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 (UK) should leave the European Union (EU) ('Brexit'). Decades of foundational assumptions in public policy and the making and administration of laws were thus overturned. It is now, however, nearly three years since the Brexit referendum, and the date on which the UK was originally meant to formally leave the EU (29 March 2019 at 11pm London time) has elapsed without the occurrence of Brexit. At the time of writing, the EU had agreed to a six-month extension of exit day to 31 October 2019 at 11pm London time, subject to prior ratification by the British Parliament of the 'EU withdrawal agreement' (the Withdrawal Agreement) and political declaration on the future relationship between the UK and the EU negotiated by the British government. Those documents – the first, a legally binding text that sets the terms of the UK's exit from the EU and, the second, a statement on the proposed long-term relationship between the UK and EU, have been rejected several times in the House of Commons, and negotiations between the primary UK political parties have not resulted in an agreed plan as to how certain terms of the Withdrawal Agreement may be renegotiated or how Brexit will alternatively be effected. The impact of Brexit and the eventual status of the UK with regard to the EU thus remains uncertain.
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 and 2018 as a result of many factors including a weakening in the value of sterling against other major currencies. This led to the Bank of England raising its base rate from 0.25 per cent to 0.5 per cent in November 2017, and then further raising the rate to 0.75 per cent in August 2018. According to the Bank of England's Inflation Report of May 2019, economic growth in other countries slowed in 2018, reducing demand for the UK's exports, which consequently became a contributing factor to the UK's economy growing at a slower pace. Investment by businesses fell in 2018, but spending by households proved robust, rising 1.7 per cent. In the first quarter of 2019, the UK's GDP is expected to have grown by 0.5 per cent, in part reflecting a larger-than-expected boost from companies in the UK and the EU building stocks ahead of recent Brexit deadlines; however, that boost is expected to be temporary with quarterly growth predicted to slow to around 0.2 per cent in the second quarter of 2019. The Bank of England also predicts that most of the increase in inflation due to the fall in the pound following the Brexit vote has now occurred, with consumer price inflation at 1.9 per cent in March 2019 and the expectation that the rate will remain slightly below the Bank of England's target of 2 per cent in the first half of its current forecast period, reflecting lower retail energy prices. The Bank's forecast is that future interest rate rises over the next few years will be gradual and limited in order to maintain its target inflation rate.
While the overall outlook for the UK economy remains cautiously positive, the long-term economic outlook will be largely dependent on the nature and timing of Brexit, and in particular on the new trading arrangements between the EU and the UK. 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 continues to be well prepared to respond to any challenges, albeit that (as explained in more detail in this chapter), the regulatory framework in the UK is undergoing fundamental changes, first in terms of the potential changes that will occur if the current framework for ongoing civil judicial cooperation between the UK and the rest of the EU ceases to apply – which would be the case if the UK leaves the EU without agreement (a 'no-deal' Brexit) – and, second, in light of a concerted effort for reforms to be introduced to the restructuring and insolvency framework to provide best-in-class tools for restructuring cases.
ii Market trends in restructuring procedures and techniques employed during this period
According to the Insolvency Service's Insolvency Statistics report for October to December 2018, 17,439 companies entered into insolvency in England and Wales in 2018, a rise of 0.7 per cent on 2017. Though total liquidations fell by 0.5 per cent to 15,618, there was an increase of 11.1 per cent in compulsory liquidations to 3,117 and a decrease in creditors' voluntary liquidations of 3 per cent to 12,501. Compared with 2017, administrations in 2018 increased by 11.2 per cent, and company voluntary arrangements increased by 16 per cent. The upshot of these results was that the estimated underlying liquidation rate in 2018 was one company liquidation per 249 of active companies, up from one in 264 in 2017.
The results in the Insolvency Service's Insolvency Statistics report for January to March 2019 shows that the above trend has continued at the start of 2019, with 4,187 total underlying company insolvencies in England and Wales in the first quarter of 2019 (representing a 6.3 per cent increase on the final quarter of 2018, and a 5.1 per cent increase on the first quarter in 2018), driven by a 6.2 per cent increase in creditors' voluntary liquidations, 21.8 per cent increase in administrations (resulting in the highest quarterly level in five years since January to March 2014) and 43.1 per cent increase in company voluntary arrangements (CVAs) in relation to the fourth quarter of 2018. The breakdown by industry reveals that the 'wholesale and retail trade; repair of vehicles' industry grouping saw the largest increase in underlying insolvencies, with 67 extra cases compared to the 12-month period ending 31 December 2018. This was closely followed by the 'administrative and support services' grouping (66 additional insolvencies); manufacturing (58 additional insolvencies); and the 'accommodation and food services' grouping (57 additional insolvencies). The construction industry continues to remain the sector with the highest number of new company insolvencies, with 3,013 insolvencies (excluding bulk insolvencies) in the 12-month period ending 31 March 2019, a 0.6 per cent increase on the equivalent period ending 31 March 2018.
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 United States.
