Bloomsbury Professional Law Insight: Corporate Insolvency and Governance Act 2020 9781526517081, 9781526517074, 9781526517104

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Bloomsbury Professional Law Insight Corporate Insolvency and Governance Act 2020

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Bloomsbury Professional Law Insight Corporate Insolvency and Governance Act 2020

Simon Beale Paul Keddie Tim Bromley-White

BLOOMSBURY PROFESSIONAL Bloomsbury Publishing Plc 50 Bedford Square, London, WC1B 3DP, UK 1385 Broadway, New York, NY 10018, USA 29 Earlsfort Terrace, Dublin 2, Ireland BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc © Bloomsbury Professional Ltd 2021 All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www.nationalarchives.gov.uk/doc/open-government-licence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998–2021. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. ISBN:  PB:     978 1 52651 708 1 ePDF:   978 1 52651 710 4 ePub:   978 1 52651 709 8 Typeset by Compuscript Ltd, Shannon To find out more about our authors and books visit www.bloomsburyprofessional.com. Here you will find extracts, author information, details of forthcoming events and the option to sign up for our newsletters

Preface

This book is an introduction to the Corporate Insolvency and Governance Act 2020 (‘CIGA 2020’). It is intended to provide an overview of those provisions of that Act which relate to insolvency and restructuring and which apply to England and Wales. It largely covers the permanent changes to the laws of England and Wales made by CIGA 2020. However, it also addresses the temporary changes to the law introduced by that Act, notwithstanding that some of these may only be in place for a short time after the publication of this book. We have anticipated that not every reader will be familiar with the law as it stood prior to CIGA 2020 so we have also included an overview of the pre-existing law in certain cases, particularly where the pre-existing law will remain in force and will dovetail with the new provisions. In addition, where we think that there are other materials that a reader would also find useful in order to understand how the courts might apply CIGA 2020, we aim to cross-reference those materials as well. This book describes the law as it stood at the end of October 2020. Various provisions within CIGA 2020 allow its permanent provisions to be amended and its temporary provisions to be extended by secondary legislation. This is likely to remain a fast-moving area and we recommend that any reader also check the latest status of any of the provisions described in this book. We would like to thank our colleagues Sheamal Samarasekara and Rhiannon Barnsley for their assistance in relation to those provisions of CIGA 2020 which relate to pensions. Finally, we would like to thank our respective partners, Clare, Clare (again!) and Vicky for providing support and hot food while we were engaged in putting book together. Simon Beale, Paul Keddie and Tim Bromley-White October 2020

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Acknowledgement

Simon Beale, Paul Keddie and Tim Bromley-White are employed as, and have written this manual in their respective capacities as, Senior Counsel or Solicitors at Macfarlanes LLP. Simon, Paul and Tim would like to acknowledge, and give thanks to, the Banking and Finance department at Macfarlanes for their support and input into the production of this manual.

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Contents

Preface  v Acknowledgementvii Table of Statutes xiii Table of Statutory Instruments xv Table of Cases xvii Chapter 1: Introduction 1 WHAT NEW PROVISONS HAVE BEEN INTRODUCED? 1 Background1 Permanent changes 2 Temporary changes 3 WHAT HAS BEEN THE REACTION TO THE PERMANENT CHANGES? 3 Overview3 The moratorium 4 The Restructuring Plan 5 The provisions protecting supplies 5 Chapter 2: Moratorium 7 INTRODUCTION7 What is the new moratorium? 7 Has a moratorium been used to date? 7 WHICH COMPANIES WILL BE ELIGIBLE FOR A MORATORIUM? 8 Eligibility for the moratorium 8 Foreign companies 9 Other entities 9 HOW CAN A COMPANY OBTAIN A MORATORIUM? 10 The two alternative routes 10 Obtaining a moratorium through the ‘out-of-court’ route 11 Applying to the court for a moratorium order 11 WHAT IS THE EFFECT OF A MORATORIUM? 12 Types of debts affected and payment holiday 12 Protection from other insolvency proceedings and enforcement 13 Restrictions on company during moratorium 14 Disposal of property subject to a security interest or hire-purchase property 16 THE MONITOR 16 What is the role of the monitor? 16

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Contents

Powers of the monitor Remuneration of the monitor WHAT IS THE DURATION OF A MORATORIUM? Initial period of a moratorium Extension of a moratorium without creditors’ consent Extending a moratorium with creditors’ consent Extension of a moratorium by court order Extension of a moratorium while a proposal for a CVA is pending Early termination of a moratorium CHALLENGES IN CONNECTION WITH A MORATORIUM Challenges to the conduct of a monitor Challenges to the conduct of directors INSOLVENCY PROCEDURES FOLLOWING A MORATORIUM AND SUPER-PRIORITY Administration or liquidation following a moratorium CVA, Scheme of Arrangement or Restructuring Plan following a moratorium

18 19 19 19 19 20 21 21 22 22 22 23 23 23 24

Chapter 3: Restructuring plan 25 INTRODUCTION25 What is the new procedure? 25 What features are shared between a Restructuring Plan and a Scheme of Arrangement? 25 To what extent will the case law on Schemes of Arrangement be relevant here? 26 How does a Restructuring Plan differ from a Scheme of Arrangement? 26 What type of company might use a Restructuring Plan? 26 Has a Restructuring Plan been used to date? 28 WHEN WILL A COMPANY BE ELIGIBLE FOR A RESTRUCTURING PLAN? 29 What is a ‘company’? 29 Financial difficulties 30 Excluded companies 30 Limited liability partnerships 31 WHAT MUST A RESTUCTURING PLAN BE DESIGNED TO ACHIEVE? 31 Statutory requirements 31 Other considerations 32 WHAT IS THE PROCEDURE FOR ADOPTING A RESTRUCTURING PLAN? 32 Who can propose a Restructuring Plan in relation to a company? 32 What process does the proposer need to follow? 33 Is there a moratorium? 34 WHICH STAKEHOLDERS VOTE ON THE RESTRUCTURING PLAN? 35 Only stakeholders who are affected are entitled to vote 35

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Contents

Stakeholders with no economic interest Moratorium creditors THE CONVENING HEARING What issues will the court consider at the convening hearing? When must the applicant give prior notice of the convening hearing? When is notice adequately given? How will the court resolve any issues raised at the convening hearing? CLASS COMPOSITION ISSUES How is class composition determined? How have the courts addressed class composition in relation to schemes? How might the courts address class composition in relation to a Restructuring Plan? THE NOTICES OF MEETINGS The method of giving notice What documents will be supplied to the creditors or members? What details will the explanatory statement need to contain? What happens where interests in a debt are held indirectly? THE MEETINGS What are the voting thresholds at the meetings? Is a physical meeting required? Is a minimum turnout required? THE SANCTION HEARING What issues will the court need to consider at the sanction hearing? When will cross-class cram-down apply? Have the provisions of the legislation been complied with? Were the classes fairly represented? Is the Restructuring Plan itself fair? Is there a ‘blot’ on the Restructuring Plan? What jurisdictional issues will the court need to consider? THE ORDER MADE AT THE SANCTION HEARING When does the Restructuring Plan become effective? What is the effect on a co-debtor or guarantor? Can the court sanction a conditional Restructuring Plan? FOREIGN COMPANIES AND STAKEHOLDERS When will the English courts have jurisdiction in relation to a foreign company? The EU Insolvency Regulation and the EU Judgments Regulation Recognition in foreign jurisdictions Can a Restructuring Plan affect the rights of members of a foreign company? PENSION SCHEMES Powers of the court to facilitate reconstruction

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35 36 37 37 38 38 39 40 40 40 41 41 41 42 42 43 44 44 44 45 46 46 46 48 48 49 50 50 50 50 51 51 52 52 53 55 55 56 57

Contents

Chapter 4: Restrictions on the termination of supply contracts 58 INTRODUCTION58 What are the new provisions? 58 What is the policy intention behind the new provisions? 58 THE PRE-CIGA 2020 REGIME 59 Section 233 IA 1986 59 Section 233A IA 1986 60 THE CHANGES INTRODUCED BY CIGA 2020 60 When do the new provisions apply? 60 WHAT RESTRICTIONS WILL BE IMPOSED? 61 Restrictions on termination because of the relevant insolvency procedure 61 What is a contract for the supply of goods and services? 63 What protections do exist for suppliers? 63 When might a supplier still terminate? 64 What types of contracts are excluded? 64 What is the exclusion in relation to small suppliers? 65 Are the new provisions applicable to a foreign supplier? 65 HOW WILL THE NEW PROVISIONS WORK IN PRACTICE? 65 The ability of the company to enforce 65 The effect on retention of title 66 The ability of the supplier to rely upon other breaches 66 Chapter 5: Temporary provisions 67 ADMINISTRATION: SALES TO CONNECTED PERSONS 67 Introduction67 The powers granted to the Secretary of State 67 The draft regulations 68 SUSPENSION OF LIABILITY FOR WRONGFUL TRADING 70 Introduction70 The wrongful trading provisions 70 The temporary suspension introduced by CIGA 2020 72 What effect has the temporary suspension had in practice? 74 SUSPENSION IN RELATION TO WINDING-UP PETITIONS 74 Introduction74 The winding-up regime 75 The temporary restrictions introduced by CIGA 2020 76 REGULATIONS TO AMEND LEGISLATION 79 Index81

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Table of Statutes

Companies Act 1989 Pt VII (ss 154–191)���������������������������������������2.28 Companies Act 2006�������������1.02; 2.57; 3.01, 3.02, 3.79, 3.120; 5.30, 5.34, 5.43 Pt 7 (ss 89–111)���������������������������������������������2.28 s 233��������������������������������������������������������������1.10 s 233A������������������������������������������������������������1.10 Pt 26 (ss 895–901)�����1.10; 2.69; 3.02, 3.05, 3.84 s 895�����������������������������������������������������2.55; 3.24 s 900������������������������������������������������������������3.140 Pt 26A (ss 901A–901L)���������������2.69; 3.02, 3.05 s 901A(2)�������������������������������������������������������3.18 s 901A(3)�������������������������������������������������������3.23 s 901A(4)��������������������������������� 3.13, 3.113, 3.114 s 901A(4)(a)������������������������������������������������3.133 s 901B������������������������������������������������������������3.20 s 901C(1)�����������������������������������2.55; 3.135; 4.13 s 901C(2)�������������������������������������������������������3.29 s 901C(3)�������������������������������������������������������3.35 s 901C(4), (5)������������������������������������������������3.38 s 901D�����������������������������������������3.68, 3.69, 3.70 s 901D(1)����������������������������������������������3.65, 3.67 s 901D(4)�������������������������������������������������������3.67 s 901E(1)�������������������������������������������������������3.69 s 901F������������������������������������������������������������3.83 s 901F(1)�������������������������������������������������������3.74 s 901F(6)�������������������������������3.107, 3.108, 3.109 s 901G���������������������������������������3.83, 3.89, 3.102 s 901G(3)�������������������������������������������������������3.86 s 901G(4)�������������������������������������������������������3.87 s 901G(5)�������������������������������������������������������3.86 s 901G(6)�������������������������������������������������������3.89 s 901H(1)–(3)������������������������������������������������3.42 s 901I(1), (2)������������������������������������������������3.134 s 901I(5)������������������������������������������������������3.136 s 901J������������������������������������������������3.133, 3.139 s 1046����������������������������������������������������������3.107 Coronavirus Act 2020 s 82����������������������������������������������������������������5.32 Corporate Insolvency and Governance Act 2020�������������������������1.01, 1.02, 1.03, 1.04, 1.07, 1.10; 2.01, 2.02, 2.04, 2.12, 2.17, 2.67; 3.01, 3.05, 3.84; 4.01, 4.03, 4.04, 4.11, 4.17, 4.23, 4.28, 4.36; 5.03, 5.05, 5.33, 5.55 s 1������������������������������������������������������������������1.04 s 2������������������������������������������������������������������1.04 s 3������������������������������������������������������������������1.04

Corporate Insolvency and Governance Act 2020 – contd s 7���������������������������������������������������������1.04; 3.01 s 8���������������������������������������������������������1.04; 5.05 s 10����������������������������������������������������������������1.04 s 12�������������������������������������������������������5.30, 5.31 s 12(1)��������������������������������������������������5.24, 5.27, 5.28, 5.29 s 12(3)–(5)�����������������������������������������������������5.28 s 12(6)������������������������������������������������������������5.28 s 12(7), (8)�����������������������������������������������������5.29 s 12(9)������������������������������������������������������������5.28 s 14�������������������������������������������������������1.04; 4.02 s 15�������������������������������������������������������1.04; 4.30 s 20�������������������������������������������������������1.04; 5.53 s 21–24�������������������������������������������������1.04; 5.54 s 25����������������������������������������������������������������1.04 s 26����������������������������������������������������������������1.04 s 27����������������������������������������������������������������1.04 Sch 1��������������������������������������������������������������1.04 Sch 2��������������������������������������������������������������1.04 Sch 3��������������������������������������������������������������1.04 Sch 4�����������������������������������������������������1.04; 2.49 para 28���������������������������������������������������������������� 2.48

Sch 9��������������������������������������������������������������1.04 Sch 10���������������������������������������������������1.04; 5.42 Sch 12���������������������������������������������������1.04; 4.09 Financial Services and Markets Act 2000 Pt 4A (ss 55H–55Z4)����������������������������2.07; 5.28 s 31����������������������������������������������������������������3.20 Housing Act 1996 Pt I (ss 1–64)�������������������������������������������������2.13 Insolvency Act 1986�������������1.02; 2.02; 3.01, 3.02, 3.13, 3.79, 3.113, 3.114; 5.11, 5.15, 5.21, 5.51 Pt A1 (ss A1–A55)�������������2.02, 2.03, 2.04, 2.05, 2.21; 3.42; 4.13 s A5����������������������������������������������������������������2.10 s A6����������������������������������������������������������������2.16 s A8����������������������������������������������������������������2.32 s A13�����������������������������������������������������2.36, 2.53 s A15��������������������������������������������������������������2.55 s A18��������������������������������������������������������������2.23 s A19��������������������������������������������������������������2.27 s A20��������������������������������������������������������������2.25 s A21��������������������������������������������������������������2.26 s A25��������������������������������������������������������������2.28 s A26�����������������������������������������������������2.28, 2.37 s A27��������������������������������������������������������������2.28

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Table of Statutes

Insolvency Act 1986 – contd s A28��������������������������������������������2.28, 2.37, 2.42 s A29�����������������������������������������������������2.28, 2.37 s A30–A32�����������������������������������������������������2.28 s A34��������������������������������������������������������������2.33 s A35��������������������������������������������������������������2.31 s A36�����������������������������������������������������2.39, 2.58 s A37��������������������������������������������������������������2.39 s A38�����������������������������������������������������2.36, 2.58 s A42�����������������������������������������������������2.59, 2.62 s A42(5)���������������������������������������������������������2.62 s A44��������������������������������������������������������������2.63 s A44(3)���������������������������������������������������������2.64 s A53(1), (2)��������������������������������������������������2.21 s 65A(2), (4)��������������������������������������������������2.68 s 117(1)����������������������������������������������������������3.14 s 122(1)(f)������������������������������������������������������5.34 s 123��������������������������������������������������������������5.35 s 123(1)(a), (b), (e)����������������������������������������5.35 s 123(2)����������������������������������������������������������5.35 s 124��������������������������������������������������������������5.35 s 174A������������������������������������������������������������2.66 s 213��������������������������������������������������������������5.30 s 214�����������������������������������������������������5.15, 5.24 s 220��������������������������������������������������������������5.40 s 221�����������������������������������������������������5.40, 5.41 s 233���������������������������������� 4.01, 4.06, 4.09, 4.11, . 4.29, 4.32 s 233A����������������������� 4.01, 4.10, 4.11, 4.12, 4.16, 4.17, 4.21, 4.29 s 233B����������������������� 4.02, 4.11, 4.13, 4.14, 4.21, 4.23, 4.24, 4.25, 4.26, 4.29, 4.30, 4.32, 4.33, 4.34, 4.35, 4.37 s 233B(2)�������������������������������������������������������4.13 s 233B(3)����������������������������������������������4.12, 4.16 s 233B(4)����������������������������������������������4.12, 4.18 s 233B(5)�������������������������������������������������������4.26 s 233B(7)����������������������������������������������4.09, 4.22 s 233B(8)�������������������������������������������������������4.19

Insolvency Act 1986 – contd s 233C������������������������������������������������������������4.02 s 238��������������������������������������������������������������5.52 s 239��������������������������������������������������������������5.52 s 245(3)(a)�����������������������������������������������������5.52 s 246ZB������������������������������������������������5.15, 5.24 s 246ZE(11)���������������������������������������������������2.48 s 435��������������������������������������������������������������5.04 Sch A1�����������������������������������������������������������1.10 Sch B1�����������������������������������������������������������2.68 para 44���������������������������������������������������������������� 2.57 para 51(1)����������������������������������������������������������� 5.08 para 52(2)����������������������������������������������������������� 5.08 para 60A������������������������������������������� 5.03, 5.04, 5.05 para 74���������������������������������������������������������������� 2.60

Sch ZA1���������������������������������������2.06, 2.07; 5.28 para 3–6, 9–13, 15, 18���������������������������������������� 5.28

Sch ZA2���������������������������������������������������������2.23 Sch 4ZZA������������������������������������������������������4.29 Pt 1 (para 1)�������������������������������������������������������� 4.12 Pt 2 (paras 2–11)������������������������������������������������ 4.29 Pt 3 (paras 12–18)���������������������������������������������� 4.29 Pt 4 (paras 19–21)���������������������������������������������� 4.29

Sch 10������������������������������������������������������������5.42 para 1������������������������������������������������������������������ 5.43 para 2������������������������������������������������������������������ 5.45 para 3, 4�������������������������������������������������������������� 5.50 para 5��������������������������������������������������������� 5.46, 5.50 para 6������������������������������������������������������������������ 5.50 para 15, 18���������������������������������������������������������� 5.52 para 19���������������������������������������������������������������� 5.47

Pensions Act 2004

s 75������������������������������������������������������������������� 3.137 s 126������������������������������������������������������������������� 2.32 s 216����������������������������������������������������������������� 3.134

UNITED STATES Bankruptcy Code Ch 11�������������������������������������������������������������2.03 Ch 15�����������������������������������������������������������3.130

xiv

Table of Statutory Instruments

Administration (Restrictions on Disposal etc to Connected Persons) Regulations 2020 (draft)������������������������������������������������5.07 Financial Collateral Arrangements (No 2) Regulations 2003, SI 2003/3226�������2.26, 2.28 Financial Markets and Insolvency (Settlement Finality) Regulations 1999, SI 1999/2979���������������������������2.26, 2.28 Insolvency (England & Wales) Rules 2016, SI 2016/1024�����������������2.49; 5.47

