I OVERVIEW OF RESTRUCTURING AND INSOLVENCY ACTIVITY
i State of the economy and the finance industry
The political and legislative landscape in the United Kingdom (UK) over the past four years has been dominated by the British electorate's decision in June 2016 that the UK should leave the European Union (EU) (Brexit), thereby overturning decades of foundational assumptions in public policy and the making and administration of laws. The UK left the EU at 23:00 GMT on 31 January 2020 (exit day), following the ratification by the British Parliament of the EU withdrawal agreement (the Withdrawal Agreement) – a legally binding text that set the terms of the UK's exit from the EU. Alongside the Withdrawal Agreement, the British Parliament agreed a political declaration setting out the framework for the future UK-EU relationship. The UK's exit from the EU triggered an 11-month transition period during which the UK effectively remains in the EU's customs union and single market and continues to obey EU rules, but is no longer part of the political institutions. The situation following the end of the transition period remains uncertain, and 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.
In recent months, however, the pervasive coverage of the Brexit negotiations in the UK press has given way to 24-hour coverage of the unprecedented situation arising from the global covid-19 pandemic. On 11 March 2020 the Bank of England lowered its base rate from 0.75 per cent to 0.25 per cent in response to the severe economic and financial disruption caused by the spread of covid-19, and further to 0.10 per cent on 19 March 2020. According to the Bank of England's Monetary Policy Report of May 2020, lower activity, tighter financial conditions and higher uncertainty about the outlook in the UK and globally due to covid-19 have resulted in lower investment. The reduction in activity has also resulted in higher unemployment, although new UK government policies implemented in response to covid-19 have significantly limited the number of job losses to date. The Bank of England predicts that inflationary pressures will remain weak in the near term and the substantial fall in oil prices is expected to push inflation below 1 per cent.
The spread of covid-19 combined with the impact of Brexit means that the outlook for the UK economy is unusually uncertain, and will depend on the evolution of the crisis and how governments, households, businesses and financial markets respond. Almost 90 per cent of businesses cited covid-19 as their top current source of uncertainty in the April 2020 Decision Maker Panel Survey. In the short term, if economic conditions worsen, 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 changes that may occur if the current framework for ongoing civil judicial cooperation between the UK and the EU ceases to apply at the end of the transition period, and, second, in light of the reforms being introduced to the UK's restructuring and insolvency framework to ensure 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 2019, there were 17,196 insolvencies in 2019, a 6.8 per cent increase on 2018 and the highest level of insolvencies since 2013. Both creditors' voluntary liquidations (CVLs) and administrations increased from 2018: CVLs increased by 8.2 per cent to 12,060 and administrations increased by 24 per cent to 1,814. This was the highest level of CVLs since 2009 and the highest level of administrations since 2013. Compulsory liquidations fell by 5.4 per cent in 2019 to 2,970, while company voluntary arrangements (CVAs) fell by 1.1 per cent to 351.
The results in the Insolvency Service's Insolvency Statistics report for January to March 2020 show company insolvencies continued to be driven by the volume of CVLs (2,708 CVLs in 1Q20), though the total number of company insolvencies in 1Q20 decreased by 8.5 per cent when compared with the previous quarter and the same quarter in the previous year. The breakdown by industry reveals that the construction industry grouping saw the largest increase in underlying insolvencies in 2019 (with 3,198 insolvencies), followed by the wholesale and retail trade; repair of vehicles' industry grouping (with 2,442 insolvencies), and the accommodation and food services grouping (with 2,307 insolvencies). Restructuring and insolvency professionals in the UK anticipate that a lengthy shutdown of the global economy because of the covid-19 pandemic will result in significant numbers of insolvencies across a variety of industry sectors.
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 holder of a qualifying floating charge 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. Parts IV and V of the IA86 set 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: (1) rescuing the company as a going concern; (2) 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 (3) realising property to make a distribution to one or more secured or preferential creditors.4
The administrator may only perform his or her functions in pursuit of the objective stated in (2) above if he or she believes that it is not reasonably practicable to achieve the objective stated in (1), and to do so would achieve a better result for the creditors as a whole.5 The administrator may only, in turn, pursue the objective stated in (3) above if he or she believes that it is not reasonably practicable to achieve the objectives stated in (1) or (2), and to do so would not unnecessarily harm the interests of the creditors of the company as a whole.6 Therefore, the administrator's primary objective is the rescue of the company as a going concern (discussed further below).
A company may propose an arrangement under Part 1 of the IA86 (a CVA) or under section 895 of the Companies Act 2006 (a scheme of arrangement or scheme) (each discussed in further detail below) to effect a reorganisation or compromise to avoid an administration or liquidation filing. A CVA or scheme may alternatively be proposed by an administrator as a means to conclude the company's administration.
iii Role of directors
The Companies Act 2006 has codified certain common law and equitable duties that a director owes to a company. There is no specific duty owed to creditors. However, where a company is or is likely to become insolvent the directors must have regard to the interests of the company's creditors.7
The effect of formal insolvency procedures on the powers of directors differs: whereas, in compulsory or voluntary liquidation, the directors lose their powers to control the company's affairs or conduct acts in the company's name, in administration, directors may not exercise any management power without the consent of the administrator. The directors will, however, remain in control of the company during a CVA or scheme procedure proposed outside administration.
Insolvency law in the UK seeks to strike a balance between facilitating an equitable distribution of the estate to creditors and providing a platform to encourage debt recovery and scrutiny of the actions of the directors. 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 to minimise losses to creditors (the temporary suspension of the wrongful trading regime in light of covid-19 is discussed below). Directors may also face personal liability in circumstances where they have been found guilty of fraudulent trading under section 213 of the IA86, misfeasance under section 212 of the IA86, or where they have used the name or trading name of a company that they were a director of within the 12 months prior to liquidation within a period of five years from the liquidation under section 216 of the IA86. Under the Company Directors Disqualification Act 1986, a court may make a disqualification order against an unfit director preventing that person from acting as a director for a specified period of between two and 15 years.
iv Clawback 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 that 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 a formal 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
Practical effect during the transition period
The European Union (Withdrawal) Act 2018 (the EUWA), which received Royal Assent on 26 June 2018, provided for the existing body of directly applicable EU law to be incorporated into UK domestic law on exit day, subject to any secondary legislation passed in the UK to address deficiencies in how retained EU law will operate effectively.
