The Restructuring Review: United Kingdom - England & Wales
Overview of restructuring and insolvency activity
i State of the economy and the finance industry
While the last five years of the political and legislative landscape in the United Kingdom (UK) has been dominated by the British electorate's decision in June 2016 to leave the European Union (EU) (Brexit), this historic event and the final stages of transition that took place over 2020 unfolded in the shadows of the unprecedented global covid-19 pandemic. In March 2020, facing the rapid spread of covid-19, the UK went into lockdown and the government imposed a stay-at-home order banning all non-essential travel and severely curtailing contact with other people. Significant portions of the economy shut down other than essential services and goods. While there was an easing of restrictions in late summer and early autumn 2020, the UK was back in lockdown by the end of the year and restrictions only started easing in April 2021, with limited travel being permitted at the end of May 2021. The development of a covid-19 vaccine and the widespread roll out of the vaccination programme in the UK have given hope that all lockdown and social distancing restrictions will be lifted in the summer of 2021. However, variants of the covid-19 virus continue to spread and it remains to be seen when life in the UK will fully return to pre-covid activity.
The covid-19 pandemic and lockdown measures took their toll on spending, incomes and jobs, tipping the UK economy into recession after negative growth in the first two quarters of 2020. The UK government implemented various financial support measures to help businesses and support jobs throughout the pandemic, including a furlough scheme for employees whereby the government paid the wages of large numbers of employees to prevent mass layoffs in businesses impacted by the pandemic. The government also offered various loan and grant programmes to businesses, many of which have been extended until September 2021. Any further extension of these support measures will likely depend on the recovery of the economy and whether the government will yield to continuing political pressure to support businesses and employees most impacted by the pandemic. In May 2021, reported government spending related to covid-19 support measures was approximately £170 billion, with an estimated lifetime cost of £370 billion.2
The Bank of England has kept its base rate at 0.10 per cent since the beginning of the pandemic as another means to help support the economy. According to the Bank of England's Monetary Policy Report of May 2021, spending in the economy remained at lower than normal levels during lockdown but the wide availability of vaccines is helping the UK economy recover rapidly. Slower growth in the UK economy has kept inflation down over the last year but the Bank of England predicts that inflation should return to around 2 per cent later this year.
With the backdrop of the pandemic, the UK transitioned out of the EU. The UK left the EU 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. During the 11-month transition period, the UK effectively remained in the EU's customs union and single market and continued to obey EU rules while it worked to negotiate a Brexit deal with the EU. The transition period ended on 31 December 2021, with the UK and EU agreeing a trade deal at the last minute, but with little else agreed about the future relationship between the UK and EU. There remains much uncertainty as to the form of the long-term relationship that will exist between the UK and the EU. At the time of writing, there has only been one quarter of reporting on the impact of Brexit in the UK. Given the overlay of the pandemic and continued lockdown during this time, it is difficult to draw any real conclusions about the immediate impact of Brexit, but it was reported that UK trade with the EU significantly constricted, with exports to the EU dropping 18 per cent and imports from the EU dropping 22 per cent from the fourth quarter of 2020 to the first quarter of 2021.
The impact of covid-19 and Brexit on the UK economy is still uncertain. We have seen the UK enter its worst recession since the 1920s in the last year, but predictions are that recovery from covid-19 could be quicker than expected. A key factor in this will be the impact that the run off of the government support programmes will have on businesses and jobs. The support of the government – along with significant liquidity in the financial markets – has allowed many businesses to survive thus far. Many questions remain as to what will happen to businesses once the government support comes to an end. The impact of Brexit will be much longer term and is much harder to predict at this time. In any event, the UK's restructuring and insolvency sector continues to be well prepared to respond to any challenges resulting from these unprecedented events. As explained in more detail in this chapter, the regulatory framework in the UK has undergone fundamental changes in the last year, in particular reforms were introduced to the UK's restructuring and insolvency framework, including a new restructuring plan, which arms the UK with best-in-class tools for implementing restructurings of distressed businesses.
