I OVERVIEW OF RESTRUCTURING AND INSOLVENCY ACTIVITY
i State of the economy and the finance industry
In 2016, the British electorate, consulted in a nationwide referendum, decided that the United Kingdom should leave the European Union (Brexit). Decades of foundational assumptions in public policy and the making and administration of laws were thus overturned. It is now two years since the Brexit referendum, and the UK will formally leave the EU on 29 March 2019 at 11pm London time. It has been agreed that interim measures will be adopted in the period until 31 December 2020 to smooth the UK’s exit from the EU, thus providing a transition period of 21 months. The impact of Brexit and the eventual status of the UK with regard to the EU remains uncertain but the existence of a transition period has gone some way to assuage concerns about a ‘cliff-edge’ scenario.
Despite the UK’s decision to leave the EU, in a survey of financial industry professionals conducted by financial advisory firm Duff & Phelps in April 2018, London was voted the world’s leading financial centre, for the first time since 2013. Participants in the survey referred, among other factors, to the unique advantages of the English legal system and London’s legal and professional service culture. These and other factors in London’s favour will remain largely unaffected by Brexit, at least in the short to medium term.
In terms of domestic economic conditions, after many years of benign inflationary conditions, the UK’s inflation rate rose during 2017 as a result of many factors including the end of a period of low oil prices and a weakening in the value of sterling against other major currencies. This led to the Bank of England raising its base rate to 0.5 per cent in November 2017, the first such increase in a decade. With consumer price inflation remaining above the Bank of England’s target of 2 per cent at the time of writing, it remains to be seen whether the November 2017 rise in the interest rate will be a one-off event or the beginning of a return to a historically normal interest rate environment.
While the overall outlook for the UK economy remains positive, in the event that economic conditions worsen, or a further rise in interest rates negatively impacts highly geared businesses, the UK’s restructuring and insolvency sector stands well prepared to respond to any challenges (as explained in more detail in this chapter).
ii Market trends in restructuring procedures and techniques employed during this period
As explained below, most large restructurings in the UK continue to be effected on an informal, out-of-court basis. Insolvency Service statistics for activity in 2017 show that overall company insolvencies increased slightly by 2.5 per cent compared to 2016, driven by a rise in creditors’ voluntary liquidations. Nevertheless, the estimated liquidation rate remained steady compared to 2016 levels, at 0.47 per cent or one in 213 active companies, and remained low compared to the long-term average of 1.2 per cent over the past 25 years.
There were 4,462 company insolvencies in England and Wales in the first quarter of 2018, an increase of 0.6 per cent compared to the first quarter of 2017. This figure comprised 3,209 creditors’ voluntary liquidations (CVLs) (72 per cent of all insolvencies) and 783 compulsory liquidations (17.5 per cent of all insolvencies), representing a total increase in the underlying number of liquidations of 11.5 per cent on the previous quarter but a decrease of 0.1 per cent on the first quarter of 2017. Further, there were 367 administrations and 102 company voluntary arrangements. These figures represent an increase of 2.3 per cent and 18.6 per cent, respectively, on the equivalent figures for the first quarter of 2017; however, they do represent a relatively stable trend since 2014. The Insolvency Service recorded one administrative receivership in the period.
The low liquidation rate by historic standards reflects the change of emphasis in the UK’s insolvency legislation towards the rescue and rehabilitation of financially distressed companies, the rise in popularity of pre-pack administrations (trends that are discussed further below) and the market practice to favour amending and extending the terms of corporate debt rather than forcing financially distressed companies into insolvency.
II GENERAL INTRODUCTION TO THE RESTRUCTURING AND INSOLVENCY LEGAL FRAMEWORK
i Secured creditors and the balance of power
The approach of the UK’s legal system to the insolvency of troubled businesses is, in part, a product of the secured credit markets in which it developed. The comprehensive security available to lenders in the UK and the rights afforded to them in the event of insolvency go some way to explaining the conventional categorisation of the UK as a ‘creditor-friendly’ jurisdiction, as opposed to one generally regarded as favouring debtors, such as the US.
A bank lending money to a UK corporate enterprise will typically take fixed and floating charges2 over the company’s assets and undertaking as security for repayment of the debt. The holder of a valid floating charge is generally entitled to be repaid in priority to unsecured creditors,3 but ranks behind fixed charge holders and certain categories of preferential creditors in respect of its claim. The holder of a valid fixed charge is generally entitled to be repaid out of the proceeds of the realisation of its security in priority to all other claims on the company’s assets. The holder of a qualifying floating charge has the right to appoint its own administrator to enforce its security where the debtor is in default. Further, while a company may also be put into administration by court order or by an out-of-court procedure by another creditor, a floating charge holder will in most cases have the right to choose which administrator is appointed.
ii Statutory insolvency regimes
Corporate insolvency law in the UK has well-developed rules governing the collection and distribution of the assets of an insolvent company on a winding up. The main statutory sources of corporate insolvency law are the Insolvency Act 1986 (IA86) and the Insolvency Rules 2016 (IR 2016), which replaced the Insolvency Rules 1986, and supplement the IA86 by providing the procedural framework for the insolvency regime. Part IV of the IA86 sets out the circumstances in which a company may be wound up on a compulsory or voluntary basis.
Compulsory liquidation involves the company being wound up by an order of the court following the petition of an interested party, most commonly on the grounds of an ‘inability to pay debts’. The company is ‘unable to pay its debts’ for these purposes under certain statutory criteria, including under the ‘cash-flow’ test (i.e., where the company is unable to pay its debts as and when they fall due) and the ‘balance sheet’ test (i.e., where the company’s assets are less than its liabilities, taking into account contingent and prospective liabilities). There is no stay or moratorium on the enforcement of security, but it is not possible to commence or continue proceedings against the company without the leave of the court.
Voluntary liquidation is commenced by a resolution of the company and does not generally involve the court. The procedure will be a members’ voluntary liquidation where the directors are prepared to make a statutory declaration that the company will be able to pay its debts in full, together with interest at the official rate, within a period of 12 months from the commencement of the liquidation. Where the directors are not prepared to make such a declaration, the liquidation will proceed as a creditors’ voluntary liquidation. In a members’ voluntary liquidation, the members of the company appoint the liquidator, whereas in a creditors’ voluntary liquidation, both the members of the company and its creditors nominate their choice of liquidator, with the creditors’ choice prevailing in cases of disagreement.