The UK's exit from the EU has subsequently been concluded on the basis of the UK-EU Withdrawal Agreement. The provisions of the Withdrawal Agreement were implemented into UK law by the European Union (Withdrawal Agreement) Act 2020 (the WAA), which received Royal Assent on 23 January 2020 and came into force at 23:00 GMT on 31 January 2020. The WAA amended the EUWA to give effect to the terms of the Withdrawal Agreement, including that the majority of EU regulations continue to apply in the UK for the duration of the transition period.8 Accordingly, during the transition period, Council Regulation (EC) 1346/2000 on insolvency proceedings (the 2000 Insolvency Regulation), Regulation (EU) 2015/848 on Insolvency Proceedings (the Recast Insolvency Regulation) and Regulation (EU) 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast) (the Recast Brussels Regulation) will continue to have effect in the UK and the EU in the same manner as before exit day without substantive change.
Practical effect after the end of the transition period
Absent further agreement between the UK and EU, (1) the Insolvency (Amendment) (EU Exit) Regulations 2019/146 (the Insolvency EU Exit Regulations) made on 30 January 2019, and (2) the Civil Jurisdiction and Judgments (Amendment) (EU Exit) Regulations 2019 (which was published in draft on 12 December 2018) (the Judgments EU Exit Regulations) will take effect at the end of the transition period on 31 December 2020 (subject to extension) and significantly change the restructuring and insolvency framework in the UK (the implications of which are discussed further below).
The Insolvency EU Exit Regulations will amend the retained Recast Insolvency Regulation that is incorporated into domestic law after the end of the transition period by disapplying virtually all of its provisions such that the UK would not be obliged to recognise insolvency proceedings in EU Member States (unless a different basis for recognition, such as the Cross-Border Insolvency Regulations 2006, applies).9 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 EU 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 essence, pursuant to the Insolvency EU Exit Regulations, the UK will retain a modified version of the Recast Insolvency Regulation's jurisdictional tests of COMI and establishment as bases for jurisdiction to open insolvency proceedings where the debtor's COMI is in the UK or where the COMI is in an EU Member State and an establishment is in the UK, in addition to the UK's domestic provisions on jurisdiction. The Insolvency EU Exit Regulations would also make consequential amendments to existing domestic legislation including the IA86.
The Judgments EU Exit Regulations will 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) (the 2001 Judgments Regulation), and amend the domestic legislation10 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 EU Member States. In the event that the transition period concludes without 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 that are ongoing at the end of the transition period).11
ii Covid-19 related legislative developments
Package of legislative measures in response to covid-19
In March and April 2020, the UK government's Department for Business, Energy and Industrial Strategy announced a package of measures (including those set out below) to assist companies with liquidity pressure and business disruption as a result of the covid-19 crisis. These measures have been implemented through the Corporate Insolvency and Governance Act 2020 (the CIGA), which entered into force on 26 June 2020. The CIGA also includes major reforms to UK insolvency law, which are described further below.
Temporary suspension of wrongful trading regime
Under section 214 of the IA86, a director may be held personally liable for wrongful trading if the company goes into an insolvent liquidation and he or she (1) knew (or ought to have concluded, based both on his or her actual skill, knowledge and experience, together with the skill, knowledge and experience that a director in his or her position ought to have) that there was no reasonable prospect of the company avoiding an insolvent liquidation; and (2) failed to take every step that he or she ought to have taken to minimise the loss to creditors. Under the CIGA, the court must assume that the directors are not responsible for any worsening of the company's financial position that occurs between 1 March 2020 and 30 September 2020. The suspension is intended to assist company directors in keeping their business trading during the covid-19 crisis without the threat of potential personal liability should the company ultimately fall into insolvency. However, the suspension does not amount to a free pass for directors. The period of suspension is limited and, as noted above, directors have a duty to consider the interests of creditors when a company is insolvent or likely to become insolvent.
Temporary ban on issuance of statutory demands and winding-up petitions
Creditors frequently press companies to pay debts by issuing statutory demands followed by winding-up petitions. The CIGA bans a creditor from issuing a winding-up petition based on a statutory demand issued between 1 March 2020 and 30 September 2020. Further, during the same period a winding-up petition filed based on a company's inability to pay debts may not be issued unless the creditor has reasonable grounds to believe that the covid-19 crisis has not affected the company or notwithstanding the crisis the company would still be unable to pay its debts.
Prior to the announcement on the suspension of winding-up petitions, the Insolvency and Companies Court was already facing a backlog of hearings due to the covid-19 crisis. Judge Mullen adjourned all 306 winding-up petitions scheduled for hearing from 25 March 2020 onwards because adequate arrangements for remote hearings had not been put in place at that time. At the time of writing, these adjourned hearings had been scheduled to be heard remotely each week from 17 June 2020 onwards in blocks of 20. Therefore, where a petition is allowed to continue because the debt is deemed non-covid-19 related, the hearing may not be scheduled in the ordinary course for at least 12 weeks from the date at which the petition is presented.
Protection from forfeiture on UK commercial leases
Under the Coronavirus Act 2020, which came into force on 25 March 2020, landlords are prohibited from exercising their right of forfeiture in respect of non-payment of rent against business tenants (falling within the definition contained in Part 2 of the Landlord and Tenant Act 1954) between 26 March 2020 and 30 September 2020. The legislation is designed to reduce the pressure on business tenants having to meet rent payments on their leases during the covid-19 crisis. However, the protections afforded by the Coronavirus Act 2020 do not amount to a waiver of the right of forfeiture for non-payment of rent. Instead, once the relevant period has expired, the tenant will be required to pay all rent due from the preceding quarters that was not paid, plus any interest, to avoid forfeiture. The definition of rent is drafted broadly under the Coronavirus Act 2020 to include any sums due under a lease, so service charges, insurance rent and other outgoings will all fall within the definition of rent, in addition to annual rent.
