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 comprises the Insolvency Act 1986 and the Insolvency (England and Wales) Rules 2016. This is supplemented by other legislation and principles of common law. The Company Directors Disqualification Act 1986 is applicable to directors of insolvent companies and schemes of arrangement are a creature of the Companies Act 2006.
1.2 What international / cross-border instruments relating to restructuring and insolvency have effect in your jurisdiction?
EU law governs jurisdiction and recognition in cross-border restructuring and insolvency cases within the European Union, which presently includes the United Kingdom. The main instrument in this regard is EU Regulation 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast) (the ‘Recast Insolvency Regulation'). If the United Kingdom leaves the European Union, the Recast Insolvency Regulation will cease to apply in, and with respect to, this jurisdiction unless there is agreement to the contrary.
A new EU directive on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures (the ‘Harmonisation Directive') has entered into force and must be implemented by each EU member state by July 2021. If the United Kingdom has left the European Union by this time (as seems likely at the time of writing), the Harmonisation Directive will not be required to be transposed into the national legislation of England and Wales (however, see question 8).
The United Kingdom has also enacted the UNCITRAL Model Law on Cross-Border Insolvency, which is implemented in England and Wales by the Cross-Border Insolvency Regulations 2006.
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 (the regimes do generally follow the usual 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 creditor friendly (in particular for senior secured creditors), but it is extremely effective for both creditors and debtors. The English courts have traditionally been the forum of choice for resolving disputes relating to major international financial and other contracts, as 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 and lack of corruption.
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 7.1).
In recent years, overseas debtors have looked to take advantage of the English regime, including taking steps to establish jurisdiction in England and Wales (eg, by moving their centre of main interests (CoMI), amending the governing law of their debt documents or otherwise). This has partly been driven by the historic absence or inadequacy of restructuring tools in their home jurisdictions. UK schemes of arrangement have offered a flexible debtor-in-possession tool without the cost and court involvement associated with processes in some other jurisdictions and with a low jurisdictional threshold, as English CoMI is not a prerequisite.
Conversely, the popularity of England and Wales as a jurisdiction of choice could diminish as a result of improvements in the restructuring and insolvency regimes in other jurisdictions (including pursuant to the Harmonisation Directive) and potential recognition issues with UK schemes and insolvency proceedings after Brexit.
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 legal framework is generally stable and well regarded, and the United Kingdom has an established restructuring culture. The main legislative instrument, the Insolvency Act 1986, is over 30 years old, while the legislative provisions relating to administration (the primary rescue proceeding) were overhauled almost 20 years ago. While there have been recent changes to the Insolvency Rules, these have not dramatically changed the laws and have only clarified the process.
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.
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.
However, Brexit has introduced uncertainty. As noted above, absent their continued application by agreement, the Recast Insolvency Regulation and its counterpart relating to the recognition of civil and commercial judgments, the recast Brussels Regulation, will cease to apply in and with respect to the United Kingdom, which poses a risk to the recognition of UK insolvency processes and schemes, respectively.
Reforms which echo a number of features of the new restructuring process contemplated by the Harmonisation Directive are also contemplated in the United Kingdom. See question 8 for further details.
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 to be transferred to the secured party. Security can take 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 takes possession of the secured asset (eg, liens and pledges).
To create a mortgage, the legal or beneficial title to the secured asset must be transferred to the secured party. Mortgages are most commonly granted over real estate, but are also taken over movable property such as ships and aircraft.
A charge may be either ‘fixed' or ‘floating'. The former requires the security provider (the chargor) to hold the charged asset to the order of the secured party (the chargee). The latter is a powerful tool, with no equivalent in many other jurisdictions, allowing security to be taken over future assets and high turnover assets such as cash, inventory and stock. The chargor is permitted to deal with assets subject to a floating charge in the ordinary course of its business.
However, secured creditors will usually seek to take fixed charge security where possible. Insolvency officeholders and preferential creditors have a priority entitlement to floating charge recoveries, and a ‘prescribed part' of the recoveries is also set aside and distributed to the debtor's unsecured creditors. Certain legal requirements must be satisfied for a charge to be considered fixed; among other things, the chargee must have the requisite degree of control over the relevant assets (ie, meaning that the chargor cannot freely deal with them). If these requirements are not fulfilled, an English court can recharacterise a fixed charge as floating.
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 matters.
