England and Wales: Restructuring Reforms Put into Practice


In summary

The significant legislative changes introduced in 2020 were tested in practice over the course of 2021. This chapter considers the impact of these legislative changes and the impact of Brexit on cross-border recognition, as well as providing an overview of the key restructuring mechanisms available under English law.


Discussion points

  • CIGA changes: ‘free-standing’ moratorium; Part 26A restructuring plan; restrictions for suppliers relying on termination clauses triggered by counterparty insolvency
  • Reforms to the regime governing pre-pack administrations
  • Post-Brexit considerations for recognition of English restructuring tools within EU member states

Referenced in this article

  • Pre-pack Administration Regulations
  • Corporate Insolvency and Governance Act 2020 (CIGA)
  • Companies Act 2006 (Companies Act)
  • Insolvency Act 1986 (Insolvency Act)
  • Regulation (EC) 593/2008 (Rome I)
  • Hague Convention of 30 June 2005 on Choice of Court Agreements
  • EU Insolvency Regulation
  • Hurricane Energy PLC [2021] EWHC 1759 (Ch)
  • Re gategroup Guarantee Limited [2021] EWHC 304 (Ch)

Background

Following government consultations in 2016 and 2018 on reforms to English insolvency frameworks, the onset of the covid-19 pandemic in the first few months of 2020 ensured that reform returned to the top of the legislative agenda. The Corporate Insolvency and Governance Bill was published on 20 May 2020, and it passed quickly through the legislative process with limited amendments, before coming into force just over five weeks later.

The CIGA[1] was implemented very quickly in light of the covid-19 pandemic, but while some provisions were temporary and specifically designed with the pandemic in mind, many of the reforms effected by the CIGA are permanent and will have an impact far beyond the ongoing pandemic. The English courts have started to put the new provisions and tools to the test, most notably the new restructuring plan under Part 26A of the Companies Act (restructuring plan). Several restructuring plans have been proposed in the past year, shedding light on issues ranging from the treatment of the tool as an insolvency proceeding to the use of the restructuring plan’s cross-class cramdown mechanism.

Moratorium

The CIGA introduced a new moratorium to provide distressed but viable companies with breathing space from creditor action to facilitate a rescue of the business as a going concern or preparation for a restructuring. As a freestanding process, it does not have to be combined with any other insolvency or restructuring procedure, and there is no requirement to have a particular outcome in mind when commencing the moratorium (beyond the rescue of the company as a going concern).

A moratorium is available to certain companies upon filing documents at court or making an application to the court, where:

  • the directors provide confirmation in documents filed with the court that the company is, or is likely to become, unable to pay its debts; and
  • the ‘monitor’, a licensed insolvency practitioner who supervises the moratorium, confirms that it is likely that the moratorium would result in the rescue of the company as a going concern.

Although the directors remain in control of day-to-day operations, the monitor scrutinises the company and the directors for the duration of the moratorium, assessing whether it is likely that the moratorium will result in the rescue of the company as a going concern. The monitor’s consent is required for certain transactions, including non-ordinary course disposals, any grant of security and payment of certain debts in excess of a de minimis threshold.

Restrictions on creditor actions

While the moratorium is in place, there are restrictions on the enforcement of pre-moratorium debts (indebtedness incurred by the company before the moratorium) and moratorium debts (indebtedness incurred by the company during the moratorium).

Pre-moratorium debts are subject to a payment holiday except for in the case of listed exceptions. Key exclusions are capital markets arrangements, bank debt and certain other financial obligations, contracts secured by a financial collateral arrangement, rent, goods and services, salary payments and expenses of the monitor.

No administration may be commenced, no winding-up petition shall be presented and no winding-up order may be made unless initiated by the directors of the company. Unless court permission is obtained, no forfeiture or re-entry rights may be exercised, no steps may be taken to commence or continue a legal process (other than certain employment-related proceedings), no floating charges will crystallise (subject to certain exceptions), and creditors are unable to enforce security over the company’s property (except for certain financial collateral).

