1 Legal framework
1.1 What domestic legislation governs restructuring and insolvency matters in your jurisdiction?
The main domestic legislation governing restructuring and insolvency matters in England and Wales is:
- the Insolvency Act 1986 and the Insolvency (England and Wales) Rules 2016 (in each case, as amended by the Corporate Insolvency and Governance Act 2020);
- the Companies Act 2006 (as amended by the Corporate Insolvency and Governance Act 2020), in relation to schemes of arrangement and restructuring plans;
- the Company Directors Disqualification Act 1986; and
- certain additional temporary COVID-19 related measures under the Corporate Insolvency and Governance Act 2020 and subsequent extension regulations.
This is supplemented by other legislation and principles of common law.
1.2 What international / cross-border instruments relating to restructuring and insolvency have effect in your jurisdiction?
The United Kingdom has adopted the UNCITRAL Model Law on Cross-Border Insolvency, implemented by way of the Cross-Border Insolvency Regulations 2006.
Prior to the Brexit implementation date (31 December 2020), the United Kingdom was treated as an EU member state, including under the Recast European Insolvency Regulation. Following the United Kingdom's formal departure from the European Union, effective 1 January 2021, the vast majority of the Recast European Insolvency Regulation has been repealed as a matter of UK law (although a small number of residual provisions remain).
The United Kingdom adopted the Cape Town Convention and related Aircraft Protocol in 2015. These provide certain and uniform rules relating to the purchase, sale, lease and financing of aircraft objects.
1.3 Do any special regimes apply in specific sectors?
The United Kingdom has over 30 special or modified insolvency regimes, which typically apply to systemically important or sensitive sectors and prioritise continued service provision and smooth handover of control over conventional creditor-focused priorities. These regimes generally follow usual UK rules and principles, but subject to modified objectives and powers.
These special regimes apply to specific sectors and types of companies, such as financial institutions, certain regulated entities (including utilities) and charities. Notably, a special rescue and insolvency procedure for banks is governed by the Banking Act 2009.
1.4 Is the restructuring and insolvency regime in your jurisdiction perceived to be more creditor friendly or debtor friendly?
The United Kingdom has historically been perceived as a creditor-friendly jurisdiction (in particular for senior secured creditors), but it is extremely effective for both creditors and debtors.
The government legislated to protect debtors during the COVID-19 crisis, as part of its wider efforts to support the economy. Debtor-friendly measures included:
- the fast-tracked introduction of a new restructuring plan procedure;
- a new standalone moratorium procedure;
- restrictions on the exercise of ipso facto clauses; and
- temporary safeguards including temporary restrictions on statutory demands and winding-up orders where a company cannot pay owing to COVID-19.
One notable creditor-friendly aspect is the comparative ease of enforcement (in terms of appointment of an officeholder, if necessary, and implementation of a sale) through receivership and administration – and, in particular, the ability of secured creditors to pick the identity of the receiver or (if they have a qualifying floating charge) the administrator. This facilitates ‘pre-pack' asset sales (see question 8.1).
1.5 How well established is the legal regime and infrastructure relevant to restructuring and insolvency in your jurisdiction (e.g. extent of recent legislative changes, availability of specialist judges / courts / advisers)?
The UK legal framework is stable and very highly regarded; the United Kingdom has a very well-established restructuring culture.
The English courts remain the forum of choice for major international financial and other contracts, because the system is seen as flexible and commercially oriented, while also offering certainty and predictability – with considerable deference to the commercial terms agreed by the parties – and the highest possible reputation for independence/lack of corruption.
High-profile cross-border restructurings are frequently conducted using English law governed documents or English proceedings. Schemes of arrangement have been a particularly popular tool in this context. There is a track record stretching back well over a decade of using schemes to implement debt restructurings, including on a cross-border basis. The Corporate Insolvency and Governance Act 2020, enacted on 25 June 2020, implemented landmark measures to improve the ability of companies to be efficiently restructured. Although still fairly new, the restructuring plan is modelled on the existing scheme of arrangement and English courts draw on their extensive experience of schemes of arrangement when considering restructuring plan cases.
Several specialist judges are available to preside over more complex insolvency proceedings and a specialist court for insolvency matters is available within the High Courts of Justice in London. Specialist lawyers, financial advisers and distressed investors are also prevalent within the United Kingdom.
2.1 What principal forms of security interest are taken over assets in your jurisdiction?
The type of security granted over an asset in England and Wales largely depends on whether legal title (ie, ownership in the ordinary sense) to the secured asset is intended to be transferred to the secured party. Security can be in the form of:
- a mortgage or security assignment (transfer of title; security provider retains possession); or
- a charge (no transfer of title; security provider retains possession).
There are also other types of security which apply where the secured party is in possession of the secured asset (eg, liens and pledges).
Mortgages: To create a mortgage, the legal or beneficial title to the secured asset must be transferred to the security holder. Mortgages are most commonly granted over real estate, but are also seen in movable property such as ships and aircraft. Legal mortgages must be in writing and executed as a deed by the security provider (the mortgagor). To take effect as a legal mortgage, a mortgage over registered title must be registered at the Land Registry. If the security is not registered, it will usually take effect as an equitable mortgage, which can undermine the strength of the security in the case of competing claims.
Charges: A charge may be either fixed or floating; secured lenders will usually aim to ensure that as much of their security is fixed as possible. A fixed charge requires the security provider (the chargor) to hold the charged asset (eg, shares) to the order of the secured party (the chargee); while a floating charge permits the chargor to deal with the asset in the ordinary course of business (the floating charge hovers above a shifting pool of assets such as cash, stock and inventory). Charges are easier to grant than legal mortgages, as fewer formalities are involved. Charges must be in writing and signed by the security provider.
Registration and formalities: Security granted by an English company or limited liability partnership must be registered at Companies House within 21 days of creation; otherwise, it may be void on insolvency and against third parties. Other types of security – for example, over intellectual property – require further formalities; certain mortgages and charges over interests in land must be executed as a deed.
2.2 How can those security interests be enforced (and what factors could complicate or prevent this process)?
Enforcement options depend on the nature of the security and the provisions of the security document, among other things.
Receivership: A secured creditor may enforce its security by appointing a receiver (usually an insolvency practitioner) over the specific secured asset(s), in accordance with the terms of the security document. The appointment can be made without court involvement. Following the appointment, the receiver will have broad powers specified in the security document, including to collect in any income from the asset and to sell it. (Administrative receivership – which involves the appointment of an insolvency practitioner over the whole of the company's property – is now available only in limited circumstances.)
Power of sale: A creditor may also exercise its power of sale under the security document (if it has a legal mortgage or if the terms of the security document otherwise permit). This permits the creditor to sell the secured asset, without needing to apply to court, and use the proceeds to settle the secured liabilities. A receiver or a creditor selling secured assets is obliged to get the best price reasonably obtainable in the circumstances; no public auction is needed unless required by the security document.
Administration: If a creditor has security over all or substantially all of the company's assets (including a floating charge), the creditor will usually have a ‘qualifying floating charge' (QFC). Once its security becomes enforceable, a QFC holder may appoint an administrator (a licensed insolvency practitioner) over the company quickly and easily without going to court. This is a popular enforcement option, as it creates a moratorium on other enforcement action against the company and potentially allows a sale of the business as a going concern, thereby maximising value.
Appropriation: Where the security constitutes a ‘financial collateral arrangement' under the Financial Collateral Arrangements (No. 2) Regulations 2003, the enforcement option of appropriation is available. ‘Financial collateral' includes cash and financial instruments (including shares); the security arrangement must constitute the requisite degree of ‘possession or control' to qualify as a ‘financial collateral arrangement'. The remedy of appropriation permits the secured creditor to appropriate (essentially, take possession of) the financial collateral, without applying to court. The power depends on the terms of the security document. If the value of the financial collateral appropriated exceeds the secured debt, the secured creditor must account to the security provider for the excess.
Foreclosure: In theory, the possibility of foreclosure constitutes an additional enforcement option, but this is uncommon in practice for various reasons.
3.1 Are informal workouts available in your jurisdiction? If so, what forms do they typically take, and what are the benefits and drawbacks as compared to formal restructuring proceedings?
Informal workouts are available and commonly used. They do not follow any prescribed form and do not involve any particular legal ‘wraparound' (eg, a moratorium or the appointment of a practitioner to formally oversee or mediate in the process).
