SECTION 1: Market overview
1.1 What have been the recent bankruptcy and reorganisation trends or developments in your jurisdiction?
The use of English schemes of arrangement to effect the restructuring of foreign debtors has continued albeit with increased scrutiny of schemes proposed by foreign companies to ensure that there is a sufficient connection to England and Wales.
Whilst this trend is likely to continue in 2017, the UK's proposed exit from the EU raises questions as to whether schemes of arrangement will continue to be popular in the long term. That will depend in large part on the framework for recognition of judgments that is established post-exit, and the extent to which other European jurisdictions can develop restructuring mechanisms that are as flexible, well-understood and viable as the scheme of arrangement.
1.2 Please review some recent important cases and their impacts in terms of precedents or shaping current thinking.
In 2016 there were schemes of arrangements in the English courts from companies registered in the Netherlands, Italy, Turkey, Germany and Bermuda. Of particular interest were the following:
- The standstill scheme: The scheme of arrangement proposed by Metinvest BV involved the use a scheme of arrangement to impose, and then extend, a standstill and was notable because the scheme of arrangement was not used to restructure or reschedule liabilities, but instead to create breathing space to allow restructuring negotiations to take place. The use of schemes of arrangements in this way is likely to continue in cases where a blocking minority of 75% of the creditors is required in any event.
- Debate about 'expediency' for the purposes of the Judgments Regulation: In Re DTEK Finance Plc, Justice Newey disagreed with Justice Snowden's interpretation of expediency under article 8(1) of the Judgments Regulation in Re Global Garden Products Italy SpA. In particular, Justice Newey noted that there was a persuasive argument that the existence of just one creditor with a domicile here will make it expedient for an English court to hear an application for a scheme of arrangement. Justice Snowden thought a certain portion of the creditors should be based here to ground the expediency analysis. The single creditor point was considered and approved in Metinvest (which preceded DTEK). Despite this line of jurisprudence, prudent applicants should try to stress connections with England on the basis of both the domicile of creditors and the value of those English domiciled creditors to be sure of meeting the expediency standard.
- The question of urgency: The scheme proposed by Indah Kiat International Finance Co BV involved a special purpose vehicle incorporated for financing purposes in the Netherlands and an urgent hearing of the application to convene a creditors' meeting with only 14 days' notice. The case is notable for its discussion of whether an urgent hearing of the application to convene the creditors' meeting was justified. In particular, Justice Snowden noted that:
In the absence of evidence of real urgency, the practice statement should be followed and a sufficient period of notice given of the convening hearing to enable scheme creditors to consider the matter, take advice and, if desired, participate at the hearing.
SECTION 2: Processes and procedures
2.1 What reorganisation and insolvency processes are typically available for financially troubled debtors in your jurisdiction?
Corporate debtors in England and Wales who seek to restructure their debt or come to an arrangement with their creditors have a wide variety of tools at their disposal. A company may first make use of contractual mechanisms in place under the terms of its financing documentation. Where a debtor faces a default under the terms of its debt documents, it may be possible to enter into so-called standstill arrangements with either a majority or a blocking minority of the creditors to allow negotiations over a restructuring proposal to take place. In some cases, even fundamental terms of the financing documents can be amended with the consent of a super-majority of creditors.
If a contractual solution is not possible, other more formal restructuring tools are available. A scheme of arrangement under the Companies Act 2006 enables companies to effect a broad range of restructuring transactions. Schemes require the consent of a majority in number and 75% in value of a company's creditors in each relevant class, and must also be approved by the court. The court, in sanctioning the scheme, must be satisfied that it is a fair and reasonable attempt to reach agreement between the company and its creditors. Companies may alternatively opt for a company voluntary arrangement (CVA). This mechanism, which cannot be used to bind secured or preferential creditors (unlike a scheme) requires the consent of 75% or more of those present at a meeting of the unsecured creditors.
A restructuring can also be effected using insolvency procedures available under English law. Administration is a rescue procedure which can be initiated by the company or its directors by court order or by holders of a floating charge over all or substantially all of the debtor's assets. Administration's primary aim is corporate rescue, but if this is not possible the administrator must try to achieve a better result for the creditors than if the company were to be wound up.