Excluded companies

Companies that are subject to either ongoing or recent (within the past 12 months) insolvency proceedings are excluded from using the moratorium, as are companies for which a moratorium is already in force or was in force during the past 12 months. Other companies excluded from the moratorium include, among others, insurance companies, certain financial institutions and any company that is party to certain capital market arrangements. Both UK companies and overseas companies that can be wound up under Part 5 of the Insolvency Act may be eligible for a moratorium.

A capital market arrangement in excess of £10 million in value, where a company has provided security to a trustee or agent, guaranteed or secured the obligations of another party, or invested in certain options, futures or other derivatives, in each case under a capital markets instrument would cause a company to be excluded from using the moratorium. This means that there are many companies, particularly those in the mid- and large-cap sector of the market with a significant amount of outstanding bonds, that will not have access to the moratorium.

Exclusions from the payment holiday

The payment holiday does not apply to pre-moratorium debts arising under contracts for ‘the provision of financial services consisting of lending’. This means that most bank facilities are excluded from the payment holiday.

Most facility agreements (including the Loan Market Association facility agreements) provide that a moratorium is an event of default. Upon an event of default, nothing in the CIGA prevents lenders’ rights to accelerate the debt or claim any rights of set-off. Where excluded debts are accelerated, the company must be in a position to settle these as they fall due; otherwise, the monitor is obliged to end the moratorium, and lenders would be able to enforce their security in accordance with the terms of their financial agreements.

Other financial obligations, such as guarantees, derivatives, factoring and finance leasing, are also excluded from payment holidays. The moratorium does not extend to financial collateral arrangements.

In practice, these exclusions limit the usefulness of the moratorium for many companies, and between the introduction of the CIGA in June 2020 and 31 October 2021, only 15 moratoriums had been obtained.

Super-priority

Unpaid moratorium debts and priority pre-moratorium debts are granted super-priority status in a subsequent liquidation or administration (or protection from compromise in a restructuring plan, a company voluntary arrangement or a scheme of arrangement (scheme)) commencing within 12 weeks of the end of the moratorium. Priority pre-moratorium debts are, generally speaking, unpaid pre-moratorium debts that are not subject to a payment holiday. However, the definition of priority pre-moratorium debts specifically excludes any amount under a financial contract that, between the date of the monitor’s statement regarding the likelihood of rescue and the end of the moratorium, fell due because of acceleration or early termination.

This raises an interesting distinction between the treatment of term loans and revolving credit facilities (RCFs). If a term loan is accelerated or subject to early termination during the moratorium, lenders would not benefit from subsequent super-priority or protection from compromise. In contrast, if a payment falls due under an RCF during the moratorium, and that payment remains unpaid and the RCF is not rolled over, then the lenders would benefit from super-priority or protection with respect to that payment.

Duration

The moratorium provides a company with an initial breathing space of 20 business days. Subject to satisfaction of certain conditions (including payment of all moratorium debts and pre-moratorium debts for which the company does not have a payment holiday), the directors may file for an extension of a further 20 business days. For companies seeking an extension, finding the liquidity to repay relevant debts and benefit from this extension may be challenging. Any extension beyond 40 business days will require the consent of the company’s pre-moratorium creditors (among other conditions) or the court. The moratorium may last for up to a year with creditor consent, or longer with the consent of the court.

The moratorium will terminate if the company enters into administration or liquidation, or if a scheme or restructuring plan is sanctioned. The monitor may terminate the moratorium if it concludes that it is no longer likely to result in the rescue of the company as a going concern, that a rescue has been achieved, that the company is unable to pay its debts that have fallen due, or if the monitor is unable to carry out its duties.

Scheme of arrangement

A scheme is a procedure set out in the Companies Act, pursuant to which the English court sanctions a compromise or arrangement between a company and (i) its creditors, or any class of them or (ii) its members, or any class of them. The company decides which creditors (whether secured or unsecured), or which members, are to be subject to the proposed compromise or arrangement.