A bank lending money to a UK corporate enterprise will typically take fixed and floating charges2 over the company's assets and undertaking as security for repayment of the debt. 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, 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 (the IA86) and the Insolvency Rules 2016 (the IR 2016), which supplement the IA86 by providing the procedural framework for the insolvency regime.4 Parts IV and V 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 of a financially distressed company through the appointment of an administrator, who takes 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 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.5
The administrator may only perform his or her functions in pursuit of the objective stated in (b) above if he or she believes that it is not reasonably practicable to achieve the objective stated in (a), and to do so would achieve a better result for the creditors as a whole.6 The administrator may only, in turn, perform his or her functions in pursuit of the objective stated in (c) above if he or she believes that it is not reasonably practicable to achieve the objectives stated in (a) or (b), and to do so would not unnecessarily harm the interests of the creditors of the company as a whole.7 Therefore, the administrator's primary objective is now the rescue of the company as a going concern.
An administrator may propose an arrangement under Part 1 of the IA86 (a 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 (each discussed in further detail below) 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 meetings8 and, in the case of a scheme, it is sanctioned by the court.
iii Role of directors
Insolvency law in the UK strikes a balance between facilitating an equitable distribution of the estate to creditors and providing a platform to encourage debt recovery and scrutinise the actions of the directors. Although the current administration regime was introduced in the IA86 to facilitate the rescue of viable businesses,9 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 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, Section 172(3) of the Companies Act 2006 provides that the duty to promote the success of the company has effect subject to 'any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company'. Successive English cases since the 1980s have established that directors of a UK company owe common law duties to creditors where the company is insolvent or close to being insolvent. However, there has historically been some uncertainty as to how close to insolvency the company has to be before the duty is invoked. In the leading case of BTI 2014 LLC v. Sequana SA,10 the Court of Appeal held that the most appropriate test is 'whether the directors knew or should have known that the company was, or was likely to become, insolvent'.
iv Claw-back actions
In addition to taking action against errant directors, the liquidator or administrator of an insolvent 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 Impact of Brexit
The European Union (Withdrawal) Act 2018 (the Withdrawal Act) received Royal Assent on 26 June 2018, providing for the repeal of the European Communities Act 1972 on the day the UK leaves the EU (at the time of writing, 31 October 2019 at 11pm, subject to any prior agreement on the Brexit withdrawal deal) and converts into UK domestic law the existing body of directly applicable EU law. The Withdrawal Act provides for the passing of secondary legislation to address failures of this retained EU law to operate effectively.
The Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018/1394, adopted on 20 December 2018, are an example of such secondary legislation, with an aim to ensure that the UK's special resolution regime continues to operate effectively after the UK leaves the EU and independently of the Bank Recovery and Resolution Directive 2014/59/EU (BRRD). The BRRD, which entered into force on 2 July 2014 and was implemented in the UK through the amendment of the Banking Act 2009 and other existing UK legislation to establish the UK's special resolution regime, aims to provide EU Member States with a common framework for the resolution of banks and investment firms, as well as ensuring cooperation between Member States, and with third countries, in planning for and managing the failure of cross-border firms. As the BRRD itself will not be retained in UK law after the UK leaves the EU, the new regulations seek to remove the deficient references to the BRRD from UK law such that the UK's special resolution regime is legally and practically workable on a standalone basis following the occurrence of Brexit. The regulations also set out the information that is to be contained in a recovery plan or group recovery plan, the additional information that may be required for a resolution plan or group resolution plan, and matters that the Bank of England is to consider when assessing resolvability. Following the UK's withdrawal from the EU, the UK will retain its third-country recognition framework (with certain amendments) and expand its scope to include EEA-led resolutions.
Brexit impact on civil justice and judicial cooperation, and insolvency legislation in the UK
In the event that the Withdrawal Agreement is ratified by the British Parliament, several existing EU regulations will continue to apply in the UK for the duration of the applicable transition period set out therein including Regulation (EU) 2015/848 on Insolvency Proceedings (the Recast Insolvency Regulation)11 and Regulation (EU) 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast) (the Recast Brussels Regulation).12
In the event that the UK's exit from the EU is not supported by a deal (i.e., with no Withdrawal Agreement, transition period or political declaration on the framework for the future UK–EU relationship), however, several UK statutes that currently rely on reciprocity from the EU or individual EU Member States would require fundamental amendment to reflect the new standalone paradigm. In particular, the restructuring and insolvency framework in the UK would be fundamentally affected in a no-deal Brexit scenario by: (1) the Civil Jurisdiction and Judgments (Amendment) (EU Exit) Regulations 2019 (which was published in draft on 12 December 2018) (the Judgments EU Exit Regulations); and (2) the Insolvency (Amendment)(EU Exit) Regulations 2019/146 (the Insolvency EU Exit Regulations) made on 30 January 2019.