Severe financial difficulties may force a company to enter liquidation, which is a process whereby the company's assets are disposed of and the proceeds distributed to creditors in accordance with a statutory waterfall of priority. This can be effected as a members' voluntary liquidation (MVL) (where the directors propose a winding-up resolution to the company's shareholders), or as a creditors' voluntary liquidation (CVL) (which also requires the consent of shareholders and creditors and, from April 2017, can be achieved through deemed consent under the reformed Insolvency (England and Wales) Rules 2016). In contrast, compulsory liquidation is a court-driven process triggered by a petition demonstrating that the company is unable to pay its debts.
2.2 Is a stay on creditor enforcement action available?
Companies in administration can benefit from a statutory moratorium, which prevents the enforcement of security interests or the initiation or continuation of legal processes against the debtor company. The moratorium lasts for the duration of the administration and allows the administrator time to formulate a strategy to facilitate the primary aim of administration: corporate rescue. The moratorium may only be lifted by the administrator or with the permission of the court. The statutory moratorium will not, however, prevent the enforcement of close-out netting rights or the rights of use and appropriation under financial collateral arrangements.
A limited moratorium may also be granted to companies that have entered a CVA with their creditors.
Recent decisions before the English courts have stayed creditor proceedings against companies that were in the process of implementing a scheme of arrangement which had a reasonable prospect of success and majority creditor support. Such a stay is awarded at the discretion of the court.
2.3 How could the reorganisation and/or insolvency processes available in your jurisdiction be used to implement a reorganisation plan?
Schemes of arrangement and CVAs can be used to effect any compromise or arrangement with the debtor company's creditors. However, the ability to bind secured as well as unsecured creditors under a scheme means that it is a more popular tool for large-scale restructurings.
In order to effect a scheme the company must apply to the court to convene meetings of the company's creditors. The convening hearing will determine the division of creditors into classes with the scheme requiring the approval of a majority in number and 75% in value of each class. Class composition can be contentious and may be challenged by dissenting creditors before the courts as a way of stalling or preventing the implementation of a scheme.
CVAs do not require the company's creditors to be divided into classes. Any reorganisation plan must be approved by 75% in value of all unsecured creditors present and eligible to vote at the creditors' meeting provided that no more than 50% of unconnected creditors vote against the proposal. In addition, any plan must be approved by 50% in value of the shareholders. If the consent of the shareholders is not sought, the creditors' vote can bind the company if it is subsequently approved by the court under the Insolvency Act 1986 (IA 1986).
2.4 How can a creditor or a class of creditors be crammed down?
Both schemes and CVAs can be used to cram-down particular dissenting creditors within a class if the required thresholds are met, with the exception that a CVA cannot bind or implement a plan that would bind secured creditors.
Once a CVA has been approved, any person entitled to vote at a meeting of creditors, the administrator or the liquidator can challenge the CVA on the grounds that it unfairly prejudices the interests of a particular creditor. Alternatively a challenge can be brought if there was a material irregularity in the way that the CVA was conducted. Where the court is satisfied of a particular ground of challenge, it may revoke or suspend the approvals given at the creditors' meeting.
Under a scheme of arrangement, the dissenting creditor can challenge the proposals at the convening and sanction hearings. They can also vote against the proposals at the creditors' meeting. When proposing a scheme of arrangement, the debtor can ignore stakeholders who have no economic interest in the scheme.
2.5 Is there a process for facilitating the sale of a distressed debtor's assets or business?
A distressed company's assets can be sold through a CVA or a scheme of arrangement. Pre-pack administrations, comparable to Chapter 11 proceedings in the US or the powers of the administrative receiver under English law, can also be used. A pre-pack allows sale negotiations to be conducted before the appointment of the administrator, with any contract of sale being concluded immediately after that appointment. Such sales will tend, therefore, to be made with shareholders, creditors or existing management of the distressed company.
