SECTION 1: Market overview
1.1 Please provide a brief overview of your jurisdiction's corporate insolvency and restructuring environment and its versatility in cross-border cases. Are there any significant current debates taking place in the market?
The UK's corporate insolvency and restructuring environment is highly flexible. Alongside New York and Singapore/Hong Kong, the UK is a key international hub attracting both domestic and foreign stakeholders when carrying out high value complex restructurings. The UK framework is, however, coming under increasing competitive pressure from insolvency reform in other jurisdictions and Brexit poses several challenges, not least for the continued recognition across Europe of UK restructuring and insolvency processes. Continued recognition post Brexit is particularly relevant for UK schemes of arrangement and company voluntary arrangements, and their use by foreign companies. The market is waiting to see whether, and if so how, UK corporate insolvency reforms put forward in 2016 will progress considering the challenges of Brexit.
Following a string of recent high profile corporate insolvencies, the role of corporate stakeholders is under the microscope. Questions are being asked whether existing governance structures are fit for purpose. Consultation published in March 2018 on Insolvency and Corporate Governance considers a broad reform package to reduce the risk of major company failures resulting from weak governance or stewardship. Its proposals could significantly expand the duties of directors to consider a wider range of interests when disposing of distressed subsidiaries, create new powers to reverse value extraction schemes, and lead to a shift in the behaviour expected from institutional investors. However, the consultation is at an early stage and the proposals lack detail. Parliamentary time is limited, so it remains to be seen how they will progress.
1.2 What have been the key recent market trends and/or legal developments in the area that practitioners should be aware of?
Changes to UK insolvency law in the last year have been aimed at modernising its procedural aspects (such as new decision making and deemed consent procedures) – e.g. the new Insolvency (England and Wales) Rules 2016. However, there has been no major reform of substantive insolvency law and the proposals put forward in 2016, noted above, appear to have stalled.
Several sectors are showing signs of stress/distress, notably retail, casual dining, construction, healthcare and business services. The issue of how businesses should deal with large pension deficits remains topical.
1.3 Please review any major (recent/current) restructuring cases or initiatives that are influencing activity or court decisions regarding insolvency and/or restructuring cases that have set precedents.
Recent first instance case law has confirmed the principle that a foreign law compromise of English law debt will be ineffective (unless there is a requirement to recognise the compromise, eg under the EU Insolvency Regulation). It remains to be seen whether the issue will face appeal.
Scheme case law last year highlighted the ability of the chairman at a creditors' meeting to reject votes where there is a clear manipulation strategy aimed at defeating the scheme.
Last year also saw the continued use of UK schemes by foreign companies. Foreign debtors often relied on a familiar course of creating scheme jurisdiction by changing the governing law of the finance documents to English law and/or shifting the scheme company's centre of main interests (Comi) to the UK.
SECTION 2: Processes and procedures
2.1 What restructuring and insolvency processes are typically available for financially troubled debtors in your jurisdiction? Do groups of companies receive special treatment?
English insolvency law operates along legal entity lines. There is no concept of a single group insolvency proceeding and limited scope for treating the assets of one group company as belonging to another group company.
Formal collective insolvency procedures under the Insolvency Act 1986 (the Act) consist of:
- company voluntary arrangements (CVAs) – used to rescue a company. More recently, it has been used to deal with obligations under unprofitable leases. It is unable to bind secured creditors without their consent;
- administration – ostensibly a corporate rescue process, although more often used to rescue the business through a going concern sale – frequently arranged in advance of filing and known as a pre-pack; and
- liquidation – a terminal procedure typically resulting in the piecemeal sale of assets (rather than the business), distribution of the proceeds to creditors and dissolution of the company. In a solvent liquidation, surplus proceeds are returned to shareholders.
Receivership is a secured creditor's limited enforcement remedy.
Large financial restructurings are usually achieved consensually without recourse to an insolvency filing, often using contractual powers under an intercreditor agreement to implement the solution.
In the absence of contractual mechanisms, a statutory scheme of compromise or arrangement may be available. The scheme is a company law, rather than insolvency law, mechanism but provides a useful tool for corporate restructuring where there are dissenting creditors.
A state of insolvency is unnecessary to support a scheme or CVA filing. Liquidation (except for the solvent type) and administration require the company to be insolvent, tested on a current or near future inability to pay debts as they fall due or on a longer-term basis where the company's liabilities exceed its assets.