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 and usually without court involvement. The receiver will typically have broad powers (specified in the security document and legislation), including a power of sale. A receiver must secure the best price reasonably obtainable in the circumstances; no public auction is needed unless required by the security document. Administrative receivership – where a receiver is appointed over all of the company's property – is now available only in limited circumstances.
Mortgagee in possession: 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), without needing to apply to court and use the proceeds to settle the secured liabilities. A mortgagee in possession has the same duties as a receiver with respect to securing the best price. However, creditors typically prefer to appoint a receiver to transact on their behalf.
Administration: If a creditor has security over all or substantially all of a company's assets (including a floating charge), it usually has a ‘qualifying floating charge' (QFC). Once its security becomes enforceable, a QFC holder can typically appoint an administrator over the company quickly and easily without going to court. This creates a moratorium on other enforcement actions against the company and potentially allows a sale of the business as a going concern, maximising value. The administrator is empowered to run the company and effectively displaces the board.
Appropriation: Where the security constitutes a ‘financial collateral arrangement' under the Financial Collateral Arrangements (No 2) Regulations 2003, appropriation may be an option. ‘Financial collateral' includes cash, shares (including shares in private companies, not only publicly traded securities) and other financial instruments. The security arrangement must afford the requisite degree of ‘possession or control' to qualify as a ‘financial collateral arrangement'. Appropriation is a powerful remedy, as it permits the secured creditor to take possession of the financial collateral without applying to court and with the assets valued only ex post facto, subject to the terms of the security document.
Foreclosure: In theory, foreclosure is an additional 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 plan and the steps of the plan 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 that it is generally less costly, generates less adverse publicity and has less commercial risk compared with a more formal process. Additionally, 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 cannot 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.
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 at question 4.1, which are often used in connection with the implementation of workouts, a debtor may use a scheme of arrangement to achieve a restructuring.
Schemes are a very versatile tool and have proven effective to implement a variety of restructurings, including amends-and-extend transactions, standstills, debt-for-equity swaps and other comprehensive reorganisations. They are a ‘tried and tested' path to which both domestic and foreign borrowers have turned.
One helpful feature is that the company can target a particular group (or groups) of its creditors (and does not have to approach its creditors generally) and only those creditors will be affected by, and vote on, the scheme. It can also be used to compromise the claims of secured, as well as unsecured, creditors.
One drawback is that there is no ‘cross-class cramdown' in a scheme, meaning that it cannot be used to disenfranchise out-of-the-money classes of creditor or shareholder. However, in many cases, schemes have been combined effectively with security enforcements or insolvency processes and inter-creditor release powers to achieve much the same result.
In most cases, no supervisor is appointed to oversee the process and court involvement is limited to two hearings (see question 3.6 for further details regarding process).
As a scheme is a Companies Act process (in contrast to administration and company voluntary arrangements, which are Insolvency Act processes), the stigma of an insolvency process is also arguably mitigated.
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 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 are by far the most prevalent.
There is no threshold requirement of current or anticipated insolvency, but in order to prove that the scheme is fair, the applicant will need to demonstrate (among other things) that scheme creditors will be in a better financial position if the scheme is implemented than if the most likely alternative occurs (often insolvency).
The proposals put forward in a scheme of arrangement 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 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, including whether:
- the classes of creditors are constituted correctly;
- the courts have jurisdiction to approve the scheme;
- procedural requirements have been complied with (including due notice to creditors); and
- the scheme is otherwise fair and there is no ‘blot' on the scheme.
In this regard, disgruntled creditors may appear at the hearings to oppose a scheme.
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, 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 (unless combined with an administration) 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, the point at which the scheme is sanctioned). However, the company will typically launch a scheme 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.
3.5 Does a moratorium or stay apply and, if so, what is its scope? Are there exceptions?
The Companies Act regime for schemes of arrangement does not offer a moratorium. If a moratorium is required, one potential option is to put the debtor in administration in parallel with proposing a scheme. There have also been isolated cases where the court has exercised its jurisdiction on the basis of civil procedure rules to stay individual creditor actions in order to allow a scheme to proceed. However, this authority to stay proceedings is at the discretion of the court and is not an automatic right of a debtor.