Prospective administrators will seek to determine the proper value of the business by reference to the market or expert reports. Extensive guidance is provided by the Statement of Insolvency Practice 16 which stipulates that the administrator must disclose any marketing activities, valuations and potential purchasers to the company's creditors before a pre-pack sale.
2.6 What are the duties of directors of a company in financial difficulty?
Directors have statutory obligations to the company. These include the duty to promote the success of the company for the benefit of the shareholders as a whole. This duty is subject to any enactment or rule of law which requires the directors to have regard to the interests of the company's creditors. Creditors' interests have to be taken into account by the directors if there is a risk to the company's solvency
Directors can also incur liability under the IA 1986 for fraudulent trading and for wrongful trading on directors.
2.7 How can any of a debtor's transactions be challenged on insolvency?
Transactions entered into by the directors of the target company in breach of their statutory and fiduciary duties may be voided or subject to challenge under English common law principles and statutory provisions and transactions that defraud creditors can also be reviewed.
English insolvency law will seek to unwind certain transactions entered into by the company in the period leading up to the commencement of the insolvency if they meet certain conditions under the IA 1986. Transactions at an undervalue, unlawful preferences and the avoidance of floating charges can be unwound for certain periods depending on whether the relevant transaction(s) were with a so-called connected person (which has a specific statutory definition) or with a non-connected person.
2.8 What priority claims are there and is protection available for post-petition credit?
The ranking of claims on administration or liquidation follows a strict statutory order known as the waterfall. Secured creditors are not included in the waterfall except to the extent that the proceeds of any security which they enforce do not cover the amount secured.
The administrator or liquidator (depending on the nature of the proceedings) can distribute administration or liquidation expenses ahead of: preferential debts (money owed to employees subject to a statutory maximum per employee); the prescribed part (funds set aside from floating charge holders to satisfy the claims of unsecured creditors); floating charge claims; unsecured claims; and, the return of shareholder equity.
2.9 Is there a different regime for credit institutions and investment firms?
Credit institutions do not fall within the scope of the regime described in 2.1 to 2.8. The Investment Bank Special Administration Regulations 2011 (2011 Regulations) apply to firms which have permission to carry on certain activities under the Financial Services and Markets Act 2000. The 2011 Regulations provide special administrators with three duties, namely to ensure the return of client money, engage with market infrastructure bodies and to rescue the investment bank as a going concern or wind it up in the best interests of its creditors. A variant of the special administration regime was also applied to building societies by the Building Societies (Insolvency and Special Administration) Order 2009.
The Bank Resolution and Recovery Directive (BRRD) has been fully implemented in the UK through the Banking Act 2009 and the Bank Resolution and Recovery Order (No 2) 2014. The BRRD introduced a special resolution regime (SRR) for failing UK banks, including holding companies and their subsidiaries. The SRR's objectives are: to ensure the continuity of the banking system; to protect and enhance the stability of the financial system; and, to protect public funds and depositors.
The SRR gives the Bank of England wide-ranging stabilisation powers as the resolution authority, to attempt to rescue credit institutions in financial difficulty. The five stabilisation options include: the transfer to a private sector purchaser; transfer to a bridge bank; transfer to an asset management vehicle; use of the bail-in tool (conversion of unsecured debt claims into equity); and, transfer of the bank into temporary public ownership.
SECTION 3: International/cross-border issues
3.1 Can reorganisation or insolvency proceedings be opened in respect of a foreign debtor?
Currently the likelihood of being able to bring insolvency proceedings in respect of a foreign debtor will depend on the location of that debtor's centre of main interests (Comi) or place of establishment. If a foreign debtor has its Comi or establishment in England and Wales, then English insolvency proceedings may be commenced in respect of that debtor.
The European Council and the European Parliament have adopted the text of a new regulation (Recast Regulation). The Recast Regulation, which is due to come into force on or after June 26 2017, will make substantial changes to the test for Comi to avoid so-called forum shopping. These changes include proposing a formal definition of Comi and changes to the way Comi is assessed. The Recast Regulation will also include pre-insolvency rescue proceedings within its scope (although not schemes of arrangement).