Schemes have become a popular restructuring tool in the English market over recent years and are used by both English and certain non-English companies to implement a broad range of restructuring transactions, from a simple ‘amend-and-extend’ transaction through to a debt-for-equity deal.

Creditors or members who are subject to the proposed compromise or arrangement either vote together in a single class or vote in separate classes. At a convening hearing, which takes place shortly after the scheme process is commenced, the court is asked to consider the question of whether one single class is required or multiple classes. Broadly speaking, the court will follow the principle that stakeholders should vote together in the same class where their rights, both pre-scheme and post-scheme, ‘are not so dissimilar as to make it impossible for them to consult together with a view to their common interest’. Having considered certain questions, including classes, the likelihood of the scheme succeeding and whether the English court has jurisdiction, the court will order that the relevant meeting or meetings are held.

A scheme is approved by a majority in number representing 75 per cent in value of the members or creditors (or of each class of members or creditors) who vote in person or by proxy at the relevant meeting or meetings.

After the meetings are held, the company returns to the court to seek its sanction of the scheme. At this ‘sanction hearing’, the court will consider a broad range of issues, including whether the scheme is fair and reasonable and whether the majority that has approved the scheme has acted in a bona fide manner. If sanctioned by the court at the sanction hearing, the scheme is binding on all creditors and members, or classes of creditors and members, who were convened to vote on the scheme.

A scheme does not have an automatic stay or moratorium, although it can be combined with the moratorium discussed above or used in parallel with an administration, giving the company the protection of the administration’s moratorium.

The process requires a period of at least six weeks from the date upon which application is made to the court for the convening hearing. This date is preceded by a preparatory phase, during which the company and stakeholders negotiate the terms of the scheme, documentation is finalised and supporting stakeholders enter into a lock-up or restructuring support agreement.

Non-English companies

Non-English companies can access the scheme process by demonstrating ‘sufficient connection’ with England and Wales. This can be achieved in a number of ways, most commonly by compromising English law debt (or amending the governing law of the debt instrument to be English law), the accession of an English co-borrower or co-issuer to the relevant finance documents or moving the centre of main interests (COMI) of a company to England.

Recognition of schemes overseas

When considering whether to sanction a scheme, the English court assesses evidence on the likelihood of the scheme being recognised in each relevant foreign jurisdiction, as this is a significant factor in determining whether a scheme is likely to achieve its purpose; if recognition is unlikely, the English court may decide against sanctioning the scheme.

Seeking Chapter 15 recognition in the United States is common, for example, where New York law governs the compromised debts or where the debtor is incorporated in the United States. With respect to recognition in any EU member state, a company would seek to demonstrate to the English court using expert evidence that the scheme is likely to be recognised in the relevant jurisdiction based on Rome I, the Hague Convention (where the relevant contractual arrangements contain an exclusive jurisdiction clause in favour of the courts of England and Wales) or the private international law of the relevant jurisdiction.

Restructuring plan

The CIGA introduced the restructuring plan to assist eligible companies in reducing, preventing, mitigating or eliminating actual or anticipated financial difficulties.

The restructuring plan is similar to the scheme in many respects, including in respect of process, class composition and timeline, which has led certain commentators to refer to the new procedure as the ‘super-scheme’. As in the case of a scheme, it is not an Insolvency Act procedure but instead is included in the Companies Act. However, there are a number of key differences.[2] As at 31 October 2021, nine companies had registered restructuring plans at Companies House since the process was first introduced by the CIGA. As further restructuring plans are proposed and considered by the English courts, the body of case law specific to restructuring plans will continue to develop and divergences from scheme case law and practice will become clear.