Insolvency Regulations 1996, SI 1996/1469�������������������������������������2.26, 2.28 Insolvent Partnerships Order 1994, SI 1994/2421����������������������������������������������2.12 Limited Liability Partnerships (Amendment etc) Regulations 2020, SI 2020/643�����������3.22 Pension Protection Fund (Moratorium and Arrangements and Reconstructions for Companies in Financial Difficulty) Regulations 2020, SI 2020/693����������������3.135

xv

xvi

Table of Cases

A Altitude Scaffolding Ltd, Re [2006] EWHC 1401 (Ch), [2006] 6 WLUK 277, [2006] BCC 904 ��������� 3.82 Apcoa Parking Holdings GmbH, Re [2014] EWHC 1867 (Ch), [2014] 4 WLUK 528, [2014] BCC 538�������������������������������������������������������������������������������������������������������������������������������� 2.11 Apcoa Parking Holdings GmbH, Re [2014] EWHC 3849 (Ch), [2015] 4 All ER 572, [2016] 1 All ER (Comm) 30����������������������������������������������������������������������������������������������������������� 3.115 B Bloom v Pensions Regulator [2013] UKSC 52, [2014] AC 209, [2013] 3 WLR 504����������������������������� 2.22 Bluebrook Ltd, Re [2009] EWHC 2114 (Ch), [2009] 8 WLUK 109, [2010] BCC 209�������������������������� 3.41 BlueCrest Mercantile BV v Vietnam Shipbuilding Industry Group [2013] EWHC 1146 (Comm), [2013] 4 WLUK 471��������������������������������������������������������������������������������������������������������� 3.34 C Castle Trust Direct plc, Re [2020] EWHC 969 (Ch), [2020] 4 WLUK 63���������������������������������������������� 3.81 ColourOz Investment 2 LLC [2020] EWHC 1864 (Ch), [2020] 7 WLUK 172����������������������������� 3.51, 3.53 Coniston Hotel (Kent) LLP (in liquidation), Re [2013] EWHC 93 (Ch), [2013] 2 WLUK 43, [2015] BCC 1������������������������������������������������������������������������������������������������������������������������������������ 2.60 Co-operative Bank plc, Re [2017] EWHC 2269 (Ch), [2017] 8 WLUK 266��������������������������������������� 3.104 D DAP Holding NV, Re [2005] EWHC 2092 (Ch), [2005] 9 WLUK 370, [2006] BCC 48 ����������� 3.15, 3.118 Dorman Long & Co Ltd, Re [1934] Ch 635, [1933] 11 WLUK 63�������������������������������������������������������� 3.98 Drax Holdings Ltd, Re [2003] EWHC 2743 (Ch), [2004] 1 WLR 1049, [2004] 1 All ER 903 ����������� 3.114 E English, Scottish & Australian Chartered Bank, Re [1893] 3 Ch 385, [1893] 7 WLUK 52������������������� 3.99 G Guardian Assurance Co, Re [1917] 1 Ch 431, [1917] 1 WLUK 43�������������������������������������������������������� 3.24 H Hawk Insurance Co Ltd, Re [2001] EWCA Civ 241, [2001] 2 WLUK 701, [2002] BCC 300�������������� 3.59 I Indah Kiat International Finance Co BV, Re [2016] EWHC 246 (Ch), [2016] 2 WLUK 355, [2016] BCC 418������������������������������������������������������������������������������������������������������������������������������ 3.128 L La Seda de Barcelona SA, Re [2010] EWHC 1364 (Ch), [2010] 5 WLUK 688, [2011] 1 BCLC 555������������������������������������������������������������������������������������������������������������������������ 3.110 Lehman Brothers International (Europe) (in administration), Re [2018] EWHC 1980 (Ch), [2019] Bus LR 1012, [2018] 7 WLUK 667, [2019] BCC 115����������������� 3.24, 3.96 Lombard Medical Technologies plc, Re [2014] EWHC 2457 (Ch), [2014] 7 WLUK 742, [2015] 1 BCLC 656������������������������������������������������������������������������������������������������������������������������ 3.111

xvii

Table of Cases

M Marconi Corpn plc & Marconi plc [2003] EWHC 663 (Ch), [2003] 3 WLUK 683������������������������������� 3.60 MyTravel Group plc, Re [2004] EWCA Civ 1734, [2004] 12 WLUK 456, [2005] 2 BCLC 123���������� 3.41 N National Farmers Union Development Trust Ltd, Re [1972] 1 WLR 1548, [1973] 1 All ER 135, [1972] 7 WLUK 144�������������������������������������������������������������������������������������������������� 3.24 Nortel Companies, Re see Bloom v Pensions Regulator������������������������������������������������������������������������� 2.22 O Official Receiver v Sahaviriya Steel Industries plc [2015] EWHC 2877 (Ch), [2015] 10 WLUK 294, [2016] BCC 456������������������������������������������������������������������������������������������������������ 4.32 P PT Garuda Indonesia, Re [2001] 10 WLUK 133, [2001] All ER (D) 53������������������������������������������������ 3.37 Pizza Express Financing 2 plc, Re [2020] EWHC 2873 (Ch), [2020] 9 WLUK 334��������������������������� 3.110 Practice Statement (Companies: Schemes of Arrangement under Part 26 & Part 26A of the Companies Act 2006 [2020] 6 WLUK 547, [2020] BCC 691 ������������������ 3.43, 3.44, 3.56, 3.57, 3.70, 3.71, 3.73 Produce Marketing Consortium Ltd (in liquidation) Ltd, Re (No 2) [1989] 3 WLUK 315, [1989] 5 BCC 569, [1989] BCLC 520���������������������������������������������������������������������� 5.21 R Ralls Builders Ltd (in liquidation), Re; Grant v Ralls [2016] EWHC 243 (Ch), [2016] Bus LR 555, [2016] 2 WLUK 319������������������������������������������������������������������������������� 5.20, 5.23 Real Estate Development Co, Re [1991] 1 WLUK 541, [1991] BCLC 210������������������������������������������� 5.41 Rodenstock GmbH, Re [2011] EWHC 1104 (Ch), [2011] Bus LR 1245, [2011] 5 WLUK 136 ���������� 3.119 S Savoy Hotel Ltd, Re [1981] Ch 351, [1981] 3 WLR 441, [1981] 3 All ER 646������������������������������������� 3.24 Sovereign Life Assurance Co (in liquidation) v Dodd [1892] 2 QB 573, [1892] 7 WLUK 18��������������� 3.59 Sunbird Business Services Ltd [2020] EWHC 2493 (Ch), [2020] 9 WLUK 214����������������������������������� 3.71 T Taylors Industrial Flooring v M & H Plant Hire (Manchester) Ltd [1989] 10 WLUK 346, [1990] BCC 44, [1990] BCLC 216��������������������������������������������������������������������������������������������������� 5.38 Travelodge Hotels Ltd v Prime Aesthetics Ltd [2020] EWHC 1217 (Ch), [2020] 5 WLUK 455 ���������� 5.49 V Van Gansewinkel Groep BV, Re [2015] EWHC 2151 (Ch), [2015] Bus LR 1046, [2015] 7 WLUK 730����������������������������������������������������������������������������������������������������������������������� 3.123 Vietnam Shipbuilding Industry Group, Re [2013] EWHC 2476 (Ch), [2013] 6 WLUK 694, [2014] BCC 433������������������������������������������������������������������������������������������������������������������������������ 3.115 Virgin Atlantic Airways Ltd, Re [2020] EWHC 2191 (Ch), [2020] 8 WLUK 120��������������������������������� 3.16 Virgin Atlantic Airways Ltd, Re [2020] EWHC 2376 (Ch), [2020] 9 WLUK 39�������������������������� 3.37, 3.85

xviii

Chapter 1

Introduction

WHAT NEW PROVISONS HAVE BEEN INTRODUCED? Background 1.01   The Corporate Insolvency and Governance Act 2020 (referred to within this Guide as ‘CIGA 2020’) came into force on 26 June 2020 as a response to the coronavirus pandemic. It made three main permanent changes to the corporate insolvency laws of the different parts of the UK. It also made a series of more temporary changes. The majority of these temporary changes also affect corporate insolvency law. However, a number deal with corporate governance, providing mechanisms to extend time limits for certain filings and enabling companies still to hold meetings by non-physical means. 1.02  Although the changes introduced by CIGA 2020 affect a variety of pieces of UK legislation, they primarily affect the Insolvency Act 1986 (referred to within this Guide as ‘IA 1986’) and the Companies Act 2006 (referred to within this Guide as ‘CA 2006’). 1.03   Table 1.1 shows the various provisions of CIGA 2020 which affect the law of England and Wales. This Guide discusses only those provisions. For the remainder of this Guide, we will use the terms ‘English law’ and the ‘English courts’ (or simply the ‘court’) to refer to what might more properly be described, respectively, as the law and the courts of England and Wales. 1.04   In addition, as the focus of this Guide is on the corporate insolvency aspects of CIGA 2020, it does not discuss the fairly small number of temporary changes relating to governance. Table 1.1  Corporate insolvency provisions of CIGA 2020 which affect England Provision Section 1 Section 2 Section 3

Title Moratoriums in Great Britain Moratoriums in Great Britain: further amendments and transition Moratoriums in Great Britain: temporary modifications

Chapter of this Guide Chapter 2 Chapter 2 Chapter 2 (continued)

1

1.05  Introduction

Table 1.1  (Continued) Provision Section 7 Section 8 Section 10 Section 14 Section 15 Section 20 Section 21 Section 22 Section 23 Section 24 Section 25 Section 26 Section 27

Title Arrangements and reconstructions for companies in financial difficulty Administration in Great Britain: sales to connected persons Winding-up petitions: Great Britain Protection of supplies of goods and services: Great Britain Temporary exclusion for small suppliers: Great Britain Regulations to amend legislation: Great Britain Purposes Restrictions Time-limited effect Expiry Consequential provisions etc. Procedure for regulations Interpretation

Schedule 1 Schedule 2 Schedule 3 Schedule 4 Schedule 9

Moratoriums in Great Britain: Eligible companies Moratoriums in Great Britain: Contracts involving financial services Moratoriums in Great Britain: Further amendments Moratoriums in Great Britain: Temporary provisions Arrangements and reconstructions for companies in financial difficulty Schedule 10 Winding-up petitions: Great Britain Schedule 12 Protection of supplies of goods and services: Great Britain

Chapter of this Guide Chapter 3 Chapter 5 Chapter 5 Chapter 4 Chapter 4 Chapter 5 Chapter 5 Chapter 5 Chapter 5 Chapter 5 Chapter 5 Chapter 5 Chapter 5 Chapter 2 Chapter 2 Chapter 2 Chapter 2 Chapter 3 Chapter 5 Chapter 4

Permanent changes 1.05   The three main permanent changes are: • The introduction of a new standalone ‘pre-insolvency’ moratorium procedure for companies in financial difficulty. • The introduction of a new form of restructuring plan for companies which are in, or likely soon to be in financial difficulty. • The introduction of new provisions to protect supplies to companies which have entered one of a number of formal insolvency procedures or other restructuring procedures by making it harder for suppliers of goods and services to amend or terminate contracts. 1.06   None of these changes is unexpected. Back in 2016, the government published a consultation paper entitled ‘A Review of the Corporate Insolvency Framework’, seeking views on measures to update the UK’s corporate insolvency regime. One of the stated aims was to improve

2

Introduction  1.10

the UK’s standing in the World Bank’s annual ‘Doing Business Report’. The measures included within the paper were also broadly in line with the aims of then-current proposals for an EU directive on introducing preventive restructuring frameworks which might help a company avoid a more extreme insolvency process. (The latter have subsequently evolved into Directive (EU) 2019/1023 of the EU Parliament and of the Council.) 1.07   The government consultation sought views on four proposals. The first three of these were variants of the moratorium, restructuring plan and protections of supplies now introduced by CIGA 2020. The fourth proposal was to create greater opportunities for companies to obtain additional funding while undergoing a rescue process. 1.08   The government provided its response to the results of the consultation in 2018, but did not take any immediate action to implement new legislation. However, the coronavirus pandemic provided a catalyst for action, and the changes were accelerated onto the statute book.

Temporary changes 1.09   The temporary changes include: • the resurrection of a previously lapsed power to allow the Secretary of State for Business, Energy and Industrial Strategy (who will be subsequently referred to within this Guide as just the ‘Secretary of State’) to make regulations in relation to pre-packaged administration sales; • a suspension of liability for wrongful trading; • a suspension of the ability of a creditor to rely upon a statutory demand, and a temporary restriction on their ability to present a winding-up petition or obtain a winding-up order; and • a power for the Secretary of State to introduce new regulations to amend, or modify the effect of, corporate insolvency or governance legislation.

WHAT HAS BEEN THE REACTION TO THE PERMANENT CHANGES? Overview 1.10   Perhaps partly as a result of the need for swift enaction, in our view none of the three permanent changes has introduced anything wholly radical into English law. Rather, each seems to take an existing provision of English law as its starting point. • Despite a number of improvements, the moratorium continues to bear a resemblance to the little-used small companies moratorium which, prior to CIGA 2020, was found in Schedule A1 to the IA 1986.

3

1.11  Introduction

• The restructuring plan builds on the well-established scheme of arrangement process which is found in Part 26 to the CA 2006 (a ‘Scheme of Arrangement’). • The provisions protecting supplies supplement existing provisions which already protected essential supplies in more limited circumstances and which are still to be found in IA 1986, ss 233 and 233A. 1.11   The general theme of the changes is, however, to move English corporate insolvency law in at least two directions with which England has previously been less comfortable than other jurisdictions: • They place an increased emphasis on saving companies as an existing corporate entity. Historically, English corporate insolvency law has developed mechanisms which often generate a return to creditors, particularly secured creditors, through a sale of a company’s business or assets rather than through the survival of the corporate entity. The development of the pre-packaged administration is an example of this. • They will potentially lead to increased involvement by the court. Again, historically English corporate insolvency law has developed mechanisms by which insolvency proceedings may been opened and issues resolved within those proceedings without the need for any hearing before a judge. Thus, for example, it is frequently possible to complete an administration, a voluntary liquidation, or a company voluntary arrangement (‘CVA’) without troubling the court at all, other than to make certain filings. 1.12   The unwillingness of the legislature in the end to introduce a rescue funding mechanism equivalent to the debtor-in-possession funding mechanisms seen in many other jurisdictions may still prove a hurdle to this new aim of saving companies in some cases. Where there is a liquidity shortfall the company is likely to remain reliant in many cases on the willingness of its existing stakeholders to inject further funds.

The moratorium 1.13   The moratorium has unfortunately so far failed to impress many insolvency practitioners. The various criticisms include the following: • The duties imposed on the monitor are seen as imposing too great a burden on any insolvency practitioner willing to assume that role. For example, in keeping with their role as a watchdog, the monitor is given no management powers. However, it appears that they are nevertheless also subject to a positive duty to ensure that creditor interests are protected. • It is unrealistic to expect that the directors will be able to perform their duties without advice. However, in contrast to a CVA where it is accepted that the nominee performs both an advisory role and a role of protecting creditor interests, it is clear that the monitor’s function is not

4

Introduction  1.16

to advise management. It has been suggested that the advisory role might in some cases be performed by another insolvency practitioner within the monitor’s firm, but with the benefit of twin engagement letters to make the division of functions clear. • The initial moratorium period is very short compared to that seen in other jurisdictions, and would not provide enough time in itself to put together a detailed plan to rescue the company. It may be in reality that this initial period would be used in many cases to try to secure general creditor consent to a longer moratorium, or failing that, to buy just enough time to put together an application to the court for a longer extension. • The moratorium rules have the potential to distort existing priorities between creditors. 1.14  Prior to the introduction of the moratorium, the insolvency profession had already developed at least one potential rival tool in the form of the ‘light touch administration’. A light-touch administration allows the company to take advantage of the administration moratorium and administration expenses regime. However, the administrators agree a protocol with management which allows management to continue to perform various previous functions. It remains to be seen which tool will be the better-used.

The Restructuring Plan 1.15   In contrast, the Restructuring Plan has generally been well-received, and the cross-class cram-down mechanism described further in Chapter 3 in particular now brings the English restructuring toolkit better into line with those of other jurisdictions. However, potential criticisms include: • in continuing to align the majority of each class that must vote in favour with the threequarters majority already used for Schemes of Arrangement and CVAs, the legislators missed a possible opportunity instead to align the majority with the lower thresholds (for example, two-thirds) seen in other jurisdictions; and • the need for a minimum of two court hearings will not make the Restructuring Plan a cheap process and it will in practice therefore not be an option for many smaller companies.

The provisions protecting supplies 1.16   Given England’s history as a creditor-friendly jurisdiction, it feels as if the legislature has adopted a general restriction on suppliers being able to rely on their contract termination rights with some reluctance. Potential criticisms include: • the provisions place a supplier who has the benefit of credit insurance in a difficult position – a credit insurer would ordinarily cease to cover further debts incurred after the company

5

1.16  Introduction

entered into a formal insolvency process and in calculating the supplier’s loss the insurer’s default position would be to allocate further monies received from the company against the oldest unpaid debts, even where these further monies were in practice paid by the company in respect of the more recent supplies; • the provisions potentially have limited teeth, in that the company would need either to seek specific performance or sue for damages where a supplier chooses not to comply; and • while the clarification that the restrictions will not prevent lessors or licensors from relying upon their existing termination rights will be welcomed by those counterparties, if the company relies, for example, on the benefit of one or more key licences to continue to trade, the new provisions will do little to assist it.

6

Chapter 2

Moratorium

INTRODUCTION What is the new moratorium? 2.01   The intention behind any moratorium for distressed companies is that it will provide a company with breathing space from creditor pressure and enforcement and the stability to allow a rescue of the company. Moratoria have been implemented in English insolvency law prior to the Corporate Insolvency and Governance Act 2020 (‘CIGA 2020’). There is, for example, a moratorium in administration and indeed an interim moratorium once a notice of intention to appoint administrators has been filed at court. There was also once an ability for a ‘small’ company to seek a moratorium when proposing a company voluntary arrangement (‘CVA’), although this little-used process has been abolished by CIGA 2020. 2.02   However, unlike the moratoria that pre-date CIGA 2020, the new moratorium which CIGA 2020 has added in the Insolvency Act 1986 (IA 1986), Part A1 is not connected with any insolvency procedure or restructuring tool such as a CVA, Scheme of Arrangement or Restructuring Plan. This chapter will just refer to this new moratorium as the ‘Part A1 moratorium’ or just the ‘moratorium’. 2.03   The Part A1 moratorium is designed to be a ‘debtor in possession’ procedure where, like Chapter 11 of the US Bankruptcy Code, the company continues to be managed by its existing management and directors rather than being displaced by an insolvency office-holder, as is the case with administration.

Has a moratorium been used to date? 2.04   At the time of writing, we are aware of at least two companies having obtained a Part A1 moratorium since CIGA 2020 came into force.

7

2.05  Moratorium

2.05   If the shortcomings already summarised in 1.13 remained unaddressed, however, we think it unlikely that the Part A1 moratorium will prove a complete substitute for administration for companies seeking to obtain the breathing space which a moratorium affords. Administration seems destined to continue to play a role in the rescue of companies and their businesses.

WHICH COMPANIES WILL BE ELIGIBLE FOR A MORATORIUM? Eligibility for the moratorium 2.06   The moratorium is available to a company if: • in the view of the company’s directors, the company is, or is likely to become, unable to pay its debts as they fall due; • an insolvency practitioner proposed to act as the ‘monitor’ forms the view that it is likely that a moratorium would result in the company being rescued as a going concern; and • the company is not one of the types of companies excluded by IA 1986, Schedule ZA1. The monitor could originally include a caveat that their view did not take into account any ­worsening of the company’s financial position as a result of the COVID-19 pandemic but as from 1 October 2020 this is no longer the case. 2.07   The types of companies listed in IA 1986, Schedule ZA1 and which are ineligible for a moratorium include: • companies that are, or in the past 12 months have been, subject to a moratorium or insolvency proceedings (however, a temporary provision in effect until 31 March 2021 allows a company which was subject to a prior moratorium, administration or CVA in the previous 12 months to still be eligible for a moratorium); • various types of financial institutions including insurance companies, banks, electronic money institutions, recognised investment exchanges, clearing houses and other providers of financial infrastructure; • securitisation companies; • parties to capital market arrangements; • public-private partnership project companies; and • overseas companies (ie non-UK companies) whose functions correspond to one of the other types of ineligible companies. There was originally also a temporary restriction on eligibility for companies that held a permission under the Financial Services and Markets Act 2000, Part 4A and who were permitted to hold client money by that Act. However, that temporary restriction was removed with effect from 1 October 2020.

8

Moratorium  2.13

2.08   The exclusion of parties to a capital market arrangement is notable as this excludes most companies that have issued or guaranteed bonds with a debt of £10 million or more. The effect is to severely limit the applicability of the moratorium to very large companies or private equity portfolio companies as these are likely to have capital structures involving bonds. 2.09   The stipulation that it is the company being rescued as a going concern and not just the business would also appear to rule out a moratorium being used as a precursor to a restructuring using a pre-packaged administration.

Foreign companies 2.10   The moratorium is not confined solely to English companies. Section A5 IA 1986 provides that an ‘overseas’ company which is not subject to an outstanding winding-up petition and is otherwise eligible for the moratorium may apply to the court for a moratorium. However, the option whereby a UK company can obtain a moratorium by filing documents at court without a hearing is not available to overseas companies. 2.11   The English courts will have jurisdiction to grant a moratorium to an overseas company if the court would have jurisdiction to wind-up the company. This means that instead of limiting the moratorium to overseas companies that have their centre of main interests in England the English courts could grant a moratorium where a company has a ‘sufficient connection’ to England. This is the same test that the court has applied in determining whether it has jurisdiction to sanction a Scheme of Arrangement of an overseas company. In that context, and as discussed in 3.112 to 3.116, the court has found that an overseas company with sufficient connection to England and Wales includes a company whose only connection to the jurisdiction was that its finance documents were governed by English law and included a submission to the jurisdiction of the courts of England and Wales (Re Apcoa Parking Holdings GmbH and others [2014] EWHC 1867 (Ch)).

Other entities 2.12   Limited liability partnerships are eligible for a moratorium. However, CIGA 2020 does not amend the Insolvent Partnerships Order 1994 to include a moratorium so general and limited partnerships are not eligible for a moratorium. 2.13  Charitable Incorporated Organisations are eligible for a moratorium unless they are private registered providers of social housing in England or registered as social landlords in Wales under Part 1 of the Housing Act 1996.

9

2.14  Moratorium

HOW CAN A COMPANY OBTAIN A MORATORIUM? The two alternative routes 2.14   Table 2.1 shows the moratorium process in flowchart form. There are two alternative routes for obtaining a moratorium: • an ‘out-of-court’ route; or • an application to court for a moratorium order. 2.15   Once the company has obtained a moratorium, the moratorium process will be the same regardless of the route by which the moratorium was obtained. Table 2.1  The moratorium process Directors file out-of-court for, or apply to Court for, a moratorium

Initial period of 20 days

Extension: •

By directors without creditor consent (IA 1986, s A10)

•

Beyond 40 days with creditor consent (IA 1986, s A11)

•

By Court on application by directors (IA 1986, s A13)

•

Automatically while CVA proposal pending (IA 1986, s A14)

•

By Court when application made for Scheme of Arrangement or Restructuring Plan (IA 1986, s A15)

Early termination:

Possible final outcomes:

•

On entry into insolvency procedures, etc. (IA 1986, s A16)

•

Recovery of the company without a further process

•

Restructuring Plan

•

By monitor (IA 1986, s A38)

•

Scheme of Arrangement

•

By Court following a challenge to monitor’s or directors’ actions (1986 IA 1986, ss A42 or A44)

•

CVA

•

Sale and/or refinancing outside insolvency

10

Moratorium  2.19

Obtaining a moratorium through the ‘out-of-court’ route 2.16   This route allows an eligible English company to obtain a moratorium quickly by filing documents at court but without the need for a court hearing. The necessary documents needed to be provided by the directors are set out in IA 1986, s A6 and are: • a notice that the directors wish to obtain a moratorium; and • a statement from the directors that, in their view, the company is, or is likely to become unable to pay its debts, and the following statements from the proposed monitor that: • they are a qualified person (ie they are qualified as and licensed to be an insolvency practitioner) and they consent to act as monitor in respect of the proposed moratorium; • the company is an eligible company; and • in the proposed monitor’s view, it is likely that a moratorium for the company would result in the rescue of the company as a going concern. The monitor was originally able to include a caveat that their view did not take into account any worsening of the company’s financial position as a result of the COVID-19 pandemic. However, as from 1 October 2020 the ability to add such a caveat no longer exists. In addition, as from 31 March 2021, this ‘out-of-court’ route will no longer be available to companies which are subject to an outstanding winding-up petition. 2.17   The moratorium will take effect from the time and date on which the automated email acknowledging the submission of the above documents to the court’s online CE-Filing system is received (paragraph 10 of the Insolvency Practice Direction relating to CIGA 2020).