Administration is a mechanism to enable external management, the administrator, to take control of the company for the benefit of all creditors, while steps are taken under the protection of a statutory moratorium to formulate a strategy to address the company’s insolvency. An administrator may propose an arrangement under Part 1 of the IA86 (a company voluntary arrangement (CVA)) or Section 895 of the Companies Act 2006 (a scheme of arrangement, or scheme), under which a reorganisation or compromise may be effected; these procedures also exist independently of administration. A scheme or a CVA may be invoked whether or not the company is in fact insolvent, and can be used in conjunction with or to avoid administration or liquidation. In each case, the arrangement will be binding on the company’s relevant creditors if the requisite majorities of the appropriate classes vote in favour of the proposals at duly convened meetings4 and, in the case of a scheme, it is sanctioned by the court.
The Small Business Enterprise and Employment Act 2015 (SBEEA 2015) and the Deregulation Act 2015 (DA 2015) have introduced a number of amendments to the IA86 that have been brought into effect. The IR 2016, which came into force on 6 April 2017 replaced the IR86 in its entirety in order to consolidate and update the IR86 with the 28 amending instruments made since the IR86 came into force. The revised rules provide, among other things, for: the abolition of creditors’ meetings as the default method for decision-making in insolvency procedures; the ability to communicate and file forms electronically; split voting rights; and a reduction in the burden of reporting and record-keeping requirements for insolvency practitioners. Further minor clarifications to the IR 2016 have been made by the IR Amendment Rules (SI 2017/366) and the IR Consequential Amendments Rules (SI 2017/369).
iii The ‘rescue culture’ and the demise of administrative receivership
Although the statutory framework does not yet provide a single comprehensive procedure under which a distressed company can seek to reorganise its obligations or capital structure, a ‘rescue culture’ has nevertheless developed in recent decades in the UK. This culture developed, in a large part, because of the introduction of the administration and CVA procedures in 1986 to support financially distressed companies pending a reorganisation, as well as reforms under the Insolvency Act 2000 and the Enterprise Act 2002 (EA02).
Designed to facilitate company rescue and to produce better returns for creditors as a whole, the EA02, inter alia, restricted the ability of secured creditors to appoint administrative receivers to a limited number of circumstances.5 It was widely acknowledged that the administrative receivership remedy gave too much power to secured parties who, as a result of their security, lacked sufficient incentive to rescue failing companies. Administrative receivership was, therefore, effectively replaced by a substantially revised administration regime, under which the administrator is now required to act in the interests of creditors as a whole. Following the EA02, an administrator may be appointed to manage the company with a view to achieving one of three statutory purposes, arranged hierarchically as follows:
- rescuing the company as a going concern;
- achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration); or
- realising property in order to make a distribution to one or more secured or preferential creditors.6
The administrator may only perform his or her functions in pursuit of the objective stated in (b) above if he or she believes that it is not reasonably practicable to achieve the objective stated in (b), and to do so would achieve a better result for the creditors as a whole.7 The administrator may only, in turn, perform his or her functions in pursuit of the objective stated in (c) above if he or she believes that it is not reasonably practicable to achieve the objectives stated in (a) or (b), and to do so would not unnecessarily harm the interests of the creditors of the company as a whole. Therefore, the administrator’s primary objective is now the rescue of the company as a going concern.8
In recent years, however, the increasing popularity of pre-pack administrations (discussed in more detail below) has to some extent undermined the aims of the revised administration regime and shifted the focus back to the protection of secured and major creditors that was such a feature of administrative receivership.
iv Role of directors
Modern insolvency law in the UK is founded on the premise that the function of corporate insolvency law is not merely to distribute the estate to creditors, but to encourage debt recovery and scrutinise the actions of the directors in order to ‘meet the demands of commercial morality’. Although administration was introduced by the IA86 to facilitate the rescue of viable businesses, it was done at a time when corporate failure was generally associated with mismanagement and concerns over director misconduct led Parliament to take a strict approach with regard to errant directors. Accordingly, it was decided that the powers of the directors should effectively cease on the appointment of an administrator, who in turn would be given wide powers to carry on the company’s business. Although the directors may remain in control of the company during proposals for a scheme or CVA if those proposals are made outside of administration, the company will not benefit from a statutory moratorium on debt enforcement, unless the company is a ‘small’ company (as defined in the IA86), in which case it may benefit from a limited CVA moratorium.
As a result of reforms introduced at the same time as the CVA and administration procedures, directors of insolvent companies may face disqualification from holding office in the future and find themselves personally liable for ‘wrongful trading’ in circumstances where they continued to trade their business despite it being in the twilight of insolvency. This test is set out in Section 214 of the IA86, and provides that a director may be held personally liable for a company’s debts where, knowing there was no reasonable prospect of the company avoiding insolvent liquidation, he or she failed to take every step that he or she ought to have taken with a view to minimising losses to creditors. Directors may also face personal liability in circumstances where they have been found guilty of fraudulent trading under Section 213 of the IA86 or misfeasance under Section 212. In addition, although the codification of directors’ duties under the Companies Act 2006 did not include a specific duty to creditors, directors of a UK company owe common law duties to creditors where the company is insolvent or nearly insolvent, and can also be held personally liable where a breach of those duties is established.
v Clawback actions
In addition to taking action against errant directors, the liquidator or administrator of a UK company may apply to the court to unwind certain transactions entered into by the company prior to the commencement of formal insolvency proceedings. A transaction entered into within a particular time frame before the onset of insolvency could be unwound, for example, if it constituted a ‘transaction at an undervalue’ or a ‘preference’.