The restructuring plan introduced cross-class cramdown, inspired by US Chapter 11 proceedings. This means that, subject to meeting two conditions, stakeholders in dissenting classes are bound by the restructuring plan, even if they do not vote in favour. To ‘cram down’ the dissenting classes, at least one class that would receive a payment under the plan, or would have a genuine economic interest in the context of the ‘relevant alternative’, must have voted to approve the restructuring plan. No member of the dissenting classes should be any worse off under the restructuring plan than they would otherwise be under the relevant alternative.

Whereas a scheme requires approval by 75 per cent in value and a majority in number of creditors or members in each class, the restructuring plan does not have the majority in number requirement. This means that, compared with the scheme, it is less likely that a high volume of creditors with low-value debt could block a restructuring plan. However, the 75 per cent threshold is higher than the 66.66 per cent threshold under Chapter 11, or under the recently introduced ‘Dutch scheme’.

The company proposing the restructuring plan must have experienced, or be likely to experience, financial difficulties that affect, or will or may affect, its ability to continue operations as a going concern.

The introduction of a cross-class cramdown mechanism is an important development as supportive creditors can now work with the company to flush or dilute existing equity or certain classes of creditors. Under Chapter 11 proceedings, the absolute priority rule ensures that the claims of a dissenting class must be satisfied in full before a more junior class can make a recovery. This feature has not been included in the CIGA, which means that it should be possible to ‘cram up’, whereby junior classes of stakeholders could work with the company to impose an arrangement on a senior class; however, in practice, this may be difficult as the court will need to be satisfied that the senior class is no worse off than in the relevant alternative, and that the junior class has a genuine economic interest in respect of the relevant alternative.

Any creditor or shareholder whose rights are affected by the proposed restructuring plan is permitted to vote at the meeting of the relevant stakeholder class. Crucially, creditors or shareholders can be excluded from the voting process if the court is satisfied that they do not have a genuine economic interest. This means that out-of-the-money stakeholders, such as shareholders in a deeply distressed business, are not required to approve a restructuring plan.

Determination of whether a stakeholder has a genuine economic interest will require the court to consider what the appropriate relevant alternative is (ie, the scenario that the court considers most likely to occur in the absence of a court-­sanctioned restructuring plan). The court may be presented with differing alternatives by opposing stakeholders, and it must determine which scenario is the most likely to occur.

In considering which scenario is the relevant alternative, the court considers relevant valuation evidence presented by the company or opposing stakeholders. Having established the relevant alternative and appropriate valuation, the court can ascertain which stakeholders have a genuine economic interest. Although it is common for US courts to make valuation determinations in Chapter 11 cases, this is relatively uncharted territory for the English courts, which, prior to the introduction of the restructuring plan, had rarely been required to consider valuation evidence in detail.

Valuations are set to take an increasingly important role in restructuring plans following the sanction hearing held in June 2021 for the restructuring plan proposed by Hurricane Energy PLC.[3] Here, the court determined that the restructuring plan did not satisfy the condition that no member of the dissenting class would be any worse off under the restructuring plan than they would otherwise be under the relevant alternative and declined to sanction the plan. Given this decision, it has become even more important for companies to ensure that they are able to provide robust evidence in support of the applicable ‘relevant alternative’ to the restructuring plan, as well as to support arguments as to which creditors or shareholders have no genuine economic interest (and thus should be excluded from voting on the restructuring plan).

As with schemes, non-English companies can use the restructuring plan if they can demonstrate that they have a sufficient connection to England and Wales. Following scheme practice, the English court will assess expert evidence on the likelihood of the plan being recognised in relevant jurisdictions. However, following the restructuring plan proposed by gategroup Guarantee Limited (Gategroup) in February 2021,[4] an important distinction has arisen between schemes and restructuring plans. The court held that a restructuring plan is an insolvency tool because it requires a company to be in financial difficulty to use the process. As a result, restructuring plans will likely not benefit from recognition under the Hague Convention (as insolvency proceedings are excluded from its scope). However, as with schemes, companies will be able to seek recognition under Rome I or the private international law of the relevant jurisdiction.

