019. The rate has fallen steadily from a high of 2.8 per cent in autumn 2017, and the Bank of England has said in its latest inflation report that it is projected to continue on a downward trajectory owing to projected falls in energy prices in the short term, but that it will gently increase as GDP increases and surpass the target rate of 2 per cent, reaching 2.4 per cent by the end of the three-year forecast period.70
In August 2018, the Monetary Policy Committee, whose remit is to set monetary policy to meet the 2 per cent target rate in a way that helps sustain growth and employment, voted to raise the bank rate to 0.75 per cent from 0.5 per cent (only the second rate increase in more than a decade). Along with other commentators, the Monetary Policy Committee has been clear in its view that the process of withdrawal of the UK from the European Union has noticeably affected the economic outlook, and that although monetary policy can support the economy, it is limited in its ability to shield the economy from the adjustments promulgated by Brexit. At its meeting in July 2019, the Monetary Policy Committee acknowledged that the levels of adjustment remain uncertain, and that its current decision-making is predicated on the basis of a smooth transition. Moreover, assuming a smooth Brexit and some recovery in global growth, the Committee expects a significant margin of excess demand to build in the medium term, which could necessitate increases in interest rates to return inflation sustainably to the 2 per cent target.71
iii PLENARY INSOLVENCY PROCEEDINGS
i CVA restructurings
In the past, a significant number of restaurants and bricks-and-mortar retailers turned to CVAs as part of their efforts to restructure their businesses. As the high street continues to be challenged by declining footfall, increasing business rates and the shift in preferences to online retail, businesses have used CVAs increasingly to restructure their lease portfolios and compromise their landlords. Commentators have noted that CVAs are not generally sufficient to save businesses (particularly retail) in isolation, and the four examples below illustrate this trend. This is particularly relevant for Jamie's Italian, where the CVA did not ultimately prove sufficient to save the business.
Debenhams is a department store in the United Kingdom and Ireland with franchise stores in other countries. The company, founded in the 18th century as a single store in London, now operates in 178 locations across the UK, in Ireland and in Denmark. As conditions have become more challenging on the high street, Debenhams' trading performance has weakened. In October 2018, the company announced the largest loss in its history – a pre-tax loss of £491 million – and plans to close up to 50 stores with the potential loss of 4,000 jobs.
Debenhams entered into negotiations with its lenders and other stakeholders, including Sports Direct, which owned close to 30 per cent of the shares in the retailer, regarding a restructuring of the group. A number of offers were made by Sports Direct International plc to inject new capital into the group, which were ultimately not considered deliverable.72 Debenhams plc entered administration on 9 April 2019 and the group was sold, via a pre-pack administration, to its lenders in a debt-for-equity swap.
On 26 April 2019, Debenhams announced that it was proposing a CVA with its landlords. The key elements of the CVA were that, although it was proposed that all Debenhams stores were to remain open during 2019, including through Christmas peak trading, up to 22 stores would be expected to close in 2020. The CVA also contemplated a business rate cut of between 48 per cent and 50 per cent on 58 of its stores. If approved, the CVA also provided for a fund of up to £25 million to be made available for those creditors compromised by the CVA to participate in future growth of the UK business.
The CVA was approved by the requisite majorities on 9 May 2019. Companies in the Sports Direct group and the Combined Property Control Group (the landlord of six Debenhams sites) sought to challenge the CVA. At the time of writing, the High Court had heard (but had not handed down judgment on) a challenge to the CVA brought by the Combined Property Control Group (the landlord of six Debenhams sites), which was funded by the Sports Direct group (though the group had withdrawn its challenge to the CVA). The hearing had been brought on an expedited basis as one of the challenges to the CVA was the grant of security to creditors that were previously unsecured, and the granting of that security would not be reviewable by an administrator absent an order on the challenge to the CVA during early September 2019.
The Arcadia group owns a number of high street brands, including Topshop, Dorothy Perkins, Miss Selfridge, Evans and Burton, with more than 570 stores in the UK.
Having lost credit insurance for suppliers, and with like-for-like sales at Topshop (its flagship brand) falling by 20 per cent in the year to December 2018, on 22 May 2019 Arcadia announced seven CVAs in respect of its group, which contemplated the closure of 23 stores, the wind-down of its US operations, a rent reduction of between 25 per cent and 50 per cent across the majority of its remaining stores (down from between 30 per cent and 70 per cent reductions originally), a reduction in the level of contributions to its pension scheme and a business rates holiday to 1 April 2020. In return the shareholder, Lady Tina Green, committed to contribute £100 million over three years to the pension fund, and landlords were offered a portion of the returns of any sale of Topshop.