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 2020, there were 12,557 insolvencies in 2020, a 27 per cent decrease on 2019 and the lowest annual level of insolvencies since 1989. This was largely driven by a low number of underlying creditors' voluntary liquidations (CVLs), which reached the lowest annual level since 2007. Compulsory liquidations and company voluntary arrangements (CVAs) to their lowest annual levels since 1973 and 1993 respectively. The company liquidation rate per 10,000 active companies fell to 29.2 in the year ending 2020 in comparison to 42.1 in the year ending 2019.
The reduction in company insolvencies in 2020 was driven in significant part by government measures put in place in response to the coronavirus pandemic as described above and in Section III of this chapter.
The results in the Insolvency Service's Insolvency Statistics report for January to March 2021 show company insolvencies continued to remain lower than pre-pandemic levels. The total number of company insolvencies in England and Wales decreased in the first quarter of 2021 by 22 per cent (with 2,384 insolvencies) when compared with the previous quarter. Similarly, when compared to the previous quarter, the total number of CVLs decreased by 18 per cent (2,047 CVLs in 1Q21). These figures may appear surprising, as many restructuring and insolvency professionals in the UK had anticipated that a lengthy shutdown of the global economy as a result of the covid-19 pandemic would have resulted in significant numbers of insolvencies across a variety of industry sectors.
iii Hot industries
The covid-19 crisis had an enormous impact on business over the last year, impacting some industries much worse than others. As noted above, government support measures helped many of these businesses avoid insolvency but they have still faced significant challenges. The casual dining and hospitality sectors suffered greatly in 2020 as the lockdown resulted in an almost total loss to their cash flow. Many restaurant groups and chains in the UK have used available restructuring tools to survive these challenges. To name a few, Le Pain Quotidien, Carluccio's and the Azzurri Group (owner of ASK Italian, Zizzi and Coco di Mama) all entered and were sold out of administration in 2020. Pizza Express completed a financial restructuring using the new restructuring plan and in parallel, ran a CVA to address its restaurant portfolio. Prezzo also used a CVA to exit a number of its unprofitable branches. With the easing of lockdown measures, this industry seems to be on an upswing at the moment but time will tell if a further right-sizing will be necessary.
The retail and consumer sector had a difficult year as well, at a time when retailers were already suffering from large store portfolios and high fixed costs. Many retail businesses have also relied on CVAs to address their store portfolios, while several were able to renegotiate favourable terms on leases outside the CVA regime. Retailers who managed an online presence fared better than others, including online fashion retailer Boohoo, which recently purchased Debenhams and a number of Arcadia Group shops out of administration. Asos, another online retailer, purchased Topshop and other leading brands out of the Arcadia Group administration as well. Notably Boohoo and Asos are only purchasing brands, which they will maintain with an online presence, but all UK shops will close and all staff will lose their jobs. These closures will have a significant impact on British high streets and it is uncertain if high street retail will ever recover from the pandemic.
Another industry hugely impacted by the covid-19 crisis was airlines around the globe and other companies in the sector such as freight and ground-handling businesses and aircraft leasing companies, which all faced unprecedented levels of financial distress. The governmental travel bans and lockdowns have had a devastating effect on cash flows for these companies and it still is uncertain when the travel industry will return to normal activity. The International Civil Aviation Organisation estimates that the worldwide airline industry had lost around US$370 billion by January 2021 as a result of the pandemic. Some countries supported airlines through the crisis by providing grants and other loans; however, the UK government chose not to provide this financial assistance to the larger airlines in the UK. In July 2020, Virgin Atlantic announced a £1.2 billion rescue plan that received the support of its shareholders, banks, aircraft owners and suppliers and was implemented using the new restructuring plan. IAG, the parent company of British Airways similarly had to raise new money from its shareholders (outside a court process) to help survive the pandemic but it had to cut more than 10,000 staff. Unfortunately, the recovery for the airline business has been slower than expected, with many travel restrictions still in place. Virgin Atlantic is reportedly already seeking additional shareholder support given the longer-than-expected recovery time, and the fallout on major airlines and related sectors is still unfolding as this chapter is being written.