Company voluntary arrangement

Unlike a scheme or a restructuring plan, both of which are Companies Act procedures, a company voluntary arrangement (CVA) is an insolvency process pursuant to the Insolvency Act. A CVA involves an arrangement between the company, its shareholders and certain or all of its unsecured creditors. A licensed insolvency practitioner (known as a supervisor) supervises a CVA, but no court involvement is required unless there is a challenge.

Although a CVA can be used to write down debt, extend maturities or reach some other form of debt compromise or arrangement, it cannot be used to compromise secured creditors (except with their express consent), meaning that it is rarely used for financial restructurings. However, it is often used to compromise leasehold obligations and, in recent years, has been a popular means for retailers and hospitality chains to reduce their leasehold liabilities to sustainable levels. As these sectors have been disproportionately impacted by the covid-19 pandemic, this trend looks set to continue.

A CVA is proposed by the company for approval by the relevant unsecured creditors and members. Unlike a scheme or restructuring plan, there is no class separation. A CVA requires 75 per cent of creditors in value to vote to approve the arrangement, but the resolution will be invalid if creditors representing more than 50 per cent of creditors unconnected to the company voted against the proposal. The CVA binds all unsecured creditors that were entitled to vote on the arrangement. Creditors can challenge a CVA on grounds of material irregularity or unfair prejudice within 28 days of reporting approval of the CVA to the court.

To be eligible for a CVA, a company must:

  • be registered under the Companies Act in England, Wales or Scotland;
  • be incorporated in a member state of the European Economic Area; or
  • have its COMI in the United Kingdom or in a member state of the European Economic Area (other than Denmark).

Following the end of the Brexit transition period, CVAs no longer benefit from automatic recognition under Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast) (the EU Insolvency Regulation), and a supervisor seeking recognition of a CVA in an EU member state would need to do so in reliance on Rome I or the private international law of the relevant jurisdiction.

Administration

Administration is a rescue procedure available under the Insolvency Act, pursuant to which a qualified insolvency practitioner, known as the administrator, is appointed to take control of the relevant company. Once appointed, the administrator aims to achieve one of the objectives set out in the Insolvency Act.

The first objective is to rescue the company on a going-concern basis. If this is unachievable, the second objective is to achieve a better result for the creditors of the company as a whole than the result that would likely be achieved by putting the company into liquidation. If this is also unachievable, the third objective is to realise the company’s property for distribution to the company’s creditors.

To enter administration the company must be insolvent or likely to become insolvent (unless the administrator is appointed by the holder of a qualifying floating charge). To be eligible, a company must meet the same criteria as for a CVA (see above).

It is also possible for companies incorporated in the Channel Islands, the Isle of Man or any country or territory designated by the Secretary of State to access the process if the court in the relevant country of incorporation applies to the UK courts for assistance in the form of an administration order.

A company enters administration either by court order, which can be at the request of certain persons, including a creditor, the company, a director of the company and certain insolvency officials under other insolvency processes, or through an out-of-court procedure by filing a notice of intention to appoint an administrator. The latter can be filed by the relevant company, the director of the company or the holder of a qualifying floating charge.

An automatic moratorium freezing creditors’ rights, including security enforcement rights, is imposed for the duration of the administration process, starting from the application to court for the appointment of an administrator or notice of intention to appoint an administrator.

The Insolvency Act grants a statutory power to holders of a qualifying floating charge to have an administrator appointed without needing a court order. A qualifying floating charge is a floating charge over all or substantially all the debtor’s property and that, by its terms, states that it intends to take effect as a qualifying floating charge for purposes of the relevant provisions of the Insolvency Act.

Pre-packs

A popular variation on the administration process is the pre-packaged administration or ‘pre-pack’, whereby a sale of the whole or part of the company’s business is arranged before the administrator is appointed, and the sale is effected immediately upon, or shortly after, the appointment. A common technique is for ‘in the money’ creditors or secured creditors to form a purchaser vehicle. This ‘newco’ will purchase the business, or parts of the business, in consideration for assuming some of the outstanding debt, effectively ‘right-sizing’ the capital structure.

