The Insolvency Review: United Kingdom - England & Wales
Insolvency law, policy and procedure
i Statutory framework and substantive law
The cornerstones of UK insolvency law are the Insolvency Act 1986 (IA 1986) and the Insolvency Rules 2016 (IR 2016), which together form the legislative landscape that applies to both companies and individuals on their insolvency (or at the time when insolvency is a real possibility). A modified form also applies to certain forms of partnership, with special insolvency regimes applying to distinct categories of regulated entities (see Section I.vi).
Supplemental legislation, including the Companies Act 2006 (which formulates certain requirements for schemes of arrangement and, more recently, a restructuring plan, which can both be used to implement restructurings) (CA 2006), the Company Directors' Disqualification Act 1986,the Law of Property Act 1925 (which, in some cases, governs the ability of a secured creditor to enforce its security or pursue other self-help remedies outside the insolvency framework) and, the recently introduced Corporate Insolvency and Governance Act 2020, also serve to support the IA 1986 and the IR 2016.
Although the laws of the European Union have only limited effect on the UK's domestic insolvency framework, it regulates issues of jurisdiction and recognition in many EU cross-border cases. As discussed in more detail in Section V.i, there remains considerable uncertainty (and there is likely to be uncertainty for some time to come) as to the impact of the United Kingdom's withdrawal from the European Union (as notified on 29 March 2017 in accordance with Article 50 of the Treaty on European Union and which became law on 31 January 2020 through the enactment of the European Union (Withdrawal Agreement) Act 2020) on these cross-border cases (both in the European Union and the United Kingdom), and on the continued applicability of EU law in the United Kingdom. Much depends on the form that Brexit takes, which is as yet unclear.
The Withdrawal Agreement includes provisions dealing with a transition period ending on 31 December 2020, (which may be extended). The Withdrawal Agreement envisages that the existing legal framework including the EU elements will remain until the end of the transition period. Notably, Article 67(3) provides that the Recast Insolvency Regulation (as defined below) will continue to apply provided the main proceedings were opened before the end of the transition period. This existing framework is therefore still addressed in detail in this chapter.
Regulation (EU) 2015/848 on insolvency proceedings (recast) (the Recast Insolvency Regulation) is currently the most significant piece of EU law in the restructuring and insolvency space – though the impact of the recently approved Directive (EU) 2019/1023 on Preventative Restructuring Frameworks (the Preventative Restructuring Directive) remains to be seen. The Directive provides for increased moratorium protection, prohibition of use of ipso facto termination clauses and the introduction of a restructuring plan that can be confirmed with cross-class cramdown. Recent reforms to the UK legislative framework that incorporate these changes came into force on 26 June 2020 through the Corporate Insolvency and Governance Act 2020, which is discussed further in this chapter.
The Recast Insolvency Regulation is directly applicable in all EU Member States except Denmark, in cases where the debtor's centre of main interests (COMI) is situated in an EU Member State. It imposes a framework of jurisdictional rules governing the opening of all proceedings that fall within its scope, overriding the national law of EU Member States where necessary, and thus limiting the jurisdiction of the English courts to open main insolvency proceedings in certain circumstances. Particular debtors fall outside the scope of the Recast Insolvency Regulation, the key examples being credit institutions and insurance undertakings, which are subject to separate regimes. The majority of the provisions in the Recast Insolvency Regulation came into force on 26 June 2017, following extensive review and revision of Council Regulation (EC) No. 1346/2000 (the original Insolvency Regulation). The original Insolvency Regulation continues to govern insolvency proceedings opened prior to that date. Throughout this chapter, we use the term 'Insolvency Regulation' where the position under the original Insolvency Regulation and the Recast Insolvency Regulation is the same.
The Corporate Insolvency and Governance Act 2020, which came into force on 26 June 2020, represents the most significant set of reforms to the insolvency framework in the United Kingdom since the Enterprise Act 2002. This legislation was brought into law very quickly to bring about changes seen as necessary to support struggling businesses as they deal with the economic and practical fallout from the covid-19 pandemic. While certain temporary measures were introduced, many of the changes are permanent in nature and they will transform the restructuring regime. The legislation brought about permanent reforms by way of: introduction of new stand-alone moratorium process, a ban on the operation of termination provisions (ipso facto clauses) and crucially, the introduction of a new pre-insolvency rescue and reorganisation procedure to further facilitate restructurings and business rescue, hereafter referred to as a 'restructuring plan'.
The Enterprise Act 2002 overhauled the corporate insolvency regime in the United Kingdom to better facilitate corporate rescues. The administration regime was simplified and the circumstances in which the holder of a qualifying floating charge (the QFC holder) may appoint an administrative receiver were significantly curtailed. These changes were intended to make the UK appear more rescue-oriented and debtor-friendly as a jurisdiction, where entrepreneurial activity is encouraged and where, in the absence of wrongdoing by a company's directors, business failure should not face the same stigma as previously.
When a business in the United Kingdom is in financial difficulties, the traditional approach to keep the business trading was to attempt to achieve a consensual solution. That said, the ever-increasing complexity of capital structures, diverse views of different stakeholders and the flexibility of implementation options (such as schemes of arrangement, the new restructuring plan, company voluntary arrangements (CVAs), and pre-packaged administrations (discussed in Section I.iii)) have contributed to an increasing prevalence of solutions that are not fully consensual – either a 'stick' to encourage consensual negotiations and elicit compromises from creditor groups, the implementation of a broadly consensual process with some dissenting creditors, or the ability to effect a cross class cram-down under the new restructuring plan process.
iii Insolvency and rescue procedures
Absent any jurisdictional limitations imposed by the Insolvency Regulation or any special insolvency regimes being relevant (see Section I.vi), the processes described below can be used either to rescue or to wind up a company in the UK. In brief, a company (including an overseas company if its COMI is in England or if the company is otherwise found to have sufficient connection with this jurisdiction) may be placed into voluntary or compulsory liquidation (unless it is subject to a special insolvency regime), or made the subject of any of three alternative statutory procedures: administration, CVA or receivership. In addition, a company may have its debts rescheduled or compromised by way of a creditors' scheme of arrangement (hereafter, a scheme) or through a restructuring plan. Unlike liquidation, administration, CVAs, schemes and restructuring plans may each form part of a wider restructuring, or may offer a means to rescue a company. The IA 1986 also provides for receivership (including administrative receivership) – a self-help remedy allowing a secured creditor to realise charged assets to recover what it is owed, outside a formal insolvency process.
Although the statutory moratorium is not an insolvency 'process' per se, the newly introduced provisions will provide businesses with breathing space from creditors within which to formulate a rescue plan. It will also be possible to combine the moratorium with the existing scheme and new restructuring plan processes, a feature which was previously lacking in the scheme framework. The moratorium is similar to that which is available in an administration such that, for as long as it applies, no steps can be taken to enforce security, commence insolvency or other legal proceedings against the company or, in the case of landlords, forfeit a lease. Subject to certain exceptions, the company will not have to pay certain debts falling due prior to the moratorium but will have to pay debts falling due during it. A moratorium is a debtor-in-possession procedure meaning that the company's management remains in control throughout. However, a licensed insolvency practitioner known as the 'monitor', is appointed to provide oversight and safeguards for creditors.
The moratorium will last for an initial period of 20 business days with an ability to extend for a further period of 20 business days without consent and with the possibility of further extensions of up to one year of more. If, during the moratorium, the monitor considers that the company is unlikely to be rescued as a going concern then he or she has a duty to terminate the moratorium.
A company may be liquidated on a solvent basis by way of a members' voluntary liquidation (MVL) or on an insolvent basis through a creditors' voluntary liquidation (CVL). CVLs are also available for companies to exit administration. Creditors have greater power in a CVL than in an MVL, being able to appoint a liquidation committee to supervise certain aspects of the winding up. A company can also be wound up on an insolvent basis by the courts in a compulsory liquidation.
In both voluntary and compulsory liquidations, the liquidator's duties include collecting in and realising the assets of the company over which he or she has been appointed for distribution to the creditors. There is no prescribed time limit within which to complete this process – once concluded, the company will be dissolved. If the liquidator believes that he or she could achieve a better result for the creditors were the company to be placed in administration, then he or she may make an application to the courts for himself or herself or another person to be appointed as administrator.