The CVA was narrowly approved by creditors, including the Pension Regulator and the Pension Protection Fund, on 12 June 2019. However, two of the CVAs now face a legal challenge in the United States from the landlords of two Topshop stores in the United States. At the time of writing, those challenges are still pending.
Jamie's Italian was established in 2008, and priced towards the upper end of high street chains of Italian restaurant. A number of factors had affected the performance of the business, including a legacy of underinvestment in older restaurants, investment in unsuitable locations and sites with high occupancy costs. At the same time, conditions in the casual dining market have become increasingly challenging, with higher labour costs and business rates alongside lower consumer spending power and confidence. The sector is particularly competitive as brands have expanded rapidly, leaving businesses little scope to pass on increased costs to consumers, with other chains – including Carluccio's, Prezzo and Byron Burger – turning to CVAs themselves.
Jamie's Italian Limited proposed a CVA with its creditors, with a key aim of placing its lease portfolio on a more sustainable footing. Landlords were split into four bands, based on the profitability of their sites, and each band faced different treatment:
- the business would continue to pay full rent at the top sites, though on a monthly rather than a quarterly basis;
- in the second group, landlords would have their rent reduced by 30 per cent;
- the third group of less profitable sites would have their rent reduced by 75 per cent until May 2018, whereafter the business intended them to close; and
- the final group comprised landlords who did not receive any payments under the proposal as the sites were not being used for trading.
- The proposal was approved by 97.44 per cent by value of all creditors on 9 February 2018.
Unfortunately, the steps taken were ultimately insufficient to save the business and, on 21 May 2019, KPMG were appointed as administrators to Jamie Oliver Restaurant Group Limited (which owned Jamie's Italian and a number of other restaurant brands).
New Look is a fast-fashion brand with 593 stores in the UK and 302 stores across Europe, China and Asia. New Look has also suffered from a challenging trading performance in a difficult retail environment, which has again been affected by factors such as increased online competition, weaker consumer confidence and the changing tastes of its target customers.
To reduce its rental cost base and to restore long-term profitability, New Look launched a CVA on 7 March 2018 to deliver cost savings by compromising leases. Under the CVA proposal, 60 UK stores were identified for potential closure, along with six sites that were sublet to third parties, and 393 stores benefited from reduced rent (ranging between 15 per cent and 55 per cent) and revised lease terms. On 21 March 2018, 98 per cent of New Look's creditors voted in favour of the CVA proposals.
New Look announced on 14 January 2019 that it had reached an agreement in principle with certain of its key financial stakeholders in relation to a transaction aimed at deleveraging and strengthening its balance sheet, and announced on 3 May 2019 that the restructuring had been implemented. The restructuring was achieved by way of a scheme of arrangement and a pre-pack sale of the group, and saw a reduction in New Look's existing debt obligations to €350 million from €1.35 million, with the bondholders compromising their debts receiving 20 per cent of the shares in the New Look group. New Look also issued new notes in an amount of €150 million to provide additional liquidity, with holders of those notes receiving 72 per cent of the shares in the New Look group.
Established over 50 years ago as a small South African outfit, Steinhoff Group has grown into a multinational retailer of furniture and household goods. On 6 December 2017, Steinhoff Group announced that it had begun an independent investigation into potential accounting irregularities led by PricewaterhouseCoopers, with profits and assets found to have been overstated by nearly US$12 billion.
In November 2018, as part of a broader restructuring of the group, Steinhoff proposed CVAs in respect of the obligations of two financial holding companies – Steinhoff Europe AG and Steinhoff Finance Holding GmbH. The key terms of the CVAs were as follows:
- in respect of Steinhoff Europe AG, the approval of a new holding structure and hive down of assets to that holding structure;
- restructuring of existing financial indebtedness into a payment-in-kind instrument;
- provision of a new deferred contingent payment instrument for creditors previously benefiting from a guarantee; and
- the implementation of an interim moratorium for the period following approval of the CVA and implementation of the CVA proposal.
The CVAs were approved, by majorities of 94 per cent in respect of Steinhoff Europe AG and 98 per cent in respect of Steinhoff Finance Holding GmbH, on 14 December 2018. The CVAs were implemented on 13 August 2019.
ii Schemes of arrangement
As discussed in Section I.iv, a scheme is not a specific insolvency tool, but its role in implementing complex cross-border restructurings cannot be overlooked. As these case studies demonstrate, it remains a popular restructuring tool for overseas companies.
Nyrstar Group restructuring
Nyrstar is a global multi-metals business, with a market leading position in zinc and lead, and growing positions in other base and precious metals. The Nyrstar business has mining, smelting and other operations located in Europe, the Americas and Australia and employs approximately 4,200 people in its various locations. Trafigura, the global commodities trader, which played an important part in Nyrstar's restructuring, is a key shareholder, creditor and trade counterparty of Nyrstar.