Postponement of Annual General Meetings
The CIGA also addresses difficulties faced by companies in complying with their normal governance requirements. Until 30 September 2020, company meetings may be held by electronic or other means. During this period, shareholders will not have the right to attend in person or to participate other than by voting. Any company obliged to hold an annual general meeting between 26 March 2020 and 30 September 2020 may postpone the meeting until 30 September 2020. Provisions are also made to extend deadlines for filing documents with Companies House and to register a charge granted by a company.
Furloughing of staff
As a result of the economic impact of the covid-19 pandemic on businesses, the UK government introduced the Coronavirus Job Retention Scheme (CJRS). The CJRS is intended to relieve the pressure on employers to continue to have to pay salaries during the crisis, thereby avoiding or at least deferring decisions on redundancies. The governing instrument of the CJRS is the Treasury direction dated 15 April 2020 'The Coronavirus Act 2020 Functions of Her Majesty's Revenue and Customs (Coronavirus Job Retention Scheme) Direction', issued under sections 71 and 76 of the Coronavirus Act 2020. The CJRS opened to employers to make claims on 20 April 2020 and is backdated to 1 March and is due to end on 31 October 2020.
Employees must have been furloughed by their employer for the employer to access the CJRS. This means that the employee has been put on a period of temporary furlough leave by their employer (the minimum period is three weeks), during which time they are not required to work. The employer is then able to make a claim under the CJRS via an online portal, enabling recovery of a portion of the furloughed employee's salary from HMRC. The amount that can be reclaimed from HMRC is capped at the lower of 80 per cent of wage costs or £2,500 per calendar month per employee, including national insurance contributions and employer auto-enrolment pension scheme contributions on the furlough pay. The formal employment relationship is not affected by the furlough.
iii Major reforms to UK restructuring law
The CIGA also introduces major reforms to UK insolvency law, namely a new restructuring scheme of arrangement, a new standalone moratorium procedure and further restrictions on third parties' right to terminate contracts with distressed companies.
The restructuring scheme of arrangement
New provisions have been added to the Companies Act 2006 to add a new type of scheme of arrangement available specifically for companies in financial distress. The new scheme will sit alongside the existing scheme of arrangement provisions that are available to any company. The new scheme will be different in the following key respects. First, the voting requirement for a class of creditors to approve a scheme will be 75 per cent in value only. Under the existing scheme regime, there is an additional requirement that a majority in number also support the scheme. Second, the court will be able to sanction a scheme where a class of creditors has not voted in favour of the scheme. This can be done where (1) none of the dissenting class members would be worse off under the scheme than under the likely alternative factual scenario (e.g., liquidation), and (2) the scheme has been approved by at least one class that would receive a payment or have an economic interest under the relevant alternative scenario. Third, the court may order that shareholders or creditor groups who would be affected by the scheme should not be allowed to participate and vote at a scheme meeting. This may happen where the shareholders or creditors do not have an economic interest in the company (i.e., they are 'out of the money'). This last provision will mean that a business may be reorganised within the existing group structure. Currently, under an existing scheme, it is often necessary to transfer the business to a new entity that will be owned by the scheme creditors (among others) because out-of-the-money shareholders and creditors would not support a scheme. Such parties are therefore left with their legal rights intact but with the business having been transferred to a new company.
The moratorium procedure
A new moratorium procedure will be available to a company that is or is likely to become insolvent. It is designed to protect a company from actions principally by its unsecured creditors while steps are taken to address its financial problems. The process is to be overseen by a monitor, who must be a licensed insolvency practitioner. A moratorium can be commenced by the directors by filing the necessary documents at court. If the company is an overseas company or a winding-up petition has been filed an application can be made to court. A moratorium commenced by the directors will last for 20 business days and may be extended once for a further 20 days without creditor consent. If the creditors agree, the moratorium may be extended for no more than a total of 12 months, including the first period. There is no limit on the length of a moratorium that may be ordered by the court.
A moratorium gives a company a payment holiday in respect of all its pre-moratorium debts with the exception of specified liabilities comprising:
- the monitor's remuneration or expenses;
- goods and services supplied during the moratorium;
- rent in respect of the moratorium period;
- wages or salary;
- redundancy payments; and
- debts or liabilities arising under contracts involving financial services.
The last of these exceptions is defined to include loans, financial leases, guarantees, capital market arrangements, securities contracts and derivative contracts. This means that a company will need to have agreed a standstill with its financial creditors or be able to meet these liabilities during the moratorium.
During a moratorium, creditors are unable to commence insolvency proceedings. Legal proceedings against the company cannot be commenced or continued without court permission. Secured creditors cannot enforce their rights without court permission, and similarly landlords are unable to forfeit leases. Floating charges cannot be crystallised either by virtue of a contractual term or through an act of the charge holder.
The monitor's duty is to monitor the company's affairs for the purpose of forming a view as to whether it remains likely that the moratorium will result in the rescue of the company as a going concern. The monitor must bring the moratorium to an end by filing a notice at court in certain circumstances. These include where the monitor thinks that the moratorium is no longer likely to result in the rescue of the company as a going concern, or where the company is unable to pay either moratorium debts or pre-moratorium debts, for which the company does not have a payment holiday, that have fallen due.