To the extent that main proceedings are pending in another EU Member State (in which the company's COMI is located), a CVL can still be commenced in the UK where the company has an establishment in the UK. If, however, main proceedings have already been opened in another EU Member State, the English courts must stay the secondary proceedings in whole or in part if requested to do so by the officeholder in the main proceedings. The English courts also have the power to request the officeholder in the main proceedings to take any suitable measure to guarantee the interests of the creditors in the secondary proceedings and of individual classes of creditors.
If a company is incorporated outside the UK and the company's COMI is not located in an EU Member State, it may still be wound up as an unregistered company under the IA 1986 in certain circumstances, including when it is unable to pay its debts or if a court is of the opinion that it is just and equitable to wind it up. Statute does not provide guidance as to the criteria that an English court would rely on to assume jurisdiction; however, case law has identified the following further requirements that must be met for the courts to exercise their discretion to make a winding-up order:
- there must be a sufficient connection with England;
- there must be a reasonable possibility, if a winding-up order is made, of benefit to those applying for the winding-up order; and
- one or more persons interested in the distribution of assets of the company must be persons over whom the courts can exercise jurisdiction.
The sufficient connection test may be satisfied by, for example, the presence of assets within the jurisdiction or finance documents that are governed by English law. The courts may also assume jurisdiction if the insolvency procedures in the relevant foreign jurisdiction are found to be unsuitable or outmoded.
An administrator can be appointed in instances where (1) a company is, or is likely to become, unable to pay its debts; and (2) the purpose of administration is likely to be achieved. The 'purpose' of administration is set out as a hierarchy of three objectives. The primary objective is to rescue the company as a going concern, failing which the administrator must seek a better result for the company's creditors as a whole than would be likely in a winding up (this being the second objective). If the second objective is not achievable, the third objective is to realise the company's property for distribution to secured or preferential creditors.
The second objective may be achieved by disposing of the company's business or its assets by way of a pre-packaged sale (pre-pack), the terms of which are agreed before the appointment of an administrator. In the case of a pre-pack, the sale is effected immediately (or soon after) the administrator takes the appointment (neither notification to the unsecured creditors nor their prior consent is required). Although the pre-pack is the subject of some controversy, it has proven to be a useful restructuring tool that has, on occasion and subject to the approval of the courts, been used by foreign companies following a shift of their COMI to England (see Section I.vii). A Statement of Insolvency Practice (SIP 16 – Pre-packaged Sales in Administration) was introduced in November 2015 to ensure greater transparency of pre-packs. It sets out the required disclosures that an administrator must make to creditors of the details of any pre-pack agreement and sale. The 2019 restructuring of UK high street retail giant Debenhams was carried out by Administrators who sold the business to creditors upon appointment, with a marketing and sales being conducted post sale with arrangements in place for creditors to transfer the Group should a higher bid (than the credit bid) be available (the market testing method used by the Administrators in that case colloquially becoming known as a 'post pack').
An administrator cannot be appointed to a company whose COMI is located outside the European Union unless it is either registered under the Companies Act 2006 or incorporated in a European Economic Area state other than the UK. The English courts' jurisdiction is, for this purpose, narrower than that for liquidations (as discussed earlier in this Section, an overseas company can be wound up if it has sufficient connection with this jurisdiction). Annex A of the Recast Insolvency Regulation lists administration as a 'collective insolvency proceeding'.
The administration will end automatically after one year, save when extended by court order or with the consent of the creditors. Complex administrations often necessitate extensions.
Administration remains a flexible tool in the restructuring 'toolbox' and continues to be adapted to address complex stations. Indeed, there has been a recent re-emergence of what has become known as 'light-touch' administrations. The key feature of a light-touch administration is that the administrator leaves some management powers and the day-to-day running of the business with directors, much like a hybrid between traditional administration and a US Chapter 11 process. The value of this construct is that it offers moratorium protection to the company, allowing the directors to focus on the long-term viability of the business while the administrator supervises the directors and seeks to address the immediate threats to the company's survival. Although not a new concept in English law, the light-touch administration has not previously been commonly use but since April 2020, it has attracted support from prominent practitioners and some respected members of the judiciary.
Company voluntary arrangement
A CVA constitutes a binding agreement between a company and its unsecured creditors to compromise the company's debts, made with the aim of allowing companies in financial difficulties to avoid liquidation. If the proposal advanced by a CVA is (1) approved by 75 per cent or more (by value) of the company's creditors; and (2) not rejected by more than 50 per cent (by value) of the company's creditors admitted for voting who are 'unconnected creditors', it will bind all creditors who were entitled to vote in the decision-making process, regardless of whether they were notified about it. Dissenting creditors and creditors whose votes are required to be left out of account are therefore bound by a resolution of the requisite majorities. Secured and preferential creditors will not be bound unless they have given their consent and, therefore, CVAs are less commonly used by companies to compromise large amounts of secured debt.
A CVA may be used alongside, or to obviate the need for, other insolvency procedures, such as administration or liquidation, where the moratorium against creditor action can be advantageous. An optional moratorium in a CVA is otherwise available for certain small companies. The advantage of a CVA is that it is quick to implement, offering a flexible tool that requires minimal court involvement. CVAs have proven to be a fashionable tool for the retail sector, both at the height of the global financial crisis and more recently, as a way for a company to reach agreement with its landlords and other unsecured creditors. The most recent trends are discussed in Section III.i.
Annex A of the Recast Insolvency Regulation lists a CVA as a collective insolvency proceeding, and it can therefore be proposed by any company, wherever incorporated, provided the company's COMI is situated in the UK. If approved, the CVA will be binding throughout the European Union and will have the same effect in other EU Member States as it does under English law.
Creditors' scheme of arrangement
Although a scheme of arrangement is not an insolvency process per se (the court's authority to approve a scheme of arrangement is contained in the Companies Act 2006), it offers a court-sanctioned compromise or arrangement between a company and its creditors, or any class of them, to reorganise or reschedule the company's debts. It can be implemented with or without formal insolvency proceedings and now, as a result of the statutory moratorium provisions introduced by the Corporate Insolvency and Governance Act 2020, it is also possible for a scheme of arrangement to be used in conjunction with a moratorium.
A scheme may be used to vary a class of creditors' rights and can bind dissenting creditors if the requisite majority or majorities of each class (being 50 per cent in number and at least 75 per cent by value) vote in favour of the scheme. More recently, the Corporate Insolvency and Governance Act 2020 has introduced an ability to bind non-consenting classes regardless of voting levels in that class (the 'cross class cram down' – see 'Restructuring Plan' below). Uses have included amendments and extensions to maturity of outstanding loans, or implementation of debt-for-equity swaps, where the underlying loan facility requires higher levels of consent that are not forthcoming. During the covid-19 crisis, schemes are being used to facilitate approvals for pre-emptive 'baskets' for super senior or rescue financing.
The process of obtaining sanction for a scheme takes time but courts can be sympathetic to expedited timetables and it is possible to complete the procedure in approximately six weeks, subject to court availability. In contrast to a CVA (in which the creditors effectively vote as a single class), debates regarding the appropriate composition of creditors are common and will be considered at the convening hearing. However, the scheme does retain the critical advantage over a CVA in that it is binding on all members of the relevant class (or classes) of secured creditors once it has been approved by the requisite majorities, received court sanction and is filed with the Registrar of Companies – in contrast, a CVA can only bind secured creditors to the extent that the relevant creditor gives its consent to be so bound.
Schemes of arrangement are commonly used for non-English or overseas companies as restructuring tools. They are available to companies capable of being wound up under the IA 1986, including an unregistered company that has 'sufficient connection' to the jurisdiction; English governing law and jurisdiction clauses in financing documents have been held to give sufficient connection to the jurisdiction, including where the relevant clauses have been amended to English law in anticipation of the scheme. Whether a procedure that is equivalent to a scheme is available in the relevant overseas jurisdiction will be a factor that the courts take into account: the courts will also want to be satisfied that recognition of the effects of the scheme will be given in other jurisdictions. This concern is often heightened when local creditors that are known to oppose the scheme may attempt to ignore its terms and bring claims against the debtor or its assets (if located outside the UK) on the basis of the original (pre-scheme) finance documents (see Section I.vii for further details).