The usual method for a debtor to seek to maintain stability when proposing a scheme without the protection of a statutory moratorium is, as mentioned in question 3.4, to enter into a lock-up agreement with as many affected creditors as possible. Such a lock-up agreement will customarily include waivers or forbearances and covenants by the creditors not to take adverse action. However, this is not a complete answer in circumstances where a payment default has occurred, as creditors typically have individual, several rights to sue for payment and petition for winding-up.
See question 8 for proposed reforms in respect of moratoria.
3.6 What process do restructuring proceedings typically follow (including likely length of process and key milestones)?
A scheme of arrangement will generally proceed as follows:
- The restructuring terms are agreed and a lock-up agreement is typically executed. Scheme 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 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 for voting purposes. Creditors can appear to raise challenges.
- Notice of creditor meetings and scheme documentation are provided to scheme creditors shortly afterwards. The scheme documentation will include an explanatory statement, summarising the proposed scheme.
- Creditor meeting(s) are held two to three weeks later, at which affected creditors vote on the scheme.
- The second court hearing (known as the ‘sanction hearing'), at which the court is requested to sanction the scheme, is held a few days later. Again, creditors may appear to raise challenges.
- If the court sanctions the scheme, the scheme will become effective in accordance with its terms once the relevant order is delivered to Companies House for registration. The restructuring described by the scheme may not become fully effective until certain additional conditions precedent have been satisfied (in particular, it may be necessary to obtain an order of the US Bankruptcy Court recognising the scheme under Chapter 15 of the Bankruptcy Code if compromising debt governed by US laws or the group has material US assets).
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 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 acting 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.
(b) Directors of the debtor
Unless the debtor is in administration or liquidation, its directors will remain in control during the restructuring process. The directors will need to be cognisant of their duties in the circumstances; although they will continue to owe their duties to the company, they will likely need to have primary regard to the interests of creditors given that the solvency of the company is probably in question. Managing potential conflicts issues, in terms of both competing stakeholder interests (particularly where there is a debate concerning the value break) and ongoing sponsor 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 will 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 or classes of creditors approve the scheme. If a scheme purports to vary the rights of a particular creditor, it will be entitled to vote. If it does not, it will not. As noted in question 3.4, a creditor's rights with respect to its security are unaffected by the launch of the scheme (though may be compromised through the scheme) and no statutory moratorium will apply to prevent a creditor from exercising its rights.
(e) Unsecured creditors
Schemes can be used to bind unsecured creditors, provided that the relevant class or classes of creditors approve the scheme. If a scheme purports to vary the rights of a particular creditor, it will be entitled to vote. If it does not, it will not.
Generally, employees will be unaffected by schemes.
(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, 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.
A scheme of arrangement is not a ‘qualifying insolvency event' that would trigger the start of an assessment period by the Pension Protection Fund and the crystallisation of any pension scheme deficit on a buy-out basis. One would also expect a scheme of arrangement to compromise only financial creditors' debts, not 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 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 to effect a change of ownership and disenfranchise out-of-the-money stakeholders through a sale of one or more group companies. 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 officeholder 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 3.3, any scheme 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?
If there are material differences in the legal rights of affected creditors either before a scheme of arrangement or as modified by the scheme, 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.
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, 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 or Irish examinership proceedings). However, this has been achieved in practice by combining schemes with a bolt-on insolvency or enforcement process, coupled with the use of inter-creditor release provisions. See also question 8 in relation to reforms in the pipeline.
3.9 Can restructuring proceedings be used to compromise secured debt?
Yes, provided that the relevant voting thresholds are met and the scheme is otherwise sanctioned by the court.
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. However, a scheme cannot be used to disclaim or surrender a lease or otherwise modify proprietary rights. Formal disclaimer of contracts or leases is available only in liquidation.
A company voluntary arrangement (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.
3.11 Can liabilities of third parties (e.g. guarantors) be released through restructuring proceedings?
Schemes of arrangement may be used to release liabilities of third parties, provided that they are necessary for the successful operation of the scheme. In particular, claims against guarantors may be released or modified under a scheme (preventing contribution claims against the principal debtor that would otherwise arise if a guarantor were required to make payment on the original terms). A release of claims against persons involved in the preparation, negotiation or implementation of a scheme, and their legal advisers, is also permissible and commonly seen.
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 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 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 either 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 inter-creditor 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 might be used in certain circumstances to ‘cram down' a proposal on a dissenting minority.
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.