Oil and gas was also hit hard during the pandemic, with prices dropping at least 40 per cent and US oil prices turning 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. Overall demand for oil saw a historic decline in 2020, but many predict that this is only temporary. Demand has started to steadily return in 2021 as the world opens up after nearly a year of lockdown. The International Energy Agency predicts that oil supplies may not rise fast enough to keep pace with the expected demand recovery, but the oil and gas sector has always been very unpredictable. Overall, like in many other business sectors, we saw many companies in the oil and gas space survive 2020 because they were able to take advantage of significant liquidity in the capital markets or had lenders who were willing to amend covenants and extend maturities to give these companies some runway to get out of the pandemic. There may be a second wave of restructuring for these companies if they are not able to recover at the anticipated pace and level.
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 charges3 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,4 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.5
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.6 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.7 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), under Part 26 of the Companies Act 2006 (a scheme of arrangement or scheme) or under Part 26A of the Companies Act 2006 (a restructuring plan or plan) (each discussed in further detail below) to effect a reorganisation or compromise to avoid an administration or liquidation filing. A CVA, scheme or plan 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.8
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, scheme or plan 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.
Recent legal developments
i Impact of Brexit
The transition period
The UK exited the EU on 31 January 2020 ('exit day'). Under the European Union (Withdrawal Agreement) Act 2020, which was granted Royal Assent on 23 January 2020, the existing body of directly applicable EU law was incorporated into UK domestic law after exit day and for the duration of the transition period. Accordingly, 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) continued to have effect in the UK and the EU until 31 December 2020.
The transition period ended on 31 December 2020 without further agreement between the UK and EU on judicial cooperation. Two regulations took effect on 1 January 2021 that have significant relevance for the restructuring and insolvency framework in the UK: (1) the Insolvency (Amendment) (EU Exit) Regulations 2019/146 (the Insolvency EU Exit Regulations) made on 30 January 2019 (the Insolvency EU Exit Regulations); and (2) the Civil Jurisdiction and Judgments (Amendment) (EU Exit) Regulations 2019 (which were published in draft form on 12 December 2018) (the Judgments EU Exit Regulations).
The Insolvency EU Exit Regulations effectively disapply virtually all of the provisions of the Recast Insolvency Regulation and amend the IA1986 and the Insolvency (England and Wales) Rules 2016 (IR 2016), SI 2016/1024. As much of the Recast Insolvency Regulation is based on reciprocity, the Insolvency EU Exit Regulations removed the UK's unilateral obligations to recognise insolvency proceedings in the remaining EU Member States, where UK proceedings or the claims of UK creditors in those EU states would not necessarily be recognised. Thus, the UK is no longer obliged to recognise insolvency proceedings in EU Member States unless a different basis for recognition exists, such as the Cross-Border Insolvency Regulations 2006.9 Pursuant to the Insolvency EU Exit Regulations, the UK retains 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 Judgments EU Exit Regulations revokes 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 amends 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. As the transition period concluded without agreement on the continued operation of the Brussels regime, this reciprocity has been lost, meaning that the Judgments EU Exit Regulations is necessary to avoid inappropriate or unworkable unilateral application of these rules by the UK following exit.11 The UK is not currently a party to the Brussels Convention 1968 and as of the time of writing faces opposition from the European Commission in its bid to join the Lugano Convention 2007.
ii Covid-19-related legislative developments12
Package of legislative measures in response to covid-19
Since the onset of the covid-19 crisis in the UK in March 2020, the UK government has implemented an extensive package of measures (including those set out below) to assist companies (and individuals) facing 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.
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 certain dates prescribed by secondary legislation. The suspension originally applied for the period from 1 March 2020 to 30 September 2020; however, further regulations were subsequently introduced so that a second period of suspension applies from 26 November 2020 to 30 June 2021. 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, indeed, did not apply between 1 October 2020 and 25 November 2020) 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 originally banned creditors from issuing a winding-up petition based on a statutory demand issued between 1 March 2020 and 30 September 2020. However, following multiple subsequent extensions this period is set to expire on 30 June 2021. 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.