Recognition of schemes by the courts of certain EU Member States has been made challenging owing to the fact that a scheme falls outside the scope of the Insolvency Regulation and is neither an informal out-of-court procedure nor a formal court-based procedure. Although Regulation (EU) No. 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the Judgments Regulation) is commonly relied on as a basis for recognition , the courts have not conclusively determined whether schemes fall within its scope (see Section I.vii for further details) and, post Brexit, this head of recognition may become more challenging. Increasingly, post Brexit, opinions provided to the court in connection with a scheme are likely to rely on private international law and other principles of comity.
Schemes may also be afforded recognition in countries outside the European Union that have implemented the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency (the UNCITRAL Model Law) in a form allowing for recognition of such processes. Where schemes are used to vary New York law obligations or where assets are located within the US it may be necessary to obtain recognition of the scheme's effect under Chapter 15 of the Bankruptcy Code (based on the Model Law).
A restructuring plan is a new restructuring tool contained in Part 26A of the Companies Act 2006. It is similar in form to a scheme where a company can propose a restructuring plan to its creditors or members. Creditors and members will be divided into classes based on the similarity or otherwise of their rights prior to the restructuring plan and following implementation. Like schemes, the court must approve the class formation and the convening of restructuring plan meetings. Each class will then vote on whether they accept the plan and provided that sufficient creditors or members approve the restructuring plan and the court considers it a proper exercise of its discretion to sanction the restructuring plan, the restructuring plan will be binding on all creditors and members regardless of whether they, individually or as a class, approved the plan.
It is possible for a restructuring plan to be used in conjunction with statutory moratorium provisions introduced by the Corporate Insolvency and Governance Act 2020. Where an application is made for a restructuring plan at a time when the moratorium is in force the court can make an order extending the moratorium.
For a consensual restructuring plan (i.e., one where each class votes in favour) to be capable of being sanctioned by the court, 75 per cent in value of creditors of members present and voting (in person or by proxy) in each class must agree the compromise or arrangement. This is similar to the threshold in a scheme but, unlike a scheme, there is no requirement for a simple majority in number of creditors or members to approve the arrangement. The most significant distinction between the two procedures is that, in certain circumstances, the restructuring plan allows for cross-class cram down. The court may sanction a plan even if it is not agreed by the requisite majority in one or more of the classes if:
- none of the members of the dissenting class(es) would be any worse off under the plan than they would be in the event of the 'relevant alternative'; and
- the plan has been agreed by a number representing 75 per cent in value of a class of creditors or members, present and voting (in person or by proxy) who would receive a payment, or have a genuine economic interest, again, in the event of the 'relevant alternative'.
For these purposes, the relevant alternative is whatever the court considers would be most likely to happen in relation to the company if the restructuring plan were not sanctioned. This may be a liquidation of the company and a sale of its assets, which would usually lead to a lower return to creditors and could see a large number of creditors disenfranchised because they have no genuine economic interest. Alternatively, it could be a sale of the assets of the company on a going concern basis, which would generally lead to a greater number of creditors retaining an economic interest. This requirement is likely to lead to real differences of opinion between the various creditor groups especially in circumstances where there is the possibility of cramming down other classes of creditors.
The restructuring plan is available to not just companies incorporated in the United Kingdom but to any company with a sufficient connection to the United Kingdom. It is understood that a restructuring plan will not be listed in the Annex to the European Insolvency regulation (Regulation EU) 2015/848 and thus it will be in the same position as a scheme of arrangement in terms of demonstrating that its effects will be recognised in relevant non-UK jurisdictions. The combination of a lack of detail or guidance from law makers as to how courts are to interpret inherently subjective matters such as a 'most likely relevant alternative' and the breadth of the power granted by the new legislation will almost certainly give rise to a rapid development of case law within this area, likely against a backdrop of more contested matters.
iv Starting proceedings
The directors of an eligible company can file the relevant documentation at court by way of an out-of-court filing which can be done electronically by way of the online court filing system. There are two qualifying conditions, namely (1) a director's statement needs to be made that the company is or is likely to become unable to pay its debts as they fall due; and (2) the monitor must confirm that it is likely that the moratorium would result in a rescue of the company as a going concern. The exception to this procedure is where there is an outstanding winding-up petition or the company is an overseas company, in which cases a court application will be required. The court may make an order where it is satisfied that a moratorium for the company would achieve a better result for the company's creditors as a whole than would be likely if the company were wound up (without first being subject to a moratorium).
A voluntary liquidation (whether an MVL or a CVL) is initiated by members of the company passing a special resolution that must state either, in the case of an MVL, that they are in favour of a voluntary liquidation, or, in the case of a CVL, that the company cannot continue its business by reason of its liabilities and that it is advisable to wind it up. Prior notice must be given by the directors to any QFC holder of their intention to propose a resolution for voluntary liquidation. The liquidation commences on the date the resolution is passed. In an MVL, the liquidator is appointed by the members, while in a CVL they are appointed by the creditors. An MVL will be converted to a CVL if, during the MVL, the liquidator forms the opinion that the company will be unable to pay its debts (and any interest) in full.
A compulsory liquidation is typically initiated on presentation of a winding-up petition to the court, generally by the company, the directors or (more often) a creditor. A court can make a winding-up order on the grounds that the company is unable to pay its debts or if the court believes it is just and equitable that the company be wound up. The petition must be advertised, either through publication in the London Gazette, or in another manner deemed suitable by the court, at least seven days before the hearing. This provides notice to creditors and other interested parties who may then attend the hearing and bring the court's attention to material relevant to whether a winding-up order should be made.
If the court is satisfied that the grounds for winding up are met, it will make a winding-up order. The role of liquidator will be automatically assumed by the official receiver (who is an officer of the court) until another liquidator is appointed. Receivers and administrators may also present petitions, and any QFC holder entitled to appoint an administrator may apply to the court to have the winding-up order discharged and an administrator appointed.
After the presentation of the winding-up petition but before a winding-up order is made, the court has the power to appoint a provisional liquidator to a company. This is similar in effect to compulsory liquidation, though the court can limit the powers of the provisional liquidator. Although relatively uncommon, provisional liquidation may be useful in certain circumstances, including when there are concerns that the directors will dissipate the company's assets between the presentation of the winding-up petition and the making of the winding-up order.
A company is placed in administration through either the in-court route (filing an application to the court for the appointment of an administrator) or the out-of-court-route (filing documents with the court to document the appointment of an administrator). The company, its directors or a QFC holder have the power to appoint an administrator out of court; however, a QFC holder may prefer the directors to make an application for reputational reasons, while also being able to influence the selection of the administrator.
An application for a court-based appointment may be made by the company, its directors or any creditor. This form of application might be the only route available – if, for instance, a creditor has presented a winding-up petition against the company, or if there are other reasons why a court-based appointment is expedient. It may be preferable to seek a court-based appointment to give a proposed administrator comfort in instances where a pre-pack sale of the company or its assets is proposed which is otherwise at risk of being challenged, or when there is a cross-border element and there is a concern that an out-of-court appointment might not readily be recognised by a foreign court. A court-based application can also avoid the risk of a subsequent challenge as to the validity of an out-of-court appointment on the basis of a procedural irregularity.
The QFC holder may seek an in-court or out-of-court appointment if an event has occurred permitting it to enforce its security – typically a default under the relevant finance documents. Although this right of appointment can arise when a company is not insolvent, in all other circumstances it will be necessary to demonstrate that the company is, or is likely to become, unable to pay its debts, and to obtain an opinion from the proposed administrator that the purpose of the administration is capable of being achieved.
If an administrative receiver is in office, the appointment of an administrator can only be made by an application to the court. The court will only appoint an administrator with the consent of the appointor of the administrative receiver or when the court regards the security under which the administrative receiver was appointed as liable to be released or discharged (whether as a preference or a transaction at an undervalue) or that the floating charge is voidable for want of new consideration at the time of its creation.