Applying to the court for a moratorium order 2.18   This will still require the completion of the same documents that are filed by a company using the ‘out-of-court’ route, as described in 2.16. A moratorium granted by a court order will take effect from the time the order is made. 2.19   As with all hearings concerned with the Part A1 moratorium, it may be listed before a High Court Judge or an Insolvency and Companies Court Judge but not a District Judge. The court will only exercise its discretion to order a moratorium if it is satisfied that the moratorium would achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up without there first being a moratorium.

11

2.20  Moratorium

2.20   As from 31 March 2021, an eligible English company that is subject to an ­outstanding winding-up petition will only be able to obtain a moratorium by applying to the court for a moratorium order. An application for a court order is also the only route for obtaining a m ­ oratorium that is available to an overseas company, provided that the overseas company is not subject to an outstanding winding-up petition.

WHAT IS THE EFFECT OF A MORATORIUM? Types of debts affected and payment holiday 2.21   Part A1 IA 1986 draws a distinction between two categories of debt in relation to the moratorium: • Pre-moratorium debts: these are debts or liabilities that have fallen due before or during the moratorium by reason of an obligation incurred before the moratorium (IA 1986, s A53(1)); and • Moratorium debts: these are debts or liabilities that fall due during or after the moratorium by reason of an obligation incurred during the moratorium (IA 1986, s A53(2)). 2.22   The distinction between pre-moratorium debts and moratorium debts mirrors to some extent the distinction between debts that are provable in an administration or liquidation and debts that are treated as expenses of the administration or liquidation. It is reasonable to expect that the court may draw on the existing case law on expenses to guide decisions on disputes over whether a debt or liability is a pre-moratorium debt or a moratorium debt. For example, in Re Nortel Companies [2013] UKSC 52 the Supreme Court held that liabilities pursuant to ­financial support directions and contribution notices issued by the Pension Regulator to a company in administration are liabilities that fall due during an administration but that arose as a result of an obligation incurred before the administration and so were provable debts not expenses of the administration. If the same logic is applied to moratoria these liabilities would be treated as pre-moratorium debts. 2.23   Pre-moratorium debts are further sub-divided into debts which are subject to a payment holiday and debts which are not subject to a payment holiday. The latter sub-category includes: • the monitor’s remuneration or expenses; • goods or services supplied during the moratorium; • rent in respect of a period during the moratorium;

12

Moratorium  2.26

• wages or salary arising under a contract of employment (including holiday pay, sick pay and contributions to an occupational pension scheme); • redundancy payments; and • debts or other liabilities arising under a contract or other instrument involving financial services (these are listed in IA 1986, Schedule ZA2 and will include commercial loans, finance leases bonds, hedging and derivative agreements and related guarantees) (IA 1986, s A18). 2.24   The company does not have to pay the pre-moratorium debts subject to a payment h­ oliday (and indeed may be restricted from doing so (see below)). However, the company will need to pay its moratorium debts and pre-moratorium debts not subject to a payment holiday as they fall due in order to continue benefitting from the moratorium.

Protection from other insolvency proceedings and enforcement 2.25   The moratorium restricts stakeholders other than the directors from commencing insolvency proceedings, although the directors are required to inform the monitor if they do initiate insolvency proceedings. In particular, pursuant to IA 1986, s A20, none of the following may take place: • presentation of a winding-up petition (other than petitions by the Secretary of State on the grounds of public interest, petitions by the Prudential Regulation Authority on the grounds that an entity it regulates is unable to pay its debts or certain petitions by the Secretary of State or the Financial Conduct Authority in relation to Cooperative European Societies and Societas Europaea); • passing of a special resolution for a voluntary liquidation unless the special resolution has been recommended by the directors; • an order for compulsory liquidation, except where petitioned for by the directors; • an application for an administration order, except by the directors; • filing of a notice of intention to appoint administrators by the company (although the directors may still file such a notice); • filing of a notice to appoint administrators by a qualifying floating charge holder; and • appointment of an administrative receiver. 2.26  To provide further protection from creditor pressure a moratorium also provides the protection from enforcement and legal proceedings set out in IA 1986, s A21 and summarised in Table 2.2, although these protections are subject to the exceptions described in the second column of that table.

13

2.27  Moratorium

Table 2.2  Protections afforded by the moratorium Restricted enforcement or legal proceeding Forfeiture by peaceable re-entry by a landlord Any steps to enforce security over company’s property

Repossession of goods in the company’s possession under a hire-purchase agreement Institution of, carrying out or continuing a legal process (including legal proceedings, execution, distress or diligence)

Crystallisation of a floating charge or exercise of a right in security to impose restrictions on the disposal of the company’s property

Exception Permitted with the court’s permission Permitted if: • enforcement of a ‘collateral security charge’ within the meaning given to the term by the Financial Markets and Insolvency (Settlement Finality) Regulations 1999 (SI 1999/2979); • enforcement of a ‘financial collateral ­arrangement’ within the meaning given to the term by the Financial Collateral Arrangements (No 2) Regulations 2003 (SI 2003/3226); or • with the court’s permission (but permission cannot be sought to crystallise a floating charge) If the security was granted during the moratorium enforcement will also require the monitor’s consent Permitted with the court’s permission Permitted if: • employment tribunal proceedings or related legal proceedings; • any other proceedings between an employer and a worker; or • with the court’s permission Restriction does not apply to a floating charge in: • a ‘collateral security charge’ within the meaning given to the term by the Financial Markets and Insolvency (Settlement Finality) Regulation 1999 (SI 1999/2979); • a ‘financial collateral arrangement’ within the meaning given to the term by the Financial Collateral Arrangements (No 2) Regulations 2003 (SI 2003/3226); • a ‘market charge’ within the meaning given to the term by Part 7 Companies Act 1989; and • a ‘system-charge’ within the meaning given to the term by the Financial Markets and Insolvency Regulations 1996 (SI 1996/1469)

Restrictions on company during moratorium 2.27  Similar to insolvency proceedings, a moratorium is required to be publicised by the company by including a statement that a moratorium is in effect and the name of the monitor on the company’s website and its business documents, which include the company’s invoices, orders for goods and service and business letter (IA 1986, s A19).

14

Moratorium  2.28

2.28   There are also a number of restrictions imposed on a company during a moratorium, which are set out in IA 1986, ss A25 to A32. These are summarised in Table 2.3, although these protections are subject to the exceptions described in the second column of that table. Table 2.3  Restrictions imposed on a company during a moratorium Restriction on company during moratorium Obtaining credit of £500 or more Granting security Entering into a ‘market contract’ within the meaning given to the term by Part 7 Companies Act 1989 Entering into a ‘financial collateral arrangement’ within the meaning given to the term by the Financial Collateral Arrangements (No 2) Regulations 2003 (SI 2003/3226) Giving a ‘transfer order’ within the meaning given to the term by the Financial Markets and Insolvency (Settlement Finality) Regulation 1999 (SI 1999/2979) Granting a ‘market charge’ within the meaning given to the term by Part 7 Companies Act 1989 Granting a ‘system-charge’ within the meaning given to the term by the Financial Markets and Insolvency Regulations 1996 (SI 1996/1469) Providing any ‘collateral security’ within the meaning given to the term by the Financial Markets and Insolvency (Settlement Finality) Regulation 1999 (SI 1999/2979) Payments of pre-moratorium debts which are subject to a payment holiday and which are more than the greater of: (i) £5,000; or (ii) 1% of the value of debts and other liabilities owed by the company at the start of the moratorium (to the extent such liabilities can be ascertained)

Disposal of company’s property

Disposal of goods in company’s possession under a hire-purchase agreement

Exception Permitted if relevant creditor has been informed that moratorium is in force in relation to the company Permitted with monitor’s consent None

None

None

None None

None

Permitted if: • monitor consents; • pursuant to a court order; or • discharging secured sums or obligations under a hire-purchase agreement where the court has permitted disposal of charged property free of security interests or disposal of hire-purchase property Permitted if: • disposal is in the ordinary way of the company’s business; • monitor consents; or • pursuant to a court order Permitted: • with the permission of the court; or • pursuant to the terms of the hire-purchase agreement

15

2.29  Moratorium

A transaction in breach of the requirement to publicise the moratorium or of the restrictions on the company summarised in Table 2.3 is not void, but the company and any officer who authorised the transaction without reasonable excuse commits an offence.

Disposal of property subject to a security interest or hire-purchase property 2.29  During a moratorium, a company may apply to the court for permission to dispose of property subject to a floating charge or property in the company’s possession under a hirepurchase agreement. The court may only give its permission if it considers that this will support the rescue of the company as a going concern. 2.30   Except in relation to a floating charge, where the company has been given permission to dispose of the property it must apply the net proceeds of the disposal plus any additional amount that the court determines is required to top-up the net disposal proceeds to the property’s open market value towards discharging the secured sums or the amount owed under the hire-purchase agreement (as relevant). Where the company has been given permission to dispose of property subject to a floating charge the floating charge holder will retain a security interest in the property which directly or indirectly represents the property disposed of.

THE MONITOR What is the role of the monitor? Statutory requirements 2.31   As the name suggests, the monitor’s intended role is to carry out an oversight function. In particular, the monitor must monitor the company’s affairs in order to decide whether it remains likely that the moratorium will result in the rescue of the company as a going concern (IA 1986, s A35). In contrast to a liquidator or an administrator a monitor is not an agent of the company and has no power to manage the company or deal with its assets. 2.32  The monitor also plays a role in communicating the commencement, extensions and termination of the moratorium to: • the registrar of companies (Companies House has prepared standard forms for this purpose); • every creditor of the company of whose claim the monitor is aware; • the Pensions Regulator where the company is an ‘employer’ in respect of an occupational pension scheme which is not a money purchase scheme; and

16

Moratorium  2.34

• the Pension Protection Fund (the ‘PPF’) where the company is an ‘employer’ in respect of a pension scheme which is an eligible scheme within the meaning of Pensions Act 2004, s 126 (and so is eligible for protection by the PPF) (see IA 1986, s A8). 2.33  A monitor must be a licensed insolvency practitioner and so will be required to comply with the Insolvency Code of Ethics and the applicable regulations of their Recognised Professional Body. A monitor will also be an officer of the court (IA 1986, s A34) and so will be subject to the obligation to act with integrity and without conflicts. Insolvency Service guidance 2.34  The Insolvency Service has produced its own comprehensive guidance as to the role and functions of the monitor (see www.gov.uk/government/publications/insolvency-act-1986part-a1-moratorium-guidance-for-monitors). In addition to re-stating the statutory requirements set out above, this guidance adds that, among other things: • Prior to the moratorium the prospective monitor will need to engage with the directors and seek information about the company’s assets, liabilities and business so that they are able to assess the company’s financial position, prospects and eligibility for a moratorium. This will be a good opportunity for the prospective monitor to obtain a list of the company’s creditors, the amounts owed to them, details of any security held together with their contact details (postal and email addresses), which the monitor will need when appointed. The extent of this pre-appointment work will be for the insolvency practitioner using their professional experience and judgement to decide on and should be proportionate to the size and complexity of the company. • The monitor must support the integrity of the moratorium process and ensure creditor interests are protected. To fulfil this role the legislation therefore enables the monitor to require the directors to provide any information the monitor requires for the purpose of carrying out their functions under the moratorium. This is necessary in order for the monitor to assess the company’s affairs in the short timescales available. The monitor should exercise their professional judgement to satisfy themselves of the accuracy of the information provided, and, is able to require the directors provide further information. • It is important that directors have regard to the interests of employees and the government believes that all good employers will inform their employees of the company’s entry into a moratorium. To safeguard employees, when in receipt of notification from the directors that a moratorium has come into force, the monitor should ensure that the directors have informed employees of the effect of the moratorium, its initial length, its effect on their wages, salary and employment rights.

17

2.35  Moratorium

While this chapter will not discuss this guidance in any greater detail, it is something which any potential monitor should ensure that they have read in full.

Powers of the monitor 2.35   As the management of the company remains in the hands of the directors the powers of the monitor are limited compared to those of a liquidator or an administrator. 2.36   The main power of the monitor is their ability, and indeed obligation, to terminate the moratorium if they think any of the circumstances in set out IA 1986, s A38 and discussed in 2.58 has occurred. The monitor also controls the ability of a company to extend the moratorium by providing the statement that, in their view it is likely that the moratorium will result in the rescue of the company as a going concern, which is required for an extension of the moratorium by the directors with or without the consent of the creditors or by a court order pursuant to IA 1986, s A13. 2.37   The monitor is also able to permit certain transactions that the company would otherwise be restricted from carrying out during the moratorium, including: • payments of pre-moratorium debts which are subject to a payment holiday and which are more than the greater of: (i) £5,000; or (ii) 1% of the value of debts and other liabilities owed by the company at the start of the moratorium (to the extent such liabilities can be ascertained) (IA 1986, s A28); • the granting of security by the company (IA 1986, s A26); and • disposal of the company’s property which is not subject to a security interest and which is not in the ordinary way of the company’s business or pursuant to a court order (IA 1986, s A29). 2.38   The monitor may only give their consent if they think that the transaction will support the rescue of the company as a going concern. 2.39   As already noted in 2.34, the monitor may request that the directors provide them with any information that the monitor requires for the purpose of carrying out their functions as monitor as soon as practicable. The monitor has no power to compel the directors to provide such information, but the directors’ incentive to comply is the obligation of the monitor to terminate the moratorium if they are not provided with the information they need (IA 1986, s A36). Finally, the monitor may apply to the court for directions about the carrying out of their functions (IA 1986, s A37).

18

Moratorium  2.44

Remuneration of the monitor 2.40  The remuneration and expenses of the monitor is a matter of contractual agreement between the company and the monitor. Unlike the remuneration of administrators or liquidators, the remuneration of the monitor is not subject to the approval of creditors. However, a s­ ubsequent administrator or liquidator may apply to the court to challenge a monitor’s remuneration as excessive. An administrator or liquidator could also assign the right to take this action. 2.41   The remuneration and expenses of the monitor incurred during the moratorium are not subject to a payment holiday. They also benefit from ranking as a ‘priority pre-moratorium debt’ in an insolvency that occurs within 12 weeks of the end of the moratorium. 2.42   Payment of the monitor’s pre-moratorium remuneration is subject to the payment holiday. Accordingly, it will be caught by the restriction on payments in IA 1986, s A28 if such payment is more than the greater of: (i) £5,000; or (ii) 1% of the value of debts owed by the company. The monitor could consent to the payment of their pre-moratorium remuneration though this may be difficult due to the conflict of interest (which is relevant to monitors as regulated insolvency practitioners and officers of the court) and difficulty in justifying that this will support the rescue of the company as a going concern.

WHAT IS THE DURATION OF A MORATORIUM? Initial period of a moratorium 2.43   A moratorium will run for an initial period of 20 business days starting on the day after the moratorium came into force. Further extension using the routes described below are possible provided that such extensions are completed while the moratorium is still in effect.

Extension of a moratorium without creditors’ consent 2.44   After the first 15 business days of the initial period of the moratorium the directors may, without the creditors’ consent or an application to the court, extend the initial period of the moratorium by a further 20 business days. In order to extend the moratorium, the directors will need to file at court: • a notice that the directors wish to extend the moratorium; • a statement from the directors that all moratorium debts or pre-moratorium debts without a payment holiday have been paid or otherwise discharged if they have fallen due;

19

2.45  Moratorium

• a statement from the directors that, in their view, the company is, or is likely to become, unable to pay its pre-moratorium debts; and • a statement from the monitor that, in the monitor’s view, it is likely that the moratorium will result in the rescue of the company as a going concern. 2.45   The process for extending the moratorium by filing documents at court applies equally to companies that obtained the initial moratorium by filing documents using the ‘out-of-court’ route and to companies that were granted a moratorium by a court order.

Extending a moratorium with creditors’ consent 2.46   After the first extension, the directors cannot unilaterally extend the moratorium without the consent of the creditors or a court order. 2.47   The documents required to be filed at court for an extension of the moratorium with creditors’ consent are the same as for the first extension by the directors plus a statement from the directors that creditors’ consent has been obtained and of the revised end date which the creditors consented to. 2.48   Creditors’ consent is obtained using a qualifying decision procedure (as defined in IA 1986, s 246ZE(11)). It is not possible to extend the moratorium using the deemed consent procedure, which would normally allow a decision of the creditors to be deemed to be made unless 10% by value of creditors object. Paragraph 28 of Schedule 4 to CIGA 2020 modifies the usual qualifying decision procedure to require consent to an extension of a moratorium to be given by: • a majority in value of the pre-moratorium unsecured creditors; and • a majority in value of the pre-moratorium secured creditors, (ie unsecured and secured creditors effectively vote as separate classes). In addition, neither a majority of pre-moratorium, unconnected, secured creditors nor a majority of pre-moratorium, unconnected, unsecured creditors must vote against the extension. 2.49   The temporary rules set out in CIGA 2020, Schedule 4 will apply until 31 March 2021 by which time permanent amendments to the Insolvency (England and Wales) Rules 2016 are expected to have been made. 2.50   There may be more than one extension with creditors’ consent, but all such extensions may not in aggregate extend the moratorium to more than one year from the start of the initial moratorium period.

20

Moratorium  2.56

2.51  An extension of a moratorium with creditors’ consent can be made after the first 15 business days of the initial duration of the moratorium. The moratorium is not extended to allow for the completion of the qualifying decision period and creditors’ consent must be obtained before the moratorium expires. 2.52  There is a potential for creditors who together hold 10% by value of the company’s ­liabilities, creditors who constitute 10% of the number of the company’s creditors or 10 or more of the company’s creditors to exercise their right to call for any qualifying decision procedure instead to be made at a physical creditors’ meeting. This may disrupt the timetable for obtaining creditor’s consent and cause the moratorium to expire before the extension can be made. Accordingly, it may be prudent for the company to start any qualifying decision procedure to consent to an extension as soon as it can.

Extension of a moratorium by court order 2.53   Section A13 IA 1986 allows the directors to apply to the court for an extension. The documents required to be filed at court are the same as for a first extension of the moratorium by the directors without creditors’ consent or a court order plus a statement of the directors as to whether the pre-moratorium creditors have been consulted about the application and if not why not. This suggests that it is not strictly necessary to consult the pre-moratorium creditors. However, the interests of pre-moratorium creditors is one of two factors that the court must consider when deciding whether to order an extension. The other factor to be considered by the court is the likelihood that the extension of the moratorium will result in the rescue of the company as a going concern. 2.54   There is no limit on the length of time by which the court may extend the moratorium and more than one application to the court for an extension may be made. 2.55   Section A15 IA 1986 provides a separate route for the court to extend the moratorium where the court has also ordered meetings to be convened to consider a Scheme of Arrangement pursuant to CA 2006, s 895 or to consider a Restructuring Plan pursuant to CA 2006, s 901C(1).

Extension of a moratorium while a proposal for a CVA is pending 2.56   If a proposal for a CVA has been made while a moratorium is in force then the ­moratorium will be automatically extended until the CVA proposal is disposed of by being approved, rejected or withdrawn.

21

2.57  Moratorium

Early termination of a moratorium 2.57   A moratorium will end if a CVA takes effect, or a Scheme of Arrangement or Restructuring Plan pursuant to CA 2006 is sanctioned by the court. A moratorium will also end early if the company enters liquidation (voluntary or compulsory) or administration or an interim moratorium pursuant to paragraph 44, Schedule B1 IA 1986 comes into effect due to the filing of a notice of intention to appoint administrators. 2.58   A moratorium may also be ended by the monitor pursuant to IA 1986, s A38. Indeed, the monitor must terminate the moratorium by filing a notice to court if the monitor thinks that: • the moratorium is no longer likely to result in the rescue of the company as a going concern; • the objective of rescuing the company as a going concern has been achieved; • by reason of a failure by the directors to comply with their obligations under IA 1986, s A36 to provide the monitor with information about the company, the monitor is unable properly to carry out the monitor’s functions; or • the company is unable to pay moratorium debts or pre-moratorium debts for which the company does not have a payment holiday. In addition, the court may order the termination of the moratorium following an application to challenge the conduct of either the monitor or the directors of the company (see 2.59 onwards).

CHALLENGES IN CONNECTION WITH A MORATORIUM Challenges to the conduct of a monitor 2.59   Section A42 IA 1986 allows a creditor, director or member of the company or any other person affected by the moratorium, to apply to the court on the grounds that an act, omission or decision of the monitor during the moratorium has ‘unfairly harmed’ the interests of the applicant. 2.60   ‘Unfairly harmed’ is the same language used in paragraph 74, Schedule B1 IA 1986 in relation to challenges to an administrator’s conduct. In Re Coniston Hotel (Kent) LLP [2013] EWHC 93 (Ch), a case concerning paragraph 74, Schedule B1 IA 1986, Norris J held that unfairly harmed would: ‘ordinarily mean unequal or differential treatment to the disadvantage of the applicant (or applicant class) which cannot be justified by reference to the interests of the creditors as a whole or to achieving the objective of the administration’.