A transaction at an undervalue involves a gift by a company, or a company entering into a transaction where it receives no consideration or consideration of significantly less value than the consideration given by the company. A preference involves putting a creditor (or a surety or guarantor for any of the company’s debts or liabilities) in a better position than the creditor would otherwise have enjoyed on an insolvent winding up. A court will not generally intervene, however, in the case of a transaction at an undervalue, if the company entered into the transaction in good faith for the purpose of carrying on its business and at the time it did so there were reasonable grounds for believing the transaction would benefit the company, or, in the case of a preference, if the company was not influenced by a desire to prefer the creditor, surety or guarantor in question. In the absence of fraud, a transaction will also not normally be unwound if the company was not insolvent at the time of the transaction and did not become so as a result of it.
The court also has the ability to make an order to unwind a transaction if it is satisfied that the transaction was entered into to defraud creditors by putting assets beyond the reach of claimants against the company or otherwise prejudicing their interests. No time limit applies for unwinding such a transaction.
Floating charges created by an insolvent company in the year before the insolvency are invalid, except to the extent of any fresh consideration, namely the value of the consideration given to the company by the lender when the charge was created. This period is extended to two years where the charge was created in favour of a connected person.
III RECENT LEGAL DEVELOPMENTS
i Modified universalism
A significant trend in English restructuring law in recent years has been the concept of ‘modified universalism’, which holds that, in cross-border insolvency matters, it is inherently desirable for all claims against the insolvent entity to be dealt with in the same process and in one jurisdiction, and hence under the common law (i.e., where statute law is silent on the subject), courts should be ready to assist foreign insolvency officeholders where appropriate in the conduct of the insolvency. Modified universalism is, therefore, both a consequence of the increasingly international nature of insolvency law and a facilitator of the trend for cross-border restructurings.
In the case of Rubin and Another v. Eurofinance SA and others,9 the Supreme Court held that no special common-law rules apply permitting judgments in respect of avoidance actions in foreign insolvency proceedings to be recognised where foreign judgments would not be recognised or enforced outside of an insolvency context. It was decided that the English courts and many Commonwealth courts applying English common law will enforce a foreign judgment in personam only if at least one of the conditions summarised in Dicey, Morris & Collins, Conflict of Laws, 15th ed., 2012 (Dicey), as Rule 43, is satisfied. One of those conditions is described in Dicey as follows:
a court of a foreign country outside the UK has jurisdiction to give a judgment in personam capable of enforcement or recognition as against the person against whom it was given . . . if the person against whom the judgment was given had before the commencement of the proceedings agreed, in respect of the subject matter of the proceedings, to submit to the jurisdiction of the court or of the courts of that country.
The concept of modified universalism has been examined recently in Re OJSC International Bank of Azerbaijan10 in the context of determining whether the rule in Antony Gibbs & Sons v. Societe Industrielle et Commerciale des Metaux11 (the Gibbs rule) still applies under English law. The Gibbs rule provides that a debt that is governed by English law cannot be discharged by foreign insolvency proceedings. In Re OJSC International Bank of Azerbaijan, the foreign representative of Azerbaijan’s largest bank successfully obtained recognition by the English High Court of an Azerbaijani restructuring proceeding under the Cross Border Insolvency Regulations 2006 (CBIR) and discretionary relief in the form of an administrative moratorium as the bank was registered and had its centre of main interests (COMI) in Azerbaijan.
During the moratorium period, the restructuring plan was approved by a substantial majority of creditors and by the Azerbaijan courts. As the English High Court moratorium was due to expire upon the termination of the Azerbaijan restructuring proceeding, the bank applied to the English Court seeking an extension of the moratorium. The respondents, who did not vote or participate in the plan, objected to the application, relying on the Gibbs rule that their debt was not discharged by the Azerbaijani process because of the Gibbs rule. The respondents argued that they had not submitted to Azerbaijan law and, therefore, retained the right to enforce their claims in England, subject only to the moratorium still in place, which was due to expire. The English court held that: (1) it did not have the power to extend a moratorium imposed under the CBIR without a limit as to time, and in particular, beyond the date on which the foreign proceeding will terminate; and (2) it should not grant a further moratorium. Hildyard J stated that ‘the fact of foreign insolvency, even one recognised formally in this jurisdiction, is not of itself a gateway for the application of foreign insolvency laws or rules or for giving them “overriding effect” over ordinary principles of English contract law’. Despite noting contemporaneous academic criticism of the Gibbs rule, the judgment notes that it undoubtedly remains good law, as evidenced by cases such as Global Distressed Alpha Fund 1 Ltd Partnerhip v. PT Bakrie Investindo,12 Rubin v Eurofinance SA13 and the Privy Council decision in Singularis Holdings Ltd v. PricewaterhouseCoopers.14
The question of whether submission to a jurisdiction under the common law can be implied was examined in the recent case of Vizcaya Partners Limited (Appellant) v. Picard and another (Respondent) (Gibraltar).15 The decision clarifies the previous uncertainty on the scope of Dicey’s fourth case. An agreement to submit to the jurisdiction of a foreign court can be implied. Implying such a term in a foreign law-governed contract in any given case will be assessed by reference to common-law principles, informed by expert evidence. The decision also confirmed that in the field of insolvency-related judgments, specifically those in avoidance actions, the increasingly applicable principle of ‘modified universalism’ does not mean that insolvency proceedings are exempt from the application of general principles.
ii Cross-border protocols
In an attempt to promote cooperation between international bankruptcy courts, the Judicial Insolvency Network (JIN) held its first meeting in October 2016, attended by judges from the US (Delaware and the Southern District of New York), Canada (Ontario), Australia (Federal Court and New South Wales), the British Virgin Islands, the Cayman Islands and England. Hong Kong sent an observer and the judiciaries of Bermuda, South Korea and Japan requested to be kept apprised of the discussions and the outcome. The meeting produced the Judicial Insolvency Network guidelines for judicial communication and cooperation on cross-border insolvency matters (the JIN Guidelines). The JIN Guidelines, which have been adopted by several important jurisdictions,16 encourage direct communication between courts and require the mutual recognition of statute law, regulations and rules of court applicable to the proceedings in other jurisdictions without further proof. Further, a court must generally recognise that orders made in the other proceedings were duly made for the purposes of the proceedings without further proof.