Informal workouts may be (and often are) carried out on a purely contractual basis if the requisite stakeholder majorities can agree a restructuring and the steps of the restructuring are otherwise permitted by the relevant documents. Where there is a large creditor group and/or not all holders are known, it is customary for a small group (or groups) of creditors to form, on an ad hoc basis or as a coordinating committee, to negotiate and agree on a plan with the debtor in an orderly fashion. The parties will then typically enter into a binding lock-up agreement which will be shared with the wider stakeholder group with a view to securing the requisite majorities to proceed either on a contractual basis or using a restructuring tool.
The benefits of an informal workout are as follows:
- It is generally less costly;
- It generates less adverse publicity;
- It involves less commercial risk than a more formal process; and
- Risks around new money, new security and/or lender liability are less acute in the United Kingdom than in other jurisdictions and do not require a process to provide a safe harbour.
However, it is not always possible to proceed on the basis of an informal workout. The debtor may need, or be unable to avoid, an insolvency process (eg, an administration might be needed to provide breathing space for negotiations or to shed unsustainable liabilities); or a process may be needed to cram down creditors because the requisite contractual majorities will not support the transaction.
Without a moratorium on creditor enforcement, informal workouts can be quickly derailed if a creditor decides to enforce. The United Kingdom tried to address this by introducing a standalone moratorium in June 2020. However, the initial duration of the moratorium – 20 business days – is extremely tight to negotiate a substantive restructuring. Further, not all companies are eligible (in particular, companies that are party to most capital market arrangements are ineligible).
3.2 What formal restructuring proceedings are available in your jurisdiction, and what are the benefits and drawbacks of each?
In addition to the insolvency proceedings discussed in question 4.1, which are often used in connection with the implementation of workouts, a debtor may use a scheme of arrangement or a restructuring plan to achieve a restructuring.
Schemes are a very versatile tool and have proven effective to implement a variety of restructurings, including amend-and-extend transactions, standstills, debt-for-equity swaps and other comprehensive reorganisations.
Restructuring plans are modelled on the existing scheme of arrangement, but with the key addition of the ability to bind dissenting class(es).
A helpful feature of both schemes and restructuring plans is that the company can target a particular group (or groups) of its creditors and does not have to approach its creditors generally; only those creditors will be affected by, and vote on, the scheme/plan. They can also be used to compromise the claims of secured, as well as unsecured, creditors.
In most cases, no supervisor is appointed to oversee the process; court involvement is limited to two hearings (see question 3.6 for further details regarding process).
As schemes and restructuring plans are processes under the Companies Act (in contrast to administration and company voluntary arrangements, which are processes under the Insolvency Act), the stigma of an insolvency process is also arguably mitigated. (However, the English court has held that the restructuring plan procedure constitutes a bankruptcy/insolvency proceeding for the purposes of the bankruptcy exclusion to the Lugano Convention.)
Entry requirements and court involvement: Both schemes of arrangement and restructuring plans are Companies Act processes, which require two court hearings, including court sanction. The availability of restructuring plans is restricted to companies in some present or prospective financial difficulties affecting the company's ability to carry on business as a going concern, which the plan must be intended to eliminate or reduce. No such requirement applies for a scheme of arrangement; it is possible to have a fully solvent scheme of arrangement.
The company must have a ‘sufficient connection' to the United Kingdom in order to propose a scheme or restructuring plan. There is significant precedent for companies taking steps to establish a ‘sufficient connection' specifically to be able to propose a scheme or restructuring plan, and a variety of ways of doing so.
Approval threshold: Stakeholders vote in classes according to their rights both before and following the scheme/restructuring plan.
The court has discretion to sanction a scheme of arrangement (and thereby bind all affected stakeholders, whether secured or unsecured and whether or not they consented or voted) if the scheme has been approved by at least 75% in value and over 50% by number of those voting, in each class.
For a restructuring plan, every creditor or shareholder whose rights are affected by the plan must be permitted to vote. However, an application can be made to exclude classes of creditors/shareholders from voting where the court is satisfied that "none of the members of that class has a genuine economic interest in the company". The court has discretion to sanction the plan (and thereby bind all affected stakeholders, whether secured or unsecured and whether or not they consented or voted) if the plan has been approved by at least 75% in value of those voting, in at least one class, which would receive a payment or have a genuine economic interest in the company in the event of the ‘relevant alternative', provided that the court is satisfied that none of the members of any dissenting class(es) would be any worse off under the plan than they would be in the event of the ‘relevant alternative'. The ‘relevant alternative' is whatever the court considers would be most likely to occur if the plan were not confirmed. The court's discretion as to whether to sanction a plan gains even greater importance given the possibility that not every class may have approved the plan; the court may decline to sanction a plan if it does not consider it would be ‘just and equitable' to do so.
3.3 How, by whom and on what grounds are formal restructuring proceedings initiated? What are the main preconditions for success?
A scheme of arrangement or restructuring plan is initiated by an application to court for an order summoning a meeting or meetings of the relevant class or classes of creditors. The application can be made by the debtor, any creditor, any member, an administrator or a liquidator. Debtor-initiated schemes/plans are by far the most prevalent. It is settled case law that the consent of the company (through either the board of directors or a simple majority of members) is required for the court to sanction a scheme of arrangement, and this is likely to be applied to restructuring plans.
There is no threshold requirement of current or anticipated insolvency for a scheme of arrangement; but in order to prove that the scheme is fair, the applicant will need to demonstrate (among other things) that scheme creditors would be in a better financial position if the scheme were implemented than if the most likely alternative occurred (often formal insolvency proceedings). Unlike for schemes, a company proposing a restructuring plan must have encountered, or be likely to encounter, financial difficulties that are affecting (or will or may affect) its ability to carry on business as a going concern. Insolvency is not a requirement.
The proposals put forward in a scheme of arrangement/restructuring plan will usually be agreed in advance between the debtor and most of the affected creditors (through a lock-up agreement following negotiations with a representative group), such that it will generally be known in advance whether the voting thresholds will be met. However, even if the scheme/plan is approved (or set to be approved) by the requisite majority, the English courts will rigorously assess the process, both at the convening hearing and at the sanction hearing, and will need to be satisfied as to a number of aspects in order to sanction the scheme/plan, including whether:
- the classes of creditors are constituted correctly;
- the court has jurisdiction to approve the scheme/plan;
- procedural requirements have been complied with (including due notice and disclosure to those affected by the scheme/plan); and
- the scheme/plan is otherwise fair and there is no ‘blot' on the scheme/plan.
In order to sanction a restructuring plan that involves binding a dissenting class:
- at least one class that would receive a payment or have a genuine economic interest in the company in the event of the relevant alternative must have voted in favour; and
- the court must be satisfied that none of the members of the dissenting class(es) would be any worse off under the plan than they would be in the event of the relevant alternative.
Affected stakeholders may appear in court to oppose the scheme/plan; this has become much more common in the last couple of years.
3.4 What are the effects of the commencement of formal restructuring proceedings, both for the debtor and for creditors?
During a scheme of arrangement or restructuring plan, the directors will remain in control of the debtor unless an administrator or liquidator has been appointed.
From the perspective of a creditor, the launch of a scheme or restructuring plan (unless combined with an administration or the standalone moratorium) does not impose a moratorium. Indeed, the event may even trigger new contractual termination rights or defaults. A creditor is typically free to enforce any such existing claim (until, in the case of creditors subject to the scheme/plan, the point at which the scheme/plan is sanctioned). However, the company will typically launch a scheme/plan only if the requisite majority of affected creditors has executed a lock-up agreement, which will typically include waivers and/or forbearances to maintain stability through the process.
Following sanction, affected creditors will be able to enforce their claim only as compromised or varied by the scheme/plan.
3.5 Does a moratorium or stay apply and, if so, what is its scope? Are there exceptions?
No automatic moratorium: Neither a scheme of arrangement nor a restructuring plan offers an automatic moratorium (unless combined with the standalone moratorium or an administration). However, English courts have a general case management power to stay proceedings, which they may use, for example, to stay a winding-up petition or enforcement of security where a company is in the process of a restructuring – as in the cases of Vietnam Shipbuilding (2013), Travelodge (2020) and Virgin Active (2021).