3.13 How do restructuring proceedings conclude?
As discussed in question 3.6, a scheme of arrangement will become effective upon the delivery of the sanction order for registration at Companies House, at which point its terms will be binding on all relevant creditors (subject to the satisfaction or waiver of any conditions precedent written into the scheme or related transaction documents).
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.
Administration: This procedure is geared towards company or business rescue. Like US Chapter 11, administration affords the protection of a statutory moratorium to facilitate the rescue or reorganisation of a company or realisation of its assets. However, unlike in Chapter 11, administration is not a debtor-in-possession proceeding and the administrator (a licensed insolvency practitioner and officer of the court) takes control. The administrator will seek to rescue the debtor as a going concern or otherwise achieve a better result for creditors than in a liquidation (or, failing that, realise the company's assets and make a distribution to secured creditors). The administrator's duties are owed to the creditors as a whole. ‘Pre-pack' administrations – an arrangement under which the sale of all or part of the debtor's business or assets is negotiated with a purchaser by putative administrators prior to their appointment – are prevalent in the United Kingdom. The administrators effect the sale almost immediately after appointment, usually without the sanction of the court or creditors. This is a powerful tool in that it preserves a ‘business as usual' message and minimises insolvency stigma. One criticism of administration is that the company is rarely saved. However, it is often the case that the business – or the parts worth saving – can be saved.
Liquidation: This is a terminal procedure ultimately resulting in the debtor's dissolution and removal from the register. Administration is typically a more suitable process in which to continue trading and to seek to sell the business as a going concern, though this occurs on occasion in the context of a liquidation. The liquidators are charged with collecting in and selling the debtor's assets, and distributing the proceeds to creditors (and members, in the event of a surplus). As in administration, directors lose control as their functions are usurped by the liquidator. There are three types of liquidation: members' voluntary liquidation (MVL), creditors' voluntary liquidation (CVL) and compulsory liquidation). See below for further details.
Company voluntary arrangement (CVA): Like a scheme of arrangement, this procedure permits a company to make a binding compromise with its creditors. However, there a number of differences:
- A CVA cannot compromise secured creditors without their consent.
- A CVA is implemented entirely out of court unless it is challenged.
- A CVA requires the consent of at least 75% in value of unsecured creditors, but will not be approved if more than half by value of unconnected creditors vote against.
- Creditors are not split into different classes for voting purposes, even if they are treated differently (though the CVA must be fair, both in terms of offering better recoveries for all creditors than administration or liquidation and in justifying differences in creditor treatment).
In recent years, as noted above, CVAs have been used extensively to compromise companies' leasehold obligations to landlords, especially in the retail and casual dining sector.
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 administrator, except that if the out-of-court route is chosen, notice must be given to QFC holders, which may intervene to appoint a different individual as administrator (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 a liquidator forms 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 the 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 is 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.
Company voluntary arrangement: 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 an administrator or liquidator makes a proposal for a CVA, the administrator or liquidator will normally act as the supervisor. The supervisor will typically play a role in adjudicating claims in the CVA process and making distributions to affected creditors. 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 liquidator takes 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 liquidator takes over the management of the company. There is no moratorium on legal proceedings against the company.
Company voluntary arrangement: The directors remain in control of the debtor and there is no moratorium on creditor actions, except in the limited circumstances detailed in question 4.4 below.
4.4 Does a moratorium or stay apply and, if so, what is its scope? Are there exceptions?
The widest form of moratorium is offered by administration. The moratorium prohibits any steps or 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 forfeiture of a lease by a landlord and 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 (like other enforcement actions with respect to financial collateral) is exempt from the administration moratorium). An interim moratorium applies from the date on which an application to court is made or a notice of intention to appoint administrators is filed.
In a compulsory liquidation, no action or proceedings can be continued or raised against the company, except with the leave of the court. Creditors may, however, take steps to enforce 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, no moratorium applies.
Certain companies may elect to take the benefit of a (non-automatic) moratorium in the context of a CVA. However, this is available only to small eligible companies (which satisfy two or more of the following criteria: turnover not more than £10.2 million; balance-sheet total not more than £5.1 million; and not more than 50 employees), and is rarely used.
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.
The UK government has announced an intention to legislate for a new moratorium procedure, which will be available for an initial and extendable 28-day period to all companies which will become insolvent if no action is taken. While the directors will remain in control of the company, creditors' interests are protected by the appointment of an authorised supervisor, a ‘monitor'.