Courts are permitted to communicate in advance of joint hearings to establish procedures for the making of submissions and the rendering of decisions and to resolve any procedural, administrative or preparatory matters. During a joint hearing, each court retains sole and exclusive jurisdiction over its own proceedings but each court should be able to hear the other proceeding simultaneously. After the hearing, courts may communicate with or without counsel present, including on substantive matters. It is noted that, regardless of the legal framework, the scope for joint hearings between courts in different jurisdictions may be limited where the time zones, language or legal culture are significantly different.
IV KEY RESTRUCTURING TOOLS, SIGNIFICANT DEVELOPMENTS AND MOST ACTIVE INDUSTRIES
i The importance of the ‘pre-pack’
The term ‘pre-pack’ is typically used in UK insolvencies to describe the sale of a distressed business where all the arrangements of the sale are negotiated, and agreed before the company enters a formal insolvency procedure and concluded by the insolvency practitioner very shortly thereafter. This allows the business to survive relatively intact while allowing it to jettison a proportion of its debts. The increase in popularity of pre-packs appears to reflect a market demand for a restructuring remedy that allows key creditors to play a central role.
On the one hand, pre-pack sales provide for a relatively rapid and straightforward business transfer without the damaging publicity and consequent harm to reputation caused by a standard insolvency process. On the other hand, critics argue that the process lacks transparency, is controlled by senior lenders, sidesteps procedural safeguards inherent in the administration process and offers no guarantees that the interests of all creditors will be properly taken into account. Pre-packs have also attracted criticism owing to a high number of sales to connected parties such as management (known as ‘phoenix’ sales) and the fact that the insolvent company may often move straight to dissolution following the sale (without a separate liquidator being appointed).
However, in many cases, particularly when a company has no cash available, pre-packs provide the only solution to saving most of the business, the company’s goodwill and allowing employees to continue working. As a result, dozens of high street names have been resurrected under pre-pack deals in the past few years, including La Senza, JJB Sports, Agent Provocateur, Bernard Matthews and Silentnight.
In an attempt to address some of the concerns surrounding the use of pre-packs, the Insolvency Service Statement of Insolvency Practice 1617 (January 2009), a revised SIP (1 November 2015) and the adoption of an Insolvency Code of Ethics for England and Wales have been published and adopted to improve the transparency and proprietary of pre-packs and to help insolvency practitioners meet the standards of conduct expected of them by providing professional and ethical guidance.
In terms of the case law treatment of pre-packs, the use of a pre-pack was explicitly approved in the case of Re Hellas Telecommunications (Luxembourg) II SCA,18 where the High Court granted an administration order in respect of the Greek telecommunications company Wind Hellas (which was incorporated in Luxembourg) and expressly granted the company’s administrators liberty to complete a pre-pack sale of the company’s assets. The judgment is significant as it was the first case where the court expressly supported a pre-pack sale.
In Capital for Enterprise Fund a LP and another v. Bibby Financial Services Ltd,19 the High Court held that a director had breached his fiduciary duties by not informing the other directors of the proposed pre-pack sale and prioritising the preservation of the company’s business, which was not in the best interests of either the company or its creditors. The case thus serves as a useful reminder of the need for a director of a company in financial difficulties to distinguish between the interests of the business of the company and that of the company and its creditors.
The recent case of Re Ve Interactive (in administration)  EWHC 196 (Ch) demonstrates that the English courts are willing to remove and investigate administrators (as well as directors) in the event of a mishandling of pre-pack sales. Ve Interactive, which was valued at £1.5 billion in 2016, was sold by administrators for £1.75 million plus other consideration in a pre-pack sale to a new company connected to the company’s management, which had mismanaged the company and incurred substantial liabilities. The High Court held that the administrators should be removed for breaching their duty to act in the best interests of the company’s creditors, for being ‘blind’ to the potential for a conflict of interest when selling a company in distress to its former management and for the mishandling of the bid process.
ii Schemes and debt–equity swaps
Schemes have become the restructuring tool of choice for UK practitioners and are increasingly competitive on an international scale for restructuring foreign as well as domestic companies. Schemes stand alongside the US Chapter 11 procedure as the pre-eminent tool for implementing complex international restructurings of multinational companies.
A scheme can be used to achieve anything that a company and its creditors or members may lawfully agree among themselves. Examples include, inter alia: a moratorium; the transfer of assets from the debtor to a new company; a release or compromise of secured debts; and a debt-to-equity swap. In recent cases, the most common arrangement or compromise for schemes has been a debt-to-equity swap. The main objective of a debt-to-equity swap is to provide a struggling company with a strengthened balance sheet and improved liquidity. This in turn improves cash flow and relieves pressure from creditors, thereby addressing concerns that directors may have about their duties and potential personal liability issues. Creditors benefit from the greater chance of their debt being repaid, preserved enterprise value and a potential for equity upside if the company returns to profitability or is sold. Key customers and suppliers are placed on a sounder footing, encouraging suppliers to provide or restore essential credit terms and credit issuers to keep lines in place, while reassuring customers that long-term or further orders will be fulfilled. Debt-to-equity swaps can be used both in consensual circumstances and in non-consensual circumstances as dissenting creditors can be ‘crammed down’ by a scheme provided the requisite percentage and number have approved the scheme and it has been sanctioned by court. There will often be ‘out of the money’ creditors when debt-to-equity swaps are being implemented by schemes, and in such situations it may be necessary to use a transfer scheme. In these circumstances a scheme is used to cram down any ‘in the money’ creditors and the pre-packs to transfer the scheme company’s assets to a new company, thereby leaving ‘out of the money’ creditors with claims against the scheme company with no assets.