Starting in 2009, at the peak of the commodities supercycle, Nyrstar purchased mines and zinc and lead smelters, which later struggled to make any kind of return and left the company facing significant debts and interest payments. More recently, Nyrstar had faced a challenging zinc market, particularly struggling with low zinc processing fees and metal prices that led to several huge profit warnings in 2018.
An English law scheme of arrangement was used to implement the deal eventually struck between Nyrstar and its bondholders. NN2, a Nyrstar group subsidiary and a newly incorporated English holding company, acceded to each of Nyrstar's bond issuances as co-issuer or co-obligor and proposed the scheme. This accession, in addition to amending the jurisdiction clause of each issuance of bonds to be governed by English law, was carried out to facilitate the restructuring and establish a connection with the courts of England and Wales.
The result of the scheme was an exchange of the Nyrstar note holders' claims against Nyrstar for new instruments issued by Trafigura, comprising €262.5 million of new perpetual notes (subordinated securities), €80.6 million of new 2023 medium-term notes and the US dollar equivalent of €225 million guaranteed zero coupon commodity-linked principal amortising instruments.
The overall group restructuring resulted in a total deleveraging of Nyrstar of approximately €1.1 billion (from approximately €2.5 billion prior to the restructuring). In addition, the restructuring resulted in Trafigura increasing its equity stake in Nyrstar to 98 per cent and the provision of new liquidity by Nyrstar's existing bank lenders.
Noble Group Limited is a major global commodities trader, incorporated in Bermuda, listed in Singapore and with its COMI in Hong Kong. In December 2018, it implemented a multi-billion-dollar restructuring involving shifting its COMI to London, implementing parallel English and Bermudan schemes of arrangement, obtaining recognition of the English scheme in the United States via Chapter 15 of the US Bankruptcy Code, and, as a final step in the process, implementing a light-touch Bermudan provisional liquidation procedure.
The scheme was novel for several reasons. First, in addition to compromising financial liabilities, the scheme also compromised certain contingent liabilities to non-finance creditors who had asserted claims against the company, including in respect of certain guarantees and certain litigation. In addition, certain steps relating to the implementation of the scheme (that had been sanctioned within the scheme order) were implemented by the Bermudan provisional liquidator, in the place of the company. This was required as following sanction of the schemes, the Singaporean authorities decided not to allow the company to transfer its listing status to a newly incorporated entity that was to act as the holding company for the restructured Group, which would have otherwise impeded the restructuring.
The English and Bermudan schemes of arrangement were approved by an overwhelming majority of scheme creditors: 99.98 per cent by value and 98.52 per cent by number. The English scheme was sanctioned on 12 November, the Bermuda scheme was sanctioned on 14 November and the schemes were granted recognition in the United States, via Chapter 15 of the US Bankruptcy Code, on 15 November.
The overall group restructuring reduced the debt burden of the Noble Group by more than US$2 billion and resulted in the transfer of 70 per cent of the equity in the group to creditors.
iv ANCILLARY INSOLVENCY PROCEEDINGS
As the prevalence of cross-border restructurings increases, the instances of recognition of foreign processes in the United Kingdom continues to increase. The Videology case demonstrates that recognition issues cannot be taken for granted, especially in instances where a COMI shift is being relied upon.
Re Videology Ltd
Videology Limited was an English incorporated company within the Videology Group, which operated from leased premises in London. Having faced setbacks – including increased competition, loss of funding and a number of litigation claims – Videology, with its US incorporated parent and a number of its subsidiaries, filed a petition under Chapter 11 of the US Bankruptcy Code to organise a sale of the group's business and assets. Although protection from creditor action arose automatically under Chapter 11 for the companies subject to that process, protection needed to be sought under English law against Videology's creditors in the UK.
Videology and its parent applied under the Cross-Border Insolvency Regulations for recognition of the Chapter 11 process as a foreign main proceeding under Article 17 of the UNCITRAL Model Law, and for the court to grant a discretionary moratorium and an extended moratorium pursuant to Articles 20 and 21 of the UNCITRAL Model Law, respectively, which would, taken together, prevent individual and collective actions by creditors in the UK.