If a secured creditor retains the right to appoint an administrative receiver, it may seek to block the appointment of an administrator by pre-emptively exercising its rights to appoint an administrative receiver, prior to the appointment of an administrator. If appointing an administrator, notice of his or her intention to appoint an administrator must be given to certain persons, including a QFC holder. During the notice period, a secured creditor who is entitled to appoint an administrative receiver may do so, or may substitute its choice of insolvency practitioner as administrator. A QFC holder who does not have the power to appoint an administrative receiver cannot block the appointment of an administrator, but may (provided the appointment is not being made by a prior ranking QFC holder) substitute its choice of insolvency practitioner as administrator.
If there is a delay between the applicant filing for administration and the order taking effect (when the in-court procedure is used) or if the applicant is required to give advance notice of its notice of intention to appoint an administrator (when the out-of-court procedure is used), an interim moratorium shields the company from creditor action, with the full moratorium taking effect on appointment.
Company voluntary arrangement
After the terms of a CVA have been proposed to a company's shareholders and unsecured creditors, an insolvency specialist (generally an accountant) will be appointed as nominee by the directors (or, if the company is in administration or liquidation, the administrator or liquidator) to implement the CVA. The nominee reports to the court whether, in his or her opinion, the proposal should be put to members and creditors. If the nominee believes it should, he or she will seek the approval of the members at a meeting, and of the creditors by way of a qualifying decision procedure.
A creditor or member can challenge the CVA in court only on the grounds of unfair prejudice or material irregularity (or both). Any challenge must be made within 28 days of filing of the notice of approval with the courts or, if the applicant did not receive notice, within 28 days of the day on which he or she became aware that the qualifying decision procedure had taken place. The CVA process is unlikely to be favoured if there is uncertainty regarding identification of the company's creditors, because of the risk of a late challenge from 'hidden creditors'.
Creditors' scheme of arrangement
A scheme is typically initiated by the company (or, if the company is in administration or liquidation, the administrator or liquidator). The first step is generally the issuance of a creditors' issues letter or 'practice statement' letter to outline the key terms of the scheme and set out the company's views on class and other issues, following which the company will make an application to court for an order granting permission to convene a meeting (or meetings) of the affected creditors to vote on the scheme. The company can exclude from the scheme any creditors that are unaffected by it (e.g., those being paid in full or whose debts are not required to be compromised). Creditors whose rights are affected by the scheme vote as a class but if the requisite majority has been achieved, that class will be bound, the minority view can be disregarded and dissenting creditors' claims will face the same treatment as creditors voting in favour of the scheme. If the voting majorities are obtained at the meeting, or meetings, the company will apply to the court for an order sanctioning the scheme. The scheme becomes effective and binding on all affected creditors when filed with the Registrar of Companies.
Affected creditors have the opportunity at the convening hearing to challenge class composition, and other creditor issues, including the fairness of the scheme. If the proposed scheme relates to an overseas company, although jurisdiction issues are considered more fully at the sanction hearing, the court may give some preliminary consideration regarding whether it will ultimately have jurisdiction to sanction the scheme.
Further objections may be raised by scheme creditors at the sanction hearing (although any objections regarding class composition should have been heard at the convening hearing so any issues to be raised should go to fairness); the court may reject them and refuse to grant leave to appeal. It is unusual for a scheme to be appealed; however, in the event that the court considers that an appeal has a reasonable prospect of success, a short-term stay may be granted prior to the sanction order being made (thus preventing an order being delivered to the Registrar of Companies for registration, and the scheme becoming effective), allowing that creditor time to seek permission to appeal. If the creditor wishes to appeal a scheme in instances where an order sanctioning the scheme has already been granted and given statutory effect through registration with the Registrar of Companies, that scheme cannot be altered or terminated other than as provided for by the scheme itself, or by an application to court for a further scheme.
All companies are eligible to apply for a restructuring plan, save for those companies that may be expressly excluded by the Secretary of State who are authorised persons (as defined under the Financial Services and Markets Act 2000 – i.e., those providing financial services). The restructuring plan can also be used by a number of non-corporate entities such as limited liability partnerships. In order to use a restructuring plan there are two conditions which must be met:
- the company must have encountered or be likely to encounter financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern; and
- a compromise or arrangement must be proposed between the company and its creditors or members (or any class of either) and the purpose of such compromise or arrangement must be to eliminate, reduce, prevent or mitigate the effect of any of the financial difficulties the company is facing.
A restructuring plan can be proposed by the company or by any creditor or member, although given that a plan will be compromising the rights of creditors or members, it is unlikely that anyone other than the company will put forward a restructuring plan. A restructuring plan can also be proposed by a liquidator or administrator of a company. The restructuring plan is deliberately intended to be flexible. There are few restrictions on what can be included and it is for the company to propose terms that it thinks will be agreeable to creditors and therefore capable of being confirmed by the court. A restructuring plan can therefore deal with debt write-downs or postponement, as well as selling off loss-making parts of the company. Similar to a scheme, an explanatory statement must be prepared explaining the effect of the compromise or arrangement and this will be shared with creditors or members of the company.
The restructuring plan involves court oversight and approval and there will be court involvement via two hearings: initially through a hearing to consider the composition of creditor classes and to summon the meetings of creditors or members to consider the restructuring plan and, after meetings have been held and assuming the requisite majorities are reached, .through a hearing to sanction the compromise or arrangement set out in the restructuring plan. Provided the court sanction is granted, the plan will become binding on all creditors and members in accordance with its terms once the court order has been delivered to the registrar of companies (in the case of a company incorporated in the United Kingdom) or published in the Gazette (in the case of an overseas company). When exercising its discretion on whether or not to sanction a restructuring plan the court considers matters such as whether the votes in favour of the plan were fairly representative of the class as a whole, whether the plan is likely to be effective in other relevant jurisdictions, whether the plan is fair and, where cross-class cram down is being effected, that the dissenting classes are not worse off than in the relevant alternative and that the plan has been approved by a class who would receive a payment or have a genuine economic interest in the company in the event of the relevant alternative. It is expected that, as with a scheme, and particularly because of the ability to impose a cross-class cram down, the court is likely to closely scrutinise a restructuring plan.
v Control of insolvency proceedings
Insolvency proceedings are managed by the insolvency office holder appointed to the company in relation to the insolvency process. In general, and as required by the IA 1986, this will be a qualified insolvency practitioner who is required to act in accordance with the regulatory regime governing their professional conduct.
As regards the directors of a company in the UK, while the company is solvent, the directors owe their duties to the company for the benefit of present and future shareholders and are not under a duty to consider creditors' interests. To the extent that there is doubt as to a company's solvency, or as a company approaches a 'zone of insolvency', its directors become obliged to consider the interests of the company's creditors, so as to minimise the potential loss to them. In instances where a director continues to trade a business after the time that he or she has realised, or ought to have concluded, that the company has no reasonable prospect of avoiding an insolvent liquidation or administration, and do not thereafter take every step to minimise loss to each creditor, he or she may be liable for the offence of wrongful trading. A director may be liable for fraudulent trading if he or she allows a company to incur debt in circumstances where there are no good reasons for believing that funds would be available to repay the amount owed at the time, or shortly after, it became due and payable.
The liquidator or administrator is empowered, under the IA 1986, to seek a court order against directors for contributions to the company's assets if their investigations reveal instances of wrongful or fraudulent trading, and to set aside transactions at an undervalue, preferences and transactions defrauding creditors. They may also assign certain of these claims to third parties, including creditors. They are further required under the Company Directors' Disqualification Act 1986 to submit a report to the relevant secretary of state on the conduct of the directors and former directors of the company. That report may lead to a director being disqualified from acting as a director, or being involved in the management of a company, for a defined period, in addition to a disqualified director being required to pay compensation.
The court has minimal involvement in the conduct of a voluntary liquidation, whereas in a compulsory liquidation the court hears the application for a winding-up order. In contrast, in an administration the court will have varying levels of involvement, depending on whether the process is commenced by way of an in-court or out-of-court application and whether the administrator is likely to need directions, owing to the complexity of the company's affairs. The court's involvement in an out-of-court and simple application may be limited to receipt and processing of the documents required to be filed at court.