Schemes are increasingly being considered by foreign companies that can establish a connection to the UK owing to the lack of a local equivalent that would enable them successfully to restructure their debts without the unanimous consent of their creditors.20 Foreign companies have been allowed to avail themselves of English law schemes where they can demonstrate both a ‘sufficient connection’ with England and Wales, and where the scheme order would be effective in the jurisdiction in which the company would otherwise be wound up. Following schemes in relation to Tele Columbus,21 Rodenstock22 and Primacom,23 it has become a well-trodden path for the English courts to exercise their scheme jurisdiction over foreign companies on the basis that there is a sufficient connection. This can be achieved where the scheme involves English law-governed finance documents, such as in Privatbank24 and in Re Codere25 schemes. The English courts have also been satisfied that a ‘sufficient connection’ with England can be established by amending the governing law and jurisdiction clauses of the debt documents to English law, as demonstrated in Re Apcoa Parking Holdings GmbH and others26 and in Re DTEK Finance BV.27 Often, this type of amendment will require the support of two-thirds of the lenders. Another means of establishing jurisdiction is to shift the COMI of the company to the UK, as was done successfully in the restructuring of Wind Hellas and in the restructuring of Magyar Telecom.28
Though the application of the EU Judgments Regulation (1215/2012) has not been finally determined in relation to schemes, foreign scheme companies have typically relied on Articles 8 (domicile) and 25 (exclusive jurisdiction)29 to establish the jurisdiction of the English courts.
Article 8 provides that a defendant may be sued in a Member State where at least one ‘defendant’ (treating scheme creditors as defendants) is domiciled, provided that ‘the claims are so closely connected that it is expedient to hear and determine them together’. The judgments in MetInvest  EWHC 79 (Ch), Hibu  EWHC 370 (Ch) and DTEK suggest that only one scheme creditor must be domiciled in England and Wales, whereas Re Van Gansewinkel Groep BV and others  EWHC 2151 (Ch) and Re Global Garden Products Italy SpA  EWHC 1884 (Ch) (GGP) suggest it may require consideration of ‘the number and value of the creditors domiciled in the UK’.
Article 25 is potentially engaged where the relevant documents contain an exclusive jurisdiction clause pursuant to which parties have agreed that the courts of a particular Member State are to have jurisdiction to settle disputes. In Hibu, Warren J found that Article 25 can apply to asymmetric jurisdiction clauses despite such jurisdiction clauses only binding one of the parties to a particular jurisdiction rather than both parties. However, in GGP, Snowden J found that Article 25 did not confer jurisdiction in respect of ‘asymmetric’ jurisdiction clauses. Following CBR Fashion,30 which notes the conflicting views in Hibu and GGP, it remains unclear which interpretation should prevail.
The English courts have paid closer attention recently to issues of fairness when considering sanctioning schemes. The judgments in Privatbank and Indah Kiat demonstrate that the courts are unwilling to fracture classes where creditors who have different rights prior to the scheme would rank pari passu in an insolvent liquidation. The courts have also considered whether ‘lock-up fees’ (also known as ‘consent fees’ or ‘work fees’), which are offered to consenting creditors who enter into a binding agreement to support the restructuring fracture the class. In Privatbank, Richards J proposed that the test that may be applied in relation to consent fees is whether it will have a material effect on the decision of a creditor to support the scheme. In this instance, the 2 per cent fee was not considered to breach the ‘materiality’ threshold.
iii Hot industries
The retail industry experienced continued restructuring activity in the second half of 2017 and early 2018, with 43,000 retailers ending the first quarter of 2018 in financial distress. Several factors affected British retail companies in an unfavourable manner. The Brexit referendum result, the introduction of the national living wage (which increased by 4.4 per cent in April 2018) and surging consumer debt levels contributed to the weakening of the value of sterling. Additionally, loss of momentum in the housing market appears to have hit consumer confidence, with households expecting their disposable income to fall this year despite the fact that real earnings are rising, according to the April 2018 PwC Consumer Survey. The continued expansion of online retailers’ market share and rising rent costs also continue to put pressure on the high street. As a result, well established brands, such as Maplin, Toys R Us, Carpetright and New Look have entered restructuring or insolvency procedures. A corollary of the recent financial difficulties in the retail sector has been the re-emergence of the CVA, an insolvency procedure that allows a voluntary compromise to be reached to repay business creditors some or all of the debt owed. CVAs are well suited to retail businesses as they allow for the closure of underperforming stores, negotiation of rent reductions with landlords and alteration to management teams, all while the business continues to trade.
The shipping industry has seen unprecedented levels of distress in the past two years. Sluggish demand for shipping has caused industry capacity to far outweigh demand, resulting in downward price pressures. Shipping companies are now experiencing increased operating costs, low freight rates and deteriorating asset values. These factors, coupled with diminished returns for investors, have caused lenders to tighten access to new finance, resulting in liquidity issues for shipping companies. The collapse of Hanjin Shipping, one of the world’s top 10 shipping companies, in February 2017 attests to these market conditions. However, there is room for cautious optimism in the shipping sector for the second half of 2018 with the prediction that demand will outstrip supply for the first time in several years, as ship order books are close to all-time lows and global trade volumes are benefiting from sustained imports of commodities and continued demand from China.
The oil and gas sector experienced significant restructuring activity throughout 2017. The impact of the steep drop in oil prices from a peak of US$115 per barrel in June 2014 to US$35 per barrel at the end of February 2016 continues to reverberate around the industry, with Ocean Rig, Pacific Drilling and SeaDrill entering restructuring processes in 2017. Reduced oil prices have resulted in a slowdown in offshore capital expenditure and financial pressure on oilfield servicing companies. OPEC-led production curbs have gone some way to rebalance the market and stabilise prices, but as we enter the fourth year of the oil downturn, the pace of recovery may not prove quick enough for struggling businesses, as the availability of utilising an ‘amend and extend’ approach runs out.
The construction and outsourcing services sector has been significantly affected by market uncertainty. There were 934 construction industry insolvencies in the first quarter of 2018 alone, an increase of 73 per cent compared to the fourth quarter of 2017, many of which were linked to the collapse of the UK’s second-largest construction company, Carillion, in January 2018. Carillion’s insolvency is likely to continue to have far-reaching implications for the UK economy, as a large proportion of its business was made up of government contracts, including the provision of services to Network Rail, the NHS and UK schools and prisons.