In respect of the parent, the court was satisfied that its COMI was in the United States and that the Chapter 11 proceedings were foreign main proceedings. Discretionary relief under Article 20(6) and Article 21(1) therefore followed on a final basis. However, in respect of Videology, the company was required to demonstrate that its COMI was in the United States to obtain the relief sought, and so rebut the presumption that its COMI was in the UK. The company drew the court's attention to the fact that senior management were based in the United States,73 there was no distinct branding from the US operations,74 strategic decisions were known by third parties to have been made in the United States75 and, finally, recent creditor meetings regarding the company's financial situation took place in the United States.76
These factors were insufficient to persuade the court that the presumption had been rebutted. The court noted that the UK was where the company's 'trading premises and staff are located, where its customer and creditor relationships are established, where it administers its relations . . . on a day-to-day basis using those premises and local staff, and where its main assets . . . are located'.77
Ultimately, the court held that the Chapter 11 proceedings were, in fact, foreign non-main proceedings (on the basis that the COMI was not in the United States); nevertheless, it granted the discretionary relief sought under Articles 20 and 21 of the UNCITRAL Model Law. In reaching this conclusion, the court noted that:
- it was typical for extended relief under Article 21(1) to be given to foreign main proceedings which, by their nature, were debtor-in-possession proceedings;78
- in situations where the proceedings were recognised as foreign non-main proceedings, the starting point would be to recognise the proceedings in the UK as the main insolvency proceedings, which is where the company's COMI is;79 and
- to grant the relief sought, there would need to be evidence of obvious benefits to the creditors as a whole, and good reasons for preventing creditors in the UK from commencing an insolvency process in the country where the company had its COMI.80
The evidence put forward by Videology persuaded the court that the sale of the group's business was financially desirable, more so than a stand-alone administration or liquidation; the Chapter 11 proceedings would protect the creditors' interests, the unsecured creditors had an effective voice in the sale negotiations and evidence was adduced from various unsecured creditors that they were in support of the Chapter 11 proceedings.81
i Uncertainty regarding the EU referendum and the future of cross-border restructurings in Europe
As discussed in Section I.i, the United Kingdom voted in favour of withdrawing from the European Union in a referendum on 23 June 2016 and on 29 March 2017, the UK government exercised its right under Article 50 of the Treaty on the European Union to notify the European Union of the UK's intention to withdraw from the European Union.
At the time of writing, it remains unclear whether the terms of the UK's withdrawal will be agreed before the scheduled departure date, currently 31 October 2019 (though this remains subject to change).82 In particular, negotiations regarding the treatment of the border between the Republic of Ireland and Northern Ireland continue to prove fractious, and a no-deal Brexit remains a possibility, absent concessions from the UK or the European Union, or both. Should the terms of withdrawal be agreed, a withdrawal agreement will address matters such as citizens' rights, the financial settlement between the UK and the European Union, and arrangements for the transition period.
There remains considerable uncertainty (and there is likely to be uncertainty for some time to come) as to the effect the UK's withdrawal will have on the regulatory environment in the European Union and the UK, and on the applicability of EU law in the UK. If a deal is not agreed, it is likely to be harder for UK office holders and UK restructuring and insolvency proceedings to be recognised in EU Member States and to deal effectively with assets located in the Member States, as the principles of mutual recognition of proceedings and judgments included within the Insolvency Regulation will fall away, and the need may well arise to open parallel proceedings, increasing the element of risk. In particular, in cases where the appointment of a UK office holder has been made in reliance on a UK domestic approach, it is much less certain that there will be recognition in the relevant Member State even if UK jurisdiction is taken on the grounds of a UK COMI or establishment (where such concepts are retained as a matter of UK domestic law).
Even in a Brexit with an agreed deal, the latest draft of the withdrawal agreement83 (though this is still being negotiated) anticipates that the Insolvency Regulation and the Judgments Regulation will cease to apply at the end of any transition period. Nevertheless, the Insolvency Regulation will apply to insolvency proceedings if main proceedings were opened before the end of the transition period, the Judgments Regulation will afford recognition and enforcement of judgments in legal proceedings instituted before the end of the transition period, and the provisions of the Judgments Regulation regarding jurisdiction will apply to legal proceedings commenced prior to the end of the transition period.
As such, in a no-deal Brexit and, absent agreement on a permanent framework with Member States in an agreed Brexit, much will therefore depend upon the private international rules in the particular Member State. As described in Section I.vii, although the UNCITRAL Model Law is one avenue of bilateral recognition (there are others), not many EU Member States have implemented legislation based on the Model Law. Approaching each jurisdiction on a case-by-case basis would further complicate cross-border restructurings, but has the potential to offer the English courts a more flexible approach to exercising discretion as to jurisdiction, which could make schemes of arrangement an even more attractive restructuring tool (although this is far from certain).