2.61   It is reasonable to assume that the court would apply the same interpretation to the term unfairly harmed in the context of a moratorium (with the necessary change to the reference to administration to be to moratorium).

22

Moratorium  2.65

2.62   The court has the discretion to confirm, reverse or modify any act or decision of the monitor, give the monitor directions or make any such order that the court thinks fit. However, the court may not (at least under IA 1986, s A42) order the monitor to pay any compensation. Nevertheless, it is still conceivable that the monitor could be ordered to return any remuneration and, in any case, the monitor would be keen to avoid the reputational damage of an adverse court order. Section A42(5) expressly contemplates that the court may order the termination of a moratorium where a monitor has failed to do this. The court could potentially also exercise its inherent jurisdiction to control one of its officers.

Challenges to the conduct of directors 2.63   Pursuant to IA 1986, s A44, challenges may also be brought against the directors by a creditor or member of a company if, during a moratorium, the directors have managed the company’s affairs, business and property so as to unfairly harm the interests of creditors or members. This may be creditors or members generally or a subset of the company’s creditors or members so long as it includes at least the applicant. The challenge may relate either to actual or to proposed acts or omissions on the part of the directors. 2.64   The court has a broad discretion to make any order it sees fit. Section A44(3) IA 1986 contemplates that the potential orders the court may give include: • regulating the directors’ management of the company’s affairs, business and property for the remainder of the moratorium; • requiring the directors to take or refrain from the act complained of; • requiring a decision of the company’s creditors to be sought using a qualifying decision procedure; and • terminating the moratorium.

INSOLVENCY PROCEDURES FOLLOWING A MORATORIUM AND SUPER-PRIORITY Administration or liquidation following a moratorium 2.65   If the company enters liquidation or administration within 12 weeks of the end of a moratorium, the ‘priority pre-moratorium debts’ (described in 2.66) and the moratorium debts will be treated as having ‘super priority’ in that liquidation or administration. These debts will accordingly then rank ahead of the expenses of the liquidation and administration (and so also

23

2.66  Moratorium

rank ahead of preferential creditors and floating charge holders) but behind fixed charge holders and the claims of the official receiver for any prescribed fees or expenses. 2.66   The priority pre-moratorium debts are set out in IA 1986, s 174A and are pre-moratorium debts that arise out of or are payable in respect of: • the monitor’s remuneration or expenses; • goods or services supplied during the moratorium; • rent in respect of a period during the moratorium; • wages or salary arising under a contract of employment, so far as relating to a period of employment before or during the moratorium; • a liability to make a redundancy payment that fell due before or during the moratorium; and • a contract or other instrument involving financial services that fell due before or during the moratorium and is not ‘relevant accelerated debt’. 2.67   The last bullet point will include most commercial lending and related guarantees. The carve-out of relevant accelerated debt from priority pre-moratorium debt was introduced into CIGA 2020 during the course of its parliamentary progress. This removed an incentive from lenders to accelerate their debt in order to obtain the super-priority given to priority pre-­moratorium debts. This would have undermined any rescue of the company which the moratorium was intended to support. Loans or other debt under a financial services contract (eg loan notes, derivatives or related guarantees) which are accelerated or in respect of which a right to demand earlier repayment is exercised will not be included as priority pre-moratorium debt and so will not be accorded ‘super-priority’ (though this may be less of a concern to a lender who will be able to recover from their fixed charge security in any case). 2.68   An administrator must make a distribution in respect of moratorium debts and ­priority pre-moratorium debts and must realise any property necessary to do so (IA 1986, ss 65A(2) and (4), Sch B1).

CVA, Scheme of Arrangement or Restructuring Plan following a moratorium 2.69   Neither a CVA, Scheme of Arrangement under CA 2006, Part 26 nor a Restructuring Plan under CA 2006, Part 26A which is proposed within 12 weeks of the end of a moratorium may compromise a moratorium debt or a priority pre-moratorium debt without the consent of the relevant creditor.

24

Chapter 3

Restructuring plan

INTRODUCTION What is the new procedure? 3.01 Prior to the Corporate Insolvency and Governance Act 2020 (‘CIGA 2020’), companies seeking to restructure their liabilities in order that they might then continue as a going concern were able to make use of a company voluntary arrangement (a ‘CVA’) under the Insolvency Act 1986 (‘IA 1986’) or a Scheme of Arrangement under the Companies Act 2006 (‘CA 2006’). Section 7 of CIGA 2020 has now introduced another procedure to the restructuring toolbox. 3.02 The new procedure has been inserted into the CA 2006 as a new Part 26A to that Act rather than into the IA 1986. It will therefore sit immediately after the existing provisions in Part 26 of the CA 2006 which deal with Schemes of Arrangement. For this reason, some practitioners now refer to a Scheme of Arrangement as a ‘Part 26 scheme’ and the new procedure as a ‘Part 26A scheme’. Others refer to the new procedure as the ‘Restructuring Plan’, and in this Guide we will do the same.

What features are shared between a Restructuring Plan and a Scheme of Arrangement? 3.03 Whatever nomenclature may be used, the process for putting forward a Restructuring Plan will certainly more closely resemble a Scheme of Arrangement than it resembles a CVA. The Restructuring Plan shares the following common features with a Scheme of Arrangement: • The Restructuring Plan will involve a meeting of each class of creditors and/or members affected by the plan. • For a class of creditors or members to approve the plan, at least 75% by value of those creditors or members must vote in favour. • A Restructuring Plan may bind secured as well as unsecured creditors.

25

3.04  Restructuring plan

• The process will also involve a court hearing prior to these meetings and a second court hearing following the meetings.

To what extent will the case law on Schemes of Arrangement be relevant here? 3.04 One of the greatest strengths of the English Scheme of Arrangement procedure is that something akin to the present procedure has existed for more than 100 years. The English courts have therefore developed a substantial amount of case law to assist any company putting together a scheme today. 3.05 The explanatory notes to CIGA 2020 indicate that the overall commonality between CA 2006, Part 26 and Part 26A is expected to enable the courts to draw on that existing body of case law where appropriate. Accordingly, it is likely that the English courts will indeed apply their previous decisions when interpreting any provisions of the CA 2006 relating to Restructuring Plans which are worded in a similar manner to those relating to Schemes of Arrangement. This should hopefully enable companies using a Restructuring Plan to be able to predict the approach of the court in many respects.

How does a Restructuring Plan differ from a Scheme of Arrangement? 3.06 However, there are some important differences between a Restructuring Plan and a Scheme of Arrangement. For example, unlike a Scheme of Arrangement: • the company must have encountered, or be likely to encounter, financial difficulties; • the applicant may seek an order excluding classes of stakeholders with no genuine economic interest from voting; • there is no requirement for a majority in number of stakeholders in each class to vote in favour; and • there is the possibility of cross-class cramdown.

What type of company might use a Restructuring Plan? 3.07 The need to prepare for two court hearings will not make it cheap for a company to use a Restructuring Plan. It seems likely therefore that, like a Scheme of Arrangement, the new Restructuring Plan is destined to be used for higher value corporate restructurings, i­ncluding many international restructurings. The CVA is likely to remain the only cost effective tool available for many lower value restructurings.

26

Restructuring plan  3.07

Table 3.1 compares the CVA, Scheme of Arrangement and Restructuring Plan processes. Table 3.1  Comparison of the English statutory restructuring processes Is it a ‘formal insolvency process’?

Does a qualified insolvency practitioner need to be involved? Is there a court hearing? Can it affect members’ rights? Can it affect secured creditors’ rights? How do creditors and members vote?

What are the voting thresholds for approval?

How are ‘fairness’ issues and procedural defects addressed?

Can it be used for foreign companies? Can the company benefit from the new provisions introduced by CIGA 2020 to protect essential services?

Scheme of Arrangement Restructuring Plan No No – however, the company must have encountered, or be likely to encounter, financial difficulties Yes – as a nominee prior No No to implementation and as a supervisor during implementation No – although certain Yes – two court hearings Yes – two court hearings filings must be made are required as part of the are required as part of with the court office process the process No Yes – can be used to Yes – can be used to alter members’ as well as alter members’ as well as creditors’ rights creditors’ rights No – secured and Yes Yes preferential creditors cannot be bound without their consent All creditors vote Only creditors or Only creditors or at a single meeting, members whose rights members whose rights regardless of whether are affected vote. Those are affected vote. Those or not their rights are creditors or members creditors or members affected. Members also are divided into classes, are divided into classes, vote, but creditors’ vote and each class votes at a and each class votes at a ordinarily prevails separate meeting separate meeting More than 75% by value At least 75% by value At least 75% by value of creditors must vote in and a majority in number of at least one class favour but approval will of each class must vote in must vote in favour. The be ineffective if more favour court may still sanction than 50% by value of a Restructuring Plan if unconnected creditors other classes have not vote against voted into favour A creditor who considers The applicant must The applicant must that they have been convince the court at a convince the court at a unfairly prejudiced or sanction hearing that the sanction hearing that the that there was a material scheme is fair and that the Restructuring Plan is fair irregularity must initiate procedure was correctly and that the procedure their own challenge carried out was correctly carried out Yes – if that company’s Yes – if that company has Yes – if that company ‘centre of main interests’ sufficient connection with has sufficient connection is in the UK this jurisdiction with this jurisdiction Yes – from the date No Yes – from the date when the CVA takes when the order is made effect to convene one or more meeting(s) to vote on the proposal for the Restructuring Plan Yes

CVA

27

3.08  Restructuring plan

Has a Restructuring Plan been used to date? 3.08 Virgin Atlantic Airways Limited (‘VAA’) became the first company to use a Restructuring Plan, and that facts of that plan are set out in 3.09 to 3.12. More recently, PizzaExpress Financing 2 plc (‘PizzaExpress’) become the second company to use a Restructuring Plan. 3.09 VAA is a company incorporated in England and Wales which operates an international airline based in the UK. At the time that its Restructuring Plan was proposed it had 35 aircraft and would ordinarily have carried about 6 million passengers a year. However, the financial position of the group of which it forms a part had been severely affected by the COVID-19 pandemic, which had reduced passenger demand to about 25% of the previous year’s levels. In the absence of both a restructuring and an injection of new money, it was projected that the group’s cash flow would soon drop to a level which would allow its bondholders to commence an enforcement process over some of its landing slots and that shortly after that the group would run out of cash altogether. 3.10 VAA’s Restructuring Plan formed part of a broader recapitalisation designed to reduce the group’s debt to a sustainable level with a revised repayment profile which, together with the introduction of almost £400 million of new money, would allow the group to trade into the foreseeable future. 3.11 Table 3.2 sets out further details of the four classes of creditors that the applicant proposed to compromise with by way of the Restructuring Plan. Three of these classes had already signed up to a plan support agreement by which they had agreed to vote in favour of the plan. Although there had been extensive engagement with the fourth class, the trade creditors, they had not been invited to sign the agreement. 3.12 A variety of other creditor classes were excluded from the plan. These excluded creditors included more than 1,000 creditors with claims of less than £50,000 as the inclusion of these creditors would have given rise to significant logistical difficulties and would have led to relatively minimal savings. Table 3.2  The VAA Restructuring Plan Class of creditor RCF creditors

Type of claim Sums owed under a fully-drawn US$280 million revolving credit facility (‘RCF’)

Treatment of claims The RCF would be converted into a term loan, the maturity date extended, the repayment provisions amended, the margin increased, the covenants amended and part of the security released to allow those assets to be charged to a new money investor (continued)

28

Restructuring plan  3.14

Table 3.2  (Continued) Class of creditor Operating lease creditors

Type of claim Sums owed under operating leases of 24 aircraft, totalling US$1.25 billion

Connected party creditors

Sums owed under a variety of licence, joint venture, service and credit facility agreements, totalling £400 million

Trade creditors

Sums owed in respect of goods or services supplied by 168 trade creditors, totalling approximately £54 million

Treatment of claims These creditors were offered three options: a rent deferral; a rent reduction and bullet repayment; or a lease termination and redelivery of the aircraft All accrued amounts would be capitalised in exchange for the issue of preference shares in VAA’s parent company, with further shares to be issued to some of the connected party creditors in exchange for further amounts falling due during the so-called ‘capitalisation period’ • Amounts owed in respect of principal and accrued interest would be reduced by 20%; • 10% of the balance due would be paid within ten days of the Restructuring Plan becoming effective; • 90% of the balance due would be paid in eight quarterly instalments commencing in December 2020

This chapter will also refer more generally to the manner in which the court applied the various provisions of the legislation in relation to the VAA plan and the PizzaExpress plan. This should help illustrate how the courts might deal with similar points in the future.

WHEN WILL A COMPANY BE ELIGIBLE FOR A RESTRUCTURING PLAN? What is a ‘company’? 3.13 For the purposes of determining which companies are eligible, the term ‘company’ is defined to mean any company liable to be wound up under the IA 1986 (CA 2006, s 901A(4)). This requirement mirrors that for a Scheme of Arrangement. 3.14 The court has jurisdiction to wind up any company registered in England and Wales (IA 1986, s 117(1)). This jurisdiction is, however, stated to be subject to Article 3 of the EU Insolvency Regulation, which provides that where an insolvent company’s centre of main interests

29

3.15  Restructuring plan

(or ‘COMI’) is in an EU Member State which is not the UK, the court has jurisdiction to wind it up only if it possesses an establishment in the UK. 3.15 In Re DAP Holding NV [2005] EWHC 2092 (Ch), a case relating to a Scheme of Arrangement of a Dutch company, the Court noted that Schemes of Arrangement did not fall within the scope of the predecessor to the current EU Insolvency Regulation which was then in force. It noted also that a court’s jurisdiction to wind up a company did not depend on its solvency, which was a transient matter than might change from time to time. It held that, because a company’s COMI and establishment were similarly matters that might conceivably change and were not additional factors which needed to be taken into account when ascertaining for these particular purposes whether a company was liable to be wound up. On this basis, the courts have historically satisfied themselves that, provided a company is registered in England and Wales, it is eligible for a Scheme of Arrangement. 3.16 At the convening hearing in relation to the VAA Restructuring Plan, the Court duly confirmed that the same logic applies to a Restructuring Plan (see para 36 of Re Virgin Atlantic Airways Limited [2020] EWHC 2191 (Ch) – the ‘VAA convening hearing judgment’). 3.17 For the reasons given in 3.112 to 3.116, it is also possible to use a Restructuring Plan to restructure the rights of creditors of a foreign company which has a ‘sufficient connection’ with England. However, it is less likely that a Restructuring Plan could be used to restructure the rights of members of a foreign company.

Financial difficulties 3.18 In order to be eligible for a Restructuring Plan, however, a company must have encountered, or be likely to encounter, financial difficulties that are affecting, or will, or may affect its ability to carry on business as a going concern. This requirement is referred to as ‘Condition A’ in CA 2006, s 901A(2). Condition B is discussed at 3.23. This differs from a Scheme of Arrangement, where there is no analogous requirement. 3.19 So far as the VAA Restructuring Plan was concerned, the Court held that there was clear evidence of financial difficulty as a result of the circumstances described in 3.09 (see para 37 of the VAA convening hearing judgment).

Excluded companies 3.20 The Secretary of State is given the power to introduce secondary legislation to exclude companies which are ‘authorised persons’, as defined in section 31 of the Financial Services

30

Restructuring plan  3.24

and Markets Act 2000 from putting forward a Restructuring Plan which proposes a compromise or arrangement between the company and creditors of a specified description (CA 2006, s 901B). 3.21 At the time of writing no such regulations have yet been made in this regard, but it might mean that in the future, financial services companies will be prohibited from entering into a Restructuring Plan designed to compromise their liabilities to their customers.

Limited liability partnerships 3.22 A Restructuring Plan will be available to a limited liability partnership in a similar way that it is available to a company (Limited Liability Partnerships (Amendment, etc.) Regulations 2020).

WHAT MUST A RESTUCTURING PLAN BE DESIGNED TO ACHIEVE? Statutory requirements 3.23 Assuming a company is eligible for a Restructuring Plan, the plan itself must satisfy the following two requirements: • a compromise or arrangement must be proposed between the company and its creditors, or any class of them or its members, or any class of them; and • the purpose of the compromise or arrangement must be to eliminate, reduce or prevent, or mitigate the effect of, any of the financial difficulties described in 3.18. These two requirements are together referred to as ‘Condition B’ (CA 2006, s 901A(3)). 3.24 So far as the first requirement is concerned, the terms ‘compromise’ and ‘arrangement’ are not defined. However, the wording used here directly replicates that used in relation to a Scheme of Arrangement (see CA 2006, s 895). The court made it clear in relation to a Scheme of Arrangement that: • The term ‘arrangement’ is to be interpreted broadly, and is not limited to something analogous to a compromise (Re Guardian Assurance Co [1917] 1 Ch 431); but • The crucial factor is that the proposal involves an element of ‘give and take’ on each side, and a more precise definition is neither necessary nor desirable (see, for example, Re Savoy Hotel Ltd [1981] Ch 351 and Re Lehman Brothers International (Europe) [2019] BCC 115 at [64]. However, the court has held that if the rights of shareholders are merely being expropriated without any compensating advantage, there is no compromise or arrangement with the

31

3.25  Restructuring plan

company (Re NFU Development Trust Ltd [1973] 1 All ER 135) and the same principle is generally thought to apply to a compromise or arrangement with creditors. 3.25 The Court duly held that there was no reason not to interpret ‘compromise or arrangement’ any differently in relation to a Restructuring Plan (para 38 of the VAA convening hearing judgment). 3.26 There is no equivalent to the second requirement for a Scheme of Arrangement. However, we anticipate that it should be a requirement which most potential applicants would find fairly simple to satisfy. 3.27 As the VAA Restructuring Plan has already showed, potential uses of a Restructuring Plan might therefore include: • reductions of the level of existing indebtedness; • extensions of the maturity date, changes to the interest rate and/or other changes to the terms of existing indebtedness; • terminations of existing contracts; or • debt to equity swaps.

Other considerations 3.28 It is wise to ensure that the terms of the Restructuring Plan should then include a waiver of any breaches or events of default which were in existence prior to the plan being proposed and which, if not waived, might still allow creditors to enforce against the company.

WHAT IS THE PROCEDURE FOR ADOPTING A RESTRUCTURING PLAN? Who can propose a Restructuring Plan in relation to a company? 3.29 An application to the court to convene meetings to vote on a Restructuring Plan made be made by any of the following: • the company; • any creditor or member of the company; • if the company is being wound up, the liquidator; or • if the company is in administration, the administrator. (See CA 2006, s 901C(2).)

32

Restructuring plan  3.31

3.30 In a similar fashion to a Scheme of Arrangement, in practice we would expect the vast majority of Restructuring Plans to be proposed by the company itself.

What process does the proposer need to follow? 3.31

Table 3.3 shows the relevant process in flowchart form.

Table 3.3  The Restructuring Plan process The company (or its liquidator or administrator or a creditor or member) puts together a proposal for a Restructuring Plan. The applicant applies to court and obtains hearing dates

Is class composition likely to be an issue? YES

NO

The applicant will need to give information about the proposed Restructuring Plan to the creditors and/or members affected and notify them of the convening hearing

The convening hearing takes place. The court decides whether to order the applicant to convene meetings of the classes of creditors and/or members affected

The applicant gives notice of the meetings to the relevant creditors or members and provides them with the Restructuring Plan and an explanatory statement

A meeting of each class takes place. Each meeting separately considers and votes on the Restructuring Plan

The sanction hearing takes place. The Court decides whether to sanction the Restructuring Plan, including whether to permit cross-class cram-down

If sanctioned, the Restructuring Plan becomes effective when its terms so provide

33

3.32  Restructuring plan

3.32 The procedure for adopting a Restructuring Plan closely mirrors that for adopting a Scheme of Arrangement. It is, broadly speaking, a three-stage process, involving two court hearings and one or more meetings of creditors and/or members: • The proposer draws up the terms of the proposed Restructuring Plan and applies to the court. • The proposer, now the ‘applicant’, notifies the creditors and/or members who will be affected and advertises the fact that this notice, known as the ‘practice statement notice’, has been given. • At the first hearing, known as the ‘convening hearing’, the court will then make an order requiring the applicant to convene meetings of the classes of the creditors or members who will be affected by the Restructuring Plan, and give directions on matters such as how the proposer should give notice of the meetings. • The applicant gives notice of the meetings to all members of relevant classes in accordance with the court order. • At each meeting, the Restructuring Plan is proposed, considered and voted on. • Provided that each of the meetings approves the restructuring by the required majority (or, if at least one of the meetings failed to approve the plan, the applicant believes that it will be able to satisfy the court the cross-class cram down provisions will apply), the applicant then applies to the court for final approval, or ‘sanction’. (In practice, the initial application to court referred to above is likely to include this further application as well.) • At this second hearing, known as the ‘sanction hearing’, the court decides whether to sanction the Restructuring Plan. • Provided the court does sanction the plan, it becomes effective when the terms of the plan so provide. 3.33 As a result of these various requirements, a Restructuring Plan will typically take at least two and a half months to implement although, as the VAA Restructuring Plan has showed, it may be possible to shorten this in urgent cases. The proposer will also need to obtain court dates for the hearings in advance.