Standalone moratorium: The Corporate Insolvency and Governance Act 2020 introduced a new standalone moratorium to temporarily prevent creditors taking enforcement action in order to allow an eligible company formal breathing space to propose and pursue a rescue plan. A company is eligible for the moratorium only where it is (and remains) likely that the moratorium will result in the rescue of the company as a going concern. However, broad capital markets exclusions render most bond issuers/guarantors ineligible for the moratorium. Under the standalone moratorium (subject to certain exceptions):
- restrictions apply to the payment or enforcement of certain ‘pre-moratorium debts' for which a company has a payment holiday during the moratorium and ‘moratorium debts';
- no winding-up petition may be presented or winding-up order made;
- no administration may be commenced; and
- except with court permission (which cannot be sought to enforce a pre-moratorium debt for which the company has a payment holiday):
- no steps may be taken to enforce security – with an important exception for the enforcement of financial collateral arrangements, such as security over shares;
- no proceedings/legal process may be commenced or continued against the company or its property;
- most floating charges may not be crystallised by the floating charge holder;
- no landlord may exercise any forfeiture rights; and
- no steps may be taken to repossess goods under any hire-purchase agreement.
A notable exception is that payments falling due under a contract involving financial services (among other excluded categories) do not benefit from the payment holiday; if they are not paid, the moratorium cannot continue.
During the moratorium, a company must pay new debts/liabilities to which it becomes subject during the moratorium (‘moratorium debts') and certain pre-moratorium debts which do not benefit from a payment holiday (including accelerated financial debt, rent in respect of the moratorium period and wages and redundancy payments). If these amounts (other than accelerated financial debt) are not paid, they will get super-priority if the company enters administration or liquidation within 12 weeks of the end of the moratorium. Any scheme, company voluntary agreement (CVA) or restructuring plan in that 12-week period cannot compromise such liabilities without consent (and such creditors are prohibited from voting on such a scheme or restructuring plan, although not a CVA).
Extraterritorial effect of moratorium: Unlike in the United States, a moratorium under English law does not purport to have extraterritorial effect. Its recognition under the laws of another jurisdiction will depend on applicable national law.
3.6 What process do restructuring proceedings typically follow (including likely length of process and key milestones)?
Schemes and restructuring plans follow broadly the same procedure. There is no express timeline provided in the Companies Act, but a scheme/plan process generally takes at least eight weeks from the issuance of the practice statement letter launching the scheme/plan to receipt of the court's sanction order which implements the scheme/plan once filed at Companies House. This does not take into account the customary pre-launch negotiation period – normally at least four weeks – between the company and relevant stakeholders. A scheme/plan is generally launched only once a significant proportion of those who are going to be affected by the scheme/plan have agreed to vote for it (via a support or ‘lock-up' agreement).
Schemes and plans require two court hearings:
- the convening hearing (at which the court may convene stakeholder meetings); and
- the sanction hearing (at which the court may sanction the scheme/plan).
Between the court hearings, the stakeholders vote on the scheme or plan.
A scheme of arrangement or restructuring plan will generally proceed as follows:
- The restructuring terms are agreed and a lock-up agreement is typically executed. Scheme/plan documents and key restructuring documents are drafted over four to eight weeks (depending on the complexity of the transaction).
- Two to three weeks before the first hearing, a practice statement letter is circulated to affected creditors, which provides a high-level overview of the proposed scheme/plan and proposed voting classes.
- The first court hearing (known as the ‘convening hearing') is held, at which the debtor seeks an order to convene the meeting(s) of creditors/shareholders for voting purposes. Affected stakeholders can raise challenges in court.
- Notice of creditor meetings and scheme/plan documentation are provided to scheme/plan creditors shortly afterwards. The scheme/plan documentation will include an explanatory statement summarising the proposed scheme/plan.
- Stakeholder meeting(s) are held three to four weeks later, at which affected stakeholders vote on the scheme/plan.
- The second court hearing (known as the ‘sanction hearing'), at which the court is requested to approve or ‘sanction' the scheme/plan, is held a few days later. Again, affected stakeholders may appear to raise challenges.
- If the court sanctions the scheme/plan, the scheme/plan will become effective once the relevant order is delivered to Companies House for registration, or otherwise in accordance with its terms. However, the English court is cautious to ensure that its order is not in vain and therefore any remaining conditions precedent must be limited to none; otherwise, the court may decline to sanction the scheme/plan unless and until the remaining conditions precedent have been satisfied or waived.
This timetable assumes that affected stakeholders are sophisticated financial institutions with experienced advisers; longer timetables may be necessary – for example, if seeking to compromise individual stakeholders.
3.7 What are the roles, rights and responsibilities of the following stakeholders in restructuring proceedings? (a) Debtor, (b) Directors of the debtor, (c) Shareholders of the debtor, (d) Secured creditors, (e) Unsecured creditors, (f) Employees, (g) Pension creditors, (h) Insolvency officeholder (if any), (i) Court.
The debtor will typically be the party proposing a scheme of arrangement/restructuring plan to implement an agreed restructuring (though the terms may be driven in large part by the relevant creditor group(s) and potentially the shareholders). The key role of the debtor in a restructuring will be to act as go-between and facilitator between the various stakeholder constituencies, with a view to securing a deal to safeguard its going-concern status or otherwise maximise value for stakeholders.
(b) Directors of the debtor
Unless the debtor is in administration or liquidation, its directors will remain in control during the restructuring process. Managing potential conflicts issues, in terms of both competing stakeholder interests (particularly where there is a debate concerning where value break) and ongoing shareholder representative involvement on the board, will also be key. See questions 6.1–6.3 for further details.
(c) Shareholders of the debtor
The role of the shareholders in restructuring proceedings will vary depending on the transaction:
- They may retain full control of the company (particularly if providing new money);
- They may be diluted through a debt-for-equity swap; or
- They may be disenfranchised entirely (with or without their consent).
The shareholders owe no duties to the company's creditors and may act in their own interests.
(d) Secured creditors
Schemes can be used to bind secured creditors, provided that the relevant class(es) of creditors approve the scheme.
A restructuring plan can bind a class of secured creditors without their consent (given the court's ability to sanction a plan which not every class has approved). However, it is likely to be more difficult to persuade the court to sanction a plan that secured creditors do not support (given their senior position within the creditor hierarchy and the nature of the ‘no worse off' condition when the court considers whether to sanction a plan that not every class has approved).
As noted in question 3.4, a creditor's rights with respect to its security are unaffected by the launch of the scheme/plan (though may be compromised through the scheme/plan). No automatic statutory moratorium will apply to prevent a secured creditor from exercising its rights, although the court has certain discretionary case management powers to stay proceedings where a scheme or restructuring plan is already underway and appears to have a good chance of success.
(e) Unsecured creditors
Schemes can be used to bind unsecured creditors, provided that the relevant class or classes of creditors approve the scheme. It is usual to leave unsecured trade creditors outside schemes of arrangement.
Under a restructuring plan, it is possible to bind whole classes of dissenting unsecured creditors. Several companies have compromised trade creditors through a restructuring plan (including the first cross-class cram-down, DeepOcean).
Generally, employees are left unaffected by schemes/plans.
(g) Pension creditors
Where a group has a defined benefit pension scheme, pension creditors can have an important role to play in restructurings. The relevant actors include:
- the trustees of the pension scheme;
- the Pension Protection Fund (PPF), which provides compensation for defined benefit occupational pension scheme members on an employer's insolvency; and
- the Pensions Regulator, which has very wide ‘moral hazard' or ‘anti-avoidance' powers to make third parties liable to provide funding to a defined benefit occupational pension scheme in certain circumstances.
Neither a scheme of arrangement nor a restructuring plan is a ‘qualifying insolvency event' that will trigger the start of an assessment period by the PPF and the crystallisation of any pension scheme deficit on a buy-out basis.
To date, schemes/plans have not generally been used to compromise pension debts. Nonetheless, pension creditors may well exert situational leverage in the context of a restructuring with a view to securing increased contributions from the restructured company, a share of the equity and/or a share in the lenders' security package to secure pension debts.