The continued uncertainty regarding the UK's relationship with the European Union after Brexit does not appear, as yet, to be affecting the UK's popularity as a restructuring hub. However, this may change if it appears no deal will be reached prior to the currently scheduled departure date (31 October 2019 at the time of writing).84 It is difficult to say whether the popularity of the English restructuring and insolvency market will be dampened in the long term. Absent ongoing participation in a framework for mutual recognition (whether the Insolvency Regulation or a new framework), cross-border procedures may become more complex to implement or gain recognition for, which has the potential to affect the English courts as a forum for restructuring.
ii Insolvency activity
As discussed in Section II, the uncertainty surrounding Brexit continues to have a dampening effect on the economy, and may have greater consequences depending on the ultimate timing and nature of the withdrawal from the European Union. It is difficult to predict with any certainty what the effect might be on insolvency activity (as so much depends on this); however, there are certain sectors that are likely to be at risk regardless of the effects of Brexit.
Bricks-and-mortar retailers and restaurants
As discussed in Section III.i, these sectors continue to face strong headwinds and we expect this to continue into 2020. If consumer spending continues to be muted, while input costs continue to increase, profit margins will fall further as competition between different retailers and restaurants continues to be fierce.
It is our expectation that the automotive industry will come under increasing pressure, partially as a result of Brexit but also owing to the economic slowdown in Germany and reduced demand from China, and this will have a significant effect on operations within the industry. As such, we may see greater numbers of insolvencies and restructurings in this sector as suppliers face the effects of hampered demand in the coming years.
iii Practical trends
As discussed in Section III.i, high street retailers and restaurant chains continue to use CVAs to address their portfolios of leases, but increasingly within broader restructurings of their financial liabilities (including through debt-for-equity swaps or schemes of arrangements), and to compromise their pension and business rate liabilities. We think this trend is likely to continue, but perhaps subject to the added pressures of challenges from landlords (as we have seen for House of Fraser, Debenhams and Arcadia Group, to name but a few).
Schemes of arrangement remain a popular restructuring tool within the restructuring sector and a number of international creditors have turned to schemes during the past year, including Nyrstar, Noble Group and Agrokor. That said, it remains to be seen what effect Brexit will have on the desirability of schemes as a flexible restructuring tool, particularly in light of the catalogue of reforms taking place across Europe and beyond. While views are mixed, there are indications that some jurisdictions, particularly Germany, may fail to grant recognition to the effects of schemes of arrangements, and as such their efficacy as a restructuring tool in a cross-border context may be somewhat tempered.
We also expect to see an uptick in the prevalence of administrations, or other adverse consequences, triggered by investigations by short sellers, in light of the movement towards covenant-lite instruments.85 The recent instance of litigation fund Burford Capital, which was the subject of short selling by US hedge fund Muddy Waters, seems to demonstrate that with lower levels of reporting in documentation, there is a growing trend for investors to review details such as accounts and investor presentations with a renewed focus to identify discrepancies, mis-descriptions and even fraudulent behaviour. We think this activity will increase in the coming years.
Another trend that is likely to continue is restructurings triggered by accounting investigations, such as the Steinhoff Group restructuring and the collapse of Pâtisserie Valérie. Increased focus is also likely to fall on directors' duties and the challenge (after the fact) of transactions as fraudulent or voidable.
iv Legislative developments
Reforms to insolvency and corporate governance rules
On 26 August 2018, the UK government published its response to detailed consultations carried out during 2017 and 2018 on reforms to insolvency and corporate governance rules. In its response, the government has proposed major changes to the existing regimes aimed at encouraging the recovery of viable companies, improving transparency in group structures, promoting responsible directorship and strengthening shareholder stewardship. These changes represent the biggest reform of the UK's domestic insolvency regime since the Enterprise Act came into force in 2002, and a significant change in focus for the UK's rescue culture.
The main proposals are as follows:
- New restructuring plan: Creation of a new restructuring plan that will enable a company to bind all its creditors through a cross-class cramdown of dissenting creditors and the approval of the court. This is based on the existing scheme of arrangement but has elements of the US Chapter 11 process, albeit it is deliberately intended to be more flexible.
- Pre-insolvency moratorium: The introduction of a new moratorium process intended to give financially distressed (but ultimately viable) companies breathing space, free from creditor pressure, to develop a rescue plan. Initially for 28 days (but can be extended), directors will retain control of a company and a monitor (who will be a licensed insolvency practitioner) to ensure creditor interests are protected during this period.
- Ipso facto rule: A prohibition on suppliers enforcing contractual termination rights (known as ipso facto clauses) that would otherwise enable a contractual counterparty to terminate a contract as a result of a company going into an insolvency procedure.
- Enhanced recovery powers: The introduction of enhanced powers of recovery for insolvency office holders, including the ability to undo a transaction or a series of transactions that are deemed to have removed value from a distressed company in the period leading up to insolvency.
- Investigative powers: A new power of investigation into the conduct of former directors of dissolved companies, which will effectively enhance the existing powers of investigation into directors' conduct and strengthen the ability to take rogue directors out of the marketplace.