Protection from forfeiture on UK commercial leases
Under the Coronavirus Act 2020, which came into force on 25 March 2020, landlords were originally 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; however, following multiple subsequent extensions, this period is set to expire on 30 June 2021. 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 addressed difficulties faced by companies in complying with their normal governance requirements. Originally until 30 September 2020 and then, following multiple subsequent extensions, until 30 March 2021, company meetings could be held by electronic or other means. During this period, shareholders did 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 March 2021 may postpone the meeting until 30 March 2021. Provisions were also made to extend deadlines for filing documents with Companies House and to register a charge granted by a company, though these relaxations have also since expired.
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, was backdated to 1 March 2020 and was originally due to end on 31 October 2020. Following multiple subsequent extensions of the CJRS, the scheme is (at the time of writing) set to expire on 30 September 2021.
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 was originally three weeks but there is no longer any minimum period), 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. For periods ending on or before 30 June 2021 employers can claim 80 per cent of an employee's usual salary for hours not worked, up to a maximum of £2,500 per calendar month. From 1 July 2021, the level of grant will be reduced each month and employers will be asked to contribute towards the cost of their furloughed employees' wages. Employers must continue to pay employer National Insurance contributions and auto-enrolment pension scheme contributions and the formal employment relationship is not affected by the furlough.
iii Major recent reforms to UK restructuring law
The CIGA has also introduced major reforms to UK insolvency law, namely a new scheme of arrangement process (referred to herein as the restructuring plan), a new standalone moratorium procedure and further restrictions on third parties' rights to terminate contracts with distressed companies.
The restructuring plan
The CIGA inserted Part 26A into the Companies Act 2006 to add a new type of scheme of arrangement (referred to as the Part 26A scheme or, more commonly, the restructuring plan) available specifically for companies in financial distress. This restructuring tool is described more fully in Section IV of this chapter.
The Part A1 moratorium
The CIGA inserted Part A1 into the Insolvency Act 1986 to add a new moratorium procedure that is 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. It is a 'debtor in possession' process that is overseen by a monitor, who must be a licensed insolvency practitioner. A Part A1 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 must first be made to court.
A Part A1 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 Part A1 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 Part A1 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 ability to terminate contracts (ipso facto clauses)
Prior to the enactment of the CIGA, the IA86 required 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 so long as the company paid for the continuing supply. The supplier could not insist that the company pay 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 restructuring plan and the moratorium (but not schemes of arrangement given that they are not considered to be insolvency proceedings). 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 Act 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), the relevant legislative provisions were eventually included in the Finance Act 2020 (and supporting secondary legislation), which came into effect on 22 July 2020. The legislation provides that from 1 December 2020, preferential status will apply to taxes paid by employees and customers that a company collects on behalf of HMRC (e.g., VAT, PAYE, employees' national insurance contributions, student loan repayments 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. Taxes subject to Crown preference rank ahead of creditors with floating charge security and unsecured creditors.
The Finance Act 2020 also includes provisions that mean 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 liability arises when HMRC issues a joint liability notice under the Finance Act 2020. Directors who have been issued with a joint liability notice have a right of review by HMRC which, if unsuccessful, triggers a right of appeal to the First-Tier Tax Tribunal.
The Pension Schemes Act 2021
The Pension Schemes Act 2021 (the PSA 2021) received Royal Assent on 11 February 2021, though most of the provisions of the PSA 2021 will require secondary legislation to be brought into force. 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. The criminal sanctions under the PSA 2021 include imprisonment and unlimited fines.
Significant transactions, key developments and most active industries
Since the introduction of the administration regime,13 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 Café Rouge (and other restaurants owned by the Casual Dining Group), 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) was revised in 2015 and the Insolvency Code of Ethics for England and Wales were 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.14 The guidance in the 2015 version of SIP 16 provided 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.
Referrals to the pre-pack pool were, however, entirely voluntary, and the process was not widely used. In an effort to address this issue, the government has introduced the Administration (Restrictions on Disposal etc to Connected Persons) Regulations 2021 (the Regulations), which entered into force on 30 April 2021 and apply to all companies entering administration on or after that date. The Regulations will apply where there is a disposal in administration of all or a substantial part of a company's business or assets and will mean that an administrator is prohibited from completing disposals of property to a person connected with the company within the first eight weeks of the administration unless he or she has obtained either the approval of creditors or a report by an independent third party referred to in the Regulations as the 'evaluator'. A further revised draft of the SIP 16 has also been published to accompany the new regime provided by the Regulations, and the pre-pack pool mechanism no longer features.