2.2 What is the impact on creditors of a formal filing? Are contractual termination rights affected? Are security or individual enforcement actions stayed?
Insolvency practitioners have powers to limit the terms essential suppliers can impose (directly or indirectly) as a condition for the continued supply of their service and compel continued supply by restricting the effect of existing insolvency-related terms in an essential supply contract. The restrictions apply, broadly, to utilities and IT-related supplies. However, in practice, there are limits as to what they can achieve.
Filing for administration automatically gives rise to a broad stay preventing, for example, the commencement or continuation of legal proceedings or secured creditor enforcement action. The moratorium may only be lifted with the consent of the administrator or the court. It does not, however, apply to certain financial collateral arrangements.
There is a limited procedural stay in liquidation but it does not prevent secured creditor enforcement. Other than for qualifying small companies, a CVA does not give rise to a stay.
The court has discretion to grant a temporary stay of creditor action where a scheme is being implemented and appears to have a reasonable chance of success with majority creditor support.
For large financial restructurings, financial creditors often refrain voluntarily from bringing disruptive action or agree to a temporary stay contractually to assist stability during the negotiation of a consensual deal.
2.3 Can a creditor or a class of creditors be crammed down?
Both a CVA and a scheme can bind dissenting or non-voting unsecured creditors, but only a scheme may do so in respect of secured claims. While creditors within a class may be crammed down in a scheme, it is not possible to cram down an entire class, since each class must vote in favour for the court to sanction it and for it to take effect.
2.4 Is there a process or practice for facilitating the sale of a distressed debtor's assets or business?
A pre-pack sale is not a special type of insolvency procedure but generally refers to:
- a sale of the business and/or assets of an insolvent company (usually by an administrator);
- where the preparatory work (eg identifying the purchaser, and negotiating the terms of the sale) takes place before appointment; and
- the sale is concluded almost immediately after appointment without court or creditor sanction, and often with little or no formal marketing of the business or assets being sold. Administrators must, however, be able to explain to the company's creditors why the insolvency sale was entered into.
In practice, a pre-pack to a secured creditor would usually involve the purchase by a special purpose vehicle (SPV) owned by the secured creditors. The consideration will likely involve a release and/or an assumption of all or some of the secured liabilities by the SPV (with the secured creditors, in effect, bidding their debt).
2.5 What are the duties of directors of a company in financial difficulty?
Directors of English companies must comply with a range of statutory, common law and fiduciary duties, including a duty, where a company is facing financial difficulties, to have regard to the interests of creditors. This requirement is reinforced by the wrongful trading provisions contained in section 214 of the Act, breach of which could lead to personal liability and/or disqualification. In particular, liability may arise if the court is satisfied that the director knew (or should have known) that, at some time before insolvency proceedings began, the company had no reasonable prospect of avoiding going into insolvent liquidation or administration; and once it had become clear to that director that there was no longer a reasonable prospect of avoiding insolvent liquidation or administration, he or she did not take every step to minimise the potential loss to creditors that they should have taken.
2.6 How can any of a debtor's transactions be challenged on insolvency?
The Act enables a liquidator or administrator to set-aside a range of pre-insolvency transactions, including transactions at an undervalue, preferences, extortionate credit transactions, certain floating charges and transactions defrauding creditors. The look-back period during which transactions are at risk ranges from six months to two years, depending on the circumstances.
2.7 What priority claims are there and is protection available for post-petition credit?
Insolvency expenses (which could include insolvency funding) rank ahead of preferential debts (primarily, certain amounts owed to employees), the prescribed part (an amount, not exceeding £600,000 ($800,200 approximately), set aside from floating charge realisations to satisfy claims of unsecured creditors), floating charge (but not fixed charge) claims and unsecured claims. Amendments are made to the order of priority when security involves financial collateral.
2.8 Are there any sectors or industries with their own or modified insolvency and restructuring regimes?
Modified insolvency regimes are typically found in the financial industry (such as the special resolution regime for banks) or the utilities, transport and health sectors. In some sectors or industries, special factors may become relevant in an insolvency situation, eg where the business operates in a highly regulated or politically sensitive area (eg prisons, schools). The Act may also be modified in its application to certain types of company or bodies (eg partnerships or insurers), although they have no separate special insolvency regime as such.