- Distressed subsidiary sales: The consideration of sales of distressed subsidiaries whereby the government intends to make directors of holding companies that sell distressed subsidiaries liable for losses caused to creditors of the subsidiary in certain defined situations.
Overall, the proposed reforms are in line with the Preventive Restructuring Directive (approved in June 2019 by the European Union),86 which provides for increased moratorium protection, prohibition of the use of ipso facto termination clauses and the introduction of a restructuring plan that can be confirmed with cross-class cramdown. Against the backdrop of Brexit, this clearly demonstrates the UK's intention to remain competitive within the cross-border restructuring and insolvency market.
The government has stated that it intends to bring forward legislation to implement these proposed changes 'as soon as parliamentary time permits'. At the time of writing, it is not clear when this will be addressed within the parliamentary timetable.
1 Peter Newman and Karen McMaster are partners and Isabel Drylie is an associate at Milbank LLP.
The authors acknowledge the contributions of Ian Johnson of Slaughter and May to the England and Wales chapter published in the sixth edition of The Insolvency Review, upon which this chapter is based.
2 This chapter considers insolvency and related restructuring laws applicable in England and Wales, which are referred to as UK insolvency law. It does not address analogous, but different, laws that apply in Scotland and Northern Ireland.
3 These came into force on 6 April 2016, in most cases replacing the Insolvency Rules 1986 in their entirety.
4 With certain significant exceptions, such as the Financial Collateral Arrangements (No. 2) Regulations 2003 (implementing the EU Directive on Financial Collateral Arrangements, which aims to simplify the process of taking and enforcing financial collateral across the European Union). The regulations disapply a number of provisions of the Insolvency Act 1986 [IA 1986], including the moratorium on enforcement of security in insolvency processes, such as administration and company voluntary arrangements and the order of priority of claims in floating charge realisations.
5 References to 'EU Member State' in the remainder of this chapter should be taken to mean an EU Member State other than Denmark.
6 Main and secondary proceedings for the purposes of Regulation (EU) 2015/848 on insolvency proceedings (recast) [Recast Insolvency Regulation] must be 'collective insolvency proceedings' and are listed in Annex A to the Regulation. Those relevant to corporate insolvencies in the UK are: winding up by or subject to the supervision of the court; creditors' voluntary liquidation (with confirmation by the court); administration (including out-of-court appointments) and voluntary arrangements.
7 Under the Recast Insolvency Regulation, the presumption does not arise if the registered office has been moved to another Member State in the three months before the request for the opening of insolvency proceedings.
8 Under the original Insolvency Regulation, such secondary proceedings had to be winding-up proceedings, and were listed in Annex B. The Recast Insolvency Regulation has removed this restriction.
9 The Insolvency Regulations diverge in their definition of 'establishment' – the Recast Insolvency Regulation introduces a three-month 'look back' period from the onset of main proceedings to determine whether a company has or had an establishment for the purposes of the Recast Insolvency Regulation, whereas the original Insolvency Regulation contained no such time limit.
10 Broadly defined as a floating charge over the whole or substantially the whole of the company's property.
11 See Sections 220 to 221 of the IA 1986, which allow for the winding up of foreign companies as unregistered companies.
12 It is not possible to appoint an administrative receiver in respect of a company incorporated outside the UK.
13 As discussed in Section I.v, the court may refuse to open secondary proceedings if an undertaking to respect local priorities is in place.
14 Re a company (No. 003102 of 1991) ex parte Nyckeln Finance Co Ltd  BCLC 539.
15 For example, Hellas Telecommunications (Luxembourg) II SCA  EWHC 3199 (Ch).
16 A Statement of Insolvency Practice (SIP 16 – Pre-packaged Sales in Administration) was introduced in November 2015 to ensure greater transparency of pre-packs. It sets out the required disclosures that an administrator must make to creditors of the details of any pre-pack agreement and sale.
17 A pre-pack administration can also be combined with a scheme, as seen in the IMO Carwash, McCarthy & Stone and, more recently, New Look restructurings.
18 But note the exception provided by Section 426 of the IA 1986 that permits the English courts to assist courts having insolvency jurisdiction in other 'relevant countries': in Re Dallhold Estates (UK) Pty Ltd  BCC 394 the court acceded to the request of a Western Australian court to grant an administration order in respect of an Australian company with assets in this jurisdiction.
19 Under the original Insolvency Regulation, the circumstances in which administration could be used as a secondary proceeding were limited, as secondary proceedings are restricted to winding-up proceedings.
20 Insolvency Rules 2016 [IR 2016], Rule 15.34.
21 The IA 1986 and IR 2016 set out various 'decision procedures' that may be used when creditors are required to make a decision. Many of these decisions would previously have been made at physical creditors' meetings, but since the IR 2016 came into force on 6 April 2017, these meetings are now permitted only if the requisite proportion of creditors so request. Challenges on the grounds of unfair prejudice are possible in some circumstances – see further under Section I.iv).