Judgments EU Exit Regulations
If enacted, the Judgments EU Exit Regulations would, in the event of a no-deal Brexit, revoke the Recast Brussels Regulation and its predecessor, Council Regulation (EC) No. 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (which applies to judgments given in proceedings commenced before 10 January 2015), and amend the domestic legislation13 implementing the Brussels Convention 1968, Lugano Convention 2007 and the EU/Denmark agreement of 19 October 2005. These EU regulations and treaties (referred to, collectively, as the 'Brussels regime') regulate jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, operating largely on a reciprocal basis between Member States. In the event that the UK exits the EU without a future agreement on the continued operation of the Brussels regime, this reciprocity would be lost, meaning that the Judgments EU Exit Regulations would be necessary to avoid inappropriate or unworkable unilateral application of these rules by the UK following exit (subject to certain saving provisions for cases which are ongoing as at exit day).14
In place of the Brussels regime, the government has stated that it would revert to the rules that apply to cross-border disputes where the Brussels regime does not apply: that is, the common law rules and (where it applies) the Hague Convention on Choice of Court Agreements 2005 (to which the UK intends to accede as a contracting state (discussed in further detail below)), given that those rules do not require reciprocity.
Insolvency EU Exit Regulations
The Insolvency EU Exit Regulations are intended to address the deficiencies that would arise in a no-deal Brexit scenario from the absence of mutual application of the Recast Insolvency Regulation. Absent the Insolvency EU Exit Regulations, the UK would be bound to continue to recognise insolvency proceedings in the remaining EU Member States under the UK's retained version of the Recast Insolvency Regulation but Member States would not be bound to recognise UK proceedings or the claims of UK creditors, unless their own domestic law provided for such recognition.
In a no-deal Brexit scenario, the Insolvency EU Exit Regulations amend the retained Recast Insolvency Regulation that is incorporated into domestic law on exit day pursuant to the Withdrawal Act by disapplying virtually all of its provisions such that the UK would not be obliged to recognise Member State insolvency proceedings (unless a different basis for recognition, such as the Cross-Border Insolvency Regulations 2006, applies).15 In essence, pursuant to the Insolvency EU Exit Regulations, the UK would retain a modified version of the Recast Insolvency Regulation's jurisdictional tests of 'COMI' and 'establishment' as bases for jurisdiction to open insolvency proceedings, which would be in addition to the UK's domestic provisions on jurisdiction. The Insolvency EU Exit Regulations would provide clarity on the status of UK insolvency orders in cases where the debtor has its COMI or an establishment in the UK, which may assist foreign courts when assessing whether to recognise those UK orders in their jurisdiction. The Insolvency EU Exit Regulations would also make consequential amendments to existing domestic legislation including the IA86.
ii Government responses to consultations on corporate insolvency framework
On 26 August 2018, the UK government's Department for Business, Energy and Industrial Strategy (BEIS) published the UK government's responses to (1) the 25 May 2016 consultation from the Insolvency Service, entitled 'A Review of the Corporate Insolvency Framework: A consultation on options for reform' and (2) the 20 March 2018 consultation from BEIS, entitled 'Insolvency and Corporate Governance: a consultation'. In response to the May 2016 consultation, which had received comments from stakeholders across the UK insolvency community, the government has said that it will introduce:
- a new statutory moratorium available for all companies that will become insolvent if action is not taken, but which are not yet insolvent, preventing creditor action against the company, overseen by an officer of the court with the title of the monitor;
- legislation to prevent the enforcement of contractual termination clauses in contracts for the supply of goods or services, or for contractual licenses, that are triggered by the entry of a contracting party into formal insolvency proceedings, a pre-insolvency moratorium process (see above), or a restructuring plan process (see below); and
- a standalone procedure whereby a company (whether it is solvent or insolvent) can propose a restructuring plan to its creditors, whether or not in tandem with a standalone moratorium (see above). The new procedure is modelled on the existing scheme of arrangement process under Part 26 of the Companies Act 2006, including the categorisation of creditors into classes for voting purposes, save that the new procedure will adopt features which are equivalent to provisions of Chapter 11 of the US Bankruptcy Code in allowing for the confirmation of the plan even where a class of creditors has voted against it, subject to satisfaction of certain conditions.
The March 2018 consultation was launched following a number of high-profile insolvencies of major UK companies, including well-known high-street retailers, and allegations of mishandling by management and shareholders. The stated aim of the consultation was 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 response to the March 2018 consultation, the government has stated that it will take forward a number of specific actions relating to various corporate governance matters in the face of company insolvencies, including work to strengthen oversight of group structures, strengthening investor stewardship (including through enforcement of the Financial Reporting Council's revised UK Corporate Governance Code, published in July 2018), consideration of the suitability of the current regime regarding the determination for payment of dividends and the considerations for directors of a holding company selling a financially distressed subsidiary.
On a wider EU level, in March 2019, the European Parliament approved the Directive on preventative restructuring frameworks, second chances and measures to increase the efficiency of restructuring, insolvency and discharge procedures, and amending Directive 2012/30/EU (the Directive on Preventative Restructuring Frameworks).16 The main objective of the Directive on Preventative Restructuring Frameworks is to reduce the most significant barriers to the free flow of capital stemming from differences in Members States' restructuring and insolvency frameworks. Although the legislation will not be implemented by the UK following Brexit, the reforms put forward in the government's response to the BEIS's March 2018 consultation appear to align with the recently approved directive. For example, the Directive on Preventative Restructuring Frameworks seeks to implement, inter alia:
- a stay to cover individual enforcement actions and the opening of insolvency proceedings where they may adversely affect a restructuring, suspending the obligation of a debtor to file for insolvency; and
- a framework for the adoption of restructuring plans, whereby any affected creditors should have the right to vote on the adoption of a restructuring plan, but the plan may still be approved by a cross-class cramdown procedure.