Junior ‘out of the money’ creditors are typically left behind in the old structure, while key employees and contracts are transferred to the newco, which can be an effective means of preserving goodwill and ensuring that the business continues on a going-concern basis.

Pre-packs are a popular rescue mechanism, but they have long been subject to criticism, with concerns raised over transparency and whether a pre-pack sale is always in the creditors’ best interests. As a result, reforms were recently enacted by way of the Administration (Restrictions on Disposal etc to Connected Persons) Regulations 2021 (the Pre-pack Administration Regulations). These Regulations apply to all companies entering administration on or after 30 April 2021. The Pre-pack Administration Regulations require that a ‘connected person’[5] who is buying all or substantially all of a company’s business or assets within the first eight weeks of an administration obtain an independent written opinion from an ‘evaluator’. The evaluator must be an independent person with professional indemnity insurance and sufficient knowledge and experience, but does not necessarily have to be an insolvency practitioner or accountant.

Liquidation

Liquidation, also referred to as winding up, is a court-based procedure set out in the Insolvency Act, pursuant to which a qualified insolvency practitioner, known as the liquidator, is appointed to realise the assets of a company and distribute the proceeds to stakeholders. Upon entering into liquidation, most businesses immediately cease trading. Once the liquidation process is complete, the company is dissolved.

There are two procedures: compulsory liquidation or voluntary liquidation. A voluntary liquidation can be a members’ voluntary liquidation (MVL) or a creditors’ voluntary liquidation (CVL).

Compulsory liquidation

Compulsory liquidation is commenced by the filing of a winding-up petition with the court, most likely by a creditor, but also possibly by the company or one of its directors. A hearing is scheduled, but a provisional liquidator can be appointed by the court for the interim period, with the objective of preserving the assets of the company.

At the hearing, the court will decide whether to make a winding-up order, and it must be satisfied that one of the grounds for winding up is fulfilled. The ground is usually that the company is unable to pay its debts as and when they fall due.

Once a winding-up order is made, the company’s creditors can appoint their own liquidator; otherwise, the official receiver is appointed as liquidator. There are various official receiver offices in England and Wales, each of which is attached to certain courts.

There is no moratorium on enforcement of security under compulsory liquidation; however, unless leave of the court is granted, there is an automatic stay in respect of the commencement or continuation of proceedings against the company.

Voluntary liquidation

The key difference between an MVL and a CVL is whether the directors have made a statutory declaration of solvency, whereby they state that, having made a full inquiry into the affairs of the company, they are satisfied that the company will be able to pay its debts in full, including any official interest, within a period specified in the declaration, which is not to exceed 12 months from the start of the winding up. If all the creditors are not repaid within this period, directors who have made a statutory declaration may be subject to a fine or imprisonment.

If the directors are able to give the statutory declaration, an MVL or a solvent liquidation will typically be commenced; otherwise, any voluntary liquidation would need to be a CVL. There is no automatic moratorium in respect of proceedings against the company, although the liquidator, any creditor or any shareholder can apply to the court for a stay.

MVL

Pursuant to an MVL, all creditors of the company are paid in full, with the balance of proceeds or assets returned to the members of the company. An MVL commences with members of the company passing a special resolution that the company should be wound up. At the general meeting where the special resolution is considered, members also resolve to appoint one or more liquidators. Once the liquidators are appointed, the powers of the directors cease.

CVL

A CVL commences with members of the company passing a special resolution that the company should be wound up. At the relevant general meeting, members will also nominate one or more liquidators. Under a CVL, all creditors of the company are unlikely to be paid in full, and no statutory declaration by the directors is required. As a result, when compared to an MVL, creditors have greater control over the process, including the right to nominate a liquidator and greater access to information.