22 The company voluntary arrangement [CVA] becomes effective immediately after the resolution to approve it has been passed (for which 14 days' notice is required).
23 A CVA is not specifically listed as a winding-up proceeding for the purposes of Annex B to the original Insolvency Regulation. Arguably though, if it is not effected within a liquidation or administration, it can be proposed as a means of terminating secondary proceedings for the purposes of the original Insolvency Regulation on the basis that it amounts to a 'composition' (see Article 34). The original Insolvency Regulation provides that closure in this way requires the consent of the liquidator in the main proceedings but, in the absence of such consent, it may become final if the financial interests of the creditors in the main proceedings are not affected by the measure proposed. The scope of secondary proceedings under the Recast Insolvency Regulation is no longer limited to winding-up proceedings.
24 The English courts' jurisdiction to sanction a scheme hinges on their jurisdiction to wind up the scheme company in question (the criteria for which are discussed earlier in this Section).
25 The court has stayed proceedings for summary judgment, however, in a case where steps to implement a scheme were well advanced and it had a reasonable prospect of success: Re Vietnam Shipbuilding Industry Group & Ors  EWHC (Comm) 1146.
26 For example, the scheme proposed by DTEK Finance Plc in April 2016, which provided the group with a moratorium in which to negotiate a restructuring.
27 Companies Act 2006, Section 895.
28 Including those whose centre of main interests [COMI] is located in another EU Member State. The English courts' jurisdiction in relation to schemes of foreign companies has been found not to have been fettered by the Insolvency Regulation: see Re Drax Holdings; Re Inpower  EWHC 2743 (convening hearing: 17 November 2003) and Re Dap Holding NV  EWHC 2092 (sanction hearing: 26 September 2005).
29 See, for example, the decisions relating to Tele Columbus, Rodenstock, PrimaCom, Seat Pagine, Vivacom, Cortefiel and Zlomrex.
30 e.g., Re Apcoa Parking Holdings GmbH & Ors  EWHC 1867 and Re DTEK Finance BV  EWHC 1164 (Ch), in which the governing law in an indenture relating to high-yield bonds was changed from New York law to English law before the scheme application was made.
31 e.g., Chapter 15 of the US Bankruptcy Code, which implements the UNCITRAL Model Law in the United States, amended the definition of 'foreign proceedings' to include 'adjustment of debt', which may include certain schemes of arrangement. US courts have recognised a significant number of schemes of arrangement, particularly in cases involving the restructuring of New York law-governed bonds or loans, including most recently the Nyrstar and Noble restructurings.
32 Notice would also be required to the appropriate regulator under the Financial Services and Markets Act 2000 if the company is an authorised deposit taker under the Banking Act 2009.
33 If the company is in administration or liquidation, the administrator or liquidator will usually act as the nominee.
34 Unless the liquidator or administrator is acting as nominee, in which case he or she does not need to report to the court, but proceeds straight to the decision-making stage.
35 See Practice Statement (Scheme of Arrangements with Creditors)  All ER (D) 57 (Apr), the purpose of which is to enable issues concerning the composition of classes of creditor and the summoning of meetings to be identified and, if appropriate, resolved early in the proceedings.
36 Practice Statement (Companies: Schemes of Arrangement)  1 WLR 1345.
37 Peninsula and Oriental Steam Navigation Company  EWHC 389.
38 An official receiver (appointed in a compulsory liquidation) is not subject to such a regime. He or she is an officer of the court and responsible directly to it and to the relevant secretary of state.
39 IA 1986, Section 6.
40 Re Cancol Ltd  1 All ER 37.
41 Re Newlands (Seaford) Educational Trust  BCC 195.
42 HMRC v. Portsmouth City Football Club Ltd and others  EWHC 2013 (Ch)).
43 Banking Act 2009 as amended by Financial Services (Banking Reform) Act 2013 and Bank Recovery and Resolution Order 2014 (SI 2014 No. 3329); Bank Recovery and Resolution Directive and Section 17 of and Schedule 2 to the Financial Services (Banking Reform) Act 2013; and The Investment Bank Special Administration Regulations 2011 (SI 2011/245) (supplemented by the Investment Bank Special Administration (England and Wales) Rules 2011 (SI 2011/1301)).
44 The Insurers (Reorganisation and Winding Up) Regulations 2004 (SI 2004/353). Separate regulations apply to Lloyd's insurers: see the Insurers (Reorganisation and Winding Up) (Lloyd's) Regulations 2005 (SI 2005/1998).