Court involvement in a CVA (other than in instances where creditors challenge the CVA) is limited to receiving a report from the nominee as to whether, in his or her opinion, the CVA proposed has a reasonable prospect of being approved and implemented and whether it should be put to the creditors and shareholders. The approval (or rejection) of the proposal must then be notified to the court through a filing within four business days of the meeting of shareholders.
Creditors wishing to challenge a CVA have 28 days following filing with the court of the CVA (or, if the creditor did not receive notice of the CVA, within 28 days of the day on which the creditor became aware of the decision procedure having taken place) in which to raise their appeal. This can be brought on the grounds of unfair prejudice or material irregularity. Whether there are grounds to challenge a CVA on the basis of unfair prejudice is ultimately a question of fact; for instance, a CVA that treats different unsecured creditors in different ways may be prejudicial to those creditors, but the question of fairness depends on the overall effect of the CVA. As to material irregularity, this is also a question of fact, but relates to how the decision procedure used to consider the CVA proposal was conducted. Issues that the courts have considered include valuation of creditor claims and whether creditors with claims likely to be settled by a third party can vote in favour of a CVA.
vi Special regimes
The nature of certain businesses means that entities operating in those areas are excluded from general insolvency regimes and subject instead to special insolvency regimes that, depending on the type of business, may be based on the administration procedure in the IA 1986.
It is beyond the remit of this chapter to set out in detail the scope of each special regime; however, it should be noted that particular rules apply to certain banks and analogous bodies (both from a national and broader European standpoint), insurance companies, postal services, water or sewerage companies, certain railway companies, air traffic control companies, London Underground public-private partnership companies, building societies and bodies licensed under the Energy Act 2004.
Under English law, each company is treated as a separate legal entity and there are no special regimes applicable to corporate groups. The Recast Insolvency Regulation has expanded the framework for coordination of insolvency proceedings concerning corporate groups by obliging insolvency practitioners and courts involved in the different proceedings to cooperate and communicate, with insolvency practitioners afforded procedural tools to request a stay of other proceedings, facilitating the opening of group coordination proceedings.
Group coordination proceedings involve appointing an insolvency practitioner to act as group coordinator. This practitioner proposes a coordination plan setting out an integrated solution for insolvent group companies or those that are restructuring. That said, participation is not required, nor are participating insolvency practitioners obliged to follow the group coordinator's recommendations or the group coordination plan.
UNCITRAL has broadly endorsed the group coordination provisions, but has also produced a framework for legislation in relation to the insolvency of enterprise groups. UNCITRAL also encourages the use of cross-border protocols to facilitate cooperation between courts and practitioners. An early example of this approach is the Maxwell Communications Corporation case, in which the administrators appointed in the UK agreed a protocol with the examiners in the US Chapter 11 proceedings. More recently, attempts have been made to use cross-border protocols (which provide guidelines for cooperation rather than legal requirements) in certain insolvency situations, such as the Lehman and Madoff insolvencies, with mixed success.
vii Cross-border issues
This section considers the framework for cross-border cooperation and recognition as at the time of writing. The UK's withdrawal from the European Union, which may have a significant effect on this framework, is discussed in Section V.i.
The English courts' jurisdiction in cross-border insolvency cases derives from four sources: the Insolvency Regulation, the Cross-Border Insolvency Regulations 2006 (CBIR), Section 426 of the IA 1986 and the common law. As discussed in Section I.i, the English courts' jurisdiction may be fettered by the Insolvency Regulation if a company's COMI is situated in another EU Member State, in which case the court of that state will have jurisdiction to open main insolvency proceedings. Prior to the original Insolvency Regulation coming into effect, if a foreign company was found to have sufficient connection with England, an English court could exercise its discretion to wind up that company as an unregistered company under Section 221 of the IA 1986 (see Section I.iii). The Insolvency Regulation now prevents such steps being taken, although the test remains in place for companies that fall outside the Insolvency Regulation's scope. An example of this is Re Arena Corporation Ltd, in which the English court found that a company incorporated in the Isle of Man but with its COMI in Denmark had sufficient connection with England (in the form of location of assets) to enable the court to exercise its jurisdiction under Section 221 of the IA 1986 to wind up the company. Cases such as these, which fall outside the purview of the Insolvency Regulation, will be subject to the relevant national law, and recognised by EU Member States and non-Member States alike in accordance with the rules of private international law.
If the debtor's COMI is outside the European Union, the Insolvency Regulation will not apply and the English courts, like those of other EU Member States, will be free to act in accordance with the UK's existing laws and practice when exercising jurisdiction, opening proceedings and recognising and enforcing proceedings opened within and outside the European Union. However, the associated provisions under the Insolvency Regulation, including automatic recognition in all EU Member States, which are available when main proceedings are opened, will not be available.
The CBIR offer another means whereby English courts may otherwise be required to recognise foreign main proceedings and foreign non-main proceedings (the equivalent of main and secondary proceedings under the Insolvency Regulation). The CBIR implement the UNCITRAL Model Law and apply it regardless of whether the relevant foreign country has enacted the Model Law. Relief by way of a moratorium on creditor action is automatically granted on recognition; other relief may be obtained at the court's discretion. The English courts are required to cooperate 'to the maximum extent possible' when recognition is granted.
The English courts can also offer assistance and relief under Section 426 of the IA 1986, which provides for cooperation both between jurisdictions within the UK and between the UK and other designated (mainly Commonwealth) jurisdictions.
If the Insolvency Regulation, the CBIR and Section 426 of the IA 1986 do not apply, the English courts have inherent jurisdiction to cooperate with foreign insolvency representatives and recognise foreign proceedings, in instances where the relevant foreign office holder has satisfied the common law principles developed by the English courts. The Supreme Court considered the principles in detail in Rubin v. Eurofinance.
It is relatively common for foreign companies have taken steps in recent years to shift their COMIs to the UK to take advantage of the UK's established insolvency and restructuring processes. Forum shopping in this manner has received judicial support at EU level with clear delineation between 'good forum shopping', when a COMI is shifted to the best place to reorganise the company and its group for the benefit of creditors (and, possibly, other stakeholders), in contrast to 'bad forum shopping', when the company acts for selfish motives to benefit itself, or its shareholders or directors, at the expense of creditors.
Hellas Telecommunications, Algeco Scotsman and Noble Group contain instructive judgments about the requirements for shifting a COMI and rebutting the presumption that a company's COMI is in the state of registration. Factors that the courts considered relevant to the migration of COMI include: moving the company's head office and principal operating address to England; notifying creditors of the change in address and that the company was shifting its activities to England; opening a bank account, from and to which payments were made; and registration of the company as a foreign company at Companies House. The courts in these three cases also considered it relevant that negotiations between the company and its creditors took place in England, with the court in Hellas noting that this factor was 'one of the most important features of the evidence' given that the 'purpose of the COMI is to enable creditors in particular to know where the company is and where it may deal with the company'. However, the court in Re Videology Ltd has cast doubt on the importance of this factor during a restructuring. While finding that the company's dealings with customers, trade creditors and finance creditors generally was relevant to establishing the COMI, the court found that the location of restructuring meetings and negotiations 'provide very little guidance as to where the company conducts the administration of its interests on a regular basis'.
Foreign companies may also seek to make use of an English law scheme of arrangement to compromise or amend the terms of their debt documents without first migrating their COMIs, giving rise to different cross-border issues to be determined by the English courts. They will need to determine matters such as whether the English courts have jurisdiction over the foreign company, and whether the scheme will be recognised in the foreign jurisdiction (discussed above in the context of Schemes of Arrangement and Restructuring Plans).