SECTION 3: Cross-border cases
3.1 Can restructuring or insolvency proceedings be opened in respect of a foreign debtor?
Under Regulation (EU) 2015/848 on Insolvency Proceedings (EIR), international insolvency jurisdiction of courts within the EU (excluding Denmark) depends on the location of a debtor's Comi or the existence of an establishment. Comi is the place where the debtor conducts the administration of its interests on a regular basis and which is ascertainable by third parties. For a corporation, there is a rebuttable presumption that its Comi is the place of its registered office. Ultimately, Comi is fact specific. The EIR creates a common regime for the taking of insolvency law jurisdiction and the recognition and effect of insolvency proceedings throughout the EU. It does not, however, purport to create uniform insolvency laws.
The English court also has jurisdiction to wind up a foreign debtor as an unregistered company based on a sufficient connection test. This must be viewed against the backdrop of the EIR, so that the jurisdiction may only be exercised provided the foreign company does not have its Comi anywhere within the EU. Exercise of the winding-up jurisdiction remains, in any event, discretionary.
It may be possible to commence insolvency proceedings by the provision of assistance under the methods specified in question 3.2.
3.2 What recognition and assistance can be given to foreign insolvency or restructuring proceedings?
In addition to the EIR, there are three main methods under which the English courts may assist in insolvency matters:
1. Section 426 of the Act enables the English court to give wide assistance to the courts of certain designated jurisdictions (mainly common law countries; they do not include the US), subject to judicial discretion.
2. The Cross Border Insolvency Regulations 2006 (CBIR) focus on recognition of and co-operation between foreign insolvency proceedings, but unlike the EIR do not allocate insolvency jurisdiction.
3. The court has an inherent power to recognise and grant assistance to foreign insolvency proceedings under the common law, although recent judicial authority has shown it is limited in scope.
SECTION 4: Other material considerations
4.1 What other major stakeholders (eg governmental or regulatory institutions) could have a material impact on the outcome of the reorganisation?
Employees, pension trustees, government or regulatory bodies could all have an impact on the outcome of a restructuring depending on the situation and what is proposed. For example, obligations to consult with employees on a business transfer or where there may be redundancies could have an impact on timing.
SECTION 5: Outlook 2018
5.1 What are your predictions for the next 12 months in the corporate reorganisation and insolvency space and how do you expect legal practice to respond?
It is expected that in the next year, we will see greater clarity on the direction of travel for UK corporate restructuring and insolvency reform.
A key issue facing the UK as an international hub is whether UK proceedings and judgments will continue to benefit from recognition across the EU following Brexit. This will depend on how negotiations progress for a Withdrawal Agreement. The Brexit challenge must also be seen amid a wider European insolvency reform agenda. For example, there are proposals for EU member states to have increasingly similar restructuring and insolvency frameworks. This could result in a directive being passed during 2019 requiring implementation by 2021. Whether or how the UK will implement such changes remains unclear, as does their impact on the stalled 2016 UK corporate insolvency reform proposals.
UNCITRAL's Insolvency Working Group is currently considering a draft model law on the recognition and enforcement of insolvency-related judgments and draft legislative provisions on facilitating the cross-border insolvency of multinational enterprise groups. The UK will consider both carefully.
Domestically, following a spate of high profile collapses, there is renewed political tension between protecting the rights of employees, pensioners, consumers and unsecured creditors while best enabling the restructuring efforts of financially troubled debtors. This is evident in the Insolvency and Corporate Governance consultation referred to earlier, as well as a White Paper published on protecting defined benefit pension schemes. There could also be change, for example, in dealing with insolvent airlines following the Monarch repatriation exercise and questions over how public services are best provided in the wake of the Carillion collapse. Further reforms to pre-pack sales involving connected parties are also possible.
|About the author|
Rebecca Jarvis is joint global head of the Linklaters restructuring and insolvency team, comprising specialists throughout Europe, the Americas and Asia and handling the world's most challenging and significant domestic and cross-border assignments.
She has outstanding experience in all aspects of non-contentious restructuring and insolvency work acting for banks, financial institutions, other creditors, corporate clients and insolvency practitioners in relation to recovery, reconstruction or distressed debt problems.
With a remarkable breadth of practice, Jarvis has acted on a wide range of work-outs, business recoveries, stressed refinancings, restructurings and insolvencies.
|About the author|
Paul Sidle is a counsel professional support lawyer (PSL) in the firm's restructuring and insolvency team. His focus is on English and international restructuring and insolvency, including the resolution of financial institutions.