(h) Insolvency officeholder (if any)
An insolvency officeholder may or may not be appointed in the context of restructuring proceedings. As discussed in question 3.5, a scheme of arrangement or restructuring plan may be combined with an administration in order to obtain a moratorium for the benefit of the debtor. An administrator or receiver may also be appointed in parallel with a scheme/plan to effect a change of ownership and disenfranchise out-of-the-money stakeholders through a sale of one or more group companies (less required in the context of a restructuring plan given the availability of cross-class cram-down). In this regard, administrators (as officers of the court) will owe their duties to the creditors generally, while receivers will owe their duties to the secured creditor that appointed them. Generally speaking, both types of officeholders will be required to act in a way that is fair and achieves the best value in the particular circumstances. Additionally, in each case, a ‘pre-pack' sale transaction will often have been agreed with the relevant stakeholders in advance and implemented by the insolvency officeholder shortly after its appointment.
As discussed in question 3.2, any scheme/plan will involve close judicial oversight by the court at the two hearings, but the court will not have broader involvement.
3.8 Can restructuring proceedings be used to "cram down" and bind dissentient creditors to a transaction supported by other creditors? Are creditors separated into classes for the purposes of voting in the proceedings? What are the relevant voting thresholds? Is "cross-class cramdown" available?
Class constitution: If there are material differences in the legal rights of affected creditors either before a scheme of arrangement/restructuring plan or as modified by the scheme/plan (such that they cannot consult together with a view to their common interest), they are likely to be required to vote in separate classes. Differences in the interests of affected creditors are unlikely to ‘fracture the class', but can lead to fairness challenges at the sanction hearing stage.
Scheme of arrangement: A scheme will be approved where, in respect of each creditor class meeting, at least 75% of the members of that class by value and more than 50% by number (present and voting, either in person or by proxy) vote in favour. If approved by all classes, the scheme will bind all affected creditors. As noted in question 3.2, schemes cannot be used to cram down entire impaired classes (as can be done in, for example, US Chapter 11, Irish examinership proceedings or UK restructuring plans). However, this has been achieved in practice by combining schemes with a bolt-on insolvency or enforcement process, coupled with the use of intercreditor release provisions.
Restructuring plan: For a class of stakeholders to approve a plan, at least 75% in value of those voting must vote in favour. Unlike a scheme of arrangement, there is no requirement for a majority in number to vote in favour. Crucially, a plan may still be confirmed by the court even where certain classes do not vote in favour.
3.9 Can restructuring proceedings be used to compromise secured debt?
Yes, provided that, in respect of a scheme, the relevant voting thresholds are met in all classes and the scheme is otherwise sanctioned by the court.
A whole class or classes of secured creditors can be compromised in a restructuring plan, provided that the court is satisfied that:
- none of the members of the dissenting class(es) would be any worse off under the plan than they would be in the relevant alternative; and
- at least one class (whether creditors or shareholders) that would receive a payment, or have a genuine economic interest in the company, in the event of the relevant alternative, has voted in favour.
Sanction remains at the court's discretion – that is, satisfaction of these conditions is necessary but not sufficient.
3.10 Can contracts / leases be disclaimed or otherwise addressed through restructuring proceedings?
In principle, a scheme of arrangement can be used to amend the terms of a contract or lease, subject to achieving the requisite consent majorities in every class.
A CVA is the typical process used in the United Kingdom to modify leases (outside a fully consensual process). This is largely because creditors (landlords and other unsecured creditors alike) vote in a single class notwithstanding differences in their rights and treatment under the terms of the CVA, allowing a debtor to treat landlords differently in terms of rent reductions, closures and so on, and thereby shape a deal that will garner the necessary support while achieving the relevant commercial aims. However, we are starting to see early cases of companies using restructuring plans rather than CVAs to restructure lease liabilities (as in the case of Virgin Active).
However, a CVA, scheme or restructuring plan cannot be used to disclaim or surrender a lease or otherwise modify proprietary rights. Instead, typically, under-performing stores are switched to very low or zero rent and the restructuring proposal offers relevant landlords the opportunity to agree to a surrender. Formal disclaimer of contracts or leases is available only in liquidation.
3.11 Can liabilities of third parties (e.g. guarantors) be released through restructuring proceedings?
Yes, in certain circumstances. Claims against third-party guarantors may be released or amended by the scheme/plan if necessary for the successful operation of the scheme/plan (to avoid ricochet claims against the principal debtor). A release of claims against persons involved in the preparation, negotiation or implementation of a scheme/plan, and their legal advisers, is also permissible and commonly seen. Issues might, however, arise where a scheme/plan creditor has a more tangential claim against a third party.
Such third-party releases have been recognised as valid in Chapter 15 recognition proceedings in the United States, notwithstanding questions with respect to their validity in a domestic Chapter 11 restructuring plan. This is important in the context of schemes/plans of debt governed by US laws.
3.12 Is any protection and/or priority afforded to the providers of new money in the context of restructuring proceedings (i.e. is "DIP financing" available)?
There is no express provision for super-priority rescue financing in restructuring or insolvency processes in the United Kingdom, unlike the debtor-in-possession (DIP) financing regime available under the US Bankruptcy Code.
Credit extended to a company in administration may be given priority over the claims of unsecured, preferential or floating charge creditors by virtue of its classification as an administration expense. However, administrators may well be reluctant to incur debt on this basis, as it would rank ahead of their own claims for fees and expenses. Further, it is not possible to afford priority status with respect to assets subject to an existing fixed charge without the consent of the relevant creditor(s).
In practice, new money may be afforded priority status by:
- layering it into the structure on a structurally senior basis and/or granting security over previously unsecured assets; and/or
- entering into new contractual intercreditor arrangements between the incoming and existing creditors, regulating their respective rights with respect to the security.
Where it is not possible to reach agreement with existing creditors in this regard, a scheme of arrangement or restructuring plan might be used in certain circumstances to ‘cram down' a proposal on a dissenting minority; this could include an offer of new financing to the debtor on a super-priority basis.
Generally speaking, even in the zone of insolvency, the borrowing of new money and grant of new security by a debtor should not be subject to challenge (including clawback or invalidity) in a subsequent insolvency process, as long as the transaction was entered into in good faith by the company and for its benefit. Specific issues arise, however, with respect to ‘roll-ups' securing old money, which must be considered on a case-by-case basis.
We understand that the introduction of a specific DIP financing regime remains under consideration by the UK government.
3.13 How do restructuring proceedings conclude?
It depends on the procedure. As discussed in question 3.6, a scheme of arrangement or restructuring plan will become effective upon the delivery of the sanction order for registration at Companies House.
4.1 What types of insolvency proceeding are available in your jurisdiction, and what are the benefits and drawbacks of each?
The key insolvency procedures are administration, liquidation (also known as winding up) and company voluntary arrangement (CVA). A new restructuring plan procedure was introduced in June 2020 and is discussed in question 3; although it is a Companies Act procedure, the English court has held that the restructuring plan procedure constitutes a bankruptcy/insolvency proceeding for the purposes of the bankruptcy exclusion to the Lugano Convention.
Administration: This is the key insolvency procedure with a view to company rescue, although successful exits from administration are relatively rare. Similar to the US Chapter 11 regime, a company that files for administration has the protection of a statutory moratorium to allow it to be rescued or reorganised or its assets realised. Unlike in Chapter 11, management lose control of the company to the administrators (who are licensed insolvency practitioners and officers of the court). However, 2020 saw a few high-profile ‘light-touch' administrations, in which administrators consent to the continued exercise of management powers by the directors, subject to certain restrictions.
The administrators will seek to rescue the company as going concern in the first instance; but if that is not possible, the goal of the administration is to achieve a better result for creditors than in a liquidation (or, failing that, a realisation of the company's assets). The administrators' duties are owed to the creditors as a whole. If the administration has not come to an end within a year, the administration will end automatically unless its term is extended in advance.
‘Pre-pack' administration is particularly prevalent in the United Kingdom. This is an arrangement under which the sale of all or part of the company's business or assets is negotiated with a purchaser (by putative administrators) prior to the appointment of administrators. Historically, the administrators effected the sale almost immediately after appointment, without the sanction of the court or creditors. However, from 30 April 2021, substantial disposals by administrators of the company's business or assets to connected party purchasers (defined broadly and including by reference to certain former connections) within the first eight weeks of an administration require advance approval from either the creditors or an independent evaluator.
Liquidation: This is a dissolution procedure involving the termination of the company (and, ultimately, its removal from the register). It involves the appointment of liquidators who collect and sell the company's assets and distribute the proceeds to creditors (and members, in the unlikely event of a surplus); the directors lose control. There are three types of liquidation:
- members' voluntary liquidation (MVL);
- creditors' voluntary liquidation (CVL); and
- compulsory liquidation.