Is there a moratorium? 3.34 There is no statutory moratorium available for companies proposing a Restructuring Plan. However: • The company may be able to take advantage of the moratorium procedure already described in Chapter 2. Where this is the case special provisions apply to new liabilities incurred during the moratorium period for the purposes of the Restructuring Plan (see 3.42). • Creditors may contractually agree to postpone their enforcement rights pursuant to lock-up or standstill agreements while the process is underway.

34

Restructuring plan  3.39

• The court may be prepared to stay court proceedings taken by creditors to recover sums owed to them where a Restructuring Plan is being proposed to implement a restructuring of creditors’ debts and there is evidence that sufficient other creditors in the same class would support that plan in the same way as they have done in the past in relation to a Scheme of Arrangement (see BlueCrest Mercantile BV v Vietnam Shipbuilding Industry Group [2013] EWHC 1146 (Comm)).

WHICH STAKEHOLDERS VOTE ON THE RESTRUCTURING PLAN? Only stakeholders who are affected are entitled to vote 3.35 Every creditor or member of the company whose rights are affected by the compromise or arrangement proposed to be effected by the Restructuring Plan must be permitted to participate in a meeting to vote on the plan (CA 2006, s 901C(3)). 3.36 However, the voting process does not need to include creditors or members who will not be affected by the Restructuring Plan. If a company is to continue to trade, for example, trade creditors who are going to continue to be paid in full may be excluded if they are to continue to be paid in full. This contrasts with the position under a CVA where all creditors are entitled to vote, even if they will not be affected. 3.37 The court has decided in the past that a Scheme of Arrangement may indeed relate only to one class of unsecured creditor, with the other unsecured creditors being dealt with outside of the scheme, provided the division of creditors shows a commercially rational approach (PT Garuda Indonesia [2001] All ER (D) 53). The court confirmed at the VAA Sanction Hearing that a Restructuring Plan could adopt the same approach, but highlighted the importance of explaining to the creditors affected by the Restructuring Plan why other creditors were being excluded from the plan (see paras 58 to 67 of Re: Virgin Atlantic Airways Limited [2020] EWHC 2376 (Ch) – the ‘VAA sanction hearing judgment’).

Stakeholders with no economic interest 3.38 The applicant is also able to apply to the court to exclude one or more classes of creditors or members who will be affected from voting where the court is satisfied that none of the members of that class has a genuine economic interest in the company (CA 2006, s 901C(4) and (5)). 3.39 A court faced with having to determine whether or not a stakeholder has a genuine economic interest will need to decide the appropriate comparator, ie the most likely alternative if the Restructuring Plan does not proceed. The ‘comparator’ is a common law concept originally developed by the courts in relation to Schemes of Arrangement but is same concept as the

35

3.40  Restructuring plan

‘relevant alternative’ described in 3.87. The court may also need to assess competing valuation evidence presented by the applicant and by the class that the applicant is seeking to exclude. 3.40 This provision should mean that the court is able to consider the valuation evidence at the convening hearing stage, rather than needing to defer this exercise until the sanction hearing. 3.41 This provision is not directly replicated in the legislation relating to Schemes of Arrangement. However, the court has held in a series in cases in relation to Schemes of Arrangement that creditors who are ‘out of the money’, ie who would not receive anything in the most likely alternative scenario, need not be included within the voting process. Thus, for example: • In Re MyTravel Group plc [2005] 2 BCLC 123, the court made it clear at first instance that a finding that a creditor had no economic interest was a serious one which needed to be considered carefully. However, the court was nonetheless entitled to look at the reality, rather than speculate as to what value might theoretically be returned to the creditors concerned following a successful restructuring. In that case, the court was satisfied that it was appropriate to view insolvent liquidation as the realistic alternative to the proposed scheme and that on the evidence it was clear that the creditors concerned would receive nothing in that liquidation. • In Re Bluebrook Ltd [2009] EWHC 2114 (Ch) (the ‘IMO Car Wash’ case), the court was obliged to look at competing valuation evidence presented by the senior lenders and by the junior lenders and preferred the former on the basis that it felt that this gave a better indication of what a real purchaser would pay for the group at that point in time. The court is therefore likely to have regard to these cases when considering the equivalent issues in relation to a Restructuring Plan.

Moratorium creditors 3.42 Where the application to the court is made before the end of the period of 12 weeks beginning with the day after the end of any moratorium under IA 1986, Part A1, any creditor in respect of: • a moratorium debt (see 2.21); or • a priority pre-moratorium debt (see 2.66) will be excluded from participating in the vote on the Restructuring Plan (CA 2006, ss 901H(1) to (3)). In turn, however, a Restructuring Plan may not compromise the debts of any such creditors without their consent.

36

Restructuring plan  3.45

THE CONVENING HEARING What issues will the court consider at the convening hearing? 3.43 A new practice statement, Practice Statement (Companies: Schemes of Arrangement under Part 26 and Part 26A of the Companies Act 2006) was issued on 26 June 2020 (the ‘Practice Statement’). This replaced an earlier practice statement which dealt only with Schemes of Arrangement. The Practice Statement is designed to deal with issues which arise on both Schemes of Arrangement and Restructuring Plans in the same way. The aim of the Practice Statement is to enable certain issues to be identified and if appropriate resolved early in the proceedings. 3.44 An applicant for a Restructuring Plan must draw to the attention of the court at the convening hearing, by evidence in support of the application or otherwise: • any issues which might arise concerning the constitution of meetings of creditors and/or members to or which might otherwise affect the conduct of those meetings (see 3.42); • any issues as to the existence of the court’s jurisdiction to sanction the Restructuring Plan, such as whether an overseas company for which a Restructuring Plan is proposed has a sufficient connection with England and Wales (as already described in 3.114); • any issues relevant to the company’s eligibility as a result of its present or likely financial difficulties (as already described in 3.18) and ability of the Restructuring Plan to resolve those difficulties (as already described in 3.23); • if an application is to be made to seek an order that a class of creditors or members affected need not participate because they have no economic interest, any issues relevant to that application (see 3.38); and • any other issue not going to the merits or fairness of the Restructuring Plan, but which might lead the court to refuse to sanction it (see paragraph 6 of the Practice Statement). 3.45 It is well-established that the function of the court at the convening hearing stage is emphatically not to consider the merits or fairness of a Scheme of Arrangement as these are questions for the sanction hearing. Clearly it is intended that the court should take a similar approach in relation to a Restructuring Plan. However, the court may well give guidance at the convening hearing as to the evidence that it will wish to see at the sanction hearing in order to make a decision on particular matters. Above all, where the company anticipates that there may be disputes about valuation at the sanction hearing, the company should bring this to the court’s attention at the convening hearing so that the court can ensure that it is properly prepared to resolve those disputes.

37

3.46  Restructuring plan

When must the applicant give prior notice of the convening hearing? 3.46 Where an application for a Restructuring Plan gives rise to any of the issues raised in 3.44, unless there are good reasons for doing so, the applicant should prior to the convening hearing take all steps reasonably open to it to notify any person affected by the Restructuring Plan of the following matters: • that the Restructuring Plan is being promoted; • the purpose of which the Restructuring Plan is designed to achieve and its effect; • the meetings of creditors and/or members which the applicant considers will be required and their composition; • any other matters that are to be addressed at the convening hearing; • the date and place fixed for the convening hearing; • that such persons are entitled to attend the convening and sanction hearings; and • how such persons may make further enquires about the Restructuring Plan (see paragraph 7 of the Practice Statement). We will refer to this notice as the ‘practice statement notice’. 3.47 The court will need to be satisfied at the convening hearing that such a notice has been adequately given or that it was appropriate not to provide such a notice. In reality, we would expect an applicant to provide a practice statement notice in relation to almost every Restructuring Plan.

When is notice adequately given? 3.48 It is the applicant’s responsibility to ensure that the practice statement notice is given in a concise form and is communicated to all persons affected in the manner which is most appropriate. 3.49 The practice statement notice needs to be given in sufficient time to enable the persons affected to consider what is proposed, to take appropriate advice and, if so advised, to attend the convening hearing. Whether adequate notice is given depends on the circumstances. The evidence which the applicant gives at the convening hearing will need to explain the steps which it has taken to give the practice statement notice and indicate what responses, if any, it has had (see paragraph 8 of the Practice Statement). 3.50 In common with the practice which has already developed in relation to a Scheme of Arrangement, an applicant might set out this information in a letter and post and/or e-mail this

38

Restructuring plan  3.56

to each person affected. The applicant might typically then advertise the fact that this letter was sent in a national newspaper and include a link to the text of the letter. Both the letter and the advertisement might also include a link to a website where more information is available. 3.51 A company will often already have entered into detailed negotiations with some key creditors or members prior to launching a statutory restructuring procedure. It may indeed have entered lock-up agreements with key stakeholders in order to ensure that it has their guaranteed support. A case in relation to a Scheme of Arrangement, but which was also decided by reference to the current Practice Statement, has emphasised that adequate notice still needs to be given to the remaining stakeholders (ColourOz Investment 2 LLC [2020] EWHC 1864 (Ch)). 3.52 The court confirmed at the VAA convening hearing that this applies equally to a Restructuring Plan, and that in the case of VAA the court needed to examine most carefully what notice had been given to the trade creditors. It approved of that fact that these creditors were not only sent a practice statement notice by letter but were also invited to a virtual webinar prior to the convening hearing explaining the process further (see paras 27 to 34 of the VAA convening hearing judgment). 3.53 In the ColourOz case, the Court suggested that the appropriate notice period might be four weeks where there was no time pressure to complete the restructuring. However, the Court indicated at the VAA convening hearing that a shorter time period, in this case a period of three weeks since the practice statement notice was sent by letter, could be justified in a case of urgency.

How will the court resolve any issues raised at the convening hearing? 3.54 Where any of the issues listed in 3.44 is drawn to the attention of the court, the court will consider whether to determine that issue forthwith at the convening hearing or whether to give directions for resolution of that issue (see paragraph 9 of the Practice Statement). 3.55 Creditors or members will still be entitled to appear and raise objections based on these issues at the sanction hearing, but the court will expect them to show good reason why they did not do so at an earlier stage (see paragraph 10 of the Practice Statement). 3.56 While it is possible that the court will direct that the meetings be delayed, this is something which the court is likely to wish to avoid where the company’s financial difficulties need to be resolved quickly. Thus, for example, the order convening the meetings may include an order giving anyone affected limited time in which to apply to vary or discharge that order with the meetings or members and/or creditors to take place in default of any such application within the time prescribed (see paragraph 12 of the Practice Statement).

39

3.57  Restructuring plan

CLASS COMPOSITION ISSUES How is class composition determined? 3.57 Because members and/or creditors may be divided into more than one class for voting purposes, class composition is one of the most significant issues that needs to be addressed at the convening hearing. Paragraph 2 of the Practice Statement makes it clear that it is the applicant’s responsibility to determine the compositions of the classes. However, in considering whether or not to make an order convening meetings of members and/or creditors, the court is required to consider whether more than one meeting or members and/or creditors is required, and if so what is the appropriate compositions of those meetings. The court will always therefore review class composition. 3.58 One of the main aims of the practice statement notice is to alert the creditors and/or members affected as to the classes into which they will be divided in order to vote on the restructuring plan. This is designed to allow any class composition arguments to be flushed out prior to the convening hearing and allow them to be raised at the hearing.

How have the courts addressed class composition in relation to schemes? 3.59 The English courts have developed more than 100 years’ of case law when considering whether a group of persons will fall within the same class in relation to a Scheme of Arrangement. The main principles arising from these cases are as follows: • The overarching question is whether the pre- and post-Scheme rights of those proposed to be included in a single class are so dissimilar as to make it impossible for them ‘to consult together with a view to their common interest’ (Sovereign Life Assurance Co v Dodd [1892] 2 QB 573). If that is the case, separate meetings must be summoned. Persons whose rights are sufficiently similar that they can consult together should be summoned to a single meeting. • It is the rights of creditors, not their separate commercial or other interests, which determine whether they form a single class or separate classes, although these latter interests might be relevant to the ‘fairness’ test at the sanction stage. • The court should take a broad approach to the composition of classes, given that every class needs to vote in favour of the Scheme. To do otherwise risks giving unjustified veto rights to a minority group of creditors, such that the test for classes becomes an instrument of oppression by a minority (see Re Hawk Insurance Company Ltd [2001] EWCA Civ 241). • It is necessary to consider both a person’s existing rights which are to be released or varied and the new rights and benefits which they are to receive under the Scheme (Re Hawk Insurance Company Ltd, as above).

40

Restructuring plan  3.65

3.60 In addition, where a Scheme is being proposed as an alternative to liquidation or administration, it is appropriate to consider how creditors would have been treated in a liquidation or administration when determining classes (Marconi Corporation Plc and Marconi Plc [2003] EWHC 663 (Ch).) 3.61 As such, secured and unsecured creditors will almost inevitably comprise different classes. However, it may be necessary to create different classes, or further different classes to deal, for example, with secured creditors with differing priority rankings, subordinated creditors or contingent creditors.

How might the courts address class composition in relation to a Restructuring Plan? 3.62 At the VAA convening hearing, the Court concluded that there was no need to take a different approach to class composition for a Restructuring Plan to that taken in relation to a scheme, and suggested that if Parliament had intended the courts to do otherwise it would have signalled this in some way in the new legislation. However, the Court also noted that it had not had the benefit of adversarial argument on this point at the VAA convening hearing. 3.63 There remains at least one relevant difference in that, unlike a scheme, a Restructuring Plan allows for cross-class cram down as described further in 3.86 to 3.93. As it is possible for a Restructuring Plan to be sanctioned even if one or more classes have failed to approve the plan, an applicant for a Restructuring Plan may have an incentive to seek to determine its classes more narrowly in order to increase the chances of at least one key class voting in favour. 3.64 There was no suggestion that the applicant in either the VAA or the PizzaExpress Restructuring Plan had attempted to determine its classes too narrowly. The court will, however, remain alive to this possibility on a future Restructuring Plan, and it feels unlikely that the court would to allow an applicant to manipulate classes artificially for this purpose.

THE NOTICES OF MEETINGS The method of giving notice 3.65 The legislation anticipates that the notices summoning the meeting(s) of the various classes will either be sent to the creditors and members concerned or given by advertisement (as per CA 2006, s 901D(1)). This potentially leaves scope to send the notices by post, by e-mail or both depending on how the company would ordinarily communicate with its creditors or members.

41

3.66  Restructuring plan

3.66 The evidence for the convening hearing should duly describe how it is proposed that members and/or creditors are to be given notice of any meeting convened to consider the Restructuring Plan (see paragraph 13 of the Practice Statement).

What documents will be supplied to the creditors or members? 3.67 The pack of documents to be supplied to each class of creditors or members when they are given notice of a Restructuring Plan will largely replicate those which would be supplied in relation to a Scheme of Arrangement. Section 901D(1) CA 2006 provides that every notice summoning a meeting: • that is sent to a creditor or member must be accompanied by an ‘explanatory statement’; or • that is given by advertisement must either include an explanatory statement or state where or how the creditors or members entitled to attend the meeting may obtain copies of such a statement. In the latter case every such creditor or member is entitled, on making an application in the manner indicated in the notice, to be provided by the company with a copy of the explanatory statement free of charge (CA 2006, s 901D(4)). In practice we would envisage that the advertisement would also contain a link to a website from which creditors or members might download a copy. As such, the full pack would ordinarily include: • notice of the meeting to which the relevant class is invited; • the Restructuring Plan itself; • an explanatory statement; and • a proxy form.

What details will the explanatory statement need to contain? Requirements under the legislation 3.68

Section 901D CA 2006 provides only that the explanatory statement must:

• explain the effect of the compromise or arrangement; • in particular, state any material interests of the directors of the company (whether as directors or as members or creditors of the company or otherwise) and the effect on those interests of the compromise or arrangement in so far as it is different from the effect on the like interests of other persons; and • where the compromise or arrangement affects the rights of debenture holders of the company, give a like explanation as respects the trustees of any deed for securing the issue of the debentures as it is required to give in respect of the company’s directors.

42

Restructuring plan  3.72

3.69 Section 901E(1) CA 2006 duly provides that It is the duty of any director of the company or trustee for its debenture holders to give notice to the company of such matters relating to that director or trustee as may be necessary for the purposes of CA 2006, s 901D. Requirements under the Practice Statement 3.70 Paragraph 14 of the Practice Statement adds that explanatory statements should be in a form and style appropriate to the circumstances of the case, including the nature of the member and/or creditor constituency and should be as concise as the circumstances permit. In addition to complying with the requirements of CA 2006, s 901D, it must: • explain the commercial impact of the Restructuring Plan; and • provide members and/or creditors with such information as is reasonably necessary to enable them to make an informed decision as to whether the Restructuring Plan is in their interests, and on how to vote on it. The information provided should in practice include, among other things: • where other creditors have been excluded from the Restructuring Plan, an explanation of why those creditors have been excluded; and • details of what the applicant considers would be most likely to occur were the Restructuring Plan not to be sanctioned by the court, with evidence to support the reasons why this alternative would offer a less favourable outcome for creditors. Where a document is incorporated into the explanatory statement by reference, readers should be directed to the material parts of the document. 3.71 Paragraph 15 of the Practice Statement indicates that the court will consider the adequacy of the explanatory statement at the convening hearing, and may refuse to make an order summoning the meetings if it considers that the explanatory statement is not in an appropriate form. However, it emphasises that the court will not approve the explanatory statement and that it will therefore remain open to any person affected by the Restructuring Plan to raise issues as to its adequacy at the sanction hearing. The case of Sunbird Business Services Limited [2020] EWHC 2493 (Ch), decided in relation to a Scheme of Arrangement, provides a cautionary tale in this regard.

What happens where interests in a debt are held indirectly? 3.72 One particular issue that may arise is where interests in the applicant’s debt are held indirectly. This may occur if, for example, a single nominee holds the legal title to a series of notes for the various beneficial owners. The fact that a person holds the beneficial interest in a note will not be sufficient in itself to make that person a creditor of the company in their own right. They may only be able to vote through the nominee.

43

3.73  Restructuring plan

3.73 Paragraph 13 of the Practice Statement provides that, if it is proposed that the votes to be cast at the meeting should by some method reflect the views of the persons holding the indirect interests, the evidence at the convening hearing should set out the applicant’s proposals in that respect and any facts justifying those proposals. In the above example, the applicant may propose a mechanism where the persons holding the beneficial interests are still given details of the Restructuring Plan and notice of the relevant meeting, and are able then to instruct the nominee how they wish the nominee to vote in respect of the notes in which they hold their beneficial interest.

THE MEETINGS What are the voting thresholds at the meetings? 3.74 At each meeting, the persons present formally consider the Restructuring Plan and vote whether to approve it. For any class of creditors or members to approve the Restructuring Plan: • at least 75% in value; • of those persons present and voting at the meeting of that class, either in person or by proxy must vote in favour (CA 2006, s 901F(1)). 3.75 Therefore, creditors or members who do not engage with the process at all, or who are present but abstain from voting, do not count when ascertaining whether at least 75% in value have voted in favour. Like a Scheme of Arrangement and a CVA, a Restructuring Plan should therefore prove a useful tool for binding uninterested creditors as well as dissenting creditors. 3.76 Unlike a Scheme of Arrangement, however, there is no extra requirement for a majority in number to vote in favour. In addition, unlike a CVA, there is no extra requirement for a percentage of unconnected creditors to vote in favour. 3.77 Also, as noted previously, unlike a Scheme of Arrangement, the court may still sanction a Restructuring Plan even if certain classes do not vote in favour (see 3.86 to 3.93).

Is a physical meeting required? 3.78 Holding a physical meeting poses at least one major logistical difficulty for the applicant. They will need to find a venue large enough to house the number of stakeholders who they believe may potentially attend the meeting even though in reality the vast majority of stakeholders are likely to choose to vote via proxies and only a few will wish physically to attend.

44

Restructuring plan  3.82

3.79 This issue has already been identified and addressed in relation to creditor meetings held in relation to insolvency procedures governed by IA 1986, such as CVAs. The default option there is now to avoid physical meetings unless a specified threshold of creditors so request. However, there are no corresponding requirements for procedures governed by the CA 2006, such as Schemes of Arrangement and Restructuring Plans. Applicants remain free to propose either a physical or a virtual meeting. 3.80 Meetings in relation to Schemes of Arrangement have been held virtually throughout the COVID-19 pandemic, and the court confirmed at the VAA convening hearing that it was equally possible to hold a virtual meeting for a Restructuring Plan. It may be that virtual meetings will remain the route of choice for many Restructuring Plans once the restrictions imposed by COVID-19 are lifted. 3.81 The fact that not all stakeholders possess the technology to access a video-link will not now necessarily prove a barrier to a virtual meeting. For example, in Re Castle Trust Direct plc [2020] EWHC 969 (Ch) the court emphasised the purpose of the ‘meeting’ was to allow creditors or members to come together to consult with each other, should they choose to do so, in order to make a collective decision. This was capable of being achieved via telephonic communication where those who were participating were able to hear and ask questions and express opinions in circumstances in which everyone else who was present was also able to hear and ask questions and express opinions.