The main sources of cross-border insolvency law in the UK are the Regulation on Insolvency Proceedings (recast) (the Recast Insolvency Regulation),31 the Cross-Border Insolvency Regulations 2006,32 which implement the UNCITRAL Model Law on Cross-Border Insolvency (the Model Law), Section 426 of the IA86 and the underlying common law. As discussed elsewhere in this chapter, the framework applicable to cross-border insolvencies may be subject to significant change in the coming years as a result of the UK’s decision to leave the EU.
i Recast Insolvency Regulation
The Recast Insolvency Regulation, which came into effect from 26 June 2017,33 replaced the EU Regulation on Insolvency Proceedings (the Insolvency Regulation).34 The fundamental premise that insolvency law is a matter for each EU Member State has remained embedded within the Recast Regulation, and the Recast Regulation seeks to strengthen the framework of recognition and cooperation between Member States. The Recast Regulation introduces the following key measures:
- measures to discourage abusive forum shopping, namely by changing the presumptions applied in relation to the location of COMI;35
- a new procedure, known as a ‘group coordination proceeding’, which will allow for coordination on insolvencies of groups of companies, in which group members can choose to participate;36
- pre-insolvency rescue proceedings to be included in the definition of main proceedings, as the scope of proceedings is broadened. Secondary proceedings will no longer be limited to winding-up proceedings. For the UK, however, schemes of arrangement under Part 26 of the Companies Act 2006 will remain outside the scope of the Recast Insolvency Regulation;37
- provision for a court to be able to postpone or refuse a request to open secondary proceedings. In certain situations, an office holder of the main proceedings may, with the support of local creditors, give an undertaking as to the treatment of creditors in other Member States in order to avoid secondary proceedings in those jurisdictions. Various other mechanisms have been introduced to minimise the need to open secondary proceedings;38 and
- EU-wide insolvency registers to be established so that they are searchable in all official languages of the EU (although these provisions will not come into force at the same time as the majority of the new provisions).39
In relation to the determination of a company’s COMI, the leading authorities under the Insolvency Regulation are the rulings of the European Court of Justice in Re Eurofood IFSC40 and Interedil Srl (in liquidation) v. Fallimento Interedil Srl and another.41 In Eurofood, it was held that the presumption in Article 3(1) that a company’s COMI is situated in the state where it has its registered office can only be rebutted if there are factors, objective and ascertainable by third parties, that enable this to be established to the contrary. The Eurofood test was subsequently applied by the High Court in Re Stanford International Bank Limited and others.42 Interedil established the principle that in determining a company’s COMI under the Insolvency Regulation, more weight must be given to the location of the company’s central administration in accordance with Recital 13 of the Insolvency Regulation (which states that a debtor’s COMI must correspond to the place where it regularly conducts the administration of its interests).
ii Cross-Border Regulations
The Cross-Border Regulations enacted the Model Law in the law of Great Britain (i.e., England, Wales and Scotland) in April 2006. The Cross-Border Regulations provide, inter alia, for the recognition of a foreign proceeding commenced or officeholder appointed in any foreign jurisdiction, regardless of whether that foreign jurisdiction has enacted a version of the Model Law.
The Cross-Border Regulations have been successfully used to obtain recognition from the English courts of insolvency proceedings in the BVI,43 Denmark,44 Switzerland,45 Antigua,46 Azerbaijan47 and other countries.
The Cross-Border Regulations provide that, on the recognition of a foreign proceeding, the court may order ‘the delivery of information concerning the debtor’s assets, affairs, rights, obligations or liabilities’,48 and may grant ‘any additional relief that may be available to a British insolvency office holder under the law of Great Britain, including any relief provided under Paragraph 43 of Schedule B1 to the Insolvency Act 1986’.49 In granting such relief, the court must be satisfied that ‘the interests of creditors . . . and other interested persons, if appropriate, including the debtor, are adequately protected’.50
iii Judicial assistance to proceedings commenced in another jurisdiction
Section 426 of the IA86 provides for the UK courts to give assistance upon request to the courts of other designated jurisdictions, which are mainly Commonwealth countries. Where Section 426 applies, it provides an alternative means of relief and assistance to the Insolvency Regulation and the Cross-Border Regulations, and the UK courts can apply the insolvency law of either jurisdiction in relation to the assistance requested.
In the important case of Rubin v. Eurofinance SA,51 the Supreme Court confirmed that English courts have a common law power to recognise and grant assistance to foreign insolvency proceedings. On the question of enforcing foreign insolvency judgments, however, the Supreme Court held that the English courts will only enforce a foreign judgment against a party that was present in the foreign jurisdiction when the proceedings were commenced, or that made a claim or counterclaim in the foreign proceedings, or that appeared voluntarily in the foreign proceedings, or that otherwise agreed to submit to the foreign jurisdiction. See Section III for a discussion of a further recent case of note in this area.
VI FUTURE DEVELOPMENTS
i The impact of Brexit
Brexit may have an impact on the recognition and enforcement of schemes of arrangement (as well as UK insolvency processes such as administration) in EU jurisdictions. It is not possible at this stage to predict with any certainty the form of relationship that will exist between the UK and the EU in the future. However, it is suggested that the options range from European Economic Area (EEA) membership, which would put the UK in a similar position to that of Norway, to no trade agreement, which would place relations between the UK and the EU on a World Trade Organization (WTO) basis. It is possible that a unique arrangement will be reached that does not reflect any current precedents, but considering the possible position under these two extremes provides an indication of the issues that are likely to arise.
If the UK were to retain EEA status, it would be open for the UK to seek to agree with the EU that the Recast Regulation would continue to apply to the UK, although this would be unprecedented as the Recast Regulation does not currently apply to any non-EU members. The continuation of the Recast Regulation would be essential for the automatic recognition of UK insolvency processes in the EU. Where Member States have passed laws based on the Model Law, this may help UK insolvency office holders seeking recognition, but as at the time of writing, the only other EU Member States that have done so are Greece, Poland, Romania and Slovenia. The Recast Regulation is not relevant to the recognition and enforcement of schemes in the EU, although the option of shifting COMI to the UK to establish jurisdiction for a scheme could be more difficult if the Recast Regulation were no longer in force. In a situation where there is no trade agreement between the UK and the EU, the continuation of the Recast Regulation with regard to the UK appears very unlikely, which would mean that recognition of UK insolvency processes in the EU would depend on judicial comity, as decided by courts on a case-by-case basis.