CVA: Like a scheme of arrangement or restructuring plan, this insolvency procedure permits a company to make a binding compromise with its creditors. However, there are a number of differences:
- A CVA cannot compromise secured or preferential creditors without their consent;
- A CVA is implemented out of court unless it is challenged;
- A CVA requires the consent of at least 75% in value of unsecured creditors; in addition, it will not be approved if more than half of the total value of unconnected creditors vote against it; and
- Creditors are not split into different classes for voting purposes, even if they are treated differently. However, the CVA must not be unfairly prejudicial – that is:
- recoveries for creditors must be better under the CVA than in the alternative, such as liquidation (the ‘vertical comparator'); and
- any differential treatment between creditors must be justifiable (the ‘horizontal comparator').
In recent years, CVAs have been used extensively to compromise companies' leasehold obligations to landlords, especially in the retail and casual dining sectors.
Special regimes apply for certain types of companies such as financial institutions, certain regulated entities and charities.
4.2 How, by whom and on what grounds are insolvency proceedings initiated? Can the instigating party (or any other parties) select the identity of the relevant insolvency officeholder?
Administration: Administration can be commenced either:
- by court order (on the application of the debtor, its directors or any creditor); or
- by using the out-of-court route, which can be instigated either by the debtor, its directors or a qualifying floating charge (QFC) holder. The instigating party can select the identity of the administrators; although if the out-of-court route is chosen, notice must be given to QFC holders, which may intervene to appoint different administrators (where the instigating party is a QFC holder, only if the other party holds a prior QFC). The administrators will need to be satisfied that they can achieve one of the statutory purposes of the administration before taking the appointment. It is also a prerequisite that the debtor is or is likely to become unable to pay its debts (save in the case of a QFC out-of-court appointment).
Voluntary liquidation: Both forms of voluntary liquidation are commenced by a debtor's members. In the case of an MVL, the shareholders choose the identity of the liquidator. In the case of a CVL, both the shareholders and creditors may nominate a liquidator and, if different persons are nominated, the person nominated by the creditors will be appointed. An MVL requires the directors to make a statutory declaration with respect to the debtor's solvency. If they do not, a voluntary liquidation will commence as a CVL. An MVL may be converted into a CVL if the liquidators form the view that the debtor is in fact unable to pay its debts in full.
Compulsory liquidation: Winding-up petitions for the compulsory liquidation of a debtor are commonly presented by a creditor, but petitions may also be presented by other parties, including the company itself and its directors. Petitions are typically based on the insolvency of the company, on a cash-flow or (more infrequently) balance-sheet basis. In this regard, a company will be deemed insolvent if it fails to pay any statutory demand after a period of three weeks. Once a winding-up order has been made, the official receiver (an officer of the UK Insolvency Service) is appointed as liquidator. The official receiver has the discretion to decide whether the company's creditors and contributories should nominate a liquidator in his or her place. If so, the official receiver may seek nominations from the company's creditors. A creditor representing 25% in value of the debtor's creditors may also serve a formal request on the official receiver to seek nominations.
In response to the COVID-19 pandemic, the UK government introduced a temporary ban on statutory demands and suspended winding-up petitions where a company's inability to pay is the result of COVID-19. This temporary ban was extended several times and expired on 30 September 2021.
From 1 October 2021 until 31 March 2022, a creditor can only present a winding-up petition on the ground that the company is unable to pay its debts if each of the following conditions is satisfied:
- the debt due by the company to the creditor is (i) liquidated (i.e., for a specific amount), (ii) has fallen due and (iii) is not an "excluded debt", which is defined as rent under a business tenancy which is unpaid by reason of a financial effect of coronavirus;
- the creditor has delivered written notice seeking the company's proposals for the payment of the debt;
- after 21 days, the company has not made a proposal for payment that is to the creditor's satisfaction; and
- the amount owed is at least £10,000.
Creditors may apply to court to disapply/vary conditions B and C, but not conditions A or D.
CVA: The directors of the debtor may propose a CVA to the company's shareholders and creditors, unless the company is in administration or liquidation, in which case the administrator or the liquidator may propose a CVA. A proposal for a CVA should nominate a person to supervise its implementation, who must be a qualified insolvency practitioner. When the administrators or liquidators make a proposal for a CVA, they will normally act as the nominee/supervisor. A CVA is proposed by delivering the relevant proposal to court, accompanied by a report from the nominee stating that the CVA has a reasonable prospect of being approved and implemented.
4.3 What are the effects of the commencement of insolvency proceedings, both for the debtor and for creditors?
Administration: The administrators act as agent of the debtor and take over management of the company from the directors. A moratorium applies to creditor actions (see question 4.4).
Compulsory liquidation: The business of the debtor ceases, except as necessary for the purposes of the winding up. The directors' powers cease and the liquidators take over the management of the company. Employee contracts are automatically terminated. Any disposition of the debtor's property after the date of the winding-up petition will be automatically void unless a validation order is obtained from the court. No action or proceedings can be continued or raised against the company, except with the leave of the court (see question 4.4).
Voluntary liquidation: The directors' powers cease and the liquidators take over the management of the company. There is no moratorium on legal proceedings against the company.
Company voluntary arrangement: Except in a CVA combined with an administration, the directors remain in control of the debtor and there is no moratorium on creditor actions.
4.4 Does a moratorium or stay apply and, if so, what is its scope? Are there exceptions?
Moratorium in administration: An automatic, broad moratorium applies when a company is in administration (and, in some circumstances, an interim moratorium pending appointment of administrators). The administration moratorium prohibits any steps/actions from being commenced or continued against the company and its property, except with the administrator's consent or the permission of the court. This includes preventing any secured creditor from enforcing its security interest (unless the security constitutes a financial collateral arrangement – see question 2.2 regarding the remedy of appropriation, which is exempt from the moratorium in administration).
Liquidation: In a compulsory liquidation, no action or proceedings can be continued or raised except with the leave of the court. Creditors may, however, take steps to enforce their security or repossess assets which are not actually owned by the company (eg, goods subject to a retention of title clause). In a voluntary liquidation, there is no moratorium on legal proceedings against the company.
Extraterritorial effect of moratorium: Unlike in the United States, a moratorium under English law does not purport to have extraterritorial effect. Its recognition under the laws of another jurisdiction will depend on applicable national law.
Please also see question 3.5 in relation to the availability of a standalone moratorium under the Corporate Insolvency and Governance Act 2020.
4.5 What process do insolvency proceedings typically follow (including likely length of process and key milestones)?
Administration: The administrators must prepare a statement of proposals with respect to how they propose to achieve the statutory objective within eight weeks of appointment, which in nearly all cases must be approved by the creditors. The administrators have wide-ranging powers to manage the business of the debtor and can:
- dispose of property;
- investigate and set aside past transactions; and
- make distributions to the debtor's creditors.
The length of the process varies depending on the complexity of the case and the actions necessitated by the administrators' proposals. An administration will automatically end within one year, but may be extended in advance multiple times. Certain highly complex administrations have exceeded 10 years (notably Lehman Brothers and Nortel Networks).
Liquidation: The liquidators take over the management of the debtor and control all of the company's assets for the purpose of collecting, realising and distributing the assets of the company to its creditors. The liquidators may also challenge past transactions and reclaim company property exercising powers under the Insolvency Act 1986. The length of the process varies depending on the complexity of the case and the time it takes to realise the debtor's assets. A voluntary liquidation may commence swiftly, given that only a shareholders' resolution is required. It is likely to take materially longer to obtain a winding-up order, particularly where the petition is contested and particularly given the current ban on statutory demands and limitations on winding-up petitions.
CVA: Those proposing the CVA prepare a document setting out its terms with the assistance of the nominees. The document is ultimately delivered to the nominees, who must assess and report to the court within 28 days on whether the proposal should be considered by the debtor's creditors and members. If the nominees so conclude, the company's members and creditors will vote on whether to reject or approve it. If approved by the requisite creditor majority (with or without modifications), the CVA will take effect. The nominees are designated as supervisor and are responsible for the implementation of the CVA terms. Following approval, a CVA can be challenged in court on the grounds of unfair prejudice or material irregularity within 28 days of approval (or, if later, within 28 days from when the creditor became aware of the vote having taken place); such challenges are often heard on an expedited basis. The CVA process typically takes four to 10 weeks from the date on which the proposals document is submitted to the nominees.