The retail industry experienced continued restructuring activity in the second half of 2020 and early 2021, with almost 40,000 retailers ending the fourth quarter of 2020 in significant financial distress.15 Furthermore, PwC's Retail Outlook 2021 reported that 11,120 chain operator outlets closed in the first half of 2020. While administrations account for a majority of these closures, a number of those administrations followed on from unsuccessful CVAs. As in 2019, 2020 also saw a continuation of well-established brands proposing CVAs, including Ann Summers, New Look, All Saints, Clarks, Moss Bros and Monsoon Accessorize. However, the total number of CVAs in 2020 fell by 26.2 per cent compared to 2019, to 259, and decreased in the first quarter of 2021 by 46 per cent when compared to the same quarter in the previous year. Government financial support packages and the suspension of landlord winding-up petitions appear to have been effective in stemming the tide of retail insolvencies, and although high street footfall decreased dramatically as a result of lockdowns imposed in connection with the covid-19 pandemic, this was largely offset by the shift to online sales (particularly in the run up to Christmas), according to PwC's Retail Outlook 2021.
While 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 during lockdowns imposed in 2020 and 2021, most of the financial support measures that the UK government provided to businesses have been extended and remain available as at the time of writing and the full extent of the economic fallout of the covid-19 crisis remains to be seen. However, it will inevitably lead to a reshaping of the high street in its current form, and will likely lead to a resurgence in financially distressed retailers considering CVAs (or restructuring plans) as a possible option to preserve 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. More recently, in Lazari Properties 2 Limited and others v. New Look Retailers Limited, Butters and another,17 the court dismissed the challenge brought by New Look's landlords confirming, in particular, that (1) a CVA is an 'arrangement' within the meaning of the Insolvency Act 1986, and (2) a CVA can provide for differential treatment among creditors voting as one class, provided that certain fairness tests are satisfied.
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,18 following the sanctioning of the scheme by the court.19
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.20 Following schemes in relation to Re Tele Columbus GmbH,21 Re Rodenstock GmbH22 and Primacom Holding GmbH v. A Group of the Senior Lenders & Credit Agricole,23 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'24 and in Re Codere Finance (UK) Limited;25
- 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 others26 and in Re DTEK Finance BV;27
- 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 BV28 and Re Algeco Scotsman PIK;29 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,30 Re Codere,31 Re NN2 Newco,32 Re Swissport Fuelling Ltd33 and Re Port Finance Investment Ltd.34
In the EU, jurisdiction for insolvency and civil matters is governed by the Recast Insolvency Regulations and the Recast Brussels Regulation. Although the application of the Recast Brussels Regulation was never finally determined in relation to schemes, the practice of English courts was to exercise jurisdiction with respect to schemes proposed by companies incorporated in an EU Member State where a relevant exception to the Recast Brussels Regulation applied to permit a deviation from the default position that a defendant should be sued in its jurisdiction of domicile.35
Given that the Recast Brussels Regulation ceases to apply in the UK following the conclusion of the Brexit transition period, the above questions 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.
Additionally, US bankruptcy courts regularly grant recognition to schemes that modify debt governed by New York law and containing New York forum selection clauses.36
iv Restructuring plans
As noted above, the CIGA introduced a restructuring plan process that sits alongside the existing scheme of arrangement. The restructuring plan shares many similarities with the scheme of arrangement but differs in the following key respects. First, the voting requirement for a class of creditors to approve a plan is 75 per cent in value only (i.e., there is no additional requirement, as there is a scheme of arrangement, that a majority in number also support the plan). Second, the court is able to sanction a plan where a class of creditors has not voted in favour of the plan. This can be done where (1) none of the dissenting class members would be worse off under the plan than under the likely alternative factual scenario (e.g., liquidation) known as the 'relevant alternative', and (2) the plan 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 plan should not be allowed to participate and vote at a plan 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 means that a business may be reorganised within the existing group structure and without resorting to a subsequent pre-pack administration, which is often seen in the context of a restructuring effected using a traditional scheme of arrangement.