Is a minimum turnout required? 3.82 As noted in 3.74 and 3.75, for voting purposes it is irrelevant whether some creditors or members vote in person or by proxy. Similarly, even if a significant number of creditors abstain or choose not to engage with the process at all this will not affect the vote. However, by analogy to a Scheme of Arrangement: • at the sanction hearing, the court will also need to look at whether the class concerned was properly represented at each meeting (see 3.96). In practice the applicant will therefore wish to ensure that a reasonable number of stakeholders do cast votes at the meeting; and • sufficient attendees will need to be present in person for a ‘meeting’ to have occurred. If a class consists of only one person, they can still hold a meeting. If only one person from a larger class attends, however, it is doubtful whether a ‘meeting’ will validly have been held (Re Altitude Scaffolding Ltd [2006] EWHC 1401 (Ch)). In practice, for a larger class, the applicant will therefore wish to ensure that the meeting is not attended only by a chairman who has been appointed the proxy of all of stakeholders choosing to vote but also by one or more stakeholders in person or through a different proxy.

45

3.83  Restructuring plan

THE SANCTION HEARING What issues will the court need to consider at the sanction hearing? 3.83 Section 901F CA 2006 provides that the court ‘may’ sanction a Restructuring Plan if the plan has been approved by the creditors or classes of creditors and/or members or classes of members at their respective meetings. Where one or more classes have not approved of the Restructuring Plan, the court will duly need to consider whether still to sanction the Restructuring Plan, in other words whether to permit ‘cross-class cram-down’ in accordance with CA 2006, s 901G. 3.84

The explanatory notes to CIGA 2020 add:

‘As is the case with Part 26 schemes of arrangement, the Court will always have absolute discretion over whether to sanction a Restructuring Plan. For example, even if the conditions of cross-class cramdown are met, the Court may refuse to sanction a Restructuring Plan on the basis that it is not just and equitable.’

3.85 At the sanction hearing in relation to the VAA Restructuring Plan, the court summarised the additional principles that it should apply to the exercise of its discretion as to whether to sanction a Restructuring Plan in addition to considering whether to permit cross-class cram-down (where applicable). These were directly analogous to those to which the court would apply to the sanction of a Scheme of Arrangement (see paras 51 and 52 of Re: Virgin Atlantic Airways Limited [2020] EWHC 2376 (Ch) – the ‘VAA sanction hearing judgment’). The court will look at: • whether the relevant provisions of the legislation have been complied with; • whether the classes were fairly represented at the meetings; • whether the Restructuring Plan itself was fair; and • whether there was a ‘blot’ or defect in the Restructuring Plan. Finally, the court will need to consider any jurisdictional issues.

When will cross-class cram-down apply? The provisions of the legislation 3.86 A Restructuring Plan may still be sanctioned by the court even if one or more classes of creditors or members have not voted in favour provided that: • the court is satisfied that none of the members of the ‘dissenting class’ would be any worse off than they would be in the event of the ‘relevant alternative’, described as ‘Condition A’ (CA 2006, s 901G(3)); and

46

Restructuring plan  3.92

• the Restructuring Plan has been approved by at least one class of creditors or members who would receive a payment, or have a genuine economic interest in the company in the event of the relevant alternative, described as ‘Condition B’ (CA 2006, s 901G(5)). 3.87 The relevant alternative is whatever the court considers would be most likely to occur in relation to the company in the event that the Restructuring Plan were not sanctioned by the court (CA 2006, s 901G(4)). What is most likely otherwise to occur will differ from case to case. Although the court was not ultimately required to determine the relevant alternative for either the VAA Restructuring Plan or the PizzaExpress Restructuring Plan, both applicants had provided creditors with details of what they considered would be most likely otherwise to occur: • VAA considered that this would be a distributing administration or a liquidation and had modelled the outcomes of those process for creditors to show that this would produce a less favourable outcome for creditors; and • PizzaExpress considered that this would be a sale of its business and assets, and at the convening hearing it had already drawn the court’s attention to a parallel sale process that was being conducted under the supervision of an independent financial advisor, but which had not generated any indicative offer that would produce a better outcome for creditors. 3.88 These provisions may allow a senior creditor class to ‘cram-down’ a dissenting class of more junior creditors. However, it may also allow a class of junior creditors to ‘cram-up’ a dissenting senior creditor class. 3.89 The existing provisions of CA 2006, s 901G will not necessarily be the end of the matter. The Secretary of State is given the power to amend the existing provisions in the future by regulations which either add additional conditions or which remove or vary the existing conditions (CA 2006, s 901G(6)). What will the court need to determine? 3.90

As the legislation currently stands, the court will therefore need to determine both:

• what the relevant alternative is for the case in question; and • what the stakeholders’ likely realisations would be in that scenario. 3.91 The applicant and the dissenting class are likely to present the court with opposing views on what that alternative might be and with differing valuation evidence. 3.92 The court has occasionally needed to perform an analogous exercise when sanctioning a Scheme of Arrangement where creditors who the company had excluded from the voting process

47

3.93  Restructuring plan

entirely because it considered they had no economic interest contested their exclusion (see 3.41). However, in the main it has been rare for the court to need to consider competing valuation evidence before sanctioning a Scheme. 3.93 It is likely that the court will need to resolve valuation disputes more frequently in relation to applications for Restructuring Plans. The existing case law in relation to Schemes may assist, but the court will doubtless develop some further case law specific to Restructuring Plans in the first few cases where dissenting classes emerge. Finally, in addition to considering whether Conditions A and B have been satisfied, the court will look more generally at whether the Restructuring Plan is just and equitable (see 3.94 to 3.104).

Have the provisions of the legislation been complied with? 3.94 The court will need to review at this point whether the classes were indeed properly constituted. It will need to be satisfied that the meetings were properly convened and held and that, subject to any cross-class cram down, the required majority of each class of stakeholders voted in favour of the Restructuring Plan at those meetings. As part of this exercise, the court will review whether the applicant has properly complied with all of the terms of the order made at the convening hearing and with any other procedural requirements. 3.95 The court will also look at whether the explanatory statement complied with the statutory requirements described in 3.68. However, it may also need to consider whether the explanatory statement was fair and provided the recipients with all of the information they reasonably required to decide how to vote should any stakeholder raise an issue in this regard as described in 3.70 and 3.71.

Were the classes fairly represented? 3.96 The court will be concerned to ensure that each class was fairly represented by those attending the relevant meeting, and the majority in every class was acting bona fide and not attempting to promote an interest which was in fact adverse to the class they claimed to represent. If the turnout at a meeting was low, the court may wish to ensure that those present and voting nonetheless represented a significant proportion of their class by value. The issues in relation to minority protection were recently examined in some detail in relation to a Scheme of Arrangement in Re Lehman Brothers International (Europe) (In Administration) [2018] EWHC 1980 (Ch).

48

Restructuring plan  3.101

Is the Restructuring Plan itself fair? Fairness generally 3.97 At the VAA sanction hearing, the court confirmed that the existing case law in relation to Schemes of Arrangement should be applied generally in determining where the Restructuring Plan was fair. 3.98 In this respect, the court will need to be satisfied that the proposed Restructuring Plan ‘is such that an intelligent and honest man, a member of the class concerned, acting in respect of his interests might reasonably approve’ (Re Dorman Long & Co Ltd [1934] 1 Ch 635). The court may still reject a Restructuring Plan at the sanction stage that has been approved by each class of stakeholders at the relevant meetings if, for example, it considers that unfairly prejudices one or more of the minority stakeholders who opposed it. 3.99 However, a court will not superimpose its own view of whether the proposal is beneficial to the stakeholders, or whether it is the best proposal that might be available. The courts recognise that a stakeholder acting on sufficient information and given sufficient time to consider it will normally be the best judge of its own commercial interests (Re English, Scottish and Australian Chartered Bank [1893] 3 Ch 385). Additional issues arising out of cross-class cram down 3.100 Where at least one class has not approved the Restructuring Plan, and the court is therefore being invited to apply cross-class cram-down, this introduces a new dynamic to this test. It would be possible, for example, for a future applicant to put forward a Restructuring Plan which made few material changes to the senior debt but very substantial changes to the more junior debt and then argue that it should be sanctioned on the basis of senior approval alone. 3.101 At the Sanction Hearing in relation to the VAA Restructuring Plan, the court had no need to consider cross-class cram-down as all of the classes had voted in favour. The court noted, however, that the VAA Restructuring Plan had an unusual feature in that 100% of the members of three of those four classes had already agreed to support the plan prior to the convening hearing by signing the plan support agreement. It observed that, in relation to a Scheme of Arrangement, it would not be normal practice to include classes of creditors where it was already known that 100% of those creditors had been willing to consent. The court noted that these three fully consenting classes appeared to have been included within this Restructuring Plan with a view to arguing that the cross-cram down power would have been available in the event that the fourth class, the trade creditors, had not voted in favour.

49

3.102  Restructuring plan

3.102 As a marker for future applicants, the court wished to make it specifically clear that in sanctioning the VAA Restructuring Plan it should not be taken to have decided that the power to cram down a dissenting class under CA 2006, s 901G can be activated by including a class of creditors who would otherwise all have been prepared to enter into consensual agreements to restructure their rights in any case (see para 50 of the VAA sanction hearing judgment). 3.103 A future court which was invited to apply cross-class cram-down may also need to decide whether the words ‘just and equitable’ used in the Explanatory Notes is designed to carry any special meaning of their own, or whether the words are simply synonymous with fairness generally.

Is there a ‘blot’ on the Restructuring Plan? 3.104 The case law in relation to Schemes of Arrangement suggests that the question for the court here is whether there is some technical or legal defect in the scheme, for example, that it does not work in accordance with its own terms or that it would infringe some mandatory provision of law (see for example Re The Co-Operative Bank Plc [2017] EWHC 2269 (Ch)).

What jurisdictional issues will the court need to consider? 3.105 Where the company is a foreign company the court will need to consider whether it has jurisdiction to sanction a Restructuring Plan in relation to that company. 3.106 Where there are foreign creditors, the court will also need to consider where the scheme will be recognised in those creditors’ own jurisdictions. The approach the court is likely to take here is discussed further in 3.127 to 3.130.

THE ORDER MADE AT THE SANCTION HEARING When does the Restructuring Plan become effective? 3.107 In practice, the terms of the Restructuring Plan will stipulate when it becomes effective. Section 901F(6) CA 2006 provides that the court’s order will have no effect until a copy of it has: • in the case of an overseas company that is not required to register particulars under CA 2006, s 1046, published in the Gazette; or • in any other case, delivered to the registrar of companies.

50

Restructuring plan  3.111

3.108 The registrar has a practice of refusing to register an order in relation to a Scheme of Arrangement until HMRC have confirmed that the scheme does not carry any liability for stamp duty, and it is understood that it will apply the same practice in relation to a Restructuring Plan. However, given that the trigger in CA 2006, s 901F(6) is delivery rather than registration, it is arguable that this ought not to delay the Restructuring Plan becoming effective. 3.109 The terms of most Restructuring Plans are therefore likely to stipulate that the plan will become effective on the later of: • the date when the relevant requirement of CA 2006, s 901F(6) is satisfied; and • the date on which the last of any other conditions precedent to the plan becoming effective is satisfied (see 3.111).

What is the effect on a co-debtor or guarantor? 3.110 The release of rights against one company jointly liable with another does not of itself release that other company. The same applies where the other company is merely a guarantor of the first, and not directly jointly liable. However, the Court held in Re La Seda de Barcelona SA [2010] EWHC 1364 (Ch) that a Scheme of Arrangement might validly include a specific provision releasing a third party from debts owed to the scheme creditors where there was a genuine compromise between those creditors and the third party and the creditors’ rights against the third party were closely connected to their rights against the scheme company. In the La Seda case, a release of a third-party guarantor satisfied the requirement for a ‘genuine compromise’ because the guarantor was in turn releasing substantial claims of its own against the group. The court confirmed in the PizzaExpress convening hearing judgment (reported at [2020] EWHC 2873 (Ch)) that the same principle should apply in relation to a Restructuring Plan.

Can the court sanction a conditional Restructuring Plan? 3.111 It is possible for the court to sanction a Restructuring Plan which only becomes effective once one or more particular conditions are fulfilled. Such conditions might include, for example, the grant of a regulatory approval. However, the court will do so only if the relevant condition has at least a reasonable chance of being satisfied (Re Lombard Medical Technologies Plc [2014] EWHC 2457 (Ch)).

51

3.112  Restructuring plan

FOREIGN COMPANIES AND STAKEHOLDERS When will the English courts have jurisdiction in relation to a foreign company? 3.112 Like a Scheme of Arrangement, a Restructuring Plan will be neither an insolvency proceeding nor a winding-up proceeding for the purposes of Regulation (EU) 2015/848 of the European Parliament and the Council of 20 May 2015 on insolvency proceedings (the ‘EU Insolvency Regulation’). This broadens its potential scope, although, as noted in 3.127 to 3.130, it potentially makes recognition a greater issue. 3.113 As already noted at 3.13, for the purposes of determining which companies are eligible, the term ‘company’ is defined to mean any company liable to be wound up under the IA 1986 (CA 2006, s 901A(4)). A Scheme can therefore extend to foreign companies, given that the English courts have the jurisdiction to wind such companies up. 3.114 While the IA 1986 gives the English courts unlimited jurisdiction to wind up a foreign company, in practice the English courts themselves have laid down constraints on when they will assume jurisdiction. As section 901A(4) is worded in the same way as the equivalent section in relation to a Scheme of Arrangement we would expect the English courts to apply the same approach for a Restructuring Plan as they would for a Scheme of Arrangement. They will only be satisfied that they have jurisdiction if the company has a ‘sufficient connection’ with England (as per Re Drax Holdings Limited [2004] 1 WLR 1049). 3.115 By analogy to the existing cases in relation to Schemes of Arrangement, we would therefore expect the English court to be persuaded that a foreign company had a sufficient connection with England if, for example: • the Restructuring Plan proposes to compromise creditor claims which are governed by English law and those creditors have agreed that any dispute would be subject to the jurisdiction of the English courts (see, for example, Re Vietnam Shipbuilding Industry Group [2014] BCC 433 at [6] to [9]); or • the Restructuring Plan proposes to compromise creditors’ claims which were originally governed by a law other than English law, but under the terms of the relevant agreement(s), these agreements have been amended so that they are governed by English law (see Re Apcoa Parking Holdings GmbH [2014] EWHC 3849 (Ch)). 3.116 It may be comparatively easy to establish a sufficient connection on this basis where the creditors to be compromised are lenders to the company and all of their compromised claims are governed by a single document such as a facility agreement. It may be harder where the creditors are trade suppliers largely based in the company’s own jurisdiction and the company has a series

52

Restructuring plan  3.121

of individual agreements with those creditors which are largely governed by the law of its own jurisdiction.

The EU Insolvency Regulation and the EU Judgments Regulation How do the two regulations interact? 3.117 The other relevant piece of legislation here is Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the ‘EU Judgments Regulation’). 3.118 We have already described the case of Re DAP Holding NV and the conclusion reached in relation to the predecessor to the current EU Insolvency Regulation in 3.15. However, the court was also content in that case to exclude that Scheme from the scope of the predecessor to the current EU Judgments Regulation. 3.119 Re Rodenstock GmbH [2011] EWHC 1104 (Ch) took matters further. That case involved a creditor Scheme of Arrangement of a solvent company whose COMI was in Germany and which had no establishment in the UK. The English court would have had no jurisdiction to place that company into liquidation. However, the evidence presented to the court made it clear that that the predecessors to the current EU Insolvency Regulation and EU Judgments Regulation which were then in force were intended to dovetail and leave no gap between them. If a Scheme was outside of the scope of one regulation, it ought to be within the scope of the other. In addition, bringing the Scheme within the scope of the EU Judgments Regulation could assist with recognition in the courts of EU Member States in which other creditors were domiciled (see 3.129). 3.120 The courts therefore now generally take the view that the EU Insolvency Regulation does not apply in relation to a scheme of a foreign company, if necessary by drawing a distinction between the circumstances in which an English court might place the company into liquidation and the manner in which the words ‘liable to be wound up’ are designed to be interpreted here. The courts’ underlying logic remains that, as the EU Insolvency Regulation itself does not restrict the English courts’ jurisdiction in relation to schemes, Parliament cannot have intended to have introduced such a restriction by choosing to use the phrase ‘liable to be wound up’ in the CA 2006. When the EU Judgments Regulation apply? 3.121 The EU Judgment Regulation still sits uneasily with proceedings of this kind in the sense that it refers to ‘defendants’ rather to classes of creditors. It is possible that a reference to the European Court of Justice would be required in order to determine unequivocally whether it

53

3.122  Restructuring plan

applies to schemes. However, in the absence of any such determination the English courts adopt the practice of assuming but without deciding, that Chapter II (including Article 4) of the EU Judgments Regulation does apply to creditor Schemes of Arrangement, on the basis that the creditors are being ‘sued’ by the company and that they are therefore defendants to the application to sanction the scheme. 3.122 Article 4(1) provides that any person domiciled in an EU Member State must be sued in their own Member State unless an exception applies. However, the courts are prepared to take the view that if one of the exceptions does apply and that accordingly they find they do have jurisdiction because the result of the exception is that that person can be sued in England, then there is no need to determine whether the original assumption was correct. What are the relevant exceptions? 3.123 Applicants in relation to Schemes of Arrangement have frequently relied upon the exception provided for by Article 8 of the EU Judgments Regulation. By Article 8, a defendant who is domiciled outside of an EU Member State may be sued in that Member State provided that another defendant in the same action is domiciled there and provided that it is expedient to hear the claims against both together to avoid the risk of irreconcilable judgments resulting from separate proceedings. On this basis, the courts have jurisdiction to sanction a creditor scheme provided at least one of the creditors is domiciled in England and Wales, although the court ideally prefers the number to be larger (see, for example, Van Gansewinkel Groep BV & ors [2015] EWHC 2151 (Ch)). 3.124 At the convening hearing for the VAA Restructuring Plan, the court confirmed that it would apply the same reasoning in relation to a Restructuring Plan. In the case of the relevant trade creditors in particular, the evidence showed that 90 out of 168 were domiciled in England and Wales. This was amply sufficient to ensure that the requirements of Article 8 were satisfied. 3.125 Applicants in relation to Schemes have also relied on the exception provided by Article 25 of the EU Judgments Regulation. Article 25 gives the court jurisdiction where the parties, regardless of their domicile, have agreed that the English courts are to have jurisdiction to settle any disputes which have arisen in connection with a particular legal relationship. On this basis, the court might have jurisdiction where, for example, the relevant creditors were all lenders under a facility agreement with an English jurisdiction clause. 3.126 At the convening hearing for the VAA Restructuring Plan, however, the court indicated that this would not have been an appropriate reason for conferring jurisdiction for that particular plan. Not all of the relevant trade creditors had contracted with VAA on terms including an English jurisdiction clause. The mere fact that some creditors had would not have been a basis for the court to assume jurisdiction against those creditors who had not.

54

Restructuring plan  3.132

Recognition in foreign jurisdictions 3.127 Even if the court satisfies itself that it has jurisdiction, as part of the sanction process it will also need to consider whether the Restructuring Plan will be recognised as having compromised creditors’ rights by the courts of any relevant foreign jurisdictions. If a dissenting creditor were able to persuade a foreign court to disregard the plan and thus use their original rights to attach assets of the company, the plan would be unfair. It would allow that creditor to improve its position compared to that of other creditors. 3.128 The court has, for example, expressed reservations about a proposed Scheme of Arrangement where the Indonesian courts had held that the underlying debt governed by New York law was invalid despite the fact that a New York court had given judgment on that debt. If the Indonesian court did not recognise a New York judgment in relation to a debt governed by New York law, it was hard to see how it would recognise a Scheme in relation to that debt under English law (Re Indah Kiat International Finance Company BV [2016] EWHC 246 (Ch)). 3.129 The company proposing the Restructuring Plan may therefore need to satisfy the court by providing expert evidence on the laws of key foreign jurisdictions. For example, where the company has material operations or assets in an EU Member State, it may need to provide a legal opinion from a lawyer familiar with the laws of that jurisdiction confirming that its courts would read the EU Judgments Regulation in the same way as the English courts. 3.130 However, it may be necessary in some cases to apply separately for recognition in the foreign jurisdictions concerned, and to provide the English court with evidence that the foreign court is likely to grant that recognition. For example, where the company has material operations or assets in the US, it might seek recognition of the Restructuring Plan as a foreign main proceeding under Chapter 15 of the US Bankruptcy Code and an order giving full force and effect to the plan in the US. At the sanction hearing for the VAA Restructuring Plan, for example, VAA provided evidence to the court that it had appointed one of its directors as a foreign representative for the purpose of seeking such relief in the US, together with expert evidence that the US Bankruptcy Court was likely to grant the relief sought.

Can a Restructuring Plan affect the rights of members of a foreign company? 3.131 All of the cases so far described above in relation to foreign companies have concerned creditor Schemes of Arrangement or Restructuring Plans. 3.132 It feels less likely that the court would find a sufficient connection with England and Wales on the basis discussed in 3.115 if the Restructuring Plan proposed to compromise members’ rights.

55

3.133  Restructuring plan

The rights of the members both vis-à-vis the company and vis-à-vis each other will almost certainly be governed by the law of that company’s own jurisdiction. 3.133 It is also worth noting that a reconstruction or amalgamation set in CA 2006, s 901J and as described in 3.139 are stated to apply only to a company within the meaning of the CA 2006, ie a company registered in England and Wales (see CA 2006, s 901A(4)(a)). A Restructuring Plan which proposed to exchange members’ shares in a company for shares in or rights against a different company might fall into this category, and thus might not be possible for a foreign company.