It therefore seems that, even following Brexit, the UK will look to position its restructuring regime in alignment with the harmonised regimes of European Member States. However, as highlighted above and discussed in more detail below, the loss of the current reciprocal recognition arrangements in a no-deal scenario may lead to restrictions in cross-border situations in the future.
iii Modified universalism
A significant feature of English restructuring law over the last couple of decades has been the concept of 'modified universalism', which holds that, in cross-border insolvency matters, it is inherently desirable for all claims against the insolvent entity to be dealt with in the same process and in one jurisdiction, and hence that under the common law (i.e., where statute law is silent on the subject), courts should be ready to assist foreign insolvency officeholders where appropriate in the conduct of the insolvency.
However, modified universalism arguably reached its high-water mark in the cases of Cambridge Gas Transport Corp v. Official Committee of Unsecured Creditors of Navigator Holdings plc17 and Re HiH Casualty and General Insurance Ltd; McMahon v. McGrath,18 given that in subsequent cases such as Rubin and Another v. Eurofinance SA and others19 and Singularis Holdings Ltd v. PricewaterhouseCoopers,20 the English courts have taken a more cautious approach. It is now clear that (1) 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, and (2) while the court has a power to assist foreign winding-up proceedings, the power is circumscribed by, among other things, the limitations of the law that applies to those foreign proceedings.
The concept of modified universalism has been examined again recently at both first instance and appeal in Re OJSC International Bank of Azerbaijan21 in the context of determining whether the rule in Antony Gibbs & Sons v. Societe Industrielle et Commerciale des Metaux22 (the Gibbs rule)23 still applies under English law. As discussed in further detail below, both courts upheld the Gibbs rule despite accepting that '[it] may be thought increasingly anachronistic in a world where the principle of modified universalism has been the inspiration for much cross-border cooperation in insolvency matters'.24
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 (typically administration), and the sale is 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 typical 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, Silentnight and Debenhams.
In an attempt to address some of the concerns surrounding the use of pre-packs, the Insolvency Service Statement of Insolvency Practice 16 (January 2009), a revised draft (1 November 2015) and the Insolvency Code of Ethics for England and Wales have been published and adopted to improve the transparency and propriety of pre-packs and to help insolvency practitioners meet the standards of conduct expected of them by providing professional and ethical guidance.25
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,26 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,27 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 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 unfavourable factors affected British retail companies alongside the 2016 Brexit referendum result, including the introduction of the national living wage (which increased by 4.4 per cent in April 2018) and surging consumer debt levels which 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 and business rents also continue to put pressure on the high street.
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. Well-established brands, such as BHS, Maplin, Homebase, Toys R Us, House of Fraser, Carpetright, Prezzo, Poundworld and New Look proposed CVAs between 2016 and 2017, with further high-profile examples such as Debenhams and Arcadia Group in the first half of 2019.
CVAs are well suited to retail businesses as they allow for the closure of underperforming stores, negotiation of rent reductions with landlords and alteration of management teams, all while the business continues to trade. It is noted, however, that a number of companies whose CVAs were approved have nonetheless subsequently failed where the proposed go-forwards business plan, product offering and/or customer proposition was fundamentally deficient, resulting in a financially unviable business. The success of a restructuring case involving a CVA is therefore intrinsically tied to the company implementing a wider operational turnaround in addition to the compromise imposed by the CVA in order to achieve future financial viability.
Schemes, alongside the US Chapter 11 procedure, are the pre-eminent tool for implementing complex restructurings of the financial liabilities of multinational companies. Over recent years, they have been increasingly used in restructurings involving foreign as well as domestic companies.
A scheme can be used to achieve anything that a company and its creditors or members may lawfully agree among themselves. In significant balance sheet restructuring cases, the most common arrangement or compromise for schemes has involved the compromise of claims of the scheme creditors (financial institutions which have provided secured funding to the company) through 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. 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 scheme28 and it has been sanctioned by court.29 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 may be used to cram down any 'in the money' creditors in conjunction with a pre-pack 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.30 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 Re Tele Columbus GmbH,31 Re Rodenstock GmbH32 and Primacom Holding GmbH v. A Group of the Senior Lenders & Credit Agricole,33 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 Re Public Joint-Stock Company Commercial Bank 'Privatbank'34 and in Re Codere Finance (UK) Limited35 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 others36 and in Re DTEK Finance BV.37 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 Re Magyar Telecom BV38 scheme.
Though the application of the Recast Brussels Regulation has not been finally determined in relation to schemes, foreign scheme companies have typically relied on Articles 8 (domicile) and 25 (exclusive jurisdiction)39 to establish the jurisdiction of the English courts.
