The Restructuring Review: United Kingdom - England & Wales
Overview of restructuring and insolvency activity
i State of the economy and the finance industry
After suffering a historic economic downturn in 2020, the UK experienced a significant economic recovery in 2021, with gross domestic product growth of 7.4 per cent, the Financial Times Stock Exchange 100 Index increasing by 14.2 per cent and a return to pre-pandemic levels of growth by January 2022.2 This is likely due in large part to the successful rollout of covid-19 vaccines, the lifting of covid-19 lockdown restrictions and the reopening of the economy. The UK government provided an estimated £400 billion of direct support for the UK economy during the pandemic,3 which helped businesses and the economy weather the pandemic.
A number of factors arising over the course of 2021 and continuing into 2022 are now driving a slowdown in economic growth. Government support measures implemented during the pandemic were largely phased out during the summer of 2021 as pandemic restrictions were lifted. In February 2022, the government adopted a 'living with covid-19' strategy for removing any remaining legal restrictions; as part of this plan, the final remaining support payments, for self-isolation and the Coronavirus Statutory Sick Pay Rebate Scheme, ended in February and March 2022. Business support programmes, including temporary VAT deferral and reduced VAT rates of 12.5 per cent for leisure, hotels and hospitality, also ended on 31 March 2022.
In addition to pandemic-related difficulties, the immediate impact of the UK exiting the EU on 31 December 2020 (Brexit) was felt during the course of 2021. Although the UK and EU agreed the Trade and Cooperation Agreement on the eve of Brexit, disruptions to the free movement of goods have impacted the UK, and trade with the EU has been significantly constricted. According to the Office for National Statistics, total exports of goods and services to the rest of the world decreased 11.5 per cent from £699.3 billion in 2019 to £619 billion in 2021.4
In addition, on 24 February 2022, war broke out in Ukraine with the invasion of Russian military forces. This has led to sanctions from the UK (as well as the EU and US) on Russian-connected businesses and individuals. The war has already triggered a steep increase in commodity, oil and gas prices and is predicted to exacerbate the strain on households and businesses in the UK in the face of steeply rising energy costs and general cost of goods. According to the Bank of England's Monetary Policy Report of May 2022, higher energy prices and global supply problems have pushed inflation well above the 2 per cent Consumer Prices Index (CPI) inflation target.5 CPI inflation rose to 5.4 per cent in 2021 and, as at May 2022, inflation has reached 9 per cent – its highest level in 40 years.6 The Bank of England kept the bank rate at 0.1 per cent from the beginning of the pandemic in March 2020 as a means of helping support the economy,7 until it increased interest rates to 0.5 per cent on 3 February 2022, further increased them to 0.75 per cent in March 2022 and raised them again to 1 per cent in May 2022.8
The confluence of these factors means that the positive economic trends of 2021 might not continue throughout 2022, although at the time of writing this has led only to a limited uptick in the number of insolvency and restructuring filings in the UK. Insolvency filings in 2021 were below pre-pandemic levels but overall are on the rise compared with 2020.
Notably, 2021 saw companies and practitioners beginning to utilise the new restructuring plan legislation that was introduced in 2020. The restructuring plan is proving to be a useful tool, and the developing jurisprudence is providing clarity as to how the plan will work in practice. As the geopolitical and domestic political and economic developments facing the UK and the world continue to play out in 2022, the UK has available an extensive toolkit, including the new restructuring plan, to address resulting corporate illiquidity and insolvency.
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 2021, there were 14,048 company insolvencies in 2021 – approximately 30 per cent lower than in 2019. The number of overall insolvencies, including creditors' voluntary liquidations (CVLs), compulsory liquidations, company voluntary arrangements (CVAs) and administrations, increased by 12 per cent between 2020 and 2021. However, the total number of corporate insolvencies in 2021 remained lower than before the covid-19 pandemic. The increase from 2020 to 2021 was driven by an increase in CVLs, which accounted for 90 per cent of company insolvencies and reached the highest annual number that have occurred since 2009. The number of CVLs in 2021 was only slightly higher than that in 2019 and was consistent with an increasing trend in CVL numbers before the pandemic. All other types of company insolvencies were lower in 2021 than both 2020 and pre-pandemic levels. CVLs are a voluntary liquidation procedure that is initiated by the company that will ultimately result in the sale or liquidation of the company, whereby administration and CVAs are processes used to restructure a company so that it may continue to operate as a going concern. All of these processes are driven by the company, but which one is used will depend on the circumstances and what the company is trying to achieve. The annual number of compulsory liquidations was the lowest since the start of the series in 1960, which is not surprising given that the government's temporary ban on the issuance of statutory demands and winding-up petitions was in place during most of the pandemic and only recently expired on 31 March 2022. Increases in insolvencies were seen across most industries in 2021 compared with 2020. Several sectors showed increases above the overall annual increase of 11 per cent, including professional, scientific and technical activities (up 35 per cent) and construction (up 25 per cent).