Restriction on suppliers' ability to terminate contracts
Currently, the IA86 requires the suppliers of utilities and information technologies to continue to supply a company that is in liquidation or administration notwithstanding any contractual right to terminate provided that the company pays for the continuing supply. In other words, the supplier cannot insist that the company pays any pre-insolvency debts as a condition of continued supplies. The CIGA extends this regime to other suppliers of goods and services and to other insolvency proceedings including the moratorium. In case of hardship, a supplier may apply to court for relief. The regime does not extend to financial contracts such as loans.
iv Other legislative developments
The Finance Bill 2020
Following the UK Chancellor's announcement in the 2018 Budget to partially reinstate HMRC as a preferential creditor in insolvencies (commonly referred to as Crown preference), draft legislative provisions were published on 11 July 2019 for inclusion in the Finance Bill 2020. The draft legislation proposed that from 6 April 2020, 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' national insurance contributions and construction industry scheme deductions) but that the status of income tax, capital gains tax, corporation tax and employers' national insurance contributions will remain unchanged. Under this proposal, taxes subject to Crown preference would rank ahead of creditors with floating charge security and unsecured creditors. The reintroduction of the Crown preference was reaffirmed in the 2020 Budget delivered by the UK Chancellor on 11 March 2020 and incorporated in the first draft of the Finance Bill 2020 published on 19 March 2020, save that its effect was delayed to 1 December 2020.
The draft version of the Finance Bill 2020 published on 19 March 2020 also provides that directors may be held personally liable for a company's tax liabilities where HMRC considers that avoidance or evasion has taken place, or where HMRC has evidence of 'phoenixism' (the practice of running up liabilities in a limited liability entity, then avoiding paying them by making the company insolvent and setting up a new company on broadly the same basis). The measure aims to ensure that genuine insolvencies are not caught, with the added safeguard of an appeal right.
The Pension Schemes Bill 2020
A draft Pension Schemes Bill 2020 was published on 16 October 2019 but fell away when Parliament was prorogued in November 2019. The draft Bill was reintroduced in the new parliamentary session on 7 January 2020 and will make significant changes that may affect distressed employers. The key changes from a restructuring perspective are: (1) enhancements for the Pensions Regulator's moral hazard and information-gathering powers including the power to interview a person it believes has relevant information in connection with an investigation, being able to enter into a wider range of premises to access records and information, and having the power to issue civil penalties for non-compliance with the investigation process and providing false information to the Pensions Regulator; and (2) new civil and criminal sanctions, including an extension of the grounds for issuing civil penalties, and the creation of new criminal offences for any person, which are failure to comply with a contribution notice, avoidance of an employer debt and conduct risking accrued scheme benefits.
IV SIGNIFICANT TRANSACTIONS, KEY DEVELOPMENTS AND MOST ACTIVE INDUSTRIES
Since the introduction of the administration regime,12 despite the primary statutory objective of an administration being the rescue of the company as a going concern, many administrations have been used as a quasi-liquidation measure or a means to distribute the assets of the business freed from some or all of its liabilities to a new vehicle of a buyer through a pre-pack sale, on the basis of the second or third statutory objective.
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 administration, and the sale is concluded by the administrator shortly after appointment. A pre-pack sale may be the only viable restructuring option where a company has no cash but has valuable business assets including the company's goodwill and employees. In such circumstances, a pre-pack provides a relatively rapid and straightforward business transfer without the damaging publicity and consequent harm to reputation caused by a typical insolvency process. 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. On the other hand, criticisms have included the suggestion that the process lacks transparency and sidesteps the procedural safeguards inherent in the administration process by not guaranteeing that the interests of all creditors will be properly taken into account, and that the majority of pre-pack sales have been 'phoenix' sales to connected parties of the insolvent company, such as management. Where this happens, the insolvent company is stripped of its underlying business and often moves straight to dissolution following the sale (without a separate liquidator being appointed). 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) (SIP 16), 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.13 The guidance in SIP 16 includes that pre-pack sales to connected parties should be referred for review to the pre-pack pool, an independent body of business professionals, and the proposed purchaser in such circumstances should provide a statement on the viability of the purchased entity for at least 12 months after the proposed sale is concluded. The CIGA has further reintroduced the powers under the Small Business, Enterprise and Employment Act 2015 that expired unused on 26 May 2020, for the Government to introduce legislation to regulate pre-pack sales to connected persons, exercisable until 30 June 2021.
The economic impact of covid-19 is expected to have a detrimental impact on many UK companies' ability to continue to operate as a going concern, and accordingly is expected to lead to an increase in insolvency filings. Aside from the introduction of the emergency fiscal and legislative measures discussed above to assist companies with short-term liquidity and legal problems, the Insolvency Lawyers' Association and the City of London Law Society have called on companies and insolvency practitioners to take advantage of the flexibility and adaptability of administration.14 A light-touch administration, in which directors retain day-to-day control of a company, subject to certain out-of-the ordinary matters requiring the administrator's prior consent, allows for stabilisation, protection and, if necessary, a restructuring mechanism for the company. The Insolvency Lawyers' Association and the City of London Law Society have published a template form of consent protocol agreement for use where administrators wish to allow directors to exercise management powers while the company is still in administration and it is anticipated that such protocol will be adapted as required to fulfil the specific requirements of each situation.15
The retail industry experienced continued restructuring activity in the second half of 2019 and early 2020, with over 31,000 retailers ending the fourth quarter of 2019 in financial distress. PwC's Retail Outlook 2020 reported 2,868 store closures in the first half of 2019 and while administrations account for a majority of these closures, a number of those administrations followed on from unsuccessful CVAs. Furthermore, 2019 also saw a continuation of well-established brands proposing CVAs, including Debenhams, Cotswold Outdoor and Select. However, the total number of CVAs in 2019 fell by 1.1 per cent compared to 2018, to 351, and decreased in 1Q20 by 26 per cent when compared to the same quarter in the previous year. Higher employment levels, faster wage rises (partly driven by National Living Wage increases) and low interest rates all provided consumers with more spending power in 2019, and although high street footfall continued to decrease, the rate of decrease had stabilised by the end of 2019, according to PwC's Retail Outlook 2020.
While 2019 was not all bad news for the retail sector, the covid-19 crisis, which hit the UK in March 2020, has caused severe business disruption to the retail sector as all non-essential retail stores were ordered to close amid the lockdown. The UK government responded by introducing a number of financial support measures to businesses, but the full extent of the economic fallout of the covid-19 crisis remains unknown. However, it will inevitably change the future of the high street, at least in the short term, and will likely lead to a resurgence in financially distressed retailers considering CVAs as a possible option to generate liquidity and rescue their business as a going concern.