Receivership

Receivership is a self-help enforcement remedy that is available to certain secured creditors to protect their interests in certain assets. The process involves the appointment of a receiver of which there are two types: a Law of Property Act 1925 (LPA) or fixed charge receiver, and an administrative receiver.

An LPA or fixed charge receiver may be appointed pursuant to the relevant security document. In the case of a mortgage, the receiver’s powers are derived from the LPA. In respect of other fixed charge security, the powers must be expressly set out in the security document. An LPA or fixed charge receivership is typically used to sell land, shares or other fixed single assets.

An administrative receiver may be appointed pursuant to the relevant security document, where the security comprises a floating charge over the whole or substantially the whole of the company’s property. An administrative receiver has wider powers than an LPA or fixed charge receiver; it will take custody of the secured asset and the company’s business, and then will oversee the disposal of the relevant assets to satisfy the secured obligations. However, the use of administrative receivership was significantly curtailed following the enactment of the Enterprise Act 2002, meaning that it is now rarely used in practice.

Restrictions on reliance on termination clauses

Many commercial contracts include ipso facto clauses, whereby a supplier is permitted to terminate a contract upon the insolvency of the relevant counterparty. Pre-CIGA, English insolvency legislation prohibited suppliers of essential supplies (ie, electricity, gas, water, communications and IT services) from enforcing ipso facto clauses.

The CIGA broadened the scope of this prohibition to include all contracts for the supply of goods and services, with the objective of ensuring continuity of supplies for distressed businesses and assisting continuity of operations. The prohibition extends not only to termination of the relevant contract but also termination of supply. Contractual clauses that provide for termination upon the commencement of a restructuring plan or the stand-alone moratorium, as well as UK insolvency procedures that pre-dated the CIGA, are covered by the CIGA prohibition. However, termination clauses triggered by schemes are not captured.

Suppliers are not permitted to make continued supply of goods and services conditional upon payment of outstanding amounts for supplies made before the insolvency trigger. Suppliers are also prohibited from increasing pricing or introducing new payment terms as a result of the insolvency trigger.

Should rights to terminate the contract have arisen before the relevant insolvency trigger event, but not have been subsequently exercised, termination after the occurrence of the insolvency trigger event is prohibited. However, once the insolvency trigger event has occurred, suppliers can terminate a contract on other contractual grounds, such as non-payment or breach of contract.

Suppliers benefit from certain safeguards. A supplier can apply to the court for permission to terminate the contract on the grounds of hardship caused to its own business. A contract can also be terminated with agreement of the company (where the company has entered a moratorium, voluntary arrangement or restructuring plan) or the office holder (in any other relevant insolvency procedure).

In addition, if a business or assets are transferred into a newco structure as part of a restructuring, suppliers do not have to supply the newco. The CIGA also includes carve-outs for contracts for financial services, meaning that insolvency events of default in finance documents are not impacted.

Looking ahead

The role of the English court

The CIGA sets out a legislative framework with broad implications for English insolvency and restructuring law and practice; however, the extent of its impact will play out in the months and years ahead, as case law and market practice evolves. For example, while the significant body of case law in relation to schemes will be helpful to companies and professionals seeking to use the restructuring plan, it has already become apparent that there will be nuances and divergences to take into account, as exemplified by the Gategroup and Hurricane Energy cases. In particular, the need for the English court to consider valuation evidence in relation to the restructuring plan and the likelihood that, in many situations, competing valuations will be presented to the court, requiring the court to be involved in resolving valuation disputes, marks a new frontier for the English courts.