4.5 What process do insolvency proceedings typically follow (including likely length of process and key milestones)?
Administration: The administrator must prepare a statement of proposals with respect to how he or she proposes to achieve the statutory objective within eight weeks of appointment, which must be approved by the creditors. If the administrator completes a pre-pack sale, he or she must send a detailed report to creditors within seven days of the transaction and at the same time as sending notice of his or her appointment to creditors. The administrator has 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 administrator's proposals. An administration will automatically end within one year, but may be extended in advance multiple times. A ‘pre-pack administration' can be implemented very quickly.
Liquidation: The liquidator takes over the management of the debtor and controls all of the company's assets for the purpose of collecting, realising and distributing the assets of the company to its creditors. The liquidator 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 shareholder resolution is required. It is likely to take materially longer to obtain a winding-up order, particularly where the petition is contested.
Company voluntary arrangement: Those proposing the CVA prepare a document setting out its terms with the assistance of the nominee. The document is ultimately delivered to the nominee, who must assess and report to the court within 28 days whether the proposal should be considered by the debtor's creditors and members. If the nominee does 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 nominee is designated as supervisor and is 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, 28 days from when the creditor became aware of the vote having taken place), such challenges often being 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 nominee.
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), though a moratorium may apply as further detailed at 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 an administration (though 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). As noted above, it is the directors who prepare and submit the CVA proposals to the nominee for consideration.
(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 may vote on the proposals document. Though the proposal can take effect if it has been approved by the creditors alone, a shareholder of the debtor can apply to the court, which has the discretion to order that the decision of the company's shareholders should prevail (although this is extremely rare).
(d) Secured creditors
Secured creditors are unable to vote on a company voluntary arrangement (save to the extent that their debt is unsecured) and secured debts cannot be compromised by a CVA.
In a creditors' voluntary liquidation, creditors are invited to nominate a liquidator, while in a compulsory liquidation a liquidator 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, a majority in value of a company's creditors must vote in favour of an administrator's proposals, and the creditors receive reports from the administrators detailing the progress of the administrator and a final progress report. An administrator 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 (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 paragraph (d) above for the role of creditors generally in a liquidation or an administration.
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. 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 are 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.
In a compulsory liquidation, the court will schedule one or more hearings following presentation of a winding-up petition and a judge will decide whether it is appropriate to make a winding-up order. An administration can also be commenced through a court order – see question 4.2.
The court generally takes a supervisory role in English insolvency proceedings. Insolvency officeholders have duties 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 such as distributions to unsecured creditors in an administration require prior approval by the court. 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 (eg, decisions on a proof of debt).
A court has no supervisory role with respect to a CVA unless a creditor elects to bring a challenge in the 28-day period following approval.
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 to 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)?
On the insolvency of a debtor, proceeds from the realisation of assets which are unsecured or secured by a floating charge must be distributed by an insolvency practitioner, in simple terms, in the following order:
- expenses in the insolvency proceedings;
- preferential debts;
- debts secured by a floating charge (subject to prescribed part – see below);
- unsecured provable debts;
- statutory interest on provable debts;
- unprovable debts (a debt of the company which is not technically provable but which is required to be paid before shareholders are entitled to a return of capital);
- subordinated claims (where appropriately worded); and
- shareholder claims.
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 to the relevant receiver or insolvency officeholder.
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 include certain (limited) employee remuneration claims. 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.
The government is reforming the preferential creditor regime to make the UK tax authority, Her Majesty's Revenue and Customs, a ‘secondary preferential creditor' for certain tax debts, including value added tax and pay as you earn, from April 2020. It also plans to increase the maximum cap for the prescribed part from £600,000 to £800,000 as part of the proposed wider reforms to the UK restructuring and insolvency legislative framework, though timing is unclear at the time of writing.
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.
Contractual provisions allowing parties to terminate upon a counterparty's insolvency will be upheld, save:
- in limited circumstances relating to the ongoing provision of certain essential supplies (eg, gas, electricity, water and communication and IT services) in administration; and
- following approval of a CVA (if, as is customary, the CVA disapplies contractual termination rights triggered by the process).
This position is subject to proposed reforms to prevent reliance on ipso facto clauses – a clause that allows a contract to be terminated on the grounds of the counterparty's insolvency – in supplier contracts more generally. 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, to the extent that this subverts the usual rules of pari passu treatment of creditors.