PENSION SCHEMES 3.134 Where a Restructuring Plan is proposed for a company which is, or has been an employer in respect of an ‘occupational pension scheme that is not a money purchase scheme’, ie a defined benefit pension scheme, any notice or other document required to be sent to a creditor must also be sent to: • the Pensions Regulator (CA 2006, s 901I(1)); and • for ‘eligible schemes’, ie defined benefit schemes which have not been expressly excluded from the ambit of the Pension Protection Fund (the ‘PPF’) (see Pensions Act 2004, s 216), the Board of the PPF (CA 2006, s 901I(2)). 3.135 The PPF will also be entitled to exercise the rights of the trustee or managers of an eligible scheme as if the PPF were a creditor of the company in its own right. Ordinarily, the PPF’s ability to exercise those rights will not prevent the exercise of the same rights by the trustees or managers. However, where the PPF is exercising the right to vote on a Restructuring Plan in a meeting summoned under section 901C(1) CA 2006, this excludes the trustees or managers from exercising these rights, and the PPF must consult with the trustees or managers before doing so. (See para 3 of The Pension Protection Fund (Moratorium and Arrangements and Reconstructions for Companies in Financial Difficulty) Regulations 2020.) 3.136 Section 901I(5) CA 2006 allows for further regulations to be made which might specify conditions to be met before the PPF may exercise any such rights and/or which might provide that such rights are to be exercisable only for a specified time, but no such further regulations have been made yet. 3.137 It is worth noting that the PPF has been given the power to exercise creditor rights even though, unlike a CVA, a Restructuring Plan is neither: • a ‘relevant event’ which would crystallise a debt from the company to the trustees of the defined benefit scheme equal to the amount by which the liabilities of the scheme exceeds the value of the scheme assets for the purposes of section 75 of the Pensions Act 1995; nor

56

Restructuring plan  3.140

• a ‘qualifying insolvency event’ which would cause an assessment period to commence during which the PPF will seek to ascertain whether the pension scheme can be rescued or, failing that, whether the scheme can afford to secure benefits which are at least equal to the compensation that the PPF would pay if it assumed responsibility. 3.138 While the PPF will be given direct access to negotiations in relation to the Restructuring Plan, the legislation does not prevent pension liabilities from being compromised under that plan and indeed raises the possibility of cross-class cram-down. However, the effect of such a compromise may be to deny the pension scheme future access to the PPF, and this may be a factor which the court would take into account in exercising its discretion as to whether to sanction that plan.

Powers of the court to facilitate reconstruction 3.139 Section 901J CA 2006 allows a court in sanctioning a Restructuring Plan to make certain provisions where: • the compromise or arrangement in question has been proposed for the purposes of, or in connection with, the reconstruction of the company (or group of companies); and • under the plan the whole or any part of the undertaking or any property of any company concerned in the plan is to be transferred to another company. 3.140 The court is empowered, among other things, to make provision for the transfer itself, and for the allotting by the transferee company of any shares or like interests in the company to any person under the compromise or arrangement. This mirrors the existing provisions of CA 2006, s 900 in relation to Schemes of Arrangement, and therefore existing case in relation to schemes may well be equally applicable to a Restructuring Plan.

57

Chapter 4

Restrictions on the termination of supply contracts

INTRODUCTION What are the new provisions? 4.01   Prior to the Corporate Insolvency and Governance Act 2020 (‘CIGA 2020’), the insolvency legislation already made limited provision to invalidate termination clauses in certain company insolvencies and rescue procedures and in relation to specific supplies. The relevant provisions, sections 233 and 233A of the Insolvency Act 1986 (‘IA 1986’), will continue to apply. Their effect, as amended by CIGA 2020, is summarised in 4.06 to 4.12. 4.02   Section 14 of CIGA 2020 has, however, introduced a range of additional provisions which will prevent suppliers of a much wider range of supplies relying on termination clauses or doing ‘any other thing’, due to a company entering a qualifying restructuring or insolvency procedure. These new provisions have been introduced by the insertion of a new IA 1986, s 233B. A new IA 1986, s 233C in turn then permits the Secretary of State to make regulations making a range of further amendments to these new provisions. 4.03   Clauses which allow a person to terminate the contract as a consequence of a series of listed insolvency events, known as ‘ipso facto’ clauses, are presently extensively used in supply contacts in the UK and prior to CIGA 2020 they were generally enforceable. As such, this change has the potential to be the part of CIGA 2020 which has the widest effect in practice. It is worth noting, however, that the new provisions will not apply in reverse, ie they will not affect a c­ ompany’s ability to terminate a contract with one of its supplier in the event of the supplier’s insolvency.

What is the policy intention behind the new provisions? 4.04   The explanatory notes to CIGA 2020 indicate that the intention behind the provisions is to maintain supplies of all goods and services to companies in restructuring and insolvency procedures by limiting the circumstances in which the supplier can terminate or alter the contract. They state that the aim is to help companies trade through a restructuring or insolvency process, thereby maximising the opportunities for the rescue of the company or the sale of its business as a going concern.

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Restrictions on the termination of supply contracts  4.09

4.05   The new provisions also seek to prevent essential suppliers from ‘ransoming’ their position by making the payment of pre-insolvency charges and fees (which rank as unsecured debts of the company) a condition to the continuation of their supply. However, the new provisions make no distinction between essential and non-essential suppliers. They apply to all contracts for the supply of goods and services except where one of the exclusions discussed in 4.25 applies.

THE PRE-CIGA 2020 REGIME Section 233 IA 1986 4.06   Section 233 IA 1986 makes special provisions in relation to: • supplies of gas; • supplies of electricity; • supplies of water; • supplies of communications services; and • supplies of certain other goods and services, including: (a) point of sale terminals; (b) computer hardware and software; (c) information, advice and technical assistance in connection with the use of information technology; (d) data storage and processing; and (e) website hosting. 4.07   It applies where: • the company enters administration; • an administrative receiver of the company is appointed; • a CVA takes effect in relation to the company; • the company goes into liquidation; or • a provisional liquidator of the company is appointed. 4.08   It provides that where the relevant insolvency officeholder requests that certain essential supplies in the categories covered by that section are continued to a business, the supplier may not make the supply conditional upon the payment of any existing outstanding debts (which will instead rank as unsecured debts). However, this is subject to a requirement that, if the supplier requests, the office-holder will personally guarantee that payments to that supplier which accrue during the period of the insolvency process are made in full. 4.09   Schedule 12 of CIGA 2020 inserts a new Schedule 4ZZA to the IA 1986. Part 1 of this new schedule provides that IA 1986, s 233B(7), described in 4.22, does not apply to types of supplies which are already covered by IA 1986, s 233.

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4.10  Restrictions on the termination of supply contracts

Section 233A IA 1986 4.10   Section 233A IA 1986 expands these protections in circumstances where the company enters into administration or a CVA takes effect. Provided the relevant contract was entered into after 1 October 2015, it prevents the providers of such essential supplies from relying on their insolvency-related contractual terms to terminate the contract (or, where applicable, the supply) or from doing ‘any other thing’ unless: • the insolvency office-holder (ie the administrator or the supervisor of the CVA) consents to the termination of the contract; • any charges in respect of the supply that are incurred after the company entered administration or the CVA took effect are not paid within 28 days of their due date; • the supplier successfully applies to court for an order that the contract is terminated on the ground that continuing to supply is causing them ‘hardship’; or • the supplier indicates that it intends to terminate the supply unless the insolvency office-holder gives a personal guarantee that the charges from the start of the administration or CVA will be paid and the insolvency office-holder fails to give this within 14 days of receipt of this notice. 4.11   CIGA 2020 has made only minor amendments to IA 1986, ss 233 and 233A. However, although the amended versions of these sections will continue in force, they will now be supplemented by the new IA 1986, s 233B as described in 4.13 to 4.32. 4.12   Part 1 of Schedule 4ZZA to the IA 1986 provides that IA 1986, ss 233B(3) and (4), described in 4.16 to 4.20, will not apply to contracts which are already covered under 1986, s 233A.

THE CHANGES INTRODUCED BY CIGA 2020 When do the new provisions apply? 4.13   Section 233B IA 1986 applies where a company becomes subject to a ‘relevant insolvency procedure’. A company becomes subject to a relevant insolvency procedure where: • a Part A1 moratorium comes into force for the company; • the company enters administration; • an administrative receiver of the company is appointed (otherwise than in succession to another administrative receiver); • a company voluntary arrangement takes effect in relation to the company;

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Restrictions on the termination of supply contracts  4.16

• the company goes into liquidation; • a provisional liquidator of the company is appointed (otherwise than in succession to another provisional liquidator); or • a court order is made under section 901C(1) of the Companies Act 2006 in relation to the company, ie an order is made to convene one or more meeting(s) to vote on a proposal for a Restructuring Plan (see IA 1986, s 233B(2)). In this regard, it is worth noting that, while the relevant restrictions will apply in relation to a Restructuring Plan, they will not similarly apply in relation to a Scheme of Arrangement. This might be a factor for applicants to take into account in choosing which of these two processes to use. 4.14   While the relevant restrictions will apply from the date the court makes an order convening meetings to vote on a Restructuring Plan, they will not apply to a CVA until the creditors’ meeting has been held and the CVA has become effective. The most likely explanation for this inconsistency is that there is simply no obvious earlier point in the CVA process from which they might apply. A company proposing a CVA and which wished to take advance of IA 1986, s 233B from an earlier stage could still do so if they were to obtain a Part A1 moratorium prior to circulating the CVA proposal. 4.15   Given the stated aim of helping companies to continue to trade through a restructuring or insolvency process, it is perhaps odd that liquidation has been included on the list of relevant insolvency procedures. However, given that some of the UK’s largest trading insolvencies in recent years have taken the form of a compulsory liquidation with the concurrent appointment of a special manager, liquidation may still prove to be a useful inclusion.

WHAT RESTRICTIONS WILL BE IMPOSED? Restrictions on termination because of the relevant insolvency procedure 4.16   Where a company becomes subject to a relevant insolvency procedure, a provision of a contract for the supply of goods or services to the company ceases to have effect when the company becomes subject to the relevant insolvency procedure if and to the extent that, under the provision: • the contract or the supply would terminate, or any other thing would take place, because the company becomes subject to the relevant insolvency procedure; or

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4.17  Restrictions on the termination of supply contracts

• the supplier would be entitled to terminate the contract or the supply, or to do any other thing, because the company becomes subject to the relevant insolvency procedure (see IA 1986, s 233B(3)). Section 233B IA 1986 therefore extends the prohibition on the use of insolvency-related provisions to terminate or vary contracts for specific, critical supplies in IA1986, s 233A to any contract for the supply of goods or services. 4.17   The words ‘any other thing’ were also used in IA 1986, s 233A prior to CIGA 2020, but there has as yet been no case law as to what they mean. However, it seems clear that they will, for example, prevent a supplier from raising prices, requiring upfront cash payment or imposing other more onerous contractual terms on the company as a result of it having become subject to the relevant insolvency procedure. Restrictions on termination for past breaches 4.18   Furthermore, where: • under a provision of a contract for the supply of goods or services to the company the supplier is entitled to terminate the contract or the supply because of an event occurring before the start of the insolvency period; and • the entitlement arises before the start of that period, the entitlement may not be exercised during that period (see IA 1986, s 233B(4)). 4.19   ‘Insolvency period’ for these purposes is defined for each relevant insolvency procedure in IA 1986, s 233B(8). Essentially, the insolvency period begins upon the commencement of the procedure and ends when the process ends or the insolvency officeholder in respect of the process leaves office without a replacement. 4.20  Suppliers are therefore prevented from terminating supply contracts based on past breaches which are unconnected with the company’s insolvency where they have not already exercised their right to terminate before the start of the relevant insolvency procedure. Consequently, it is much more difficult for suppliers to terminate contracts once a customer is subject to an insolvency procedure. Suppliers will still be able to terminate as a result of new breaches which only occur after the start of the insolvency procedure, such as non-payment for goods subsequently supplied.

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Restrictions on the termination of supply contracts  4.25

No ability to seek a guarantee 4.21   Unlike section 233A IA 1986, there is no ability under IA 1986, s 233B to seek a guarantee from an insolvency officeholder as a condition of future supply. No ability to require pre-insolvency debts to be paid 4.22   The new provisions also prevent suppliers from requiring that any outstanding charges which relate to the period before the relevant insolvency procedure commenced are paid as a condition of future supply (IA 1986, s 233B(7)).

What is a contract for the supply of goods and services? 4.23   CIGA 2020 does not contain a definition of a contract for the supply of goods or services. The explanatory notes to CIGA 2020 do however provide some guidance regarding the types of contracts which would fall within the scope of IA 1986, s 233B, and state (at paragraph 231) that: ‘A contract is only subject to s.233B if it is a contract for the supply of goods and services. Agreements such as licenses, property leases and agreements for the sale of land or property are not characterised as contracts for the supply of goods and services, therefore they are not covered by the provisions of s.233B. A sophisticated lease/license/sale agreement may contain an element of provision for the supply of goods and services; this element would be covered by s.233B. The remainder of the lease/license/sale agreement will not be affected.’

4.24   Whilst it is therefore clear that licenses and agreements for the sale or lease of property are not covered by section 233B, there is scope for certain types of agreement still to be partially covered by section 233B where those agreements contain both a proprietary element and a supply of goods and services. Such agreements may include leases of serviced offices (which contain both a lease of a property and a supply of services to the tenant), whereby the supplier would be prevented from terminating the provisions of the agreement which relate to the supply of services, but would be entitled to terminate or forfeit the lease.

What protections do exist for suppliers? 4.25   There are, however, certain protections which seek to mitigate any prejudice caused to such suppliers. Broadly speaking, these protections fall into three categories: • an ability for the supplier still to terminate the contract in certain circumstances (see 4.26 to 4.28);

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4.26  Restrictions on the termination of supply contracts

• a permanent exclusion of certain types of suppliers and contracts from the remit of IA 1986, s 233B (see 4.29); and • a temporary exclusion for small suppliers who may be most adversely affected by the introduction of section 233B (see 4.30 to 4.31).

When might a supplier still terminate? 4.26   Section 233B(5) IA 1986 provides that where a provision of a contract ceases to have effect or an entitlement under a provision of a contract is not exercisable under IA 1986, s 233B the supplier may nevertheless terminate the contract if: • in a case where the company has entered into administration, administrative receivership, liquidation or provisional liquidation the officeholder consents to the termination of the contract; • in any other case, the company consents to the termination of the contract; or • the court is satisfied that the continuation of the contract would cause the supplier hardship and grants permission for the termination of the contract. 4.27   An insolvency officeholder will, as an officer of the court, be required to act reasonably and in good faith when considering any request for a contract to be terminated. Consequently, if the company does not require the goods or services which are supplied under the contract during the period of the relevant insolvency process, it is likely that the officeholder will agree to a termination of the contract. 4.28   In the absence of a consensual termination of the contract, the supplier is able to apply to the court for an order that the continuation of the contract is causing it hardship and should therefore be terminated. What constitutes ‘hardship’ is not defined in CIGA 2020 and is therefore likely to be determined by the courts on a case-by-case basis. However, the explanatory notes to CIGA 2020 indicate that ‘hardship’ is likely to be interpreted to entail the risk of the supplier itself becoming insolvent if it is not allowed to terminate the contract.

What types of contracts are excluded? 4.29  In addition to the contracts which are excluded from IA 1986, s 233B because they continue to fall within the scope of IA 1986, ss 233 and 233A (as already described in 4.06 to 4.12), Schedule 4ZZA to IA 1986 sets out certain further exclusions. In this regard: • Part 2 excludes contracts where the supplier is one of listed type of persons from the scope of section 233B. These persons include insurers, banks and a range of other providers of financial services.

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Restrictions on the termination of supply contracts  4.33

• Part 3 excludes certain listed types of financial contracts, derivatives contracts and contracts forming part of capital market investments. • Part 4 excludes certain set off and netting arrangements and aircraft leasing arrangements.

What is the exclusion in relation to small suppliers? 4.30  Section 15 of CIGA 2020 provides that IA 1986, s 233B will not apply where the company becomes subject to the relevant insolvency procedure during the ‘relevant period’ and the supplier is a small entity at the time the company becomes subject to the procedure. 4.31   A supplier is a small entity if at least two of the following conditions was met in its most recent financial year: • its turnover was not more than £10.2 million; • its balance sheet total was not more than £5.1 million; and • its number of employees was not more than 50. At the time of writing the relevant period has been extended until 31 March 2021.

Are the new provisions applicable to a foreign supplier? 4.32   This question has not yet been determined in relation to IA 1986, s 233B. However, the Court was prepared to make an order under IA 1986, s 233 against a company’s foreign parent to require it to restore the company’s access to an IT system (Official Receiver v Sahaviriya Steel Industries Plc [2015] EWHC 2877 (Ch)). This suggests that it may be prepared to take a similar approach in relation to IA 1986, s 233B.

HOW WILL THE NEW PROVISIONS WORK IN PRACTICE? The ability of the company to enforce 4.33   A supplier may have additional incentives not to continue to supply – see, for example, the discussion of credit insurance in Chapter 1. Should a supplier fail to supply further goods and services notwithstanding the provisions of IA 1986, s 233B it will not be in contempt of court. Rather, the company, through its officeholder or its directors depending on the type of procedure, will need either to bring court proceedings for damages or to seek an order for specific performance.

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4.34  Restrictions on the termination of supply contracts

4.34   Both of these remedies present their own difficulties, particularly where timing is critical and where the company may well be short of funds with which to pursue litigation. Indeed, although IA 1986, s 233B may well also be applicable to a foreign supplier, this does raise the potential additional issue of seeking the assistance of the courts of the foreign supplier’s own jurisdiction in order to enforce an order of the English court. 4.35   We expect therefore that, at least in some cases, the company will need to use the threat of proceedings as leverage in a further negotiation with its supplier in order to reach some mutually acceptable further terms rather than to rely just on the provisions of IA 1986, s 233B in their own right.

The effect on retention of title 4.36   Many suppliers of goods will have retention of title provisions in their contracts with the company. The new provisions are silent in this regard, and as such the supplier’s rights in this right are likely to be unaffected. It appears therefore that the company will need to reach a negotiated agreement with the supplier in relation to goods already supplied and which are subject to retention of title in exactly the same way as it would prior to CIGA 2020 coming into force.

The ability of the supplier to rely upon other breaches 4.37  Section 233B IA 1986 restricts the supplier from doing certain things because the company becomes subject to the relevant insolvency procedure. We anticipate that suppliers might be advised to revise their contractual terms so as additionally to allow them to terminate on the basis of certain other events that might typically occur at around the time of an insolvency. These might include, for example, ceasing trading part of a business or disposal of certain major assets. Similarly, if a supplier foresees a relevant insolvency procedure as imminent, it might be advised to threaten to terminate on the basis of any breaches which already exist unless the company enters into more favourable terms that would apply going forwards, including on an insolvency.

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Chapter 5

Temporary provisions

ADMINISTRATION: SALES TO CONNECTED PERSONS Introduction 5.01   A pre-packaged administration sale, or ‘pre-pack’, is a sale of an insolvent company’s business which is negotiated and arranged prior to the appointment of the administrator, with the actual sale taking place immediately or very shortly after the appointment of the administrator. Such sales are often to directors of or persons connected with the insolvent company and can be controversial as creditors may be unaware of the sale until after it has been completed. 5.02   In 2013, as a result of concerns about the possible abuses of pre-packs, the government commissioned Teresa Graham to carry out an independent review. She, in turn, commissioned research on a large sample of pre-packs carried out during the preceding few years. The resulting report, the Graham Review, was published in 2014. It made a number of recommendations, with the suggestion that government might wish to legislate if these were not voluntarily adopted by the insolvency profession. 5.03  In 2015 the insolvency profession duly put into place a number of protections for creditors in relation to pre-packs which broadly followed these recommendations. These included the introduction of a ‘pre-pack pool’ an independent body of experienced business people. Where a connected party proposed to purchase the business and asset of a company via a pre-pack they were entitled to apply to the pool for an opinion on the transaction. Paragraph 60A of Sch B1 of the Insolvency Act 1986 (‘IA 1986’) was nevertheless also introduced in 2015 to give the Secretary of State the power to legislate if so required. The Corporate Insolvency and Governance Act 2020 (‘CIGA 2020’) now revives para 60A of Sch B1.

The powers granted to the Secretary of State 5.04   Paragraph 60A of Sch B1 IA 1986 gave the Secretary of State the power to prohibit or to impose requirements or conditions in relation to the disposal, hiring out or sale of property

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5.05  Temporary provisions

of a company by an administrator to ‘connected persons’ in circumstances specified by the regulations. A ‘connected person’ in relation to a company means: • A relevant person in relation to the company. In this respect, a relevant person means: (i) a director or other officer, or shadow director, of the company; (ii) a non-employee associate of such a person; or (iii) a non-employee associate of the company. • A company connected with the company. In this respect a company is connected with another if a relevant person of one is or has been a relevant person of the other. The term ‘associate’ is defined in IA 1986, s 435. A ‘non-employee associate’ of a person is defined in IA 1986, para 60A of Sch B1 to mean a person who is an associate of that person otherwise than by virtue of employing or being employed by that person. 5.05   Paragraph 60A of Sch B1 IA 1986 originally granted these powers for a five-year period. These powers were not used during that period, and the period duly expired in May 2020, prior to the date on which CIGA 2020 was enacted. Section 8 of CIGA 2020 revives para 60A. The Secretary of State is now granted these powers until the end of June 2021. The explanatory notes to CIGA 2020 state that the intention of reviving this previously lapsed power is to provide for greater scrutiny of ‘pre-pack sales’.

