England and Wales: overview of restructuring mechanisms and recent developments

In summary

The permanent legislative reforms introduced by CIGA (most notably the Part 26A restructuring plan) have been embraced by practitioners and companies as useful advances in the UK restructuring framework. This article provides an overview of the key restructuring mechanisms available under English law, summarises some of the key developments in law over the course of 2022 and considers what might lie ahead.

Discussion points

• Developments in the Part 26A restructuring plan
• Post-Brexit considerations for recognition of English restructuring tools within EU member states
• Directors’ duties: Sequana

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
• Re Virgin Active Holdings Ltd [2021] 2 BCLC 62 (Virgin Active)
• Hurricane Energy PLC [2021] EWHC 1759 (Ch) (Hurricane Energy)
• Re gategroup Guarantee Limited [2021] EWHC 304 (Ch) (Gategroup)
• Re Smile Telecoms Holdings Ltd [2021] EWHC 933 (Ch); Re Smile Telecoms Holdings Ltd [2022] EWHC 387 (Ch) (Smile Telecoms)
• Re Amicus Finance Plc (In Administration) [2021] EWHC 3036 (Ch) (Amicus Finance)
• Re Houst Ltd [2022] 7 WLUK 303 (Houst); BTI 2014 LLC v Sequana SA [2022] 3 WLR 709 (Sequana)

Background

The CIGA, which came into force on 26 June 2020, introduced both permanent measures to update the UK restructuring and insolvency regime, and temporary measures relating to insolvency law and corporate governance to assist businesses during the covid-19 pandemic. While all temporary measures expired on 31 March 2022,^[1] many of the permanent reforms effected by the CIGA, most notably the new restructuring plan under Part 26A of the Companies Act (restructuring plan), have been embraced by practitioners and companies as useful tools assisting the rescue of companies as going concerns.^[2] Several restructuring plans have been proposed in the past year, shedding light on issues ranging from the distribution of a ‘restructuring surplus’ to the use of the restructuring plan’s cross-class cramdown mechanism. The year 2022 also saw the first use of the ‘cram-out’ mechanism in Smile Telecoms and the departure from the statutory order of priority under the ‘relevant alternative’ in Houst.

The CIGA introduced permanent reforms in three key areas: a free-standing moratorium under Part A1 of the Insolvency Act, restrictions on termination provisions (ipso facto clauses) under section 233B of the Insolvency Act and the restructuring plan.

Moratorium

The moratorium aims 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 from exercising their 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 30 November 2022, only 40 moratoriums were obtained.^[3]

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 a period of initial breathing room 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 (1) its creditors, or any class of them, or (2) 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 typically 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.^[4] As at 30 November 2022, 14 companies had registered restructuring plans at Companies House since the process was first introduced by the CIGA.^[5] 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 ‘Dutch scheme’ introduced in January 2021.

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 financial difficulties test has been shown to be a relatively low bar to entry. To meet the threshold financial difficulties test, the plan company does not need to be in actual or imminent insolvency. For example, in Hurricane Energy, the financial difficulties test was satisfied where the plan company’s bond maturities were approximately 14 months away and the company could continue trading profitably for almost a year.

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. In Houst, the court concluded that the exclusion must be taken as deliberate and departed from the statutory order of priority under the ‘relevant alternative’, permitting under-secured bank lender claims to receive better treatment than His Majesty’s Revenue and Customs (HMRC) as a preferential creditor. Under the ‘relevant alternative’ (a pre-pack administration), the recipient of the largest dividend would have been HMRC (15p/£) versus 7p/£ for a bank lender. The remainder of the bank lending would have ranked as an unsecured claim. Under the Houst plan, although HMRC’s net return would increase (to 20p/£), the bank lender would also receive significantly more than their fixed charge security would otherwise have yielded (27p/£, including 20p/£ for their under-secured debt, while ordinary unsecured creditors would only receive 5p/£). This illustrates a key difference between the approach to priority of claims under the restructuring plan and Chapter 11 proceedings. Exclusion of the absolute priority rule also 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 (‘cram-out’). This means that out-of-the-money stakeholders, such as shareholders in a deeply distressed business, are not required to approve a restructuring plan. The year 2022 saw the first use of the cram-out mechanism in Smile Telecoms. Given the draconian consequences of exclusion, the court has indicated in that case that it needs to be ‘entirely satisfied’ that it is appropriate to do so. In Smile Telecoms, the court was satisfied that the excluded classes were ‘well out of the money’ and this was ‘not a marginal case’. Further, the valuation evidence was provided to all the interested parties in sufficient time (one month prior to the convening hearing) and was analysed at length by their advisers. While objections were raised by one excluded creditor about the decision made on class composition, the court refused to revisit the decision at the sanction hearing as that creditor had neither sought to appeal the convening decision nor appeared at the sanction hearing.