Impact of Brexit on European restructurings

Post-Brexit, the framework for automatic recognition of insolvency and restructuring proceedings provided by the EU Insolvency Regulation no longer applies to proceedings in England and Wales. Insolvency office holders will need to seek recognition for English insolvency procedures (including the restructuring plan) on a case-by-case basis, in reliance on Rome I or the private international law of the EU member state where recognition is sought or, where adopted by an EU member state, via the domestic legislation adopting the UNCITRAL Model Law on Cross-Border Insolvency. Recognition of English judgments, such as those relating to schemes, will similarly be a matter of private international law (to the extent that Rome I and the Hague Convention do not apply), requiring a state-by-state assessment of the relevant EU member states in which the debtor has a nexus. The increased uncertainty, time and cost required to seek recognition could mean that the use of English restructuring tools becomes more challenging for European companies, although the wealth of English case law and highly reputable English court system means that the English tools will retain their appeal.

DIP financing

Chapter 11 permits debtor-in-possession (DIP) financing, which is used to fund the business during the course of the Chapter 11 proceedings. Lenders under DIP financing may be secured on a super-prime basis, provided that other secured creditors consent, or if the company can show that financing was unavailable on better terms, and the other secured creditors are ‘adequately protected’.

The CIGA did not introduce a DIP regime applicable to restructuring plans, meaning that any new funding must fit within the framework of the existing debt documentation. However, approval may be sought pursuant to a restructuring plan for new priming debt. The government has also indicated that further legislation that would implement a regime for DIP financing may be forthcoming.

Conclusion

Until recently, many jurisdictions lacked tried-and-tested restructuring tools. As a result, English procedures such as schemes, or Chapter 11 proceedings in the United States, have become very popular with non-English or non-US companies seeking to restructure.

A number of European jurisdictions have or are about to introduce new restructuring procedures. With increased competition from those jurisdictions, particularly given the impact of Brexit on cross-border recognition of English processes, we may see fewer European companies looking to the English courts as a forum for their restructurings.

In the context of this increased competition, the changes introduced by the CIGA have been welcome. They have strengthened the English restructuring regime, making certain features of Chapter 11, such as a cross-class cramdown, available for both English companies and overseas companies that can demonstrate a sufficient connection to England and Wales. While Chapter 11 will remain a popular tool for cross-border restructurings, and certain European companies may choose to use new restructuring tools available in their jurisdictions of incorporation, England and Wales will remain a pre-eminent forum to restructure a business.


Notes

[1] The CIGA introduced certain temporary measures to give businesses flexibility and breathing space to continue trading and to survive the covid-19 pandemic. Temporary changes to wrongful trading provisions expired on 30 September 2020, but were temporarily reinstated from 26 November 2020 to 30 June 2021. Other measures expired on 30 September 2021, including a temporary suspension of winding-up proceedings commenced on the basis of a statutory demand and a temporary suspension of winding-up petitions triggered by cash flow insolvency, where the pandemic caused the relevant financial difficulties. These have been replaced by more narrow restrictions on winding-up petitions presented between 1 October 2021 and 31 March 2022, which are targeted at assisting small businesses with ongoing recovery from the economic effects of the pandemic.

[2] One key distinction is that, while the restructuring plan is a Companies Act process (as is the scheme), rather than a process regulated by the Insolvency Act, in the case of the restructuring plan proposed by Gategroup (discussed in further detail below), the English court held that the restructuring plan is in fact an insolvency tool.

[3] Hurricane Energy PLC [2021] EWHC 1759 (Ch).

[4] Re gategroup Guarantee Limited [2021] EWHC 304 (Ch).

[5] ‘Connected person’ for the purpose of the Pre-pack Administration Regulations has the meaning given to that term in paragraph 60(A)(3) of Schedule B1 of the Insolvency Act. This is a broad definition that includes: (i) any company connected with the company in administration; (ii) any directors, officers or shadow directors of the company in administration; and (iii) any non-employee associates of such persons or of the company in administration. In the guidance released by the Insolvency Service in relation to the Pre-pack Administration Regulations on
30 April 2021, it is noted that a secured lender could also be considered a connected person, although this is likely to be the case only where such secured lender has exercised control or voting rights under their security.

Unlock unlimited access to all Global Restructuring Review content