While the restructuring plan is still a relatively new tool it is gaining in popularity among both foreign and domestic debtors, with six high-profile restructuring plans already coming through the English High Court since the legislation was introduced. The popularity of the process is most likely down to its similarity to the scheme of arrangement that practitioners are already familiar with. Indeed, in the first restructuring plan case that came before the court, the court confirmed that it should adopt the same approach regarding jurisdiction, the concept of compromise or arrangement and the classification of claims.37
Furthermore, the cross-class cramdown feature of the restructuring plan has also been used in the case of Re DeepOcean 1 UK Ltd,38 which provided helpful initial guidance on how the courts might approach this new tool, including commentary that the concept of 'no worse off' in the relevant alternative is a broad one.
i Principal sources
Following the end of the Brexit transition period, the main sources of cross border insolvency law in the UK are: (1) the Cross-Border Insolvency Regulations 2006 (SI 2006/1030) (CBIR), which implement the UNCITRAL Model Law on Cross-Border Insolvency (the Model Law) in Great Britain (i.e., England, Wales and Scotland); (2) Section 426 of the IA86; and (3) the underlying common law. The Recast Insolvency Regulation continued to apply in the UK during the transition period but its key features are no longer applicable in the UK as of 1 January 2021.
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.
i The impact of Brexit
Recognition of insolvency proceedings
The revocation of substantive provisions of the Recast Insolvency Regulation means the end of automatic recognition of UK insolvency processes in the EU. This makes the coordination of UK insolvency proceedings concerning debtors with a multinational European presence significantly more difficult. The loss of reciprocity under the Recast Insolvency Regulation means 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 will not automatically bind the courts of EU Member States unless domestic laws provide for that. English law will not automatically be recognised as the governing law of the insolvency proceeding and the question of whether additional insolvency proceedings can be opened in an EU Member State is determined by the domestic laws of that specific EU Member State.
An officeholder appointed in respect of a UK insolvency proceeding will 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 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 lengthier 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). 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, while the UK was part of the EU, was not on the list of UK insolvency proceedings that were subject to the Recast Insolvency Regulation. Foreign companies will still be able to avail themselves of an English law scheme following Brexit, provided that the English court determines that the sufficient connection test under domestic law is satisfied and can thus exert its jurisdiction.
While the hypothetical questions about whether the jurisdictional tests under the Recast Brussels Regulation apply to English schemes proposed by foreign companies are no longer relevant, 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.
Currently, recognition and enforcement of schemes of arrangement in the EU are essentially 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 will 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.60 However, in other circumstances the recognition of a scheme for a company incorporated in another EU Member State may be less predictable.
In an attempt to mitigate the impact of the UK's exit from the EU without a deal in relation to the recognition of civil judgments, however, the UK acceded to the Hague Convention on Choice of Court Agreements 2005 in its own right, effective from 1 January 2021. 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, and to enforce the resulting judgments in accordance with the Convention. However, 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. Furthermore, there is also a degree of uncertainty as to when EU Member States will consider the UK to have become a 'contracting state' – while the UK enactment of the Hague Convention was carried out with a view to preserving the UK's uninterrupted status as a contracting state from 1 October 2015 (when the EU acceded to it), the European Commission has indicated that it does not agree with this approach.
Furthermore, 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 would be 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 Recast Brussels Regulation. As at the time of writing, the non-EU signatories to the Lugano Convention have approved the UK's accession. However, on 4 May 2021 the European Commission published its assessment of the UK's application in which it recommended that the EU should not provide approval.
Realistically, it is too early to tell whether doubt about the possible recognition of schemes will 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.
Recognition of restructuring plans
Given the similarities of the restructuring plan to the scheme of arrangement, practitioners had generally assumed that the cross-border recognition considerations applicable to schemes would apply to the restructuring plan in the same way. However, following the decision in Re gategroup Guarantee Limited61 it is clear that this is not a safe assumption and the English court has indicated that restructuring plans, unlike schemes of arrangement, are 'insolvency proceedings' for the purpose of the Lugano Convention and therefore fall outside its scope. If EU Member States take the same approach, it would appear unlikely that the Lugano Convention will offer much assistance to debtors seeking recognition of their restructuring plans. On the other hand, as in relation to schemes, where a debtor proposes a restructuring plan compromising English law governed debt, this would still appear to have a good prospect of being recognised across the EU pursuant to normal rules of private international law.