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. However, a number of companies whose CVAs were approved have nonetheless subsequently failed where the proposed business plan, product offering 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 to achieve future financial viability. Going forward, developing case law around landlord challenges to CVAs may bring reassurance to retailers seeking to enter into a CVA. For example, in Discovery (Northampton) Limited v. Debenhams Retail Limited,16 the court upheld the CVA and provided some useful judicial guidance, confirming that (1) the fact that future rent is reduced under the CVA does not inevitably render it unfair, though rent reductions that fall below market value could potentially be considered unfair; and (2) a CVA can compromise future rent liability.
A company may alternatively look to effect a compromise with its creditors using a scheme of arrangement. A scheme can be used to achieve anything that a company and the requisite percentage and number of scheme creditors or members may lawfully agree among themselves, over and above the objection of non-consenting creditors,17 following the sanctioning of the scheme by the court.18
In significant balance sheet restructuring cases, a common approach is for the scheme to compromise the claims of financial institutions that have provided secured funding to the company through a debt-to-equity swap that strengthens the company's balance sheet and addresses liquidity concerns. A scheme implementing such a debt-for-equity swap may be structured to disenfranchise out-of-the-money creditors who are not included as participants in the scheme, with a subsequent pre-pack administration sale to a new vehicle owned by the relevant secured creditors supporting the transaction.
The flexibility of the jurisdiction exercised by English courts has meant that schemes have been utilised by a number of foreign companies as well as domestic companies to implement complex restructurings of the financial liabilities of multinational corporate groups.19 Following schemes in relation to Re Tele Columbus GmbH,20 Re Rodenstock GmbH21 and Primacom Holding GmbH v. A Group of the Senior Lenders & Credit Agricole,22 foreign companies have availed 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. Different approaches have been followed to establish a sufficient connection, including:
- the scheme compromising creditors' claims derived from finance documents that are English law-governed, such as in Re Public Joint-Stock Company Commercial Bank 'Privatbank'23 and in Re Codere Finance (UK) Limited24;
- the amendment of the governing law and jurisdiction clauses of the relevant finance documents to English law, as demonstrated in Re Apcoa Parking Holdings GmbH and others25 and in Re DTEK Finance BV;26
- the shifting of the COMI of the company to the UK, as was done successfully in the restructuring of Wind Hellas and in Re Magyar Telecom BV27 and Re Algeco Scotsman PIK28; and
- the establishment of a UK entity as a co-obligor under the relevant finance documents that is the proponent of the scheme, as exemplified in Re AI Scheme,29 Re Codere30 and Re NN2 Newco.31
In the EU, jurisdiction for insolvency and civil matters is governed by the Recast Insolvency Regulations and the Recast Brussels Regulation. While schemes do not fall within the scope of the Recast Insolvency Regulations by virtue of not being listed as insolvency proceedings, the application of the Recast Brussels Regulation has not been finally determined in relation to schemes. Nevertheless, the practice of English courts to exercise jurisdiction with respect to schemes proposed by companies incorporated in an EU Member State has been to refer to Articles 8 (domicile) and 25 (exclusive jurisdiction) of the Recast Brussels Regulation.32 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,33 Hibu34 and DTEK suggest that only one scheme creditor must be domiciled in England and Wales, whereas Re Van Gansewinkel Groep BV and others35 and Re Global Garden Products Italy SpA (GGP)36 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 EU 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,37 and the recent scheme judgment of Snowden J in Re Noble Group Limited,38 which note the conflicting views in those cases, it remains unclear which interpretation will prevail.
In the event that the Recast Brussels Regulation ceases to apply in the UK following the conclusion of the Brexit transition period, 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 impact the recognition of English law schemes across the EU thereafter.
As noted above, the CIGA has introduced a new restructuring scheme of arrangements that will sit alongside the existing scheme of arrangements.
iv Hot industries
The oil and gas sector had a year of relative calm in 2019 after prolonged volatility in the sector since 2015 caused by oil-price-led issues. Upstream companies benefited from relatively robust oil prices and cost efficiencies. However, the covid-19 crisis has rocked the sector in 2020. Oil prices dropped at least 40 per cent and US oil prices turned negative for the first time in history in April 2020. The drop in prices was initially triggered by decreased demand starting in China caused by covid-19, but has been compounded by disputes between Saudi Arabia and Russia over prices and production cuts. The International Energy Agency has predicted that global oil demand in 2020 will decrease for the first time since 2009, which underscores the risks to an industry that had already been facing widespread financial distress over the long term.
The covid-19 crisis has caused airlines worldwide and other companies in the sector such as freight and ground-handling businesses to face unprecedented levels of financial distress. The drastic fall in passenger demand has been reinforced by widespread governmental travel bans and lockdowns. The International Air Transport Association predicts that the worldwide airline industry will lose up to $252 billion in passenger revenue in 2020 because of the crisis. Virgin Australia fell into the control of administrators at Deloitte in April 2020, while Virgin Atlantic announced it will make redundant a third of its workforce and will not re-open its operations at London Gatwick Airport. Similarly, IAG, the parent company of British Airways, announced that it intends to implement a redundancy programme, which may result in the loss of up to 12,000 jobs from its workforce of 42,000 staff. Norwegian Air recently struck a deal with bondholders to implement a $1 billion debt-for-equity swap.
The retail and consumer sector had a difficult year in 2019, with trading data indicating that it was the first year in which the market contracted. Traditional retailers continued to suffer from large store portfolios and high fixed costs. Many retail businesses relied on CVAs to address their store portfolios, whilst several were able to renegotiate favourable terms on leases outside the CVA regime. The financial turmoil of the covid-19 crisis is especially damaging for the retail sector due to government-imposed lockdowns, government-imposed store closures, a reduction in consumer spending and the furloughing of employees. Department store Debenhams appointed administrators in April 2020 for the second time in a year, continuing to trade online only. Oasis and Warehouse, two fashion retailers with UK store portfolios owned by Icelandic Bank Kaupthing, appointed administrators in mid-April 2020 after failing to find a buyer for the group. Global lifestyle brand Cath Kidston appointed administrators in April 2020 and announced it would close all 60 of its UK stores. Cath Kidston's owner, Barings Private Equity Asia, has bought the company out of administration by way of a management buy-out.