4.6 What are the respective roles, rights and responsibilities of the following stakeholders during the insolvency proceedings? (a) Debtor, (b) Directors of the debtor, (c) Shareholders of the debtor, (d) Secured creditors, (e) Unsecured creditors, (f) Administrator, (g) Employees, (h) Pension creditors, (i) Insolvency officeholder, (j) Court.
Generally, a debtor's contractual obligations remain enforceable upon the commencement of an insolvency proceeding (subject to limited exceptions such as employment contracts in a compulsory liquidation), although a moratorium may apply as further detailed in question 4.4. However, a breach of obligations arising prior to the proceeding will give rise only to an unsecured claim (unless the insolvency officeholder has taken action to ‘adopt' the contract for the benefit of the estate). New obligations that the officeholder causes the company to incur will typically rank as expenses of the proceeding.
(b) Directors of the debtor
Directors' powers will generally cease in a liquidation or administration (although an officeholder may request their assistance). In a CVA, the directors remain in control (the role of the nominee/supervisor being limited to oversight of the CVA).
(c) Shareholders of the debtor
The shareholders of a debtor have limited involvement in most insolvency proceedings, except in the case of a voluntary liquidation, which is commenced by a shareholders' resolution.
In the case of a CVA, the shareholders of the debtor are invited to vote on the proposals document. Although the proposal can take effect if it has been approved by the creditors alone, a shareholder of the debtor can apply to the court (although this is extremely rare), which has discretion to determine whether the decision of the company's shareholders should prevail over the decision of the creditors.
(d) Secured creditors
Secured creditors are unable to vote on a CVA (save to the extent that their debt is ‘under-secured') and secured debts cannot be compromised by a CVA without the relevant secured creditor's consent.
In a CVL, creditors are invited to nominate the liquidators; while in a compulsory liquidation, the liquidators may be appointed by a company's creditors (which may occur at the invitation of the official receiver or at the instigation of a creditor representing 25% in value of the debtor's creditors). A creditor will be entitled to vote only the unsecured or under-secured element of its debt.
In most circumstances, the administrators' proposals require the support of at least a majority in value of a company's creditors. The creditors receive reports from the administrators detailing the progress of the administration and a final progress report. The administrators must also invite creditors to form a creditors' committee. Any person that has proved for a debt which is not fully secured is eligible to be a member of such committee.
(e) Unsecured creditors
A CVA proposal will be implemented if it is approved by at least 75% by value of the company's unsecured creditors that vote (at least 50% by value of which must be unconnected with the company) – see question 4.1. The proposal will be binding on all unsecured creditors, even if they are subject to different treatment under the CVA (subject to their rights to appeal on the grounds of fairness).
See question 4.6(d) for the role of creditors generally in a liquidation or an administration. In administration and liquidation, unsecured creditors have an entitlement to share in the prescribed part (which is a fund (maximum £800,000) from the proceeds of realising assets covered by floating charge security). Otherwise, unsecured creditors will receive a distribution only once all secured and preferential creditors have been paid in full.
A compulsory liquidation automatically terminates employees' service contracts. Otherwise, the entry of a company into administration, voluntary liquidation or the CVA process has no immediate direct impact on employees. Certain employment-related claims rank as preferential debts in liquidation or administration. The administrators must decide whether they wish to adopt existing employment contracts within 14 days of the commencement of an administration; and once a contract is adopted, priority is given for all ongoing wages, which must be paid as expenses of the administration.
(g) Pension creditors
Unpaid contributions to occupational pension schemes (within certain limits) rank as preferential debts in a liquidation or administration.
Otherwise, any deficit on a defined benefit pension scheme – and any financial support direction or contribution notice issued by the Pensions Regulator exercising moral hazard powers – will constitute an ordinary unsecured claim in an administration or liquidation. The claim will be valued on a full buy-out basis, meaning that pension creditors may often have a material influence in the process.
The occurrence of an administration, liquidation or CVA will constitute a ‘qualifying insolvency event' in respect of a pension scheme, triggering an ‘assessment period' during which the Pension Protection Fund (PPF) will determine whether it should take responsibility for it. If so, and pending this determination, the PPF is entitled to stand in the shoes of the pension trustees and exercise creditors' rights on behalf of the pension scheme.
(h) Insolvency officeholder
Insolvency officeholders have the responsibilities described in question 4.5. The administrators have a duty to act in the best interests of all creditors (not just the creditor that appointed them, if applicable).
Certain types of insolvency proceedings may be commenced in or out of court.
Following the opening of insolvency proceedings, the court generally takes a supervisory role only. Insolvency officeholders are officers of the court and have a duty to report to the court; and the court may provide directions to the insolvency officeholder upon request.
Certain actions that may be taken by insolvency officeholders require the court's prior approval.
An administrator or liquidator may apply to court to bring claims for wrongful or fraudulent trading against directors, or to seek to set aside antecedent transactions.
Finally, a creditor or member of the company may apply to court to challenge the insolvency officeholder's conduct, or to challenge a CVA.
4.7 What is the process for filing claims in the insolvency proceedings?
The creditors of a company in administration or liquidation must file a proof of debt. Proving entitles a creditor to participate in decision procedures and participate in distributions made by the relevant officeholder.
The officeholder will give notice of his or her intention to declare a dividend which will set out a last day for proving and state where and how proofs may be delivered. If a creditor fails to submit a proof of debt by the time of a distribution and additional funds are available subsequently, the creditor may participate in the next distribution and receive a ‘catch-up payment'.
4.8 How are claims ranked in the insolvency proceedings? Do any claims have "super priority" and is there scope for subordination by operation of law (e.g. equitable subordination)?
General ranking: On the insolvency of a debtor, the proceeds from the realisation of assets must be distributed, in simple terms, as follows:
- fixed charge holders;
- expenses in the insolvency proceedings;
- preferential creditors;
- prescribed part creditors;
- floating charge holders;
- unsecured creditors;
- statutory interest on provable debts;
- subordinated creditors (where appropriately worded); and
Where winding-up/administration proceedings are begun within 12 weeks of the end of any standalone moratorium, unpaid moratorium debts and unpaid priority pre-moratorium debts are paid after fixed charge holders, but in priority to all other categories.
Fixed charge holders have sole entitlement to the proceeds of assets over which a fixed charge has been granted (until their debt has been discharged in full), subject to paying the costs of realisation. Expenses in the insolvency proceedings include the officeholder's fees and expenses, as well as new liabilities that the officeholder causes the debtor to incur during the insolvency process.
Preferential creditors: Preferential creditors include certain (limited) employee remuneration claims and, since 1 December 2020, Her Majesty's Revenue & Customs (the UK tax authority) in respect of certain tax debts, including value added tax and pay as you earn. In addition, a ‘prescribed part' is carved out of the proceeds of floating charge realisations, which is made available to satisfy unsecured debts, up to a cap of £600,000 or, where the relevant floating charge was created on or after 6 April 2020, £800,000. The increased cap also applies where the relevant floating charge was created before 6 April 2020 if a later floating charge (over any of the company's assets) ranks equally or in priority.
Equitable subordination: There is no concept of equitable subordination in England and Wales.
4.9 What is the effect of insolvency proceedings on existing contracts? Is the counterparty free to terminate? Can they be disclaimed?
The general rule is that a company's contracts remain enforceable upon insolvency. Properly drafted, a retention of title clause will survive an insolvency filing.
Reliance by suppliers on ipso facto clauses – which allow one party to a contract to terminate, or impose altered terms, solely on the basis of the insolvency of the counterparty – in contracts for the supply of goods and services is prohibited where the counterparty becomes subject to a relevant insolvency procedure (including the restructuring plan and the standalone moratorium, but not including a scheme of arrangement). Furthermore, the supplier may not make payment of outstanding amounts (in respect of supplies made prior to the insolvency trigger) a condition of continuing supply. (Certain exceptions apply – for example, for financial services contracts and contracts related to aircraft equipment.)
There is also an ‘anti-deprivation' principle, which prohibits any contract from providing that property will transfer to another on the occurrence of an insolvency event.