Article 8 provides that a defendant may be sued in an EU 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,40 Hibu41 and DTEK suggest that only one scheme creditor must be domiciled in England and Wales, whereas Re Van Gansewinkel Groep BV and others42 and Re Global Garden Products Italy SpA (GGP)43 suggest that Article 8 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,44 and the recent scheme judgment of Snowden J in Re Noble Group Limited,45 which note the conflicting views in those cases, it remains unclear which interpretation should prevail.
In the event that the Recast Brussels Regulation ceases to apply in the UK following a no-deal Brexit, the above questions would cease to be relevant to schemes, thereby leaving the sufficient connection test as the clear test for the court to exert jurisdiction. As discussed further below, however, this may also have a significant impact on the recognition of schemes across the EU.
iv Hot industries
The retail industry has seen continued restructuring activity through 2018, for the reasons discussed above, in addition to newer challenges including online competition and changing consumer habits. As a result, the second half of 2018 saw well established retailers such as House of Fraser, Evans Cycles, and HMV enter restructuring or insolvency procedures, or being sold in distressed M&A deals. Meanwhile, the consumer industry, in particular the casual dining sector, also showed signs of distress through 2018, with the number of restaurant businesses going bust reaching its highest level since 2010, jumping by more than a third in 2018, according to Debtwire's Distressed Market Outlook 2019. Restaurant chains Gaucho and Byron are just two examples of such businesses that have struggled, while the Jamie's Italian chain filed for administration in May 2019.
The oil and gas sector remains volatile – while 2018 saw increased activity in the oil services sector and a recovery of the oil price, the price fell back to below US$50 a barrel at the end of the year, with Ocean Rig, Pacific Drilling and SeaDrill entering restructuring processes in 2017, and Dolphin Drilling entering the process in 2018. The weakness of the oil price at the end of 2018 has meant that the oil sector has not recovered as much as hoped.
The automotive industry also faces challenges as a result of factors including the likely long-term shift to electric cars, the supply chain risks in the event of a hard Brexit, and a change in consumer preferences with younger people favouring ride hailing and sharing services over car ownership.
The property and construction industry continues to be affected by the collapse of the UK's second-largest construction company, Carillion, in January 2018. The business had close to £1 billion in debt when it failed, leaving thousands of companies and contractors in its supply chain at a loss. One stark example is Balfour Beatty, the UK's largest construction company, which anticipated a £45 million hit as a result of Carillion's failure. 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. In May 2019, British Steel Limited, the UK's second-largest steelmaker, filed for liquidation following the collapse of negotiations between British Steel Limited's owner and the UK government to inject fresh capital into the business (which had just weeks before the filing received a £120 million loan from the government to help it meet payments to an EU environmental scheme)to stave off the problems caused by a drop in orders by European customers due to the uncertainty caused by the Brexit process.
The main sources of cross-border insolvency law in the UK are the Recast Insolvency Regulation, the Cross-Border Insolvency Regulations 2006 (SI 2006/1030) (the CBIR), 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, replaced the 2000 Insolvency Regulation. The fundamental premise that insolvency law is a matter for each EU Member State has remained embedded within the Recast Insolvency Regulation, and the Recast Insolvency Regulation seeks to strengthen the framework of recognition and cooperation between EU Member States. The Recast Insolvency 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;46
- 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;47
- 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;48
- 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;49 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).50
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 IFSC51 and Interedil Srl (in liquidation) v. Fallimento Interedil Srl and another.52 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 English High Court in Re Stanford International Bank Limited and others.53 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).
The CBIR enacted the Model Law in the law of Great Britain (i.e., England, Wales and Scotland) in April 2006. The CBIR 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 CBIR have been successfully used to obtain recognition from the English courts of insolvency proceedings in the BVI,54 Denmark,55 Switzerland,56 Antigua,57 Croatia,58 Azerbaijan59 and other countries.
The CBIR 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',60 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'.61 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'.62
In a notable application of the CBIR, 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 and was granted discretionary relief in the form of an administrative moratorium. The restructuring plan was subsequently approved by a substantial majority of creditors and by the Azerbaijan courts and, 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 on the basis that their English law 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. At first instance, 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 terminated; and (2) it should not grant a further moratorium. Hildyard J stated that 'the Model Law is designed to afford a breathing space only until that stage (of the plan taking effect according to the law by which it is governed). Though the 'tool-box' may be deep, the tools should not be deployed to subject a creditor whose rights cannot by the law of this jurisdiction be substantively changed under the law of the plan to restrictions beyond that limit in time.'63 The English Court of Appeal agreed with the High Court and held that relief under the Model Law should be consistent with its procedural and supporting role and could not continue beyond the termination of the relevant foreign proceeding.
In the summer of 2018, however, UNCITRAL published a new Model Law on the Recognition and Enforcement of Insolvency-Related Judgments (the IRJ Model Law), which is now available for domestic adoption globally. Article 13 of the IRJ Model Law sets out a mandatory obligation to recognise and enforce foreign insolvency-related judgments and would, if the UK were to adopt the IRJ Model Law and the English courts to resolutely apply its effects, reverse the position enshrined in Rubin and the rule in Gibbs, and would represent a significant liberalisation of the English law approach towards recognising the substantive effect of foreign law insolvency procedures.