Importantly, however, the scheme jurisdiction over foreign companies does not depend on the Recast Regulation. When seeking sanction for a scheme, the scheme company must satisfy the English court that the scheme will have a substantial effect that, for a foreign company, involves establishing that it is likely to be recognised in any key jurisdictions where it could be challenged, such as the jurisdiction where the scheme company is incorporated or where it has significant assets. Arguments for the recognition and enforcement of schemes of arrangement in the EU are usually based on private international law and the Brussels Regulation.52 As with the Recast Regulation, the Brussels Regulation does not currently apply to any non-EU members, and so its continuation with regard to the UK after the UK’s departure from the EU would be unprecedented. A more viable option is, however, presented by the existence of the Lugano Convention,53 which currently applies to the EU, Switzerland, Norway and Iceland and is similar to the EU Judgments Regulation. As an EEA member, therefore, it seems likely that the UK could accede to the Lugano Convention, which would support the continuing recognition and enforcement of schemes in the EU. If the UK had no trade agreement with the EU, Lugano Convention membership would appear to be unlikely, and recognition and enforcement of schemes of arrangement in the EU would be a matter entirely for the private international laws of EU Member States; nevertheless, it is likely that in these circumstances EU Member States would not have a problem with continuing to recognise and enforce the effect of schemes of arrangement in accordance with their own private international laws and without the added assistance of the Brussels Regulation.
The UK’s departure from the EU may have an adverse impact on the ability of EU companies to benefit from UK insolvency processes. Further, if the EU were to develop more attractive restructuring procedures as set out in the proposed Directive discussed above, European businesses may choose to pursue cross-border restructurings in other jurisdictions. It is anticipated, however, that the factors that make the UK an attractive forum for international restructurings, and the structural and cultural shortcomings that make many foreign companies, both within and beyond the EU, reluctant to pursue complex restructurings in their home jurisdictions, will continue regardless of the political events to come.
ii The EU’s proposal for a Directive on preventive restructuring frameworks
On 22 November 2016, the European Commission released a proposal for a Directive on preventive restructuring frameworks, second chances and measures to increase the efficiency of restructuring, insolvency and discharge procedures, amending Directive 2012/30/EU.54 Among others, one main objective of the proposal is to ensure that Member States implement key principles of preventive restructuring frameworks. The EU has recognised that the current differences between the insolvency regimes of the different Member States translate into additional costs for investors in cross-border restructurings. The scheme of arrangement is widely used in this context and was used as a template for the preventive restructuring frameworks presented in the proposal. The main points of the proposal are summarised below:
- debtors accessing restructuring procedures should remain in control of their assets and existing management should have day-to-day operation of the business;
- appointment by court of an insolvency practitioner should be limited to exceptional cases;
- preventive restructuring frameworks should be available on the application of debtors, or of creditors with the agreement of debtors;
- a debtor should be able to initiate a temporary moratorium for up to four months through a court application;
- the stay should cover individual enforcement actions and the opening of insolvency proceedings where they may adversely affect a restructuring and the obligation of a debtor to file for insolvency would be suspended for the duration of the stay; and
- if complex restructurings require more time Member States may allow courts to grant a longer stay up to a maximum of 12 months.
The proposal further provides that the Member States should determine a framework for the adoption of restructuring plans. Any affected creditors should have the right to vote on the adoption of a restructuring plan. Member States may also grant such voting rights to affected equity holders. For voting purposes, the affected creditors should be separated in classes that should be formed in such a way that each class comprises claims or interests with rights that are sufficiently similar to justify considering the members of the class a homogenous group with commonality of interest and as a minimum secured and unsecured claims should be treated in separate classes. A restructuring plan shall be deemed to be adopted if a majority in the amount of claims is obtained in every class. The level of majority may be determined by Member States but may not be higher than 75 per cent of the claims in the class. Where the necessary majority is not reached in one or more voting classes, the plan may still be confirmed by a cross-class cramdown procedure, whereby if the plan has been approved by at least one class of affected creditors other than an equity-holder class and any other class that, upon a liquidation of the enterprise, would not receive any payment or other consideration, the court may approve the plan.
It remains to be seen if and how the proposal will be implemented by the European Parliament, the Council and ultimately the Member States. It is already apparent that the proposal has been welcomed by many practitioners in Europe. The proposed frameworks have considerable similarities with the scheme of arrangement procedure as well as restructuring under US Chapter 11. Therefore, if the frameworks proposed become widely adopted in the EU, the UK’s position as the forum of choice for European cross-border restructurings may in time be adversely affected, although no legislation can provide for the institutional and cultural advantages that form a large part of the UK’s attractiveness in this area. It is understood that the proposal is expected to be finalised by the European Parliament and the Council in 2019, and the process of implementation is expected to begin in Member States in 2022.
iii BEIS consultation
The UK government’s Department for Business, Energy & Industrial Strategy (BEIS) published a consultation paper in March 2018 that proposes a number of new measures to improve the UK’s corporate governance and insolvency regimes. Following recent high-profile insolvencies of major UK companies, including well known high-street retailers (as discussed in more detail in Section IV.iii) and allegations of mishandling by management and shareholders, the stated aim of the consultation is to reduce the risk of major company failures occurring through shortcomings of governance or stewardship and to strengthen the responsibilities of directors of firms when they are in or approaching insolvency. In summary, the consultation seeks to address the following matters:
- sales of business in distress – proposals to ensure that directors responsible for the sale of an insolvent subsidiary take proper account of the interests of the subsidiary’s stakeholders and to deter reckless sales, which could harm stakeholder interests. Where a large company or business cannot support itself then the directors involved in any sale, including directors of a holding company controlling the sale of shares in a subsidiary, should satisfy themselves that the sale would lead to a better outcome for creditors than putting the company into formal insolvency;
- reversal of value extraction schemes – proposals to address and challenge situations in which a company in financial difficulties has been bought by investors who then strip it of its assets to lessen their loss or protect their profits;
- investigations into the actions of directors of dissolved companies – proposals to extend existing investigative powers into the conduct of directors to cover directors of dissolved companies and to provide the Insolvency Service with the necessary powers to investigate when companies are dissolved with outstanding debts or allegations of director misconduct; and
- corporate governance in pre-insolvency situations – proposals to strengthen corporate governance when companies enter financial difficulties, particularly in relation to: group structures; shareholder responsibilities; payment of dividends; directors’ duties and the role of professional advisers and protection for company supply chains in the event of insolvency.