45 Note, however, the existence of a number of statutes that provide for company groups to be considered as one entity in non-insolvency situations, for example, the Companies Act 2006 with the concept of group accounting; and taxation legislation with concepts such as 'controlling interests' and group taxation and tax relief.
46 See, for example, Collins & Aikman  BCC 861 and Nortel Networks SA  BCC 343.
47 See MPOTEC (EMTEC) GmbH  BCC 681.
48 Legislative Guide on Insolvency Law, Part Three: Treatment of Enterprise Groups in Insolvency adopted by UNCITRAL on 5 July 2010 and published on 21 July 2010. Elsewhere, INSOL Europe has recommended the introduction of group proceedings.
49 See the UNCITRAL Practice Guide on Cross-Border Insolvency Cooperation (adopted 1 July 2009).
50 Note, too, the Foreign Judgments (Reciprocal Enforcement) Act 1933, which provides for enforcement in England of civil and commercial judgments made in designated jurisdictions, provided that the judgment has been registered under that statute.
51 Re Arena Corporation Ltd  All ER (D) 277.
52 Recital (33) of the original Insolvency Regulation and Recital (88) of the Recast Insolvency Regulation confirm that Denmark, which exercised its opt-out in relation to the Insolvency Regulation, is not to be regarded as a Member State for the purposes of the Insolvency Regulation.
53 The English courts may refuse to provide assistance under the Cross-Border Insolvency Regulations 2006 [CBIR] if it would be manifestly contrary to public policy.
54 In cases of conflict between the obligations of the UK under the Insolvency Regulation and the provisions of the CBIR, the Insolvency Regulation will prevail. In essence, the CBIR provide an alternative basis for judicial cooperation where the Insolvency Regulation does not apply, for example if the debtor's COMI is not situated in an EU Member State or where the type of proceeding (or foreign representative) in question is not covered by the Insolvency Regulation, or to the extent that they do not conflict with the Insolvency Regulation.
55 Rubin & Anor v. Eurofinance SA & Ors  UKSC 46 (24 October 2012).
56 See opinions of Advocate General Colomer, delivered to the European Court of Justice in Cases C-1/04 Staubitz-Schreiber  ECR 1-701 and C-339/07 Seagon v. Deko Marty Belgium NV  ECR-1-767.
57 An early example of 'good' forum shopping can be seen in the Schefenacker restructuring, where the holding company of a German automotive supplier moved ownership of its assets and liabilities to a new, English-registered holding company so that it could enter into a CVA.
58 Hellas Telecommunications (Luxembourg) II SCA  EWHC 3199 (Ch); 2010 BCC 295.
59 Re Algeco Scotsman PIK SA  EWHC 2236 (Ch);  BCC 82.
60 Re Noble Group Limited  EWHC 3092 (Ch),  BCC 349.
61 Hellas Telecommunications (Luxembourg) II SCA  EWHC 3199 (Ch); 2010 BCC 295 at .
62 Re Videology Ltd  EWHC 2186 (Ch);  BCC 195.
63 ibid., at .
64 Re Van Gansewinkel Groep BV & Ors  EWHC 2151 (Ch) (22 July 2015).
65 Mr Justice Snowden found that the number of scheme creditors domiciled in England (15 of the 106 creditors, spread across the classes) and the size of their claims (€135 million in total) were sufficient to make it expedient for all scheme claims to be determined together.
66 Adjusting for an anomalous bulk insolvency filing.
67 Insolvency Service, 'Insolvency Statistics – January to March 2019', 30 April 2019.
68 HM Treasury, 'Forecasts for the UK economy: a comparison of independent forecasts', July 2019.
69 Office of National Statistics, Statistical Bulletin, 'Labour Market Overview: August 2019', 13 August 2019.
70 Bank of England, 'Inflation Report', August 2018.
71 Monetary Policy Summary and minutes of the Monetary Policy Committee meeting ending on 31 July 2019, 1 August 2019.
72 Debenhams plc press release, 9 April 2019.
73 Re Videology Ltd  EWHC 2186;  BCC 195 (Ch) at .
74 ibid., at .
75 ibid., at  and .
76 ibid., at .
77 ibid., at .
78 ibid., at .
79 ibid., at .
80 ibid., at .
81 ibid., at .
82 We note that The European (Withdrawal) (No. 6) Bill, which gained royal assent on 9 September 2019, requires the Prime Minister to request an extension to this departure date. It remains to be seen whether the timetable will alter in light of this new legislation.
83 Draft Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community, published 19 March 2018, joint progress statement from the negotiators dated 19 June 2018.
84 See footnote 82, above.
85 A type of financing issued with fewer restrictions on the borrower and fewer protections for the lending party.
86 Directive (EU) 2019/1023 of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt, and amending Directive (EU) 2017/1132 (on restructuring and insolvency).