In a liquidation or a distributing administration, statutory set-off applies where a creditor of the insolvent company is also a debtor of the company. Set-off is mandatory and automatic, and the relevant rules supersede all other contractual rights of set-off that are inconsistent with them.
Liquidators (but not administrators) have the power to unilaterally disclaim onerous executory contracts to avoid incurring future liabilities.
4.10 Can transactions entered into by the debtor prior to be insolvency be challenged and set aside? What are the relevant grounds / look-back periods / defences?
Certain pre-insolvency transactions may be challenged under the Insolvency Act 1986.
Grounds for challenge: Possible grounds for challenge include:
- transactions at an undervalue;
- extortionate credit transactions;
- avoidance of floating charges;
- transactions defrauding creditors; and
- property dispositions after the commencement of a winding up.
Each of these grounds essentially aims to unwind transactions that would otherwise have frustrated or allowed the company to avoid the payment of creditors on insolvency in accordance with the statutory priority of claims. In most cases, only administrators or liquidators may bring a claim challenging a reviewable transaction (although claims for transactions at an undervalue and preferences can be assigned by the officeholder to any third party). However, where there is fraud, any party that is a victim of the transaction may make a challenge.
Look-back period: The look-back period ranges between:
- two years prior to the commencement of insolvency proceedings where the transaction was with a connected party (including directors, shadow directors, and associated persons and companies); and
- six months for other parties.
The look-back periods were temporarily extended by six months for winding-up orders made in respect of petitions presented between 27 April 2020 and 30 September 2021.
Most grounds for challenge require an officeholder to commence court proceedings. However, a floating charge entered into during the look-back period will be void automatically, save to the extent of any new money provided on or after the charge was granted.
Defences include demonstrating that:
- the company was not insolvent at the relevant time (a number of actions);
- the debtor did not have a desire to prefer the recipient (preferences); and
- the transaction was entered into in good faith and for the benefit of the company (transactions at an undervalue).
Court order/impact on third parties: The court generally has a wide discretion to make any order it thinks fit to restore the position to what it would have been but for the relevant antecedent transaction. There are protections for third parties that acted in good faith, for value and without notice of the relevant circumstances.
4.11 How do the insolvency proceedings conclude? Can any liabilities survive the insolvency proceedings?
Administration: The administrators' appointment automatically ceases 12 months after the date of appointment. This can be extended before expiry either by court application or (for the first extension) with the consent of the creditors. The administration can be ended by court order, and administrators appointed out of court that believe the purpose of the administration has been sufficiently achieved can end the proceedings by filing a form with the court and Companies House. An administration may be converted into a CVL if assets remain to be distributed or can end in dissolution.
Liquidation: Once all assets have been collected in and distributed, and the debtor's affairs have otherwise been fully wound up, the liquidators must make an account of the winding up and file a final return with Companies House. The debtor will be automatically dissolved three months later. If the liquidator is the official receiver (in a compulsory liquidation), the liquidation will end three months after the official receiver notifies Companies House that the liquidation has concluded. In certain circumstances, a company may be restored to the register following dissolution, in which case it will remain subject to any liabilities that were not discharged at the time of dissolution.
CVA: If a CVA is approved, it will be implemented and end in accordance with its terms (a CVA will typically prescribe a certain term during which claims will be adjudicated upon and distributions made – and potentially time-limited variations to contractual obligations, as is often the case with CVAs addressing lease obligations). All liabilities of the debtor survive the CVA, except to the extent that they are compromised as part of the CVA.
5 Cross-border / Groups
5.1 Can foreign debtors avail of the restructuring and insolvency regime in your jurisdiction?
Yes. Availability to foreign debtors depends on the procedure.
Impact of Brexit: Pre-Brexit implementation, ‘main' UK insolvency proceedings could be opened only in respect of companies incorporated in EU member states if they had their centre of main interests (CoMI) in the United Kingdom. Eligibility has now widened and it is now possible to open insolvency proceedings under the tests in UK domestic law, regardless of whether the debtor is based elsewhere in Europe.
Eligibility for administration or CVA:
- The company must be UK registered or have its CoMI in the United Kingdom;
- The company must be incorporated in a European Economic Area (EEA) state; or
- If the company is not incorporated in an EEA state, it must have its CoMI in an EU member state.
(The English court also has jurisdiction under Section 426 of the Insolvency Act 1986 to make an administration order in respect of a foreign company upon receipt of a letter of request from a court in certain other jurisdictions (mainly former or present members of the Commonwealth).)
Eligibility for scheme of arrangement, restructuring plan or liquidation: The company must have a ‘sufficient connection' to England and Wales. This is often established by the debtor having its CoMI in the United Kingdom, or where the debt subject to the scheme/plan is governed by English law and/or contains an English jurisdiction clause. If a debtor has had none of these things, the English courts have on a number of occasions accepted jurisdiction where steps have deliberately been taken to create a connection – for example, a ‘CoMI shift' or the amendment of relevant debt documents to be governed by English law. However, the court will also need to be satisfied that the effect of the scheme/plan will be recognised and given substantial effect in the debtor's jurisdiction of incorporation and other key jurisdictions (eg, where key guarantors are incorporated).
5.2 Under what conditions will the courts in your jurisdiction recognise and/or give effect to foreign insolvency or restructuring proceedings or otherwise grant assistance in the context of such proceedings?
As noted at question 5.2, the United Kingdom has adopted the UNCITRAL Model Law on Cross-Border Insolvency, via the Cross-Border Insolvency Regulations 2006. Critically, however, recognition does not necessarily extend to recognition and enforcement of the plan of reorganisation within the foreign proceedings.
Following the end of the Brexit implementation period, as of 1 January 2021, EU insolvency proceedings are no longer recognised automatically in England. Proceedings may instead be recognised under the Cross-Border Insolvency Regulations 2006.
Section 426 of the Insolvency Act 1986 allows a court in a ‘relevant country' to apply to the UK courts for assistance in insolvency proceedings. Under Section 426, the United Kingdom has wide discretion to apply UK insolvency law or the relevant foreign insolvency law. As noted, the relevant countries are mainly former or present members of the Commonwealth.
5.3 To what extent will the courts cooperate with their counterparts in other jurisdictions in the case of cross-border insolvency or restructuring proceedings?
The English courts will generally seek to cooperate (substantively and procedurally) with their counterparts in other jurisdictions (subject to certain tenets of common law). The legal basis for cooperation may be found in the Cross-Border Insolvency Regulations 2006, Section 426 of the Insolvency Act 1986 and the principle of comity under the English courts' general common law powers. The courts have stopped short of adopting a fully universalist policy, however, favouring a doctrine of ‘modified universalism' which allows the courts to appraise the fairness of the relevant proceedings and protect the interests of local creditors.
In 2017, the United Kingdom adopted the Judicial Insolvency Network (JIN) Guidelines for Communication and Cooperation between Courts in Cross-Border Insolvency Matters. Like the UNCITRAL Model Law on Cross-Border Insolvency, the JIN Guidelines have been adopted on a voluntary basis by courts in various jurisdictions, including Singapore, Bermuda, Cayman, Australia, South Korea, Canada and the United States. They aim to promote and provide a framework for enhanced communication and cooperation among courts, insolvency representatives and parties involved in cross-border insolvency proceedings, including the conduct of joint hearings.
5.4 How are corporate groups treated in the context of restructuring and insolvency proceedings? If there is no concept of a group proceeding (or consolidation), is there any regime through which insolvency officeholders must / may cooperate?
Under English law, each company in a corporate group is treated as a single entity and its directors must consider the interests of creditors in relation to that particular company (rather than the group as a whole). Unlike in Chapter 11, there is no formal concept of group proceedings/joint debtors, or substantive consolidation. However, the commercial reality is that what is beneficial for a group is often beneficial for each individual company, and there is scope for coordination between affiliated entities.
We understand that the United Kingdom will soon issue a public consultation as to whether to adopt the UNCITRAL Model Law on Enterprise Group Insolvency. If adopted, we would expect to see the introduction of a group insolvency solution to provide for the coordination of multiple insolvency proceedings across a group of companies (both domestically and cross-border).