BEIS has invited the views of, inter alios, directors of companies, institutional shareholders and investors, insolvency practitioners, business representative bodies, credit managers, civil society groups, academics, think tanks, landlords, employees and members of the public. The consultation period closed on 11 June 2018.
1 Christopher Mallon is a partner, Alex Rogan is a senior associate and Martyn Cukier is an associate at Skadden, Arps, Slate, Meagher & Flom (UK) LLP.
2 While a fixed charge attaches to a particular asset and allows its disposal only with consent of the secured creditor or on repayment of the debt, a floating charge is created over a class of assets, present and future, and allows the debtor to carry on its business and deal with such assets until a default under the relevant loan agreement (or other defined event), upon which the charge ‘crystallises’ and attaches to the secured assets, preventing the debtor dealing with the assets without repayment of the debt or consent of the creditor.
3 However, where assets are subject to a floating charge created on or after 15 September 2003, a liquidator, receiver or administrator must in general make a ‘prescribed part’ of the floating charge realisations (currently 50 per cent of the first £10,000 and 20 per cent of the remainder, capped at £600,000) available for the satisfaction of unsecured debts in priority to the claim of the floating charge holder.
4 CVA proposals must be approved by a simple majority in value of the members and three-quarters in value of the company’s creditors present and voting. A scheme requires approval by a majority in number representing three-quarters in value of the members or creditors (or of each class of members or creditors) who vote at a meeting convened by the court for the purpose of considering the scheme. The scheme must subsequently be approved by the court.
5 The EA02 also made a number of other amendments to the corporate recovery laws of the UK. In particular, the Crown’s preferential status in insolvency proceedings has been abolished, and in its place a proportion of floating charge recoveries are ‘ring-fenced’ for the general unsecured creditors.
6 Paragraph 3(1), Schedule B1 to the IA86.
7 Paragraph 3(3), Schedule B1 to the IA86.
8 Paragraph 3(4), Schedule B1 to the IA86.
9  EWCA Civ 895.
10  EWHC 59 (Ch).
11 (1890) 25 QBD 399.
12  1 WLR 2038.
13  AC 236.
14  AC 1675.
15  UKPC 5.
16 Including the Supreme Court of Singapore (via Registrar’s Circular No. 1 of 2017), the US Bankruptcy Court for the District of Delaware (via Local Bankruptcy Rule 9029-2), the US Bankruptcy Court for the Southern District of New York (via General Order M-511), the Supreme Court of Bermuda (via Practice Direction, Circular No. 6 OF 2017) and the Eastern Caribbean Supreme Court for the British Virgin Islands (via Practice Direction 8 of the BVI’s Insolvency Rules 2005). The English High Court adopted the guidelines on 5 May by adding a reference to the JIN Guidelines in Chapter 25 of the Chancery Guide.
17 SIP 16.
18  EWHC 3199 (Ch).
19  EWHC 2593 (Ch).
20 Following the success of schemes of arrangement in the UK, a number of jurisdictions (such as the Netherlands and Singapore) have recently implemented reforms to their restructuring frameworks. Such reforms have included the adoption of a procedure similar or identical to the UK’s scheme of arrangement in part or in full in order to benefit from the increasing global demand by companies for this popular and flexible restructuring tool. However, the UK remains the most popular forum to effect a scheme as it has been well tested in the English courts, and the case law continues to evolve in response to the practical and commercial needs of distressed companies.
21 Re Tele Columbus GmbH  EWHC 249 (Ch).
22 Re Rodenstock GmbH  EWHC 1104 (Ch).
23 Primacom Holding GmbH v. A Group of the Senior Lenders & Credit Agricole  EWHC 164 (Ch).
24 Re Public Joint-Stock Company Commercial Bank ‘Privatbank’  EWHC 3299 (Ch).
25 Re Codere Finance (UK) Limited  EWHC 3778 (Ch).
26  EWHC 3849 (Ch).
27  EWHC 1164 (Ch).
28 Re Magyar Telecom BV  EWHC 3800 (Ch).
29 For example, where the relevant documents contain an exclusive jurisdiction clause pursuant to which parties have agreed that the courts of a particular Member State are to have jurisdiction to settle disputes.
30  EWHC 2808 (Ch).
31 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 (OJ L 141, 5 June 2015, pp. 19–72).
32 SI 2006/1030.
33 Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015, Article 92.
34 Council Regulation (EC) 1346/2000 on insolvency proceedings (OJ 2000 L 160/1).
35 Ibid., Article 3.
36 Ibid., Chapter V.
37 Ibid., Articles 1 and 3.
38 Ibid., Article 36.
39 Ibid., Articles 25–30.
40 Case C-341/04.
41 Case C-396/09.
42  EWHC 1441 (Ch).
43 Akers and McDonald v. Deutsche Bank AG (Re Chesterfield United Inc. and Partridge Management Group SA)  EWHC 244 (Ch).
44 Larsen and others v. Navios International Inc (Re Atlas Bulk Shipping A/S)  EWHC (Ch) 878.
45 Cosco Bulk Carrier Co Ltd v. Armada Shipping SA and another  EWHC 216 (Ch).
46 Re Stanford International Bank Ltd (in liquidation)  EWCA Civ 137.
47 Re OJSC International Bank of Azerbaijan  EWHC 59 (Ch).
48 Article 21(1)(d), Schedule 1 of the Cross-Border Regulations.
49 Article 21(1)(g), Schedule 1 of the Cross-Border Regulations.
50 Article 22(1), Schedule 1 of the Cross-Border Regulations.
51  UKSC 46.
52 Council Regulation (EU) 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast) (also known as the Recast Brussels Regulation), which has applied from 10 January 2015, superseding the 2001 Brussels Regulation.
53 Convention on jurisdiction and the enforcement of judgments in civil and commercial matters signed in Lugano on 30 October 2007.
54 Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards that, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 54 of the Treaty on the Functioning of the European Union, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent text with EEA relevance.