Finance documents, in most cases, do contain clauses conferring jurisdiction (typically one-way exclusive jurisdiction clauses) on the English courts. In the Van Gansewinkel case, Mr Justice Snowden took the view that if the jurisdiction provisions of the Judgments Regulation were to apply to schemes (a point that was not decided) then, in that particular case, it would not limit the court's jurisdiction to sanction the scheme. If the provisions did apply, he was entitled to regard all scheme creditors as coming within the jurisdiction of the English court under Article 8(1) of Chapter II, which provides that a party may be made a party to proceedings in another EU Member State in instances where one or more of the co-defendants are domiciled in that Member State and it is expedient to hear the claims against all the defendants in a single court. However, Snowden J noted that a one-sided exclusive jurisdiction clause for the benefit of the scheme creditors did not amount to submission by those creditors to the jurisdiction of the English court. As such, if the jurisdiction provisions of the Judgments Regulation apply to schemes, absent a migration of a COMI or other connecting factors, a one-way exclusive jurisdiction clause alone would not be sufficient to bring a company within the jurisdiction of the English court by virtue of Article 25(1) of Chapter II.
The meaning of the term 'judgment' in Article 32 of the Judgments Regulation also continues to be debated in relation to schemes. Some commentators have argued that, albeit that the term is given broad scope by Article 32, the procedure for implementing an English scheme is not adversarial in nature and so the sanction order cannot be considered a judgment and cannot not be granted recognition under that regulation. Further English and European case law on this topic is likely, particularly as the approach with regard to recognition following Brexit becomes clear, as schemes remain a popular and flexible implementation tool. Again, it is anticipated that the same issues will also apply to a restructuring plan.
Two recent schemes have implemented restructurings by proposing a compromise on guarantors rather than principal debtors, where the guarantors have their COMI located within England and Wales. This is discussed in more detail below.
In the first quarter of 2020, the total number of companies entering insolvency proceedings decreased by 8.5 per cent compared with the same quarter in 2019 and 8.5 per cent lower than the last quarter in 2019. A popular view among commentators in relation to elevated levels of insolvencies in 2019 is that the economy was reacting to continued uncertainty regarding Brexit. One possible interpretation of the decrease recorded in the first quarter of 2020 could be that the adverse impact of Brexit and the uncertainties that come with it might be on the decline. While Brexit and its effects on the UK remain a topic of interest, what is of more immediate interest is the covid-19 pandemic that became a global phenomenon at the end of March 2020. In England and Wales, restrictive measures including a total lockdown on movement were introduced from the 23 March and did not begin to ease until June 2020.
Interestingly, the second quarter of 2020 did not witness the unprecedented levels of insolvencies that one might have expected. Rather, the numbers of company insolvencies fell by 23 per cent compared with the first quarter, and by 33 per cent when compared with the second quarter in 2019. In the 12 months ending in the second quarter of 2020, the company liquidation rate was estimated at 0.36 per cent of all active companies in England and Wales, slightly down from 0.40 per cent in the 12 months ending in the first quarter of 2020. CVLs have fallen by 12 per cent since the first quarter and this has been the major driver of the overall fall in company insolvencies. CVAs decreased by 32 per cent from the first quarter, and by 49 per cent when compared to the second quarter in 2019. Administrations decreased by 3 per cent from the last quarter of 2019. Consistent with the trend since 2018, the highest number of insolvencies in the second quarter of 2020 was in the construction sector, and the second highest was in the 'wholesale and retail trade' (repair of vehicles' industrial grouping), followed by accommodation and food services grouping. In the second quarter, these three sectors generally saw a decrease in company insolvencies compared to the 12 months ending in the first quarter of 2020. Construction insolvencies fell by 10 per cent, wholesale and retail trade; repair of vehicles industrial grouping fell by 8 per cent and accommodation and food fell by 13 per cent.
The reduction in company insolvencies has been attributed to government measures put in place in response to covid-19, some of which include:
- reduced HMRC enforcement activity since UK lockdown was applied on the evening of 23 March;
- temporary restrictions on the use of statutory demands and certain winding-up petitions from 27 April and to 30 September 2020;
- enhanced government financial support for companies and individuals;
- the Bank of England cutting its interest rate to 0.1 per cent and optimising banks' capital requirements to support business lending; and
- financial service regulators being advised to address situations of financial difficulty (of individuals and companies) with forbearance and due consideration.
In terms of early indications of the impact of the pandemic on the UK economy, as of 26 July 2020, 38 per cent of businesses that resumed trading after the lockdown restrictions were lifted (led by the accommodation and food sector, followed by the arts, entertainment and recreation sector and the construction sector) reported that capital expenditure had stopped or was lower than normal because of the pandemic. In this period, about 58 per cent of businesses in England and Wales reported a decrease in turnover outside of normal range. In the labour market, the data for May 2020 suggests that the number of employees in the UK on payrolls is down more than 600,000 compared with March 2020 while the number of job vacancies fell to a record low (a decrease of 60 per cent compared to March 2020). From the end of March into April, the number of people temporarily away from work rose by 6 million and April saw a total pay fall in real terms for the first time since January 2018. In terms of potential impact on GDP, the June 2020 average of independent forecasts for UK GDP growth (compiled by HM Treasury) was -9.2 per cent compared to the 1.4 per cent estimated for the same period in 2019.
The Office for National Statistics has stated that while statistics are currently inconclusive given the practical difficulty of compiling data in real time, it is safe to conclude that the economic shocks caused by the pandemic will at least result in a technical recession.
Plenary insolvency proceedings
i CVA restructurings
In the past, a significant number of restaurants and bricks-and-mortar retailers turned to CVAs as part of their efforts to restructure their businesses. As the high street continues to be challenged by declining footfall, increasing business rates and the shift in preferences to online retail, businesses have used CVAs increasingly to restructure their lease portfolios and compromise their landlords. Commentators have noted that CVAs are not generally sufficient to save businesses (particularly retail) in isolation, and the four examples below illustrate this trend. CVAs are increasingly being used to restructure, along with landlord claims, other significant unsecured claims such as business rates (for example, the Homebase CVA) as well as non UK leases.
Debenhams is a department store in the United Kingdom and Ireland with franchise stores in other countries. The company, founded in the 18th century as a single store in London, operating in 178 locations across the UK, in Ireland and in Denmark. As conditions became more challenging on the high street, Debenhams' trading performance weakened. In October 2018, the company announced the largest loss in its history – a pre-tax loss of £491 million – and plans to close up to 50 stores with the potential loss of 4,000 jobs.
Debenhams entered into negotiations with its lenders and other stakeholders, including Sports Direct, which owned close to 30 per cent of the shares in the retailer, regarding a restructuring of the group. A number of offers were made by Sports Direct International plc to inject new capital into the group, which were ultimately not considered deliverable. On 9 April 2019 Debenhams plc entered administration and the group was sold, via a pre-pack administration, to its lenders in a debt-for-equity swap.
On 26 April 2019, Debenhams announced that it was proposing a CVA with its landlords. The key elements of the CVA were that, although it was proposed that all Debenhams stores were to remain open during 2019, including through Christmas peak trading, up to 22 stores would be expected to close in 2020. The CVA also contemplated a business rate cut of between 48 per cent and 50 per cent on 58 of its stores. If approved, the CVA also provided for a fund of up to £25 million to be made available for those creditors compromised by the CVA to participate in future growth of the UK business.
On 9 May 2019, the CVA was approved by the requisite majorities. Companies in the Sports Direct group and the Combined Property Control Group (the landlord of six Debenhams sites) subsequently sought to challenge the CVA. In September 2019, the High Court rejected the challenge on four out of five grounds, essentially finding among other things that rent reduction and the compromise of future rents under the CVA was not prejudicial to landlord's rights. The landlords successfully applied for permission to appeal the decision of the High Court which was granted in February 2020. Debenhams filed for a 'light-touch' administration in April 2020 and, as at writing, its future remains uncertain.
Homebase is the UK's second largest DIY and homewares retailer with over 241 stores and 11,000 employees (as of August 2018). The business was impacted by cocktail of issues that adversely impacted the retail sector and a rebranding exercise that did not go as planned. About 70 per cent of the stores were running at a loss and total sales had fallen by more than 10 per cent by the end of the first half of 2018. A key part of the plan to improve profitability was to cut costs and renegotiate most of the company's leases through a CVA.
In August 2018, the company announced a CVA under which it proposed closing some stores and cut its rent bill, allowing the company to stay afloat but unfortunately putting 1,500 jobs at risk. The company's owner, Hilco Capital, had emphasised that the alternative to the CVA was for the company to be put into an immediate insolvency proceeding.