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.
A liquidator (but not an administrator) has 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.
Transactions may be challenged if they are at an undervalue, preferences, extortionate credit transactions, floating charges for no value, transactions defrauding creditors or asset dispositions after the commencement of a winding up. Generally, transactions are vulnerable if they would otherwise have frustrated or allowed the debtor to avoid paying creditors on insolvency in accordance with the statutory priority of claims. In most cases, only an administrator or liquidator of a company may bring a claim challenging a reviewable transaction (although transactions at an undervalue and preference claims can now 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.
The look-back period ranges from six months to two years before the commencement of insolvency proceedings, depending on the nature of the action and whether the transaction was with a connected party (including directors, shadow directors, and associated parties).
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).
The court generally has wide discretion to make any order that 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: An administrator's appointment automatically ceases 12 months after the date of appointment. This can be extended before expiry either by court application or with the consent of the creditors. The administration can be ended by court order, and an administrator appointed out-of-court who believes 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 liquidator 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.
Company voluntary arrangement: 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; the jurisdictional threshold varies according to the relevant procedure and looks set to change on Brexit.
Under the Recast Insolvency Regulation, UK insolvency proceedings may be opened in respect of companies incorporated in other EU member states only if they have their centre of main interest (CoMI) or an establishment in the United Kingdom. As noted above, this may change. The starting position as a matter of domestic law is that the courts may accept jurisdiction to wind up a foreign company if:
- it has a ‘sufficient connection' with England and Wales;
- there is a reasonable possibility, if a winding-up order is made, of benefit to the applicant(s); and
- one or more persons interested in the distribution of the company's assets is a person over which the court can exercise jurisdiction.
Schemes of arrangement are not regulated by the Recast Insolvency Regulation and there is no strict requirement that a debtor company have a UK CoMI or establishment to avail of the process. The courts have imported the ‘sufficient connection' test from a winding-up context. This may still be established as a result of the debtor's CoMI or establishment being in the United Kingdom, although it has also been sufficient that the debt subject to the scheme is governed by English law and/or contains an English jurisdiction clause. In cases where 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 amendment to the debt documents. However, in all cases, the court will also need to be satisfied that the effect of the scheme 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?
The United Kingdom is currently party to the Recast Insolvency Regulation. This provides for automatic recognition of certain collective insolvency proceedings opened in all European member states. The extent to which that regime – or a treaty replicating elements of that regime – might apply post-Brexit remains uncertain. If the United Kingdom leaves the European Union without a deal, the Recast Insolvency Regulation will no longer apply and automatic recognition in the United Kingdom will no longer be available to European officeholders in insolvency proceedings opened after exit day.
However, the United Kingdom has adopted the UNCITRAL Model Law on Cross-Border Insolvency through the Cross-Border Insolvency Regulations 2006. These regulations permit recognition of foreign proceedings, and assistance to the foreign insolvency officeholder (including a moratorium), upon application to the UK court – usually a fairly predictable court procedure. However – critically – recognition may not extend to recognition/enforcement of a debt restructuring plan or judgment within the foreign proceedings:
- If creditor or shareholder rights compromised under a restructuring plan are governed by English law, the English court will recognise and enforce the compromise only in respect of parties that are subject to the foreign proceedings – that is, if they were present in the foreign jurisdiction when proceedings commenced, submitted a proof of debt or voted in the proceedings (among other things).
- This rule – the so-called ‘rule in Gibbs' – means that foreign proceedings cannot otherwise effectively compromise debts governed by English law.
- A parallel UK process may therefore be required to compromise English law debt if not all creditors are subject to the foreign proceedings and if parties require certainty.
The rule in Gibbs remains good law in the United Kingdom, despite academic criticism. We understand that the United Kingdom is likely to adopt the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments in due course to address the above concerns.
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). Legal basis for cooperation may be founded on the Recast Insolvency Regulation, 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.
Procedurally, the Recast Insolvency Regulation specifically provides for cooperation between EU courts. Further, 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 Lawon 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 are required to consider the interests of creditors in relation to that particular company (rather than the group as a whole). Unlike in US Chapter 11, the United Kingdom has no formal concept of group proceedings or 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.
The Recast Insolvency Regulation makes specific legislative provision to try to facilitate coordination between officeholders (albeit on a voluntary basis).