The Insolvency Service's Insolvency Statistics report for January to March 2022 shows that the total number of company insolvencies in England and Wales increased in the first quarter of 2022 by 6 percent (to 4,896 insolvencies) when compared with the previous quarter. Yet company insolvencies continued to remain lower than pre-pandemic levels. The number of CVLs increased to the highest quarterly level since the start of the series in 1960 (with 4,274 CVLs in the first quarter of 2022). The number of compulsory liquidations also increased but remained lower than levels seen before the covid-19 pandemic.
iii Hot industries
The covid-19 pandemic had an enormous impact on businesses over the past two years, but the effects varied between industries, with some suffering much more than others. As noted above, government support measures helped many businesses avoid insolvency, but they have still faced significant challenges. The casual dining and hospitality sectors suffered greatly in 2020 and the first six months of 2021 as the coronavirus restrictions, including no or limited dine-in trade and various other measures, remained in place until June 2021. All restrictions were lifted on 19 July 2021, followed by a corresponding surge in retail and hospitality sales. However, UK restaurant insolvencies jumped by 31 per cent in the third quarter of 20219 and by another 20 per cent to 354 in the fourth quarter of 2021.10 Many restaurants found themselves with a cash flow crisis, with sales that did not recover quickly enough following lockdown closures to compensate for mounting expenses. These increasing restaurant costs included repayment of government loans, refurbishment of premises, increased supply chain costs and resumption of the 20 per cent VAT bill on 1 April 2022, after VAT had been held at a reduced hospitality rate of 5 per cent from 15 July 2020 to 30 September 2021 and then at 12.5 per cent through to 31 March 2022. In addition, the end of the furlough scheme, which supported employers and their employees while restaurants were closed during the pandemic, ended in September 2021, with costs no longer subsidised by the government. Further, emergence of the omicron variant once again spurred the government to announce temporary and precautionary restrictions on 30 November 2021, which harmed consumer spending over the holiday period. Many restaurant groups and chains in the UK used available restructuring tools to manage in the face of these challenges. For example, in 2020, Pizza Express completed a financial restructuring using the new restructuring plan and a parallel CVA to address its restaurant portfolio. CVAs continued to be popular in 2021 and were used to reorganise company debt by restaurant groups Market Halls and Drake & Morgan and by Greene King's Loch Fyne business to exit leases on 11 sites that the brewer and pub operator decided to close due to the pandemic.11 The ban on creditors filing winding-up petitions was lifted in March 2022, so this now leaves companies vulnerable to creditor action as well.
The non-essential retail and consumer sector also had a difficult year. Successive lockdowns and supply chain issues compounded existing concerns at a time when retailers with large store portfolios were already suffering from high fixed costs of physical retail stores. The retail industry experienced continued restructuring activity in 2021 but at a slower rate than in 2020. PWC's Retail Outlook for 202212 reported that 10,059 chain operator outlets closed in 2021, marking 313 fewer closures than in 2020, and asserted that closure numbers for 2022 are expected to slow further. High-end fashion house Ralph & Russo went into administration in March 2021, as did Amanda Wakeley in May 2021. UK retail sales unexpectedly fell in the first quarter of 2022, raising concerns of sluggish economic growth even before the Russian invasion of Ukraine. Trinity Group, a Chinese-owned upmarket fashion conglomerate and owner of several fashion brands, including Kent & Curwen, Gieves & Hawkes, D'Urban (Japan) and Cerruti, went into administration early in January 2022. Victoria's Secret UK, the underwear retailer, went into administration in June 2020 and is now being liquidated, having spun off its online business, which will continue to trade. Many retail businesses have also relied on CVAs to address their store portfolios, whereas several were able to renegotiate favourable terms on leases outside the CVA regime. However, the total number of CVAs in 2021 fell by 55.6 per cent compared with 2020.13 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 2022.14
Airlines around the globe and other companies in the air transportation sector, such as freight and ground handling businesses and aircraft leasing companies, were hugely impacted by the covid-19 crisis and faced significant levels of financial distress. 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 lost around US$137.7 billion in 2020 and US$51.8 billion in 2021, with a total of US$201 billion in industry losses in 2020 to 2022 as a result of the pandemic.15 IAG, the parent company of British Airways and Aer Lingus, raised over €2 billion through the issuance of unsecured and convertible bonds in 2021 to help survive the pandemic,16 but it still had to cut more than 10,000 staff.17 IAG recorded a loss of €2.9 billion in 2021 due to continuing international travel restrictions, the emergence of new variants and expensive testing requirements. The airline business is expected to rebound in 2022 as international travel restrictions are relaxed, although, at the time of writing, airlines are struggling to cope with increased demand as travel restrictions have lifted, largely due to staff shortages.18
The oil and gas industry has been extremely volatile during the pandemic, and the negative impact of environmental, social and governmental initiatives and the energy transition on the industry has required companies to refocus and address sustainability issues. Prices significantly dropped at the beginning of the pandemic in 2020 and US oil prices even turned negative for the first time in history in April 2020. Demand steadily increased in 2021 as the global economy rebounded from lockdowns. Oil prices rose by 50 per cent in 2021 and have spiked even higher as a lack of production capacity to meet demand coincides with supply disruptions from the Russian invasion of Ukraine and related sanctions. Oil supplies have not kept pace with demand as economies around the globe recover. The Organization of the Petroleum Exporting Countries' monthly report for April 2022 projects that world demand for 2022 will rise by 3.67 million barrels per day. Overall, as with many other business sectors, many companies in the oil and gas space survived 2020 and 2021 by taking advantage of significant liquidity in the capital markets or obtaining relief from existing lenders to give themselves the time to recover from the economic shocks and slack demand of the pandemic. With rising demand and oil prices, many of these companies might survive without further restructuring.