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 CBIR, 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,64 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.
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 43,65 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.
iv 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,66 encourage direct communication between courts and require the mutual recognition of statutory 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.
VI FUTURE DEVELOPMENTS
i The impact of Brexit
As highlighted above, it is not possible at this stage to predict with any certainty the form of the long-term 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 ratified, the negotiated Withdrawal Agreement between the government would provide for the continuation of the current cross-border framework for a period of time; however, the arrangement following the expiry of the transitional period would be subject to further agreement between the UK and the EU. In the longer term, if the UK were to agree to retain EEA status, it would be open for the UK to seek to agree with the EU that the Recast Insolvency Regulation continue to apply to the UK, although this would be unprecedented as the Recast Insolvency Regulation does not currently apply to any non-EU members. The continuation of the Recast Insolvency Regulation would be essential for the automatic recognition of UK insolvency processes in the EU.
A no-deal Brexit may well make it harder for UK office holders to be recognised in EU Member States and to enable them to deal with assets located in those other members states. Much depends upon the private international rules in the particular Member State and practitioners will need to ascertain the relevant Member State's approach. In Germany and the Netherlands, for example, there may well be recognition in cases where the UK process has followed and applied COMI rules in line with the Recast Insolvency Regulation. However, in cases where the appointment of a UK office holder has been made in reliance on a UK domestic approach rather than the COMI rules, it is much less certain that there will be recognition in the relevant Member State. Where Member States have passed laws based on the Model Law, this may help UK insolvency office holders seeking recognition, however, as at the time of writing, the only other EU Member States that have done so are Greece, Poland, Romania and Slovenia. In other key EU jurisdictions such as France, Italy and Spain, recognition will likely require a more lengthy judicial recognition process and there will be greater scope for parallel proceedings with the concomitant risks of increased costs to the insolvency estate and different treatment of creditors. The aforementioned countries have not indicated that they will be adopting the Model Law any time soon.67
The position in relation to inward bound insolvency processes is unlikely to have the same element of uncertainty because of the CBIR. In a no-deal Brexit scenario, these regulations are likely to be heavily used by practitioners in EU Member States seeking recognition and other relief, including an automatic stay in many cases with a discretion to extend and seek further relief where possible.
The position of English schemes of arrangement, however, is more nuanced. Schemes, which are not an insolvency process but rather a function of company law under Part 26 of the Companies Act 2006, not subject to the Recast Insolvency Regulation meaning that their availability to foreign companies is not dependent upon whether the existing Recast Insolvency Regulation continues to apply in the UK or is largely removed from English insolvency law in the no-deal scenario. Similarly, as highlighted above, the hypothetical questions about whether the jurisdictional tests under the Recast Brussels Regulation apply to English schemes proposed by foreign companies would cease to apply in the no-deal scenario, leaving the 'sufficient connection' test as the only relevant test for the English court's consideration as to whether to exercise its jurisdiction.
Nevertheless, as foreshadowed above, recognition of schemes of arrangement proposed by foreign companies (where their nexus to the UK is COMI) may be a more cumbersome process if the Recast Brussels Regulation is repealed, as the present practice of foreign companies adducing evidence that the scheme will be recognised in the relevant EU Member States in which the terms of the restructuring must be implemented (in order to satisfy the English court that its order sanctioning the scheme will not be in vain because the effects of the scheme will indeed be implementable) has relied on the above-mentioned articles of the Recast Brussels Regulation.
Going forward in a post-no-deal Brexit scenario, recognition and enforcement of schemes of arrangement in the EU would be a matter entirely for the private international laws of EU Member States. In most cases (for example, a scheme proposed by a foreign company which seeks to compromise debts governed by English law), it is likely that 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 rules of private international law and without the added assistance of the Recast Brussels Regulation. However, a noteworthy exception would potentially be the recognition of schemes proposed by companies incorporated in EU Member States which have purported to establish sufficient connection with the English court's jurisdiction by shifting their COMI into the UK. Such scheme proposals may be at greater risk of challenge unless there are other UK-connecting factors.
The UK government's intention is that, in the absence of a deal with the EU, it will rejoin the Hague Convention on Choice of Court Agreements 2005 in its own right (rather than its current participation by virtue of its EU membership). To that end, the government took the step on 28 December 2018 of depositing its instrument of accession to contract to the Hague Convention in its own right.68 The continuation of the UK's participation in the Hague Convention would mean that courts in EU Member States would be obliged to give effect to exclusive choice of court agreements designating the English courts entered into after that date, and to enforce the resulting judgments in accordance with the Convention.69 Although the steps taken to provide for the continued application of the Hague Convention are to be welcomed, there are certain limitations as compared to the current regime, including that the Hague Convention does not contain any rules relating to jurisdiction in situations other than exclusive choice of court agreements, and does not contain any rules relating to jurisdiction in the absence of party choice.