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
The National Security and Investment Act 2021 (NSIA), which received royal assent on 29 April 2021 and is expected to take effect later in 2021, introduces a mandatory foreign direct investment notification regime in the UK for transactions in certain sectors to protect national security. The NSIA will need to be considered in connection with relevant distressed M&A transactions, and clearance sought if required, as failure to comply with the notification requirements could result in such transactions being rendered void.
1 This chapter was originally drafted by Dominic McCahill, a former partner at Skadden, Arps, Slate, Meagher & Flom (UK) LLP, Jonathan Akinluyi and Olivia Bushell, former associates at Skadden, Arps, Slate, Meagher & Flom (UK) LLP and Annabelle Atkins, a former trainee solicitor at Skadden, Arps, Slate, Meagher & Flom (UK) LLP, and has been updated by Peter K Newman, a partner, Nicole Stephansen, a counsel, and Riccardo Alonzi and Raphaella Ricciardi, each associates, at Skadden, Arps, Slate, Meagher & Flom (UK) LLP.
2 As reported by the National Audit Office (NAO) in May 2021.
3 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.
4 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.
5 Paragraph 3(1), Schedule B1 to the IA86.
6 Paragraph 3(3), Schedule B1 to the IA86.
7 Paragraph 3(4), Schedule B1 to the IA86.
8 BTI 2014 LLC v. Sequana SA  EWCA Civ 112. An appeal against this judgment was heard in the Supreme Court on 4 and 5 May 2021 and, at the time of writing, is currently awaiting judgment.
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 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 Please note that the time periods for application of the legislative measures described in this Section have been constantly evolving and the applicable periods for many provisions have been extended multiple times and may be out of date by the time this goes to print. Accordingly, readers are encouraged to confirm the state of play at the time of considering whether any protections still apply.
13 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.
14 The 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.
15 According to the Retail Gazette website accessed on 31 May 2021 (https://www.retailgazette.co.uk/blog/2020/12/impact-of-coronavirus-hits-home-for-retailers-with-almost-40000-in-significant-financial-distress/).
16  EWHC 2441 (Ch).
17  EWHC 1209 (Ch).
18 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 restructuring plan.
19 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.
20 Following the success of schemes of arrangement in the UK, a number of jurisdictions (such as the Netherlands and Singapore) have recently implemented reforms to their restructuring frameworks. Such reforms have included the adoption of a procedure similar or identical to the UK's scheme of arrangement in part or in full 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.
21  EWHC 249 (Ch).
22  EWHC 1104 (Ch).
23  EWHC 164 (Ch).
24  EWHC 3299 (Ch).
25  EWHC 3778 (Ch).
26  EWHC 3849 (Ch).
27  EWHC 1164 (Ch).
28  EWHC 3800 (Ch).
29  EWHC 2236 (Ch).
30  EWHC 1233 (Ch).
31  EWHC 3778 (Ch).
32  EWHC 1917 (Ch).
33  EWHC 1499 (Ch). Notably, the scheme company was originally an English company guarantor as opposed to a borrower. The English company entered into a deed of contribution with the borrowers in order create a primary co-obligation with the borrowers and to create 'ricochet' claims.
34  EWHC 378 (Ch).
35 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.
36 See e.g., In re Avanti, 582 B.R. 603 (Bankr. S.D.N.Y. 2018); In re Agrokor D.D., 591 B.R. 163, 196 (Bankr. S.D.N.Y. 2018) ('U.S. Bankruptcy courts have long permitted foreign bankruptcy proceedings to bind U.S. creditors even where the debtor entered into a contract governed by New York law and agreed to a New York forum selection clause').
37 Re Virgin Atlantic Airways Ltd  EWHC 2191 (Ch).
38  EWHC 138 (Ch).
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 is able to seek judicial assistance in the UK pursuant to Section 426 of the IA86.
60 It is also 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 adopted 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.
61  EWHC 304 (Ch).