The casual dining and hospitality sectors similarly face significant challenges in 2020 stemming from the covid-19 crisis. The casual dining chain Carluccio's, which operates 73 dine-in restaurants in the UK, appointed administrators in April 2020. In March 2020, casual dining chain Byron Burgers appointed KPMG to advise on how the company could survive the crisis and also announced its intention to furlough all of its employees.
The property and construction industry faced a difficult 2019. Already thin profitability was eroded by missteps in tendering, project management and cashflow management. Statistics from the Insolvency Service revealed that in the 12 months ending 2Q19, the highest number of corporate insolvencies lay in the construction industry. 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 just weeks before the filing had 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. In 2020, the covid-19 crisis has impacted the global construction industry due to labour shortages, supply chain issues and financial pressure on construction firms. It is anticipated that there will be a wave of restructurings by construction firms as they seek to respond to the challenges to the industry.
i Principal sources
In the UK, the main sources of cross border insolvency law are: (1) (to the extent it will continue to apply beyond the Brexit transition period) the Recast Insolvency Regulation, (2) the Cross-Border Insolvency Regulations 2006 (SI 2006/1030) (the CBIR), which implement the UNCITRAL Model Law on Cross-Border Insolvency (the Model Law) in Great Britain (i.e., England, Wales and Scotland); (3) Section 426 of the IA86; and (iv) the underlying common law.
The Recast Insolvency Regulation and the CBIR are both instruments founded on the principle 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. The Recast Insolvency Regulation, which came into effect from 26 June 2017, governs the opening and conduct of insolvency proceedings in EU Member States. The Recast Insolvency Regulation provides that where the centre of main interests (COMI) of a debtor is located in an EU Member State,39 insolvency proceedings opened in that EU Member State are known as main proceedings and are automatically recognised and effective as such throughout the EU. The laws of that EU Member State will then govern the insolvency proceedings and their effects throughout the EU, subject to limited exceptions. Insolvency proceedings can only be opened in another EU Member State if the debtor has an establishment40 there, and are referred to as secondary proceedings if commenced after the main proceeding (in limited circumstances, such proceedings can be commenced before the main proceedings are opened, in which case they are referred to as territorial proceedings).
The CBIR provides a framework for the recognition in Great Britain of insolvency proceedings commenced or an officeholder appointed in another jurisdiction regardless of whether that foreign jurisdiction has enacted a version of the Model Law, but unlike the Recast Insolvency Regulation, the Model Law does not prescribe in what jurisdiction insolvency proceedings can or cannot be commenced. Recognition is not automatic: a foreign officeholder must apply for recognition of the foreign proceeding, and the types of relief that the recognising court in Great Britain may provide depend on whether the foreign proceeding is a main or non-main proceeding, (i.e., equivalent to a main or secondary proceeding under the Recast Insolvency Proceeding). Recognition of main proceedings automatically confers a stay on creditor action and proceedings against the debtor in Great Britain, and the court has discretion to provide appropriate relief at the request of the foreign officeholder where necessary to protect the assets of the debtor or the interests of the creditors within the jurisdiction. The court has power to grant the same discretionary relief in respect of a non-main proceeding, but the stay will not apply unless ordered by the court. The CBIR have been successfully used to obtain recognition from the English courts of insolvency proceedings in the BVI,41 Denmark,42 Switzerland,43 Antigua,44 Croatia45 and Azerbaijan,46 among others.
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 either UK law or the insolvency law of the requesting jurisdiction.
Limits of modified universalism
The extent to which English courts have applied universalism as underlying the principle of judicial assistance in international insolvency proceedings arguably reached its high-water mark in the cases of Cambridge Gas Transport Corp v. Official Committee of Unsecured Creditors of Navigator Holdings plc47 and Re HIH Casualty and General Insurance Ltd; McMahon v. McGrath,48 given that in subsequent cases such as Rubin and another v. Eurofinance SA and others and New Cap Reinsurance Corporation (in liquidation) and another v. Grant and other49 and Singularis Holdings Ltd v. PricewaterhouseCoopers,50 the English courts have taken a more cautious approach, considering conflicts between the principles of modified universalism and (1) common law principles on the recognition and enforcement of foreign judgments in personam,51 and (2) the rule in Antony Gibbs & Sons v. Societe Industrielle et Commerciale des Metaux52 (the Gibbs rule).53
In Rubin v. Eurofinance; Re New Cap Insurance, 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. The CBIR does not displace or extend the common law rules prescribing the circumstances in which the English courts would recognise and enforce foreign judgments; as the CBIR did not expressly refer to the enforcement of judgments, the relief provisions under Article 21 could not, therefore, be used as a gateway to the enforcement of foreign judgments.
The CBIR cannot be used to enable an English court to grant relief which would be available as a matter of foreign law where such relief is not available under English law. In Fibria Celulose S/A v. Pan Ocean Co. Ltd,54 the High Court refused to stay a contractual counterparty from serving a termination notice under a contract governed by English law against a Korean company whose Korean insolvency proceedings had been recognised as foreign main proceedings under the CBIR. The High Court held that Article 21 of the CBIR cannot be used to enable an English court to grant relief that would be available as a matter of foreign law where such relief is not available under English law and even if the court had the power to stay a termination notice, it would not have been appropriate to give effect to the provisions of Korean insolvency law as the parties had freely chosen English law as the governing law of their contract.
In Re OJSC International Bank of Azerbaijan,55 it was held that the CBIR cannot be used to grant a permanent stay preventing the enforcement of English law-governed creditors' rights as a result of a foreign insolvency process. In the case, 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.56
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. 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'.57
ii Cross-border protocols
The Chancery Division of the High Court of England and Wales has adopted 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 courts in several important jurisdictions,58 encourage direct communication between courts and insolvency representatives in parallel proceedings and in conducting joint proceedings, 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.