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 charges19 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 creditors20 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 when the debtor is in default. Further, although 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., when the company is unable to pay its debts as and when they fall due) and the balance sheet test (i.e., when 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 when 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. If 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.21
The administrator may perform their functions in pursuit of the objective stated in (2) above only if they believe that it is not reasonably practicable to achieve the objective stated in (1) and that to do so would achieve a better result for the creditors as a whole.22 The administrator may, in turn, pursue the objective stated in (3) above only if they believe that it is not reasonably practicable to achieve the objectives stated in (1) or (2) and that to do so would not unnecessarily harm the interests of the creditors of the company as a whole.23 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, when a company is or is likely to become insolvent, the directors must have regard to the interests of the company's creditors.24
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 the future and find themselves personally liable for wrongful trading in circumstances in which 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 if, knowing that there was no reasonable prospect of the company avoiding insolvent liquidation, they failed to take every step to minimise losses to creditors. Directors may also face personal liability in circumstances in which they have been found guilty of fraudulent trading under Section 213 of the IA86 or misfeasance under Section 212 of the IA86 or if 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 whereby 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 in the case of a transaction at an undervalue, however, 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 that 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 if the charge was created in favour of a connected person.
Recent legal developments
i Impact of Brexit
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'. The transition period ended on 31 December 2020 without further agreement between the UK and EU on judicial cooperation and with no subsequent agreement at the time of writing. Two regulations took effect on 1 January 2021 that have significant relevance for the restructuring and insolvency framework in the UK and cross-border restructurings involving 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 (the Judgments EU Exit Regulations).
The Insolvency EU Exit Regulations effectively disapply virtually all of the provisions of Regulation (EU) 2015/848 on Insolvency Proceedings (the Recast Insolvency Regulation), which had effect during the transition period, 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 2006.25 Pursuant to the Insolvency EU Exit Regulations, the UK retains a modified version of the Recast Insolvency Regulation's jurisdictional tests of centre of main interests (COMI) and establishment as bases for jurisdiction to open insolvency proceedings where the debtor's COMI is in the UK or when 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. As is discussed further in Section VI, the position on recognition of UK insolvency proceedings in the EU remains somewhat unclear, as the Recast Insolvency Regulation will not apply in the EU in respect of UK insolvency proceedings relating to a debtor, and few EU Member States have implemented the UNCITRAL Model Law on Cross-Border Insolvency (which was incorporated into English law pursuant to the Cross-Border Insolvency Regulations 2006).
The Judgments EU Exit Regulations revoke the Recast Brussels Regulation and its predecessor, Council Regulation (EC) No. 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (which applies to judgments given in proceedings commenced before 10 January 2015) (the 2001 Judgments Regulation), and amends the domestic legislation26 implementing the Brussels Convention 1968, the 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 are necessary to avoid inappropriate or unworkable unilateral application of these rules by the UK following its exit.27 As is further discussed in Section VI, the UK is not currently a party to the Brussels Convention 1968 and, at the time of writing, the UK's bid to join the Lugano Convention 2007 is being blocked by the European Commission on behalf of the EU. As is discussed further below, the UK and EU are both parties to the 2005 Hague Convention on Choice of Court Agreements (the Hague Convention), which the UK re-joined in its own right with effect from 1 January 2021 (and was effected into UK law pursuant to the Private International Law (Implementation of Agreements) Act 2020). The Hague Convention contains provisions regarding recognition and enforcement of judgments when a contract has an exclusive jurisdiction clause but not when there is a non-exclusive jurisdiction clause (nor provision for allocating jurisdiction in such circumstances). Ambiguity remains with regard to asymmetrical jurisdiction clauses.
ii Covid-19-related legislative developments
The temporary measures the UK government implemented in respect of the covid-19 crisis have now expired. In particular, (1) the temporary suspension of the wrongful trading regime expired on 30 June 2021, (2) the temporary ban on the issuance of statutory demands and winding-up petitions expired on 31 March 2022, (3) the protection from forfeiture on UK commercial leases expired on 25 March 2022 in England (but has been retained in Wales until 24 September 2022),28 (4) the ability to postpone annual general meetings expired on 30 March 2021 and (5) the furlough scheme expired on 30 September 2021.