5.5 How is the debtor's centre of main interests determined in your jurisdiction?
The United Kingdom has retained the definition of ‘CoMI' contained in Article 3 of the Recast Insolvency Regulation. Under the Recast Insolvency Regulation, a debtor's CoMI corresponds to the place where the debtor administers its interests on a regular basis and is therefore ascertainable by third parties. There is a rebuttable presumption that a debtor's CoMI is located at the place of its registered address, unless the debtor has moved its registered office in the three months preceding the application to open insolvency proceedings.
In assessing a debtor's CoMI, the English courts may consider various factors, including:
- the location of the debtor's head office functions, treasury management and internal accounting functions;
- business relations with clients and lenders; and
- the law governing the debtor's main contracts.
The English courts have held that the concept of CoMI should be interpreted consistently for the purposes of the UNCITRAL Model Law on Cross-Border Insolvency and the Recast European Insolvency Regulation.
5.6 How are foreign creditors treated in restructuring and insolvency proceedings in your jurisdiction?
Foreign creditors have the same rights in proceedings under UK insolvency law as UK creditors. Foreign currency debts are converted into sterling under the Insolvency Act 1986 and the Insolvency Rules 2016.
6 Liability risk
6.1 What duties do the directors of the debtor have when the company is in the "zone of insolvency" (or actually insolvent)? Do they have an obligation to commence insolvency proceedings at any particular time?
There is no obligation on directors to commence insolvency proceedings when a company is insolvent. However, directors may be personally liable if they breach certain duties. For example, directors can be liable for wrongful trading if they knew or ought to have known that there was no reasonable prospect of the company avoiding insolvent liquidation or administration and, from that point, failed to take every step to minimise potential losses to creditors. There are also potential criminal sanctions, including for fraudulent trading if the business was carried on with the intent to defraud creditors. Wrongful trading provisions were temporarily amended during the COVID-19 crisis such that directors of most companies were not to be liable for any worsening of a company's financial position in the periods 1 March to 30 September 2020 or 26 November 2020 to 30 June 2021. This relaxation was introduced to encourage directors to persevere with companies which would have been viable absent COVID-19, with the aim of preventing a wave of avoidable filings. This was a relaxation, rather than a total ‘switch-off', of the wrongful trading provisions.
At all times, the directors of an English company owe fiduciary duties to the company itself, and not to any stakeholder of the company directly.
In the case of a healthy company, the directors have a duty to act in a way that is most likely to promote the company's success for the benefit of its shareholders as a whole. However, when a company is insolvent or is in the zone of insolvency (ie, when the directors know or should know that the company is or is likely (probable) to become insolvent), this duty shifts towards the creditors of the company with a view to minimising their losses.
6.2 Are there any circumstances in which the directors could incur personal liability in the context of a debtor's insolvency?
A breach of directors' duties can lead to a director incurring personal liability, or being disqualified from acting as a director or being involved in the management of a company for a specified period. In some instances, it may even lead to a criminal prosecution.
The principal potential causes of action are:
- wrongful trading;
- fraudulent trading; and
- a claim for misapplication of company property or misfeasance.
Directors are generally most cognisant of the wrongful trading offence. As noted, wrongful trading occurs where a director knew or ought to have concluded that there was no reasonable prospect that the debtor would avoid insolvent liquidation or administration and failed to take every step to minimise losses for creditors. In these circumstances, a court may order a director to contribute some or all of the deficit between the amount that would have been available for distribution to creditors had the debtor ceased to trade earlier and the amount that was actually available.
Liability will arise for wrongful trading only if there was an increase in the overall net deficiency of the company's assets, caused by the continuation of trading. If so, and if one or more particular creditors suffers disproportionate losses, the directors will be unable to avoid liability based purely on the defence that they took every step to minimise potential losses to creditors as a whole; they must also show that continued trading was designed so as to minimise the risk of loss to individual creditors.
As noted in question 6.1, wrongful trading provisions were temporarily amended during the COVID-19 crisis.
The insolvency legislation also permits administrators and liquidators to sell certain claims against directors to third parties. This will likely arise in circumstances where there is merit to a case against a director, but the administrators or liquidators have insufficient funds to pursue the case or consider that selling the claim is a more effective way to realise value for the creditors.
As well as financial penalties, these offences can lead to a disqualification order in respect of future directorships.
6.3 Is there any scope for any other party to incur liability in the context of a debtor's insolvency (e.g. lender or shareholder liability)?
Directors' duties (and the consequences of breach thereof) apply to:
- directors formally in office at the time at which insolvency proceedings commence;
- former directors;
- de facto directors (ie, persons occupying the position of director, irrespective of any formal appointment or title); and
- shadow directors.
In the context of a workout, lenders and shareholders should be careful not to take any action which could see them being characterised as a shadow director. A ‘shadow director' is a person or entity on whose instructions or directions the company's directors are accustomed to act. In addition, the board must actively engage in conduct in conformity with such directions. A person will not become a shadow director merely by providing instructions or recommendations; and will not be a shadow director by reason only that the directors act on advice given by him or her in a professional capacity.
7.1 Is it possible to effect a "pre-pack" sale of assets, and is it possible to sell the assets free and clear of security, in restructuring and insolvency proceedings in your jurisdiction?
‘Pre-pack' administration is particularly prevalent in the United Kingdom. This is an arrangement under which the sale of all or part of the company's business or assets is negotiated with a purchaser (by putative administrators) prior to the appointment of administrations. Historically, the administrators have effected the sale almost immediately after appointment, without the sanction of the court or creditors. However, from 30 April 2021, substantial disposals by administrators of the company's business or assets to connected-party purchasers (defined broadly and including by reference to certain former connections) within the first eight weeks of an administration require advance approval from either the creditors or an independent evaluator.
The ability to implement sales on this ‘pre-packaged' basis relies on the ability of the debtor or a security holder to appoint a practitioner of its own choosing – a key differentiating factor between the United Kingdom and many other jurisdictions, and a powerful tool.
The administrators can sell floating charge assets without the consent of the secured party, but will require the consent of the secured party or a court order to sell assets free and clear of fixed charges. A receiver is appointed over specific charged assets and acts with the authority of the charge holder, albeit as agent of the chargor.
7.2 Is "credit bidding" permitted?
Yes, credit bidding is permissible and is often seen in English workouts. The ability of a creditor (or creditor group) to credit bid effectively, however, will typically depend on the nature and extent of its security and some cash leakage to unsecured creditors may be unavoidable depending on the situation.
8 Trends and predictions
8.1 How would you describe the current restructuring and insolvency landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?
The latest insolvency statistics show that insolvency rates remain significantly below pre-pandemic levels. In a controversial balancing act, the government has repeatedly extended temporary COVID-19-related restructuring and insolvency measures to support the UK economy, to the frustration of landlord creditors in particular. As the United Kingdom (hopefully) emerges from the COVID-19 pandemic, the market is focused on whether and how struggling companies which managed to survive the crisis (perhaps by taking on new debt or by refusing to pay rent) can continue to survive in the medium term.
The government recently announced new legislation to provide for the ring-fence of, and a binding arbitration scheme in respect of, rent arrears accrued during periods in which the tenant was required to close owing to COVID-19 restrictions. This legislation is expected to be enacted before 25 March 2022.
The government also plans to consult on whether to implement the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments and the UNCITRAL Model Law on Enterprise Group Insolvency.
The Pensions Scheme Act received royal assent on 11 February 2021; the relevant provisions are provisionally expected to enter into force in April 2022. The act introduces, among other things, new criminal offences for those that put the assets of a defined benefit pension scheme at risk. There is concern among the restructuring profession that this may be wide enough to capture those involved in legitimate restructuring activity, although it is to be hoped that only the most egregious conduct will be captured and the standard of proof required for criminal offences (‘beyond reasonable doubt') sets a high bar.
9 Tips and traps
9.1 What are your top tips for a smooth restructuring and what potential sticking points would you highlight?
Early and proactive engagement between a debtor and its creditors is highly recommended in order to achieve the best outcomes.
When discussions commence, it makes sense to take steps swiftly to stabilise the situation (using waivers or forbearances) and implement appropriate governance arrangements, with respect to both managing any actual or perceived conflicts on the debtor boards and mobilising creditors to form coherent representative groups to facilitate negotiations. Debtors may baulk at covering advisory costs (particularly at a time when liquidity may be tight) on all sides, but it can be a false economy to do otherwise; accepting the engagement of (and paying for) experienced advisers early on often helps to drive smoother and quicker outcomes, with reduced cost in the long run.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.