Any doubt on the possible recognition of schemes may lead to practitioners deciding to use the restructuring tools of other EU Member States where recognition is clear cut, particularly in light of the above-mentioned efforts by the EU to harmonise restructuring frameworks pursuant to the Directive on Preventative Restructuring Frameworks. 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 Corporate insolvency framework reforms
The legislative timetable for the wide ranging proposals in relation to the reform of the UK restructuring and insolvency framework is not known at this stage, and instead the government has said the reforms would be introduced through legislation as soon as 'parliamentary time permits'.
It is noted that, at the time of writing, no legislation has been proposed by the government in relation to the proposed reforms and it is unclear when this will occur. In February 2019, the City of London Law Society and the Insolvency Lawyers' Association published an issues paper in reply to the government's 26 August 2018 response to the BEIS consultation, which raises a number of conceptual issues regarding the substance and operation of a number of the proposals that will need to be addressed, particularly the adaptability of certain features transported from equivalent provisions under Chapter 11 of the US Bankruptcy Code into the UK insolvency framework. As such, the current expectation is that a number of additional consultations alongside development of the details of certain measures will be required prior to any advancement towards legislative drafting and the parliamentary discussion phase.
iii Crown preference
The UK Chancellor announced a proposal in the 2018 Budget to partially reinstate HMRC (the UK tax authority) as a preferential creditor in insolvencies from 6 April 2020 (commonly referred to as 'Crown preference'). It is proposed that preferential status will only apply to taxes paid by employees and customers that a company collects on behalf of HMRC (e.g., VAT, PAYE, employees' NIC and construction industry scheme deductions) and the status of income tax, capital gains tax, corporation tax and employer NICs will remain unchanged. Under this proposal, taxes subject to Crown preference would rank ahead of creditors with floating charge security and unsecured creditors. At the time of writing, the proposal remains under consultation and may not be enacted into law in its current form, or at all.
1 Christopher Mallon is a retired partner at Skadden, Arps, Slate, Meagher & Flom (UK) LLP. Jonathan Akinluyi, Riccardo Alonzi and Olivia Bushell are associates at Skadden, Arps, Slate, Meagher & Flom (UK) LLP.
2 While a fixed charge attaches to a particular asset and allows its disposal only with consent of the secured creditor or on repayment of the debt, a floating charge is created over a class of assets, present and future, and allows the debtor to carry on its business and deal with such assets until a default under the relevant loan agreement (or other defined event), upon which the charge 'crystallises' and attaches to the secured assets, preventing the debtor from 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. In August 2018, in response to the March 2018 consultation on the corporate insolvency framework in the UK (discussed in further detail below), the UK government announced plans to potentially increase the maximum size of the prescribed part from £600,000 to £800,000.
4 The IR 2016, which came into force on 6 April 2017 replaced the Insolvency Rules 1986 and the 28 amending instruments thereto in their entirety in order to consolidate and update the insolvency procedural framework. The revised rules (which have been clarified by additional statutory instruments which have subsequently come into force) 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.
5 Paragraph 3(1), Schedule B1 to the IA86.
6 Paragraph 3(3), Schedule B1 to the IA86.
7 Paragraph 3(4), Schedule B1 to the IA86.
8 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, provided that not more than 50 per cent by value of the total unconnected creditors vote against the CVA proposal. 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.
9 By the Enterprise Act 2002. Schedule B1 to the IA 1986 sets out the administration regime which applies to all administrations commenced after 15 September 2003.
10  EWCA Civ 112.
11 Article 67(1)(a) of the Withdrawal Agreement provides that the provisions regarding jurisdiction of the Recast Brussels Regulation shall apply in the UK, as well as in Member States in situations involving the UK, in respect of legal proceedings instituted (and proceedings or actions related to them) before the end of the transition period. Article 67(2)(a) of the Withdrawal Agreement further provides that the provisions of the Recast Brussels Regulation regarding the recognition and enforcement of judgments in legal proceedings instituted before the end of the transition period shall apply in the UK, as well as in Member States in situations involving the UK.
12 Article 67(3)(c) of the Withdrawal Agreement provides that the EU Insolvency Regulation shall apply to insolvency proceedings, and any action which derives directly from the insolvency proceedings and is closely linked with them (such as avoidance actions), provided that the main proceedings were opened before the end of the transition period.
13 Including: (i) the Civil Jurisdiction and Judgments Act 1982, (ii) the Civil Jurisdiction and Judgments Order 2001/3929 and (iii) the Civil Jurisdiction and Judgments Regulations 2009/3131.
14 The saving provisions will provide that the Brussels regime will continue to apply to proceedings commenced before exit day which have not yet been concluded, judgments obtained in proceedings commenced before exit day in an EU Member State or a state applying one of the other Brussels regime instruments where a party wishes to obtain recognition or enforcement of that judgment in the UK, or where the parties have come to a court settlement or have registered an 'authentic instrument' before exit day and one party wishes to obtain recognition and enforcement in the UK after exit day.