iii Sanctions against Russia29
Following the Russian invasion of Ukraine in February 2022, the UK expanded the existing sanctions regime contained in the Russia (Sanctions) (EU Exit) Regulations 2019 (SI 2019/855), which came fully into force on 31 December 2020 (as subsequently amended). At the time of writing, sanctions against Russia (and, in certain circumstances, Belarus and certain regions internationally recognised as part of Ukraine) include asset freezes, transport restrictions and financial sanctions. This includes financial services sanctions that prohibit dealing in certain shares and bonds issued by sanctioned Russian banks after 1 August 2014, issued by sanctioned Russian companies after 12 September 2014 and issued by all other Russian entities after 1 March 2022. In addition, no new loans may be entered into (or rolled over) when made by or to sanctioned Russian banks and companies, the Russian Government or, from 1 March 2022, any Russian entity, nor may any UK credit or financial institution continue a correspondent banking relationship with any 'designated person'. The UK sanctions (together with corresponding US and EU sanctions) will likely lead to liquidity stress for UK companies with significant exposure to Russian assets and refinancing issues for UK companies with exposure to Russian debt.
iv Major recent reforms to UK restructuring law
The Corporate Insolvency and Governance Act 2020 (the CIGA), which entered into force on 26 June 2020, has introduced major reforms to UK insolvency law, namely a new scheme of arrangement process (referred to herein as the restructuring plan), a new stand-alone 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.
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 (1) the monitor's remuneration or expenses, (2) goods and services supplied during the moratorium, (3) rent in respect of the moratorium period, (4) wages or salary, (5) redundancy payments, and (6) debts or liabilities arising under contracts involving financial services.
Debts or liabilities arising under contracts involving financial services 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. 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 if the monitor believes that the moratorium is no longer likely to result in the rescue of the company as a going concern, or if 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, as 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 cases of hardship, a supplier may apply to court for relief. The regime does not extend to financial contracts such as loans.
Other legislative developments
The National Security and Investment Act 2021 (NSIA), which came into force on 4 January 2022, 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 merger and acquisition transactions, and government clearance sought if required, as failure to comply with the notification requirements could result in such transactions being rendered void.
Significant transactions, key developments and most active industries
Since the introduction of the administration regime,30 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 when 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 might be the only viable restructuring option when a company has limited liquidity but has valuable business assets including the company's goodwill and employees. In such circumstances, a pre-pack provides a relatively rapid and straightforward business transfer without the damaging publicity and consequent harm to reputation caused by a typical insolvency process. As a result, dozens of high street names have been resurrected under pre-pack deals in the past few years, including La Senza, JJB Sports, Agent Provocateur, Bernard Matthews, Silentnight, Prezzo and Fazenda. 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. When 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.31 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 entirely voluntary and the process was not widely used. In an effort to address this issue, the government 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 apply when 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 they have 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.
In a CVA, a company seeks unsecured creditor approval of a potential compromise. All unsecured creditors are classified together with one vote on a proposed compromise. The CVA requires no court involvement unless the CVA is challenged after it has been approved. CVAs are well suited for businesses with significant lease obligations, including restaurant chains and 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. CVAs were used by many major retail brands in 2020 to manage their liabilities, and this trend continued in 2021 with well-established brands proposing CVAs, including Regis UK Limited, Dune Group and Total Fitness.
Recently, there have been significant landlord challenges to CVAs, but these have not been successful, and the developing CVA case law continues to allow CVAs to be a flexible restructuring tool. For example, in Discovery (Northampton) Limited v. Debenhams Retail Limited,32 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,33 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. These principles were subsequently upheld in the case of Re Regis UK Limited,34 although the CVA in that case was ultimately overturned for other reasons.
Often, a CVA is filed in parallel with a scheme of arrangement for companies that need to restructure both operational and financial debt. The new restructuring plan allows companies to restructure lease liabilities together with financial liabilities and also offers additional flexibility to a CVA, including a cramdown feature that could allow a company to manage lease liabilities without landlord consent if various conditions are met. As is discussed below, the Re Virgin Active Holdings Ltd restructuring plan compromised landlord liabilities against their objection. The use of one tool versus the other will largely depend on the circumstances facing the relevant company, but it remains to be seen whether the restructuring plan might overtake CVAs as the preferred tool for lease liability management.
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 the objection of non-consenting creditors,35 following the sanctioning of the scheme by the court.