5.5 How is the debtor's centre of main interests determined in your jurisdiction?
The English courts have considered that the concept of CoMI should be interpreted consistently for the purposes of the UNCITRAL Model Lawon Cross-Border Insolvency and 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 main 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.
CoMI is assessed on the date on which the application to open insolvency proceedings is filed.
5.6 How are foreign creditors treated in restructuring and insolvency proceedings in your jurisdiction?
Foreign creditors have the same rights in proceedings under British insolvency law as creditors in Great Britain. 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?
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, directors have a duty to act in a way 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.
There is no obligation on directors to commence insolvency proceedings within a particular timeframe when a company is insolvent or in the zone of insolvency. However, directors may be personally liable if they deepen creditors' losses by continuing to trade while a company is insolvent or otherwise breach certain duties, as set out in question 6.2.
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. 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 only for wrongful trading if the net shortfall of assets to liabilities increases on an overall basis, not with respect to a particular creditor. However, a director may still be liable for breach of duty if an individual creditor's position is worsened.
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 administrator or liquidator has insufficient funds to pursue the case or considers 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 not only to de jure directors in office at the time at which insolvency proceedings commence, but also to 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 by merely providing instructions or recommendations, and will not be a shadow director by reason only that the directors act on advice given by them 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?
Yes, it is possible to effect a ‘pre-pack' asset sale, through both administration and receivership. See question 4.1 for further details with respect to administration. 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.
‘Pre-packs' in an administration context have been the subject of material controversy and governmental review in recent years. This is because the essence of such a transaction is that it is communicated to creditors ex post facto as a ‘done deal', giving them no opportunity to review and consider whether to approve a transaction (in the way contemplated by the insolvency legislation). The concern is that the tool can be used to facilitate a ‘stitch-up' between unscrupulous practitioners and related parties, where a group is delivered back to its former owners free of certain liabilities and in a way that does not maximise value for creditors. It is submitted that these are exceptional cases, however, and that the insolvency and restructuring community generally regards ‘pre-packs' as a legitimate and valuable means of effecting transactions while minimising the stigma of insolvency.
An administrator 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 their 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?
Brexit is casting a long shadow over the UK restructuring and insolvency landscape, just as it is doing in other sectors. It has introduced considerable uncertainty and likely distracted focus from law reforms that might otherwise be implemented more swiftly.
As noted in question 1.5, absent alternative arrangements, Brexit is likely to mean that the Recast Insolvency Regulation and the recast Brussels Regulation no longer apply in or with respect to the United Kingdom. This leads to an unsatisfactory asymmetry with respect to recognition. The United Kingdom may continue to recognise EU insolvency proceedings under the Cross-Border Insolvency Regulations 2006 (albeit not automatically). However, UK insolvency proceedings may not be recognised in Europe (certainly not automatically), and the position will vary as between member states according to the private international law regimes in each one. Schemes of arrangement are not insolvency proceedings and the Recast Insolvency Regime does not apply to them. However, many member states regard a scheme sanction order as a judgment capable of recognition under the Brussels Regulation. Brexit therefore knocks out this basis of foreign recognition, meaning that other bases will need to be relied upon.
Separately, in August 2018 the government announced its intention to reform corporate insolvency laws in the United Kingdom by introducing new measures aimed at facilitating restructurings, including a new statutory moratorium, the possibility of cross-class cram-down and the prohibition of ‘ipso facto' termination clauses based on insolvency events. These reforms echo certain features of Chapter 11 and the Harmonisation Directive, and can be expected to enhance the already strong restructuring and insolvency framework in the United Kingdom.
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. This has been undermined in many instances by the prevalence of ‘covenant-lite' instruments. Where once financial covenants would have functioned as an early warning indicator of impending issues, their absence has meant that issues are often spotted or acknowledged too late (the debtor and/or the sponsor may be in denial), and restructurings are today often triggered by and/or structured around new money to solve for urgent liquidity requirements.
When discussions do kick off, 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 often helps to drive smoother and quicker outcomes, with reduced cost in the long run.
Sticking points can arise where there are creditor groups with widely divergent interests, leading to protracted and difficult negotiations with the debtor sitting in the middle. Secondary trading can both cause and solve these issues, as existing players exit and new players arrive – and parties building controlling or blocking stakes in relevant parts of the capital structure can act as a help or a hindrance to getting a deal done, depending on the situation.
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.