On 31 August 2018, the CVA was approved by 95.92 per cent of the voting creditors approve the CVA, well above the 75 per cent needed for it to pass. Some landlords had initially considered taking legal action against the plan but subsequently came around to support the CVA.
By February 2020 the company's turnaround plans appear to have been successful when Homebase announced plans to end its CVA 18 months early (April 2020 instead of August 2021) due to a recent uptick in the performance of the business. The company had reportedly signed 75 new leases since the CVA was approved, with less than 5 per cent of its leases being covered by the CVA as of February 2020. It remains to be seen what impact the covid-19 pandemic may have had on the early termination plans and the company's turnaround efforts.
Paperchase is one of the well-known stationary retailers in the UK operating about 145 stores across the UK as of 2018-year end. The business, like many others in the retail sector, was impacted by a combination of factors such as high business rates and pressures from macro-economic issues. Paperchase saw a decline in its financial situation principally because of lower footfall, expensive rent and rates bills and foreign currency exposure. The company had reduced its credit insurance and the owners, Primary Capital, had put in £4.5 million in an effort to reduce its overall costs and boost liquidity.
On 4 March 2019, the company announced that it was launching a CVA which contemplated different categories of adjustments. In the first category, 45 stores were to remain largely unaffected by the CVA. The second group contemplated varying levels of minimum guaranteed rents ranging from 35 per cent to 80 per cent across 70 stores. Additional amounts above the minimum base rents will be determined based on turnover. In 28 stores, the CVA envisaged a 50 per cent rent reduction for three months, after which there would either be a rent-free period or closure. The CVA also proposed the closure of a small number of loss-making stores.
On 22 March 2019, the CVA obtained approval from 78.6 per cent of voting creditors, consisting mainly of trade suppliers, landlords and service providers worth a total value of £27.94 million. About 21.4 per cent of all voting creditors (worth £7.62 million, out of which the HMRC held £3.46 million). One of the main reasons why the CVA received the support of key suppliers and customers was the fact that there was evidence of a viable business plan and a clear path for the financial and operational restructuring of the business.
ii Schemes of arrangement
As discussed in Section I.iv, a scheme is not a specific insolvency tool, but its role in implementing complex cross-border restructurings cannot be overlooked. As these case studies demonstrate, it remains a popular restructuring tool for overseas companies. Shifting COMI is lengthy, costly process and can have significant adverse cost consequences and yet, in some cases, especially where Chapter 15 recognition is sought, there are significant advantages in carrying out a 'foreign main restructuring' rather than a 'foreign non-main' restructuring (i.e., a COMI-based restructuring). We are accordingly seeing more 'novel' means of creating this link. An example of a recent restructuring based on the COMI of a guarantor rather than a debtor, is set out below.
Based in Switzerland, Swissport is one of the largest airports and ground services provider in the world, operating 300 airports in 47 countries. As of the first quarter of 2020, the group had over €2 billion of debt in its capital structure. Having been severely hit by the covid-19 pandemic, Swissport sought certain amendments to its debt arrangements to allow it t borrow up to €380 million of new money on a super-priority basis.
The restructuring was implemented through a scheme of arrangement launched by Swissport Fuelling Ltd (SFL), a UK-based subsidiary of the Swissport group. Notably, SFL was not a borrower under loan documents, and it was strategically brought forward as the scheme company in order to establish sufficient connection with England (the borrowers were foreign companies and the relevant debt was governed by New York law). It has long been established that a scheme can be used to release liabilities of creditors against non scheme companies, on the basis that the releases are 'necessary' so that the scheme may take effect, on the basis that if not released the subrogated claims of non released guarantors would undermine the effect of the scheme. However, this argument does not work 'the other way around' because a principal debtor has no claim against a guarantor, the release of claims against a guarantor will not give rise to any ancillary or related claims.
In order to deal with this lacuna, an English law-governed deed of contribution was executed in favour of the borrowers, making SFL a primary co-obligor and conferring a right of contribution from SFL on the existing borrowers. In some respects, this is only a small step farther than the use of co-obligor schemes, which has become relatively common under English law (i.e., where a new borrower or co-issuer is incorporated within the UK) the unilateral nature of the deed of contribution and the fact that it is entirely un-regulated for within the finance documents may provide for less creditor protection. It is also possible to implement such a structure without the lasting (and possibly adverse) implications of creating a multi issuer structure.
All the scheme creditors voted in a single class and unanimously supported the scheme. It could be that in a less harmonious scheme the use of the same technique (i.e., a deed of contribution) might be challenged.
Ancillary insolvency proceedings
As the prevalence of cross-border restructurings increases, the instances of recognition of foreign processes in the United Kingdom continues to increase. The Videology case demonstrates that recognition issues cannot be taken for granted, especially in instances where a COMI shift is being relied upon.
Re Videology Ltd
Videology Limited was an English incorporated company within the Videology Group, which operated from leased premises in London. Having faced setbacks – including increased competition, loss of funding and a number of litigation claims – Videology, with its US incorporated parent and a number of its subsidiaries, filed a petition under Chapter 11 of the US Bankruptcy Code to organise a sale of the group's business and assets. Although protection from creditor action arose automatically under Chapter 11 for the companies subject to that process, protection needed to be sought under English law against Videology's creditors in the UK.
Videology and its parent applied under the Cross-Border Insolvency Regulations for recognition of the Chapter 11 process as a foreign main proceeding under Article 17 of the UNCITRAL Model Law, and for the court to grant a discretionary moratorium and an extended moratorium pursuant to Articles 20 and 21 of the UNCITRAL Model Law, respectively, which would, taken together, prevent individual and collective actions by creditors in the UK.
In respect of the parent, the court was satisfied that its COMI was in the United States and that the Chapter 11 proceedings were foreign main proceedings. Discretionary relief under Article 20(6) and Article 21(1) therefore followed on a final basis. However, in respect of Videology, the company was required to demonstrate that its COMI was in the United States to obtain the relief sought, and so rebut the presumption that its COMI was in the UK. The company drew the court's attention to the fact that senior management were based in the United States, there was no distinct branding from the US operations, strategic decisions were known by third parties to have been made in the United States and, finally, recent creditor meetings regarding the company's financial situation took place in the United States.
These factors were insufficient to persuade the court that the presumption had been rebutted. The court noted that the UK was where the company's 'trading premises and staff are located, where its customer and creditor relationships are established, where it administers its relations . . . on a day-to-day basis using those premises and local staff, and where its main assets . . . are located'.
Ultimately, the court held that the Chapter 11 proceedings were, in fact, foreign non-main proceedings (on the basis that the COMI was not in the United States); nevertheless, it granted the discretionary relief sought under Articles 20 and 21 of the UNCITRAL Model Law. In reaching this conclusion, the court noted that:
- it was typical for extended relief under Article 21(1) to be given to foreign main proceedings which, by their nature, were debtor-in-possession proceedings;
- in situations where the proceedings were recognised as foreign non-main proceedings, the starting point would be to recognise the proceedings in the UK as the main insolvency proceedings, which is where the company's COMI is; and
- to grant the relief sought, there would need to be evidence of obvious benefits to the creditors as a whole, and good reasons for preventing creditors in the UK from commencing an insolvency process in the country where the company had its COMI.
The evidence put forward by Videology persuaded the court that the sale of the group's business was financially desirable, more so than a stand-alone administration or liquidation; the Chapter 11 proceedings would protect the creditors' interests, the unsecured creditors had an effective voice in the sale negotiations and evidence was adduced from various unsecured creditors that they were in support of the Chapter 11 proceedings.
i Uncertainty regarding the EU referendum and the future of cross-border restructurings in Europe
As discussed in Section I.i, the United Kingdom voted in favour of withdrawing from the European Union in a referendum on 23 June 2016 and, on 29 March 2017, the UK government exercised its right under Article 50 of the Treaty on the European Union to notify the European Union of the UK's intention to withdraw from the European Union.