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. Following schemes in relation to Re Tele Columbus GmbH,36 Re Rodenstock GmbH37 and Primacom Holding GmbH v. A Group of the Senior Lenders & Credit Agricole,38 foreign companies have availed themselves of English law schemes when they can demonstrate a sufficient connection with England and Wales and when the scheme order would be effective in the jurisdiction in which the company would otherwise be wound up. A variety of creative approaches have been used 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'39 and in Re Codere Finance (UK) Limited;40 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 others41 and Re DTEK Finance BV;42 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 BV43 and Re Algeco Scotsman PIK;44 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,45 Re Codere,46 Re NN2 Newco,47 Re Swissport Fuelling Ltd48 and Re Port Finance Investment Ltd.49
Recognition of schemes in the EU is uncertain after Brexit since the Recast Brussels Regulation has ceased to apply in the UK. However, as is discussed further below, private international law may still serve as a basis for scheme recognition in EU Member States, so this has not yet caused an issue in post-Brexit schemes. In addition, US bankruptcy courts regularly grant recognition to schemes that modify debt governed by New York law and contain New York forum selection clauses.50
Recently, courts have been focused on whether fees offered to certain creditors in schemes, including consent fees (for signing an agreement in support of the restructuring), work fees (for creditors who take a lead role in the negotiations) and backstop fees (for creditors who agree to backstop new financing to the company), are disguised consideration that may fracture a class. There have been no successful challenges to fees in recent schemes (see Codere Finance 2 (UK) Limited)51 but courts have demonstrated that they want clear evidence as to the basis for these fees and to whom they are being paid. Courts will also consider the aggregate fees being paid and overall recovery to creditors receiving those fees as compared with those who are not receiving the fees.
The use of a scheme to restructure a company is a well-trodden course, and schemes are still the favoured restructuring tool in the UK, with 12 schemes being filed in 2021 and three schemes being filed in 2022 (at the time of writing).
iv Restructuring plans
As is 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. In the first restructuring plan case that came before the court, the court confirmed that it should adopt the same approach as it does in schemes of arrangement with regard to analysing jurisdiction, the concept of compromise or arrangement, and the classification of claims.52 Accordingly, a significant body of scheme case law will inform implementation of the restructuring plan legislation. Nonetheless, the restructuring plan differs from schemes in the following key respects.
First, a company must show that it is in financial distress to use the restructuring plan. Second, 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). Third, the court is able to sanction a plan if a class of creditors has not voted in favour of the plan. This can be done when (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. Fourth, 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 might happen when the shareholders or creditors do not have an economic interest in the company (i.e., they are 'out of the money'). This latter 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.
The restructuring plan is gaining in popularity among both foreign and domestic debtors. Eight restructuring plans have been sanctioned by the English court – Re Virgin Atlantic Airways Ltd,53 Re Pizzaexpress Finance 2 Plc,54 Re Premier Oil plc,55 Re gategroup Guarantee Ltd,56 Re Virgin Active Holdings Ltd,57 Re Amicus Finance plc,58 Re DeepOcean 1 UK Ltd59 and Re Smile Telecoms Holdings Ltd60 – and the court has declined to sanction one: Re Hurricane Energy plc.61
As an initial matter, courts are finding that the financial distress test (i.e., the company has or will encounter financial difficulties) is broad. In Re DeepOcean 1 UK Ltd, Justice Trower found that the test should be widely construed and that a loss-making company using the restructuring plan to effectuate a solvent winddown satisfies the test.62
Three of these plans (Re DeepOcean 1 UK Ltd, Re Virgin Active Holdings Ltd and Re Amicus Finance plc) used the new cross-class cramdown feature, which is a key element of the restructuring plan. In these cases, the courts reaffirmed that a company can cram down a class of creditors if (1) they are 'no worse off' than in the relevant alternative, which is the alternative outcome if the plan were not sanctioned (most likely a liquidation), and (2) at least one 'in the money' class has accepted the plan. The company will have to submit sufficient evidence explaining the relevant alternative and valuation evidence that the dissenting creditors are no worse off. Challenging creditors will also have to submit their own thorough valuation evidence to challenge a company's valuation. In Re Hurricane Energy plc, the court (for the first time) declined to exercise its discretion to cram down a dissenting class since the plan company had failed to show that the relevant alternative would leave the dissenting class no worse off, as it was not clear that insolvency was the only alternative to the plan.63
One plan (Re Smile Telecoms Holdings Ltd) successfully excluded out-of-the-money classes, which means these stakeholders did not have a vote. In this case, the court found that both junior creditors and shareholders had no genuine economic interest in the company and could be excluded from plan meetings and still be compromised. The court laid out a number of principles that should be applied to determine when a class could be so excluded.64 Notably, valuation evidence was key here. It is clear that valuation evidence will be a critical factor in restructuring plans, whether to take advantage of the cross-class cramdown or to exclude stakeholders from the vote altogether.