In larger insolvencies, officeholders appointed in respect of different estates of a corporate group located in different jurisdictions may agree to adopt a protocol to assist with cross-border cooperation, information sharing and communication.
VI FUTURE DEVELOPMENTS
i The impact of Brexit
As highlighted above, the Withdrawal Agreement provides for the continuation of the current framework for the recognition of insolvency and civil judgments in the UK and EU; however, the situation following the end of the transitional period remains uncertain. 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, with discussions further impacted by covid-19.
Recognition of insolvency proceedings
The continuation of the Recast Insolvency Regulation would be essential for the automatic recognition of UK insolvency processes in the EU. Absent further agreement, the Recast Insolvency Regulation as incorporated into domestic legislation at the end of the transition period pursuant to the EUWA and the Insolvency EU Exit Regulations, would make the coordination of UK insolvency proceedings concerning debtors with a multinational European presence more difficult. In particular, the loss of reciprocity under the Recast Insolvency Regulation would mean that the determination by a UK court that a debtor's COMI is located in the UK or that the debtor has an establishment in the UK would not automatically bind the courts of EU Member States unless domestic laws provide for that; accordingly, English law would not automatically be recognised as the governing law of the insolvency proceeding and the question of whether additional insolvency proceedings could be opened in EU Member States would be determined by the domestic laws of the relevant EU Member States.
An officeholder appointed in respect of a UK insolvency proceeding would accordingly need to apply to the courts of the relevant EU Member States for recognition of the proceeding and the effect of English law thereto. The approach of each EU Member State will depend on its own rules of private international law. 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 officeholder has been made in reliance on a UK domestic approach other than the COMI rules, it is much less certain that there will be recognition in the relevant EU Member State. Where EU Member States have passed laws based on the Model Law, this may help UK insolvency officeholders 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.
The position in relation to inward-bound insolvency processes (i.e., insolvency proceedings commenced in an EU Member State seeking recognition in the UK) is unlikely to have the same element of uncertainty because of the CBIR (though, as noted above, English courts' willingness to apply foreign law is constrained by English common law principles). Following the end of the transition period, and absent further developments regarding the continued application of the Recast Insolvency Regulation, it is anticipated that the CBIR are likely to be heavily used by practitioners in EU Member States (in the same manner as has been the case with respect to recognition of non-EU proceedings) seeking recognition and other relief, including an automatic stay in many cases with a discretion to extend and seek further relief where possible.59
Recognition of schemes of arrangement
A scheme is not an insolvency process (but rather a creature of company law under Part 26 of the Companies Act 2006) and is not subject to the Recast Insolvency Regulation. The outcome is that foreign companies will still be able to avail themselves of an English law scheme after the conclusion of the transition period, provided that the English court determines that the sufficient connection test under domestic law is satisfied and can thus exert its jurisdiction.
The hypothetical questions about whether the jurisdictional tests under the Recast Brussels Regulation apply to English schemes proposed by foreign companies will cease to apply. Nevertheless, as foreshadowed above, this may mean that recognition of schemes of arrangement proposed by foreign companies (where their nexus to the UK is their COMI being located within the jurisdiction) may be a more cumbersome process, as foreign companies will no longer be able to rely on evidence that the scheme will be recognised in the relevant EU Member State in which the terms of the restructuring must be implemented on the basis of Articles 8 and 25 of the Recast Brussels Regulation. Consequently, the company will need to demonstrate by other means that the scheme can be given effect as a practical matter to persuade the court to exercise its discretion to sanction the scheme.
Absent an equivalent regime following the conclusion of the transition period, 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 that 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, in other circumstances the recognition of a scheme for a company incorporated in another EU Member State may be less predictable.
In anticipation of exiting the EU without a deal or transition period, the UK government deposited an instrument in December 2018 to rejoin the Hague Convention on Choice of Court Agreements 2005 in its own right following its exit from the EU. 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. Pursuant to the conclusion of Brexit on the basis of the Withdrawal Agreement, the UK withdrew its accession to the Hague Convention on 31 January 2020, but will intend to deposit a new instrument of accession prior to the termination of the transition period, to take effect from the end of the transition period.60
Debtors' ability to rely on the Hague Convention with respect to the recognition of scheme judgments is limited in scope, as 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.61 In this regard, the UK deposited an application on 8 April 2020 to accede to the 2007 Lugano Convention in its own right at the end of the transition period to govern the jurisdiction and the enforcement of judgments in civil and commercial matters between EU Member States and Norway, Iceland and Switzerland. This is a key development for cross-border recognition of UK judgments as, subject to approval, which is required from the EU, Denmark, Norway, Iceland and Switzerland, this should, in principle, ensure the continuation of the Brussels regime on jurisdiction and the enforcement of judgments, as the Convention mirrors the 2001 Judgments Regulation.
Despite the above efforts to bridge the gap in the cross-border recognition and enforcement of English judgments, any doubt about the possible recognition of schemes may lead practitioners to decide that it is preferable to use the restructuring tools of EU Member States where recognition is clear cut, particularly in light of the efforts by the EU to harmonise restructuring frameworks pursuant to the Directive on Preventative Restructuring Frameworks and the impending introduction of new procedures across the EU, such as the Dutch scheme. 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 Covid-19 related legislative developments
Details of the measures introduced by the UK government in response to covid-19 have been set out above, as have the reforms to UK insolvency law. These measures may be extended or adjusted as circumstances require, either by virtue of provisions contained in the existing legislation and the CIGA or through future legislation.
iii Other legislative developments
At the time of writing, the Finance Bill 2020 had its second reading in the House of Commons on 27 April 2020 and has been committed to a Public Bill Committee, proceedings of which must end no later than 25 June 2020. The Pension Schemes Bill 2020, whose reading commenced in the House of Lords, has passed through the Grand Committee stage and is subject to the report stage to the House of Lords.