A scheme of arrangement can be used by any company which is liable to be wound up under the IA 1986. The IA 1986 gives the English courts jurisdiction to wind up foreign companies, which is separate from the jurisdiction based on Comi. To exercise this jurisdiction, a number of tests should be met, the most important of which is that the company should have a sufficient connection to England and Wales.
3.2 Can recognition and assistance be given to foreign insolvency or reorganisation proceedings?
Parties may wish to apply for foreign insolvency proceedings or judgments to be recognised in England if they want to enforce against the debtor's assets located in England and Wales, or to avoid costly litigation by bringing fresh proceedings before the English courts. The rules governing recognition of foreign insolvency proceedings will depend on where those proceedings were brought. Regulation EC 1346/2000 (Insolvency Regulation) and, from April 2017, the Recast Regulation set out how proceedings before EU courts (with the exception of Denmark) can be enforced in England and Wales.
The Credit Institutions Winding Up Directive 2004 (CIWUD) provides that insolvency proceedings in respect of EU credit institutions can only be commenced in that credit institution's home member state, but that such proceedings must be recognised before the courts of other member states. The BRRD introduced two important changes to CIWUD. First, resolution was brought within the scope of CIWUD such that it became a reorganisation measure (that is, it became subject to mandatory recognition). In addition, the parent and holding companies of credit institutions in resolution became subject to the provisions of CIWUD. The effectiveness of this change remains to be seen as there have been proceedings before the English courts in relation to Novo Banco (the good bank formed from Banco Espírito Santo) which took a narrow view of this recognition obligation.
Section 426 of the IA 1986 allows for courts in relevant countries (the Channel Islands, Isle of Man and most Commonwealth countries) to apply to the English courts for assistance in insolvency proceedings. Section 426 cannot be used to recognise foreign judgments per se, but the scope of this assistance is wide such that the English court can make an order for injunction or an administration order under its scope.
The United Nations Commission on International Trade Law (Uncitral) Model Law was designed to provide a harmonised approach to cross-border insolvency proceedings. The Model Law was effected in the UK by the Cross-Border Insolvency Regulations 2006 (CBIRs). The CBIRs, much like the Insolvency Regulation, make a distinction between foreign main proceedings (which must take place in the jurisdiction in which the debtor has its Comi) and foreign non-main proceedings (which take place in a jurisdiction in which the debtor has its establishment). The rules encourage co-operation with foreign courts only in relation to collective proceedings.
An established principle of the common law is that of modified universalism, which holds that insolvency proceedings should have universal application and that English courts should, whilst respecting other principles of English law, have the inherent ability to recognise all foreign proceedings.
SECTION 4: Other material considerations
4.1 What other major stakeholders could have a material impact on the outcome of the reorganisation?
Where part of the business is being transferred, the company has an obligation to consult employees about potential redundancies at an early stage. If the company operates a pension scheme, there may need to be consultations with the Pensions Regulator and, in some circumstances, approval may need to be sought. Discussions with government and regulatory organisations, such as HM Revenue & Customs, is sometimes necessary, particularly if these bodies are creditors of the company.
SECTION 5: Outlook 2017
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?
First, when Brexit formally occurs, the Recast Regulation will not apply absent to a further agreement and so English insolvency proceedings will not be automatically recognised. In the case of inbound EU insolvency proceedings, any proceedings would have to be recognised on the basis of common law principles and the Cross-Border Insolvency Regulations 2006 regime (which implemented the Model Law) (see section 3.2 above). Given the more limited scope of the common law and the Model Law in terms of recognition the resulting situation would mean considerably more uncertainty as to the recognition of inbound insolvency proceedings than the current framework (and the framework under the Recast Regulation).
Outbound UK insolvency proceedings would be more complex as only four EU countries have adopted the Model Law (Greece, Poland, Slovenia and the UK), and outbound proceedings would therefore need to rely on local, possibly diverging, laws for recognition of UK insolvency proceedings, which would be challenging if material assets are located in a number of different jurisdictions.