On 23 January 2020, the European Union (Withdrawal Agreement) Bill 2019-20 received Royal Assent, becoming the European Union (Withdrawal Agreement) Act 2020 which came into force at 11.00 pm (UK time) on 31 January 2020 under the first paragraph of Article 185 of the withdrawal agreement.
The withdrawal agreement includes provisions dealing with a transition period commencing on the date the UK leaves the EU and ending on 31 December 2020, which may be extended. In relation to the Recast Insolvency Regulation, the withdrawal agreement provides that '[i]n the United Kingdom, as well as in the Member States in situations involving the United Kingdom, the following provisions shall apply as follows: … (c) Regulation (EU) 2015/848 of the European Parliament and of the Council shall apply to insolvency proceedings, and actions referred to in Article 6(1) of that Regulation, provided that the main proceedings were opened before the end of the transition period'.
There remains considerable uncertainty (and there is likely to be uncertainty for some time to come) as to the effect the UK's withdrawal will have on the regulatory environment in the European Union and the UK, and on the applicability of EU law in the UK. If a deal is not agreed, it is likely to be harder for UK office holders and UK restructuring and insolvency proceedings to be recognised in EU Member States and to deal effectively with assets located in the Member States, as the principles of mutual recognition of proceedings and judgments included within the Insolvency Regulation will fall away, and the need may well arise to open parallel proceedings, increasing the element of risk. In particular, in cases where the appointment of a UK office holder has been made in reliance on a UK domestic approach, it is much less certain that there will be recognition in the relevant Member State even if UK jurisdiction is taken on the grounds of a UK COMI or establishment (where such concepts are retained as a matter of UK domestic law).
Even in a Brexit with an agreed deal, it is unclear if the Insolvency Regulation and the Judgments Regulation will continue to apply at the end of any transition period. In a no-deal Brexit and, absent agreement on a permanent framework with Member States in an agreed Brexit, much will therefore depend upon the private international rules in the particular Member State. As described in Section I.vii, although the UNCITRAL Model Law is one avenue of bilateral recognition (there are others), not many EU Member States have implemented legislation based on the Model Law. Approaching each jurisdiction on a case-by-case basis would further complicate cross-border restructurings, but has the potential to offer the English courts a more flexible approach to exercising discretion as to jurisdiction, which could make schemes of arrangement an even more attractive restructuring tool (although this is far from certain).
The continued uncertainty regarding the UK's relationship with the European Union after Brexit does not appear, as yet, to be affecting the UK's popularity as a restructuring hub. However, this may change if it appears no deal will be reached prior to the currently scheduled departure date (31 December 2020 at the time of writing). Nevertheless while it is difficult to say whether the popularity of the English restructuring and insolvency market will be dampened in the long term, all indications suggest the contrary.
ii Insolvency activity
As discussed in Section II, the uncertainty surrounding Brexit continues to have a dampening effect on the economy and may have greater consequences depending on the nature of the withdrawal from the European Union. However, as we move into the third quarter of 2020, the biggest influencing factor is likely to be the economic fall-out from the covid-19 pandemic. To date, the fiscal severity of the global pandemic has been largely buffered by the emergency support packages made available by the British government. As these support measures are phased out and the impact of the extensive closures, restricted movements, company office closures, bans on social gatherings and social distancing measures necessitated by the response to the coronavirus becomes apparent, we are likely to see a significant uptick in distressed situations. .
Travel: business and consumer
Unsurprisingly, the most immediate casualty of the covid-19 restrictions has been the travel industry. Public organisational restructurings undertaken by the major airline companies, including British Airways and Virgin, illustrate the financial pressure this industry is coming under. The intertwined nature of the travel industry means that reduced capacity levels will have a knock-on effect to tour operators, hotels, ancillary travel (car hire, taxis) and travel support services (maintenance, jet fuel, airports). While the forum of choice for international airlines is still Chapter 11 (Avianca and Latam being notable recent examples), Virgin Atlantic has recently become the first user of the new restructuring plan process. As noted above, travel services company Swissport applied for a scheme in order to create capacity for super senior financing. Thomas Cook, one of the UK largest (and oldest) travel agents, collapsed in 2019.
Entertainment and restaurants
The covid-19 pandemic has added pressure to a sector already battling with reduced consumer spending, staff availability concerns due to Brexit and proposed immigration restrictions. Fears over the illness and social distancing measures (including mandatory wearing of masks) has been affecting consumer behaviour with reduced booking levels being experienced across the UK. In broader entertainment, footfall has been significantly impacted and capacity levels in cinemas and theatres will continue to be significantly down on pre-covid-19 levels because of ongoing 'empty seat' social-distancing measures Recent insolvencies have included Casual Dining Group, Carluccio's and the recent CVA and restructuring announced by Pizza Express
Retail and leisure
The retail and leisure industry already had considerable challenges prior to the covid-19 outbreak. The impact of restrictions on mobility and a deterioration in confidence is likely to materially exacerbate these challenges. In particular, the long period of store closures, social distancing measures and travel restrictions will impact footfall and sales. Indoor shopping environments and businesses with sales linked to travel sites or certain age groupings will suffer the impact of limited mobility and confidence. This is all likely to impact secondary stakeholders such as landlords, who will see reduced revenue from tenants; supply chain providers; and local authorities because of reduced business rates revenue. So far, in 2020, there has been a number of significant retail insolvencies including Debenhams, Laura Ashley, Debenhams, Monsoon, Oasis, Cath Kidston, Oak Furniture Land, Victoria's Secret, Go Outdoors, TM Lewin and Bensons for Beds. Retail landlord Intu was the subject of a high-profile insolvency in June 2020.
Industrials and engineering
Industrials are likely to be among the hardest hit, given the duration of supply-side disruptions to date caused by the covid-19 restrictions, the weakness in business and consumer confidence and a fall in the price of oil. The pandemic resulted in the closure or partial shutdown of a number of original equipment manufacturers in China and surrounding areas from January 2020. Because of the global integration of many supply chains, supply disruptions are amplified. Reduced sales because of the effects of the pandemic in end markets is likely to impact business confidence.
iii Practical trends
As discussed in Section III.i, high street retailers and restaurant chains continue to use CVAs to address their portfolios of leases, but increasingly within broader restructurings of their financial liabilities (including through debt-for-equity swaps or schemes of arrangements), and to compromise their pension and business rate liabilities. This trend is likely to continue, but perhaps subject to the added pressures of challenges from landlords (as we have seen for House of Fraser, Debenhams and Arcadia Group, to name but a few).
Schemes of arrangement remain a popular restructuring tool within the restructuring sector and a number of international creditors have recently turned to schemes, including Nyrstar, Noble Group and Agrokor. That said, it remains to be seen what effect Brexit will have on the desirability of schemes as a flexible restructuring tool, particularly in light of the catalogue of reforms taking place across Europe and beyond. While views are mixed, there are indications that some jurisdictions, particularly Germany, may fail to grant recognition to the effects of schemes of arrangements, and as such their efficacy as a restructuring tool in a cross-border context may be somewhat tempered.
We also expect to see an uptick in the prevalence of administrations, or other adverse consequences, triggered by investigations by short sellers, in light of the movement towards covenant-lite instruments. The recent instance of litigation fund Burford Capital, which was the subject of short selling by US hedge fund Muddy Waters, seems to demonstrate that with lower levels of reporting in documentation, there is a growing trend for investors to review details such as accounts and investor presentations with a renewed focus to identify discrepancies, mis-descriptions and even fraudulent behaviour. We think this activity will increase in the coming years.
Another trend that is likely to continue is restructurings triggered by accounting investigations, such as the Steinhoff Group restructuring and the collapse of NMC Health plc. Increased focus is also likely to fall on directors' duties and the challenge (after the fact) of transactions as fraudulent or voidable.
The concept of a 'light-touch' administration is also beginning to gain some popularity following fears that the covid-19 pandemic will result in widespread business failures. Debenhams has taken the lead in experimenting with this newly revived procedure in its ongoing administration and some other companies such as Carluccio's have followed the same path. There is some confidence in the market that the light-touch administration can serve as another useful tool to support the economy through the current crisis, but it remains to be seen whether the process will retain its appeal in the long term.