1 Dominic McCahill is a partner at Skadden, Arps, Slate, Meagher & Flom (UK) LLP. Jonathan Akinluyi and Olivia Bushell are associates, and Annabelle Atkins is a trainee solicitor, 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 £800,000 since 6 April 2020) available for the satisfaction of unsecured debts in priority to the claim of the floating charge holder.
4 Paragraph 3(1), Schedule B1 to the IA86.
5 Paragraph 3(3), Schedule B1 to the IA86.
6 Paragraph 3(4), Schedule B1 to the IA86.
7 BTI 2014 LLC v. Sequana SA  EWCA Civ 112. At the time of writing there is an appeal pending to the Supreme Court.
8 At the time of writing, the transition period runs from exit day to 23:00 GMT on 31 December 2020
9 The Insolvency EU Exit Regulations contain transitional provisions that provide, among other matters, that the Recast Insolvency Regulation (or 2000 Insolvency Regulation with respect to main proceedings opened before 26 June 2017) would continue to apply to main proceedings that were opened before exit day (now probably intended to be the end of the transition period).
10 Including: (1) the Civil Jurisdiction and Judgments Act 1982, (2) the Civil Jurisdiction and Judgments Order 2001/3929 and (3) the Civil Jurisdiction and Judgments Regulations 2009/3131.
11 The saving provisions provide that the Brussels regime will continue to apply to proceedings commenced before the end of the transition period that 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.
12 By the Enterprise Act 2002. Schedule B1 to the IA86 sets out the administration regime which applies to all administrations commenced after 15 September 2003.
13 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.
14 See Insolvency Lawyers' Association “Changing the Narrative around Administration” at https://www.ilauk.com/docs/ILA.v_.1.ChangingtheNarrativeAfter260320Call_.pdf.
15 See 'Joint Administrators' Consent under Paragraph 64 of Schedule B1 to the Insolvency Act 1986' Protocol and Explanatory Note at https://www.ilauk.com/docs/ILA.Consent_Protocol_%282_April%29%282002357605_.1%29_copy__1.pdf.
16  EWHC 2441 (Ch).
17 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 for the plan to be approved if certain conditions are met.
18 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 (as he then was) 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.
19 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 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 schemes have 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.
20  EWHC 249 (Ch).
21  EWHC 1104 (Ch).
22  EWHC 164 (Ch).
23  EWHC 3299 (Ch).
24  EWHC 3778 (Ch).
25  EWHC 3849 (Ch).
26  EWHC 1164 (Ch).
27  EWHC 3800 (Ch).
28  EWHC 2236 (Ch).
29  EWHC 1233 (Ch).
30  EWHC 3778 (Ch).
31  EWHC 1917 (Ch).
32 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.
33  EWHC 79 (Ch).
34  EWHC 370 (Ch).
35  EWHC 2151 (Ch).
36  EWHC 1884 (Ch).
37  EWHC 2808 (Ch).
38  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.
39 Article 3(1) Recast Insolvency Regulation provides that a debtor's COMI is the place where the debtor conducts the administration of its interests on a regular basis that is ascertainable by third parties, and that there is in most cases a rebuttable presumption that a corporate debtor's COMI is the location of the company's registered office. The leading authorities on the determination of a company's COMI (under the 2000 Insolvency Regulation) were the rulings of the European Court of Justice in Re Eurofood IFSC (Case C-341/04) and Interedil Srl (in liquidation) v. Fallimento Interedil Srl and another (Case C-396/09). The Eurofood test was subsequently applied by the English High Court in Re Stanford International Bank Limited and others  EWHC 1441 (Ch).
40 Article 2(10) of the Recast Insolvency Regulation defines an establishment as any place of operations where a debtor carries out or has carried out in the three-month period prior to the request to open main insolvency proceedings a non-transitory economic activity with human means and assets.
41 Akers and McDonald v. Deutsche Bank AG (Re Chesterfield United Inc. and Partridge Management Group SA)  EWHC 244 (Ch).
42 Larsen and others v. Navios International Inc (Re Atlas Bulk Shipping A/S)  EWHC (Ch) 878.
43 Cosco Bulk Carrier Co Ltd v. Armada Shipping SA and another  EWHC 216 (Ch).
44 Re Stanford International Bank Ltd (in liquidation)  EWCA Civ 137.
45 Re Agrokor DD  EWHC 2791 (Ch).
46 Re OJSC International Bank of Azerbaijan  EWHC 59 (Ch).
47  1 AC 508, PC.
48  1 WLR 852, HL.
49  EWSC 46.
50  AC 1675, PC.
51 Pursuant to rule 43 (Dicey, Morris and Collins, Conflict of Laws, 15th ed, 2012, para 14R-054), an English court will only recognise and enforce a judgment in personam from a foreign court in one of the following cases: (1) if the person against whom the judgment was given was, at the time the proceedings were instituted, present in the foreign country; (2) if the person against whom the judgment was given was the claimant, or counterclaimed, in the proceedings in the foreign court; (3) if the person against whom the judgment was given submitted to the jurisdiction of that court by voluntarily appearing in the proceedings.; or (4) 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 that court or of the courts of that country.
52 (1890) 25 QBD 399.
53 In general terms, the Gibbs rule provides that contractual obligations governed by English law cannot be discharged by foreign law proceedings, and can only be discharged under English law or where the creditor agrees to the foreign law discharge of the obligations owed to them.
54  EWHC 2124 (Ch).
55  EWHC 59 (Ch) and  EWCA Civ 2802.
56  EWHC 59 (Ch) at .
57  EWCA Civ 2802 at .
58 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.
59 Ireland will also be able to seek judicial assistance in the UK pursuant to section 426 of the IA86.
60 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 at the end of the Brexit transition period.
61 It is noted, however, that, pursuant to the Law Applicable to Contractual Obligations and Non-Contractual Obligations (Amendment etc.) (UK Exit) Regulations 2019, the UK government has committed to adopt Regulation 593/2008 on the law applicable to contractual obligations (Rome I) and Regulation (EC) No 864/2007 on the law applicable to non-contractual obligations (Rome II) into domestic law after the transition period.