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.

Case law^[6] shows that valuations plays a particularly critical role in the context of restructuring plans. In Hurricane Energy,^[7] 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 as well as the recent decision in Smile Telecoms, 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).

An additional feature of Chapter 11 is that it 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.

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. Smile Telecoms was the first plan proposed by a non-UK company, incorporated in Mauritius. When considering if the plan would be given effect in foreign jurisdictions, the court took comfort in the fact that the shareholders being compromised were out of the money and the company could apply to the court in Mauritius for recognition of the plan under the UNCITRAL Model Law on Cross-Border Insolvency 1997 (the Model Law) as enacted in Mauritius.

Following the restructuring plan proposed by gategroup Guarantee Limited in February 2021,^[8] 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, following the United Kingdom’s exit from the European Union, the framework for automatic recognition of insolvency and restructuring proceedings within the European Union provided by the Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast) (the EU Insolvency Regulation) no longer applies to proceedings opened in England and Wales (see details below).

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 (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.

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 the EU Insolvency Regulation, and a supervisor seeking recognition of a CVA in an EU member state would need to do so relying 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 (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 (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 rightsizing 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) which apply to all companies entering administration on or after 30 April 2021. The Pre-pack Administration Regulations require that a ‘connected person’^[9] 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 (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.

Directors’ duties in the zone of insolvency

Directors have a duty to take into account and give appropriate weight to the interests of the company’s creditors as a company approaches insolvency (the zone of insolvency). This is a sub-category of the broader duty of the directors to promote the success of the company under section 172(1) of the Companies Act and is well established under common law (the rule in West Mercia).^[10]

In Sequana, a recent judgment handed down by the Supreme Court, some further guidance has been provided on this duty. Specifically, the court confirmed that (1) the creditor duty is not a standalone duty nor a duty that directors owe directly to creditors; (2) it arises when directors know or ought to know the company is insolvent, bordering on insolvency (imminent insolvency) or when an insolvent administration or liquidation is probable (which could be earlier than actual or imminent insolvency) and will not arise if the company simply has a real (rather than remote) risk of insolvency in the future; and (3) the nature of duty and the extent to which it overrides any conflicting interest of shareholders will depend on the company’s financial difficulties: if liquidation is inevitable, creditors’ interests become paramount as the shareholders cease to retain any valuable interest in the company, and prior to that, there will be a fact-specific evaluation, weighing up the competing interests of creditors and shareholders, the weight of which will vary in function of the level of distress of the company.

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 predated 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 use of restructuring plans

Although as case law and market practice has developed, helpful guidance has been provided to companies and professionals seeking to use the restructuring plan, there remain a number of uncertainties. For example, it remains to be seen to what extent the court will allow shareholders to retain equity and a share of the restructuring surplus at the expense of in-the-money creditors (where greater court scrutiny is expected to be applied following Virgin Active),^[11] and on the other hand, to what extent in-the-money shareholders could be diluted for the benefit of creditors to implement non-consensual debt for equity swaps post-Hurricane.

Similarly, further judicial guidance is awaited on how the court will balance transparency and disclosure requirements while ensuring the accessibility and utility of the restructuring plan. In this respect, the court suggested in Virgin Active that it will consider whether any dissenting creditor wishing to challenge the plan used the means legitimately available to it under the Civil Procedure Rules (CPR) to obtain the required information prior to the sanction hearing. However, an application under CPR 31.12 was refused in Amicus Finance, where the court acknowledged that the company had provided ‘quite substantial documentation’, the company would not have had the luxury of time and money to undertake an extensive disclosure exercise, and the requested additional information would have little utility to the questions for the sanction hearing. It thus appears that a balance will be struck by the court on a case-by-case basis between providing creditors with access to information and the burden that such access places on the plan company.

Impact of Brexit on European restructurings

As mentioned above, 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. Debtor companies and insolvency office holders will need to seek recognition for English restructuring and 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 Model Law. Recognition of English judgments, such as those relating to schemes, will similarly be a matter of private international law (to the extent that the Hague Convention does not apply), requiring a state-by-state assessment of the relevant EU member states to which the debtor has a nexus. This implies that the hurdles to be overcome to achieve recognition of a restructuring plan or a scheme within the European Union are now comparable to those required to achieve recognition elsewhere in the world. 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.

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 introduced new restructuring procedures over the past two years to implement the European Restructuring Directive of 20 June 2019. 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.

At the same time, the changes introduced by the CIGA (notably the restructuring plan) have strengthened the English restructuring regime, making certain features of Chapter 11, such as a cross-class cramdowns, 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