15 The Insolvency Exit Regulations contain transitional provisions which provide that the Recast Insolvency Regulation would continue to apply where main proceedings were opened before exit day, as would the EC Regulation on Insolvency 1346/2000 (the 2000 Insolvency Regulation) where proceedings were opened before 26 June 2017 (the date when the 2000 Insolvency Regulation was superseded by the Recast Insolvency Regulation).
16 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.
17  1 AC 508, PC.
18  1 WLR 852, HL.
19  EWCA Civ 895.
20  AC 1675, PC.
21  EWHC 59 (Ch) and  EWCA Civ 2802.
22 (1890) 25 QBD 399.
23 In general terms, the Gibbs rule provides that a debt that is governed by English law cannot be discharged by foreign insolvency proceedings.
24  EWCA Civ 2802 at .
25 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.
26  EWHC 3199 (Ch).
27  EWHC 2593 (Ch).
28 This is on the basis that those dissenting creditors are grouped together in a voting class with supporting creditors who together constitute a majority in number and hold at least 75 per cent in value of the claims of the voting members of the class. The statutory voting threshold must be met in each scheme voting class, meaning that it is not possible for 'cross-class cramdown' as is permissible under a Chapter 11 plan of reorganisation. This approach is further in contrast to the proposed standalone restructuring procedure (discussed in further detail above), which will allow cross-class cramdown in order for the plan to be approved if certain conditions are met.
29 The English courts have paid closer attention recently to issues of fairness when considering sanctioning schemes. For example, 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.
30 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.
31  EWHC 249 (Ch).
32  EWHC 1104 (Ch).
33  EWHC 164 (Ch).
34  EWHC 3299 (Ch).
35  EWHC 3778 (Ch).
36  EWHC 3849 (Ch).
37  EWHC 1164 (Ch).
38  EWHC 3800 (Ch).
39 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.
40  EWHC 79 (Ch).
41  EWHC 370 (Ch).
42  EWHC 2151 (Ch).
43  EWHC 1884 (Ch).
44  EWHC 2808 (Ch).
45  EWHC 3092 (Ch). Snowden J's convening hearing judgment ( EWHC 2911 (Ch)) and sanction hearing judgment ( EWHC 3092 (Ch)) in relation to the Re Noble Group Limited scheme further provide instructive analysis on the court's jurisdiction in relation to schemes proposed by foreign companies, class issues, the role of the court at each hearing, procedural matters, and questions relating to the fairness of the terms of the scheme.
46 ibid, Article 3.
47 ibid, Chapter V.
48 ibid, Articles 1 and 3.
49 ibid, Article 36.
50 ibid, Articles 25–30.
51 Case C-341/04.
52 Case C-396/09.
53  EWHC 1441 (Ch).
54 Akers and McDonald v. Deutsche Bank AG (Re Chesterfield United Inc. and Partridge Management Group SA)  EWHC 244 (Ch).
55 Larsen and others v. Navios International Inc (Re Atlas Bulk Shipping A/S)  EWHC (Ch) 878.
56 Cosco Bulk Carrier Co Ltd v. Armada Shipping SA and another  EWHC 216 (Ch).
57 Re Stanford International Bank Ltd (in liquidation)  EWCA Civ 137.
58 Re Agrokor DD  EWHC 2791 (Ch).
59 Re OJSC International Bank of Azerbaijan  EWHC 59 (Ch).
60 Article 21(1)(d), Schedule 1 of the CBIR.
61 Article 21(1)(g), Schedule 1 of the CBIR.
62 Article 22(1), Schedule 1 of the CBIR.
63  EWHC 59 (Ch) at .
64  UKSC 46.
65 Paragraph 14R-054.
66 Including the Supreme Court of Singapore (via Registrar's Circular No. 1 of 2017), the US Bankruptcy Court for the District of Delaware (via Local Bankruptcy Rule 9029-2), the US Bankruptcy Court for the Southern District of New York (via General Order M-511), the Supreme Court of Bermuda (via Practice Direction, Circular No. 6 OF 2017) and the Eastern Caribbean Supreme Court for the British Virgin Islands (via Practice Direction 8 of the BVI's Insolvency Rules 2005). The English High Court adopted the guidelines on 5 May 2017 by adding a reference to the JIN Guidelines in Chapter 25 of the Chancery Guide.
67 It should also be noted, however, that Ireland will also be able to seek judicial assistance in the UK pursuant to Section 426 of the Insolvency Act 1986.
68 If the Withdrawal Agreement is concluded and enters into force on exit day, the UK will continue to be treated as an EU Member State during the transition period and EU law, including the Convention, will continue to apply to the UK for the duration of the transition period. In these circumstances the UK will withdraw the instrument of accession.
69 To that end, the Civil Jurisdiction and Judgments (Hague Convention on Choice of Court Agreements 2005) (EU Exit) Regulations 2018 (S.I. 2018/1124), which contain provisions required to implement the Hague Convention in the UK after the UK accedes to the Hague Convention in its own right, were laid before the British Parliament on 1 November 2018. These regulations will only come into effect on exit day in the event of a no-deal Brexit.