Given the uncertainty of how Brexit negotiations will evolve and whether future insolvency rules will feature in those discussions means that predictions as to the development of, and trends in, the restructuring and insolvency space are difficult.
In the absence of an agreement with regards to recognition of insolvency proceedings there may be a need to commence parallel proceedings in jurisdictions which hold substantial real assets of the debtor due to the lack of reciprocity/recognition. The absence of an agreement detailing the automatic recognition of insolvency proceedings will not be fatal however as practitioners will be able to revert back to the pre-2002 insolvency framework in which there was no common recognition framework.
We suspect, however, that the UK government will seek to retain benefits of mutual recognition and will attempt to agree bilateral treaties with individual member states if no agreement with the EU is forthcoming.
Second, in 2016, the UK Insolvency Service launched a consultation on possible changes to the English insolvency regime. Broadly, the consultation sought views on the introduction of a new three-month restructuring moratorium for all companies (ie the benefits of a moratorium without the management of the debtor being displaced); whether debtors should be able to designate certain contracts as 'essential' thereby preventing the relevant counterparty from invoking insolvency termination clauses; a new statutory restructuring mechanic, which would bind secured and unsecured creditors and allow debtors to cram out-of-the-money creditors; and measures to encourage rescue financing.
Third, on November 22 2016, the EU Commission published a draft directive designed to harmonise restructuring frameworks across member states. The draft directive will be discussed and may be amended by the European Council and the European Parliament. Once finalised, member states will be required to implement its provisions within two years.
It is possible that the implementation of the directive will lead to more viable local restructuring tools for foreign companies, and thus create competition with the English scheme of arrangement. Whilst the directive will not apply to England and Wales post-Brexit, we expect the English restructuring regime will be tweaked if necessary to maintain its position as the most popular forum for international restructurings in Europe.
|About the author|
Partner, Cleary Gottlieb Steen & Hamilton
David J Billington is a partner based in the London office. His practice focuses on international financing and restructuring transactions. He has experience in bank lending, high-yield bonds, structured and real estate finance, and securitisation. His experience includes advising: Truvo on its €1.5billion cross-border restructuring; Silver Point Capital as agent and senior lender to the Spanish and South American gaming business Codere; TPG on the multi-billion dollar leveraged buyouts of real estate services firms DTZ and Cushman & Wakefield; and, CVC on the leveraged buyout of the European businesses of the Campbell's Soup group and subsequent covenant-lite dividend recap.
He is recognised as a leading banking and finance lawyer by Chambers UK, and is recommended by The Legal 500 UK for acquisition finance and emerging markets work. In 2013, Financial News named him as one of their '40 under 40 Rising Stars of Legal Service'. He joined the firm in 2006, having previously worked at Allen & Overy in London. He received a B.A. degree in law in 1999 with first class honours from Cambridge University (Gonville & Caius College) and received his Legal Practice Certificate from Nottingham Law School in 2000.
|About the author|
Partner, Cleary Gottlieb Steen & Hamilton
Andrew C Shutter is a partner based in the London office. His practice focuses on the origination and restructuring of international debt and equity financing transactions. He represents issuers, borrowers, and financial institutions in international capital markets, syndicated bank lending, high yield, derivatives and securitisation transactions. He also has experience in sovereign debt restructurings including advising Greece on its 2012 €205 billion restructuring which is the largest bond restructuring ever completed. His experience for corporates includes advising a group of Polish companies on a 2015 scheme of arrangement, Celsa (UK) Holdings, and its UK subsidiaries on the restructuring of their English and German law senior facilities and Truvo in its €1.5 billion global restructuring. He has advised loan to own creditors in many complex situations including Oerlikon and Quinn. He authors a column on restructuring in the Global Restructuring Review. He is internationally recognised for his expertise in restructuring/insolvency by Chambers UK, and in debt capital markets by The Legal 500 UK. He is also distinguished as a leading lawyer in banking and finance by Chambers Global, Chambers Europe, Chambers UK and The Legal 500 UK. He joined the firm in 1997 and became a partner in 2001. He speaks Spanish.