When it comes to distributions under the plan and the value created by the restructuring, known as the 'restructuring surplus', courts have found that out-of-the-money creditors may not be entitled to this value, but shareholders providing new money in the restructuring may share in it. In Re Virgin Active Holdings Ltd, Justice Snowden found that when valuation evidence shows that value clearly breaks in the senior class, that class has the ability to determine how the restructuring surplus is distributed.65
As is discussed further in Section IV.ii, 'Recognition of restructuring plans' below, Re gategroup Guarantee Ltd66 has also thrown up an interesting point on cross-border recognition of restructuring plans. The court held that restructuring plans, unlike schemes of arrangement, are to be considered insolvency proceedings for the purposes of the Lugano Convention.67 Although this does not have direct application currently (as the UK is not a party to the Lugano Convention at the time of writing), this might prove persuasive when seeking cross-border recognition of a restructuring plan in the future.
Although the initial restructuring plan decisions have helped to give comfort to companies seeking to utilise the new tool, a number of questions remain when it comes to the use of restructuring plans. Some of these points are currently hotly debated, including, among others, how the courts will interpret the lack of absolute priority rule68 in the CIGA legislation, how the restructuring surplus can be distributed and how the court might use its discretion to permit cross-class cramdown. That said, the restructuring plan has already proved to be a flexible tool, and it is likely that it will become an increasingly popular choice to implement financial and operational restructurings.
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 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 Regulation). 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 if 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 used successfully to obtain recognition from the English courts of insolvency proceedings in the British Virgin Islands,69 Denmark,70 Switzerland,71 Antigua,72 Croatia73 and Azerbaijan,74 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 plc75 and Re HIH Casualty and General Insurance Ltd; McMahon v. McGrath,76 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 other77 and Singularis Holdings Ltd v. PricewaterhouseCoopers78 the English courts have taken a more cautious approach, considering conflicts between the principles of modified universalism and common law principles on the recognition and enforcement of foreign judgments in personam79 and the rule in Antony Gibbs & Sons v. Societe Industrielle et Commerciale des Metaux80 (the Gibbs rule).81
In Rubin v. Eurofinance and 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, that made a claim or counterclaim in the foreign proceedings, 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 that would be available as a matter of foreign law if such relief is not available under English law. In Fibria Celulose S/A v. Pan Ocean Co. Ltd,82 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 if 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,83 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 that 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. Justice Hildyard stated:
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.84
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'.85 The Supreme Court declined to hear the appeal of this decision.
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,86 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.
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. 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 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 in which the UK process has followed and applied COMI rules in line with the Recast Insolvency Regulation. However, in cases in which 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. If EU Member States have passed laws based on the Model Law, this might help UK insolvency officeholders seeking recognition. However, 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 is 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 in respect of 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 if possible.87
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.
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. To date, EU Member States have not had an issue 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.88 However, in other circumstances, the recognition of a scheme for a company incorporated in another EU Member State might 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 in its own right, effective from 1 January 2021. The continuation of the UK's participation in the Hague Convention means that courts in EU Member States are 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 in respect of 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'. Although the UK's 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, although the UK automatically left the Lugano Convention upon Brexit, on 8 April 2020, the UK applied to accede to the Lugano Convention in its own right at the end of the transition period. The Lugano Convention provides a comparable structure with the Recast Brussels Regulation by ensuring that parties' contractual choice of jurisdiction is enforced and that judgments handed down from Member States' courts in civil and commercial matters are recognised and enforceable across the EU and in 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 would ensure the continuation of the Brussels regime on jurisdiction and the enforcement of judgments. Nevertheless, although the non-EU signatories to the Lugano Convention approved the UK's accession, in June 2021, the European Commission formally blocked the UK's accession to the Lugano Convention. The EU has asserted that the Lugano Convention is a complementary measure for European Free Trade Association and European Economic Area countries that possess close regulatory integration with the EU based on a high level of mutual trust, and requires a connection to the EU's single market. Thus, the UK's reintegration within the Lugano regime of mutual recognition of civil judgments does not appear likely in the near future.
In the absence of Lugano, accession to the 2019 Hague Convention on Recognition and Enforcement of Foreign Judgments in Civil or Commercial Matters might present an attractive alternative to the UK. The 2019 Hague Convention provides a partial solution by introducing a single global framework across all signatories for the recognition and enforcement of civil court decisions given in accordance with jurisdiction clauses, although it possesses a risk of parallel proceedings and may not apply to exclusive jurisdiction clauses entered into before 1 January 2021, among certain other limitations. This treaty was concluded in July 2019 but has not yet come into force. The US, Israel, Costa Rica, Russia, Ukraine and Uruguay have all expressed their intention to ratify the treaty, as has the EU as of 16 July 2021, when the EU Commission published its proposal for a European Council decision in favour of accession. Although the UK has not taken an official position at the time of writing, this treaty might provide the best long-term solution for cross-border recognition and enforcement of judgments.
Recognition of restructuring plans
Given the similarities of the restructuring plan to the scheme of arrangement, practitioners generally hoped 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 Limited89 this is likely not a safe assumption, as 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. Although the UK is not a party to the Lugano Convention at the time of writing, if EU Member States take the same approach, it is unlikely that the Lugano Convention would offer much assistance to debtors seeking recognition of their restructuring plans. On the other hand, in relation to schemes, whereby a debtor proposes a restructuring plan compromising English law-governed debt, this still appears to have a good prospect of being recognised across the EU pursuant to rules of private international law.
1 Peter K Newman and Nicole Stephansen are partners and Graham Dench and Raphaella S Ricciardi are associates at Skadden, Arps, Slate, Meagher & Flom (UK) LLP. This chapter includes, with relevant updates, portions of a predecessor chapter drafted by Dominic McCahill, a former partner, and Jonathan Akinluyi and Olivia Bushell, former associates, at Skadden, Arps, Slate, Meagher & Flom (UK) LLP.
2 ONS, Understanding the UK Economy, 12 April 2022.
3 Hansard, HC Deb. vol.705 col.1143, 16 December 2021.
4 ONS, UK trade in goods, year in review: 2021, 12 April 2022.
5 Bank of England Monetary Policy Report May 2022 accessed on 31 May 2022 at https://www.bankofengland.co.uk/-/media/boe/files/monetary-policy-report/2022/may/monetary-policy-report-may-2022.pdf, p.6.
6 Bank of England Monetary Policy Report May 2022 accessed on 31 May 2022 at https://www.bankofengland.co.uk/-/media/boe/files/monetary-policy-report/2022/may/monetary-policy-report-may-2022.pdf, p.32.
7 Monetary Policy Summary, November 2021 accessed on 31 April 2022 at https://www.bankofengland.co.uk/monetary-policy-report/2021/november-2021, p.2.
8 Bank of England Monetary Policy Report May 2022 accessed on 31 May 2022 at https://www.bankofengland.co.uk/-/media/boe/files/monetary-policy-report/2022/may/monetary-policy-report-may-2022.pdf, p.6.
9 UHY Hacker Young, 'UK restaurant insolvencies jump 31% in last quarter', 22 November 2021, https://www.uhy-uk.com/insights/uk-restaurant-insolvencies-jump-last-quarter.
10 UHY Hacker Young, 'Restaurant insolvencies jump by a fifth to reach highest levels since pandemic began', 15 March 2022, https://www.uhy-uk.com/insights/uk-restaurant-insolvencies-jump-last-quarter.
11 Hospitality round-up accessed on 31 April 2022 at https://www.bighospitality.co.uk/tag/keyword/Hospitality/CVA.
12 Retail Outlook - 2022 - PwC UK accessed on 31 April 2022 at https://www.pwc.co.uk/industries/retail-consumer/insights/retail-outlook.html#:~:text=Winning%20in%202022,labour%20shortages%20and%20supply%20chains.
13 The Insolvency Service Company Insolvency Statistics October to December 2021 accessed on 31 April 2022 at https://www.gov.uk/government/statistics/company-insolvency-statistics-october-to-december-2021.
14 Retail Outlook - 2022 - PwC UK accessed on 31 April 2022 at https://www.pwc.co.uk/industries/retail-consumer/insights/retail-outlook.html#:~:text=Winning%20in%202022,labour%20shortages%20and%20supply%20chains.
15 International Civil Aviation Organisation, Economic Impacts of COVID-19 on Civil Aviation accessed on 31 April 2022 at https://www.icao.int/sustainability/Pages/Economic-Impacts-of-COVID-19.aspx.
16 International Airlines Group, Annual Report and Accounts 2021, p 29.
17 International Airlines Group, Annual Report and Accounts 2021, p 39.
18 Georgiadis, Philip, 'Delays, shortages and strikes: Can the aviation industry get airborne by summer?', Financial Times, 10 June 2022, https://www.ft.com/content/8bdb785a-4770-416c-b453-dbfcb1c21d68.
19 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, current 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.
20 However, when 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.
21 Paragraph 3(1), Schedule B1 to the IA86.
22 Paragraph 3(3), Schedule B1 to the IA86.
23 Paragraph 3(4), Schedule B1 to the IA86.
24 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.
25 The Insolvency EU Exit Regulations contain transitional provisions that provide, among other matters, that the Recast Insolvency Regulation (or 2000 Insolvency Regulation in respect of main proceedings opened before 26 June 2017) would continue to apply to main proceedings that were opened before the end of the transition period.
26 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.
27 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 when a party wishes to obtain recognition or enforcement of that judgment in the UK, or when 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.
28 Pursuant to the Coronavirus Act 2020 (Alteration of Expiry Date) (Wales) Regulations 2022 (WSI 2022/86).
29 The legislative and regulatory measures described in this section are evolving and might be out of date by the time it goes to print. Accordingly, readers are encouraged to confirm that restrictions remain current.
30 By the Enterprise Act 2002. Schedule B1 to the IA86 sets out the administration regime that applies to all administrations commenced after 15 September 2003.
31 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.
32  EWHC 2441 (Ch).
33  EWHC 1209 (Ch).
34  EWHC 1294 (Ch).
35 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.
36  EWHC 249 (Ch).
37  EWHC 1104 (Ch).
38  EWHC 164 (Ch).
39  EWHC 3299 (Ch).
40  EWHC 3778 (Ch).
41  EWHC 3849 (Ch).
42  EWHC 1164 (Ch).
43  EWHC 3800 (Ch).
44  EWHC 2236 (Ch).
45  EWHC 1233 (Ch).
46  EWHC 3778 (Ch).
47  EWHC 1917 (Ch).
48  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 to create a primary co-obligation with the borrowers and to create 'ricochet' claims.
49  EWHC 378 (Ch).
50 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.').
51  EWHC 2441 (Ch).
52 Re Virgin Atlantic Airways Ltd  EWHC 2191 (Ch).
54  EWHC 2873 (Ch).
55  CSOH 39.
56  EWHC 304 (Ch).
57  EWHC 1246 (Ch).
58  EWHC 3036 (Ch).
59  EWHC 138 (Ch).
60  EWHC 387 (Ch).
61  EWHC 1759 (Ch).
62  EWHC 3549 (Ch).
63 The facts in Re Hurricane Energy plc were fairly unusual. The company did not face immediate insolvency. Pursuant to the plan, the company would continue to trade while its bonds would be restructured and ultimately repaid, with bondholders receiving 95 per cent of the post-plan equity; the surplus of 5 per cent of the equity would go to existing shareholders, which would, in the words of the plan company, be 'less than meaningful'. The plan received the overwhelming support of bondholders but was overwhelmingly rejected by shareholders. The court held that the 'no worse off' test had not been met. The onus was on the plan company to demonstrate that the dissenting class would be no worse off under the plan, and it had failed to satisfy the court of that. The dissenting class had put forward a number of alternative scenarios that gave a realistic prospect of a better return to shareholders should the plan not be sanctioned, and it was not for the dissenting class to demonstrate that any of the alternatives they had put forward was more likely than that suggested by the company. The court also held that even if the no worse off test had been met, the court would still have refused to use its discretion to sanction the plan.
64 The principles as set out by the court are as follows: (1) determination as to whether a class has a genuine economic interest should be made by reference to the relevant alternative; (2) this should be applied on the balance of probabilities in a real, rather than a theoretical, sense; and (3) at a convening hearing (rather than sanction), the court may conclude that there is insufficient evidence to reach a conclusion or, alternatively, that none of the members of a class has a genuine economic interest and there is no purpose to be gained from requiring a meeting of that class. On the basis of the valuation evidence (which was not adequately contested), the court was satisfied that there was only one class of creditors (namely one super-senior lender) with a genuine economic interest. In this instance, the dissenters were not properly organised and presented no valuation evidence at the convening hearing, and when they did so at the sanction hearing they did not submit themselves to cross-examination.
65  EWHC 1246 (Ch).
66  EWHC 304 (Ch)
67 This case was brought during the Brexit transition period, when the UK was still a party to the Lugano Convention. The court determined that a restructuring plan fell within the insolvency exemption of the Lugano Convention and, as such, the English courts had jurisdiction to sanction a plan made by an English company to compromise bonds contractually subject to Swiss law and jurisdiction.
68 The absolute priority rule is a confirmation requirement in respect of a Chapter 11 plan of reorganisation under the United States Bankruptcy Code, whereby a creditor class may be crammed down only if no more junior stakeholder receives any recovery until all more senior classes have been paid in full or otherwise consented. Part 26A does not include such a requirement, thereby allowing, for example, equity to stay intact while junior creditor classes may be compromised.
69 Akers and McDonald v. Deutsche Bank AG (Re Chesterfield United Inc. and Partridge Management Group SA)  EWHC 244 (Ch).
70 Larsen and others v. Navios International Inc (Re Atlas Bulk Shipping A/S)  EWHC (Ch) 878.
71 Cosco Bulk Carrier Co Ltd v. Armada Shipping SA and another  EWHC 216 (Ch).
72 Re Stanford International Bank Ltd (in liquidation)  EWCA Civ 137.
73 Re Agrokor DD  EWHC 2791 (Ch).
74 Re OJSC International Bank of Azerbaijan  EWHC 59 (Ch).
75  1 AC 508, PC.
76  1 WLR 852, HL.
77  EWSC 46.
78  AC 1675, PC.
79 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.
80 (1890) 25 QBD 399.
81 In general terms, the Gibbs rule provides that contractual obligations governed by English law cannot be discharged by foreign law proceedings and can be discharged only under English law or if the creditor agrees to the foreign law discharge of the obligations owed to them.
82  EWHC 2124 (Ch).
83  EWHC 59 (Ch) and  EWCA Civ 2802.
84  EWHC 59 (Ch) at .
85  EWCA Civ 2802 at .
86 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 British Virgin Islands' 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.
87 Ireland is able to seek judicial assistance in the UK pursuant to Section 426 of the IA86.
88 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.
89  EWHC 304 (Ch).