The draft regulations 5.06   On 8 October 2020, the government published a report setting out its views on how well the voluntary measures put in place to comply with the recommendations in the Graham Review had worked. It noted some positive improvements, but also noted the low number of connected parties who had voluntarily made use of the pre-pack pool. The report made clear that in many circumstances a pre-pack sale remained the best outcome for creditors and that the government did not therefore intended to impose an outright ban on such sales. However, it concluded that some form of regulation was necessary. 5.07  Accordingly, a proposed draft of the Administration (Restrictions on Disposal etc to Connected Persons) Regulations 2020 has now been published. They will apply to ‘substantial disposals’ in administrations that commence on or after the day on which the regulations come into force. A ‘substantial disposal’ means: • a disposal, hiring out or sale of what is, in the administrator’s opinion, all or a substantial part of the company’s business and assets;

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Temporary provisions  5.10

• to one or more connected persons; and • within eight weeks beginning on the day on which the company enters into administration. 5.08  Under the current draft, the administrator must not make a ‘substantial disposal’ unless: • the administrator seeks a decision on the proposed disposal from the company’s creditors under IA 1986, para 51(1) or 52(2) of Sch B1 and the creditors approve the administrator’s proposal; or • the connected person has first obtained a report from an evaluator in respect of the proposed disposal. 5.09   A report from an evaluator must include a statement that either: • the evaluator is satisfied that the consideration to be provided for the relevant property and the grounds for the substantial disposal are reasonable in the circumstances (a ‘case made opinion’); or • the evaluator is not satisfied that the consideration to be provided for the relevant property and the grounds for the substantial disposal are reasonable in the circumstances (a ‘case not made opinion’). The administrator must send a copy of the report to every creditor, other than a creditor who has opted-out of receiving correspondence. The administrator is entitled still to proceed if the report contains a case not made opinion, but will need also to provide a statement to the creditors setting out their reasons for proceeding with the disposal regardless. 5.10   What is most striking is the lack of qualifications required to perform the role of evaluator. An individual meets the requirements as to qualification if they themselves believe that they have the relevant knowledge and experience to provide the report. The evaluator must also be independent, but this requirement will be satisfied unless the evaluator: • is connected with the company; • is an associate of the connected person or connected with the connected person; • knows or has reason to believe that they have a conflict of interest with respect to the substantial disposal; or • has within the 12 months before the date of the report provided advice to the company (or a company connected with the company) in connection with or in anticipation of the commencement of an insolvency procedure or in relation to corporate rescue or restructuring.

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5.11  Temporary provisions

SUSPENSION OF LIABILITY FOR WRONGFUL TRADING Introduction 5.11   The wrongful trading provisions in the IA 1986, which are summarised in 5.15 to 5.20, allow a company’s liquidator or administrator to apply to the court for a declaration that directors of a company in liquidation or administration are liable personally to contribute to the assets of that company. 5.12   The crisis caused by the COVID-19 pandemic caused a great deal of uncertainty around trading conditions, in both the immediate and longer-term future. The government anticipated that directors would be obliged to make decisions about the future viability of their companies in this environment of uncertainty. 5.13   The government’s view was that the threat of a possible future liquidator or administrator making a wrongful trading application created a strong deterrent to directors causing a company to continue to trade where there was a threat of insolvency. It therefore wished to introduce a measure which would mean that, when the court was considering whether to declare a director liable to contribute to a company’s assets under wrongful trading provisions and was considering the amount to be contributed, it should not take into account losses incurred during the period in which businesses were suffering from the impact of the pandemic. By introducing such a suspension period, its aim was to remove the deterrent to continuing to trade a business which would have been viable but for the impact of the pandemic during that period. 5.14   The suspension period has now ended. However, this temporary provision will remain relevant in assessing the potential personal liability of a director of a company that traded during that period and which has now entered into, or which later enters into, formal insolvency.

The wrongful trading provisions When might a director be found to have been ‘wrongfully trading’? 5.15   The wrongful trading provisions are set out in IA 1986, s 214 in relation to a liquidation and IA 1986, s 246ZB in relation to an administration. Although they are set out in different sections of the IA 1986, the two set of provisions are substantially identical in form. 5.16   If a director allows a company to continue trading at any time when they know or ought to conclude that there is no reasonable prospect that the company will avoid entering into ­insolvent administration or going into insolvent liquidation, that director may be held personally liable to

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Temporary provisions  5.21

contribute to a company’s assets in the event that that company does duly enter into insolvent administration or go into insolvent liquidation at some later date. The point where the director reaches, or ought to reach, this conclusion is often termed the ‘critical date’. 5.17  For these purposes ‘insolvent administration’ and ‘insolvent liquidation’ means that the company enters into administration or goes into liquidation at a time when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the ­administration or the liquidation (as the case may be). 5.18   An action for wrongful trading can only be brought by the administrator or the liquidator, as the case may be, and not by an individual creditor or group of creditors. The administrator or liquidator bringing an action will need to identify a date as the critical date. For example, this may be the date on which the directors knew, or ought to have concluded that there was no longer any reasonable prospect that funding required by the company in order to continue to trade would be available. The concept of a critical date, however, means that a director is not liable for wrongful trading simply because the company has been trading at a time when it is insolvent. 5.19   The standard to be applied by the court in deciding whether a director has been guilty of wrongful trading is that of a ‘reasonably diligent person’ having: • the general knowledge, skill and experience which may reasonably be expected of a person entrusted with carrying out the same functions as are carried out by that director in relation to the company; and • the general knowledge, skill and experience which that director actually has. 5.20   The court will not find a director liable if it is satisfied that, once that director knew or ought to have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation, they took every step which they ought to have taken to minimise the potential loss to the company’s creditors. However, the court has emphasised that the need to take ‘every step’ (as opposed to ‘every reasonable step’) sets a high bar generally for a director seeking to use this defence (see, for example, Re Ralls Builders Limited (in liquidation) [2016] EWHC 243 (Ch)). What will ordinarily be the extent of the director’s liability? 5.21   The IA 1986 does not specify a means by which the director’s contribution is to be calculated, so this is left to the court’s discretion. In Re Produce Marketing Consortium Ltd (No 2) [1989] 5 BCC 569, however, it was made clear that the court’s jurisdiction here was primarily compensatory rather than penal. Without seeking to limit the court’s discretion, the appropriate amount that a director was to be declared liable to contribute was the amount by which the

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5.22  Temporary provisions

company’s assets could be seen to have been depleted by the director’s conduct. In practice the amount the director may be obliged by the court to pay is likely to be based on the amount by which the losses to the company’s creditors have increased after the critical date. 5.22   There is a distinction between creditors whose positions would have worsened anyway, regardless of the director’s actions, and creditors who might have been protected had the director ceased trading earlier. The first category might include lenders who have advanced term loans to the company, where the principal sum has not increased after the critical date, and where interest would have continued to accrue at the same rate until payment, even had the directors placed the company into a formal insolvency process earlier. This second category, however, might include persons who have delivered further goods or provided further services after the critical date but who remain unpaid. This category might include not only trade suppliers but also, for example, providers of utilities and the company’s employees. It is this second category which will be most relevant here. 5.23   The approach of the courts now seems to be to look at whether the directors’ decision to continue trading after the critical date caused any net loss to these creditors overall, rather than look at whether individual creditors might have suffered a loss. In the Ralls Builders case, for example, the court ruled that the directors ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation six weeks before the company actually entered administration and that the directors were unable to take advantage of the defence described in 5.20. Nevertheless, it declined to order that the directors make any contribution to the assets of the company on the basis that the liquidators had been unable to show that the continued trading had caused any increase in the net deficiency of the company.

The temporary suspension introduced by CIGA 2020 How does the temporary suspension work? 5.24   Section 12(1) of CIGA 2020 provides that, in determining liability for the purposes of IA 1986, s 214 or s 246ZB, the contribution (if any) to a company’s assets that is it proper for a person to make, the court is to assume that that the person is not responsible for any worsening for the company or its creditors that occurs during the ‘relevant period’. 5.25  The relevant period is defined as the period beginning with 30 March 2020 and ending with 30 September 2020. The Secretary of State was empowered to extend this period if it was clear that the impact of the pandemic was continuing at the end of the existing period, but chose not to do so.

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Temporary provisions  5.28

5.26  As already indicated in 5.13, the wrongful trading provisions themselves were not suspended. Rather, the suspension was of the directors’ liability to contribute towards losses incurred by creditors as a result of trading during the relevant period. A director may conceivably still be found liable for wrongful trading for a period which includes the relevant period, which might have other implications for that director. For example, a finding of wrongful trading is taken into account when deciding whether a director should be disqualified. In practice, however, it is almost inconceivable that an administrator or liquidator would pursue a wrongful trading action if there would be no financial benefit to the company and its creditors in doing so. 5.27   It is worth noting in this respect that the court is obliged to assume (rather than presume) that the director in question was not responsible for any worsening during the relevant period even where there is strong evidence that that director was in practice responsible. It appears that Parliament did not intend the assumption in CIGA 2020, s 12(1) to be capable of being rebutted, regardless of the circumstances. What types of entity are excluded from the suspension? 5.28  Section 12(1) does not apply if at any time during the relevant period the company concerned: • was excluded from being eligible by Schedule ZA1 to the IA 1986 (see CIGA 2020, ss 12(3) to (5)). These excluded company types accordingly mirror those excluded from being eligible for the Part A1 moratorium and are listed in Table 5.1. Table 5.1  Types of company excluded from the suspension of liability for wrongful trading Type of company Insurance companies Banks Electronic money institutions Investment banks and investment firms Payment institutions Operators of payment systems etc Recognised investment exchanges, clearing houses, etc. Securitisation companies Parties to capital market arrangements Public-private project companies Certain overseas companies

Paragraph of IA 1986, Sch ZA1 Paragraph 3 Paragraph 4 Paragraph 5 Paragraph 6 Paragraph 9 Paragraph 10 Paragraph 11 Paragraph 12 Paragraph 13 Paragraph 15 Paragraph 18

• had a permission to carry out a regulated activity under Part 4A of the Financial Services and Markets Act 2000 and was not subject to a restriction to refrain from holding monies for clients (see CIGA 2020, ss 12(6) and (9)).

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5.29  Temporary provisions

5.29   It is also made clear that section 12(1) will not apply to a number of other entities such as building societies, friendly societies and credit unions that, although they are not companies, are within the scope of the wrongful trading legislation (CIGA 2020, ss 12(7) and (8)).

What effect has the temporary suspension had in practice? 5.30   The effect of CIGA 2020, s 12 has been to suspend only one of the various p­ rovisions under which directors might incur personal liability if they continued to trade during the relevant period. Directors might, for example, still be found liable in respect of any breaches of their duties which they owed to the company under the CA 2006 or for fraudulent trading under IA 1986, s 213. Director might still face disqualification as a result of the actions which have caused losses to creditors during the relevant period. In addition, directors might still be liable to contribute as a result of wrongful trading which occurred before or after the relevant period. 5.31   In practice therefore advisors to directors of companies in financial difficulty usually advised those directors to take the same actions as they would have advised them to take had CIGA 2020, s 12 never been enacted.

SUSPENSION IN RELATION TO WINDING-UP PETITIONS Introduction 5.32   In order to protect businesses from eviction by landlords, the Coronavirus Act 2020, s 82 created a moratorium on commercial landlords enforcing the forfeiture of leases for unpaid rent. Because this moratorium applied only to forfeiture and not to other landlord remedies, however, landlords soon stated to use other means, including statutory demands followed by winding-up petitions, to put pressure on their tenants to pay outstanding rent. 5.33   The government quickly concluded that further measures were needed to prevent not only commercial landlords but unpaid creditors more generally from using a statutory demand or a winding-up petition as a debt collection tool. Its view, as stated in the explanatory notes to CIGA 2020, is that these procedures are not intended to be used as a tool for debt collection but are to deal with financial failure and tackle companies that are no longer viable. As a result, CIGA 2020 has introduced a temporary restriction both on when a creditor can present a winding-up petition and on when that creditor can obtain a winding-up order.

74

Temporary provisions  5.37

The winding-up regime In what circumstances might a creditor ordinarily seek a winding up order? 5.34   A company may be wound up by the court if, among other things, the company is unable to pay its debts (IA 1986, s 122(1)(f)). For these purposes, a ‘company’ means a company registered in England and Wales under the CA 2006. 5.35   Under IA 1986, s 123, a company is deemed unable to pay its debts: • If a creditor (by assignment or otherwise) to whom the company owes over £750 has served on the company a written demand (in the prescribed form) requiring payment of the sum due and the company has failed at any time during the following three weeks to pay that sum or to secure or compound for it to the reasonable satisfaction of the creditor (IA 1986, s 123(1)(a)). The written demand in question is usually known as a ‘statutory demand’. In practice, it is now the content rather than the form of this written demand which is prescribed. • If, in England and Wales, execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part (IA 1986, s 123(1)(b)). • If it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due (IA 1986, s 123(1)(e)). This is generally known as the ‘cash-flow test’. • If it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities (IA 1986, s 123(2)). This is generally known as the ‘balance sheet test’. Section 124 IA 1986 duly allows a creditor to present a winding up petition requesting the court to wind up a company on the basis that is unable to pay its debts. When would a creditor ordinarily have served a statutory demand? 5.36   The cash-flow test and the balance sheet test are the two main tests used to determine whether a company is unable to pay its debts. However, in order for a creditor to show that a company fails one of these two main tests, it has to prove to the satisfaction of the court that this is the case. This would require the creditor to produce at least some evidence, even in cases where the company seems obviously to be in trouble. 5.37   Service of a statutory demand was therefore introduced to provide a more straightforward route by which a creditor may establish that a company is unable to pay its debts prior to presenting a winding-up petition. Provided the debt is then neither satisfied nor disputed during the following three-week period, the company will be deemed to be unable to pay its debts without the need for the creditor to produce any further evidence of this to the court.

75

5.38  Temporary provisions

5.38   There is nothing to prevent a creditor from presenting a winding-up petition on the basis of an undisputed debt due to them without first serving a statutory demand (Taylors Industrial Flooring v M & H Plant Hire (Manchester) Ltd [1990] BCLC 216). The non-payment can in itself be treated as evidence that the company is cash-flow insolvent. The creditor need not then, in effect, extend an additional three weeks’ credit to the company. 5.39   However, there are several reasons why a creditor might ordinarily wish first to serve a statutory demand if its aim is to collect an unpaid debt from the company: • if the company fails to dispute the debt following service of the statutory demand, there is far less chance that it will successfully be able to do so once a winding-up petition is served; • it is a very cheap step, which in itself is sufficient to persuade the company to pay – unlike the presentation of a winding-up petition (or the indeed the issue of court proceedings), there is no need to pay a court fee or to make any other payment to the court; • the existence of the statutory demand will not become public and will not therefore alert other creditors to the fact that one creditor is taking action; and • once a winding-up petition is presented, the petitioning creditor potentially loses control of the process and it may then no longer be possible for the company to pay the debt. Unregistered companies 5.40   Under IA 1986, s 221, the English courts also have the jurisdiction to wind up any unregistered company if, among other things, the company is unable to pay its debts. An ‘unregistered company’ means any association and any company other than a company registered in any part of the UK under the Joint Stock Company Acts or under the legislation (past or present) relating to companies in Great Britain (IA 1986, s 220). A foreign company will therefore fall within this definition. 5.41  Whilst on its face, IA 1986, s 221 gives an English court unlimited jurisdiction, in practice the courts themselves have laid down constraints on when they will assume jurisdiction (see Re Real Estate Development Company [1991] BCLC 210).

The temporary restrictions introduced by CIGA 2020 5.42   Section 10 of CIGA 2020 directs the reader to Schedule 10 to CIGA 2020, which contains the relevant temporary provisions. Prohibition on petitions relying on statutory demands 5.43   A creditor can no longer present a petition for the winding up of a registered company, ie a company registered in England and Wales under the CA 2006, in reliance on an unsatisfied

76

Temporary provisions  5.49

statutory demand where that demand was served during the ‘relevant period’ (IA 1986, para 1 of Sch 10). For the purposes of this paragraph 1, the ‘relevant period’ began on 1 March 2020 and currently ends on 31 December 2020. Other restrictions on winding up petitions and orders 5.44   There is no outright prohibition on a creditor otherwise presenting a winding-up petition. However, it will need to satisfy certain further conditions before it can do so. 5.45  A creditor will only be able to present a petition for the winding up of a registered company during the ‘relevant period’ on the basis that the company is unable to pay its debts if it has reasonable grounds for believing that: • coronavirus has not had a financial effect on the company; or • the company would have been unable to pay its debts on the basis stipulated even if c­ oronavirus had not had a financial effect on the company (see IA 1986, para 2 Sch 10). 5.46   Furthermore, where a creditor has presented a winding up petition during the relevant period on the basis that the company is unable to pay its debts, the court will additionally need to consider whether it appears that coronavirus has had a financial effect on the company before the presentation of the petition. If it appears to the court that it has, then the court may wind up the company only if it is satisfied that the company would have been unable to pay its debts on the basis stipulated even if coronavirus had not had a financial effect on the company (IA 1986, para 5 Sch 10). For these purposes the relevant period began on 27 April 2020 and currently ends on 31 December 2020. 5.47   Certain of the Insolvency (England and Wales) Rules 2016 relating to the content and advertisement of a winding-up petition are also temporarily modified by IA 1986, para 19 Sch 10 pending the introduction of an amended set of rules. 5.48   Our view is that during the period for which these restrictions apply there are unlikely to be many cases where a creditor will successfully be able to present a petition or to obtain a winding-up order. Most companies which are unable to pay their debts at present are likely to be able to produce evidence of the adverse effect of the coronavirus pandemic on their finances. 5.49  In Travelodge Hotels Limited v Prime Aesthetics Limited and others [2020] EWHC 1217 (Ch), for example, the court was prepared to grant an injunction to restrain a landlord’s winding-up petition against Travelodge even before the Corporate Governance and Insolvency Bill had been published on the basis of evidence of what the forthcoming legislation would contain.

77

5.50  Temporary provisions

There was evidence that Travelodge had been trading very healthily for the first two months of 2020, but that as a result of the lock-down caused by COVID-19 its revenue had dropped by 95%, causing a liquidity shortfall. There were turnaround plans in place that would involve the injection of new money, although those would likely also involve compromises to be made by its landlords, if necessary through a CVA. Unregistered companies 5.50   Paragraphs 3 and 6 to Sch 10 IA 1986 introduce restrictions on when a court can wind up an unregistered company which are substantially identical to those described in 5.44 to 5.49 for a company registered in England and Wales. How does this affect the hardening periods for antecedent transactions? 5.51   Certain actions carried out by the company prior to its administration or liquidation can only be avoided under provisions of the IA 1986 if the ‘onset of insolvency’ occurs within a particular period following the date of that action. These time periods are generally described as ‘hardening periods’. Once the relevant period has elapsed, the transaction will have ‘hardened’ as it will no longer be capable of avoidance. Where a company goes into compulsory liquidation as a result of a winding up order, the onset of insolvency is deemed to occur on the date the winding up petition was presented. 5.52   If a creditor is to be prevented from presenting a winding-up petition there is a danger that the relevant time periods will elapse and that it will no longer be possible to attack or avoid those transactions. Those time periods have therefore since been extended to some extent as indicated in Table 5.2 (see IA 1986, para 15 and 18 Sch 10). Table 5.2  Extensions of hardening periods Type of transaction Preference to an unconnected party (IA 1986, s239) Avoidance of floating charges granted to an unconnected party (IA 1986, s 245(3)(a)) Transaction at an undervalue (IA 1986, s 238) Preference to a connected party (IA 1986, s 239)

Revised hardening period The longer of: • 6 months to the date of the winding up petition; and • 12 months to the date of the winding-up order The longer of: • 12 months to the date of the winding up petition; and • 18 months to the date of the winding-up order The longer of: • 2 years to the date of the winding up petition; and • 2 years and six months to the date of the winding-up order

Avoidance of floating charges granted to a connected party (IA 1986, s 245(3)(a))

78

Temporary provisions  5.55

REGULATIONS TO AMEND LEGISLATION 5.53   The Secretary of State is given the power to make further regulations to amend, or modify the effect of, corporate insolvency or governance legislation so as to: • change the conditions that must be met before a corporate insolvency or restructuring procedure applies to entities of any description; • change the way in which a corporate insolvency or restructuring procedure applies to entities of any description; or • change or disapply any duty of any person with corporate responsibility or the liability of such a person to any sanction. (see CIGA 2020, s 20). 5.54   The power contained in this provision is therefore wide-ranging, but has some significant restrictions (see CIGA 2020, ss 21–23). The powers of the Secretary of State in this regard are currently due to cease after 30 April 2021 (CIGA 2020, s 24). 5.55   The explanatory notes to CIGA 2020 explain that at the time that CIGA 2020 was enacted there were no specific plans to use the power contained within this provision, but as the full extent of the impact of the pandemic on business became clear, it could be exercised to make urgent preventative or mitigatory amendments. At the time of writing no such regulations have been made.

79

80

Index [all references are to paragraph number] A Administration moratorium effect, 2.25 interaction with provision, 2.05 subsequent proceedings, 2.65–2.68 pre-packaged sales ‘associate’, 5.04 background, 5.01–5.02 ‘company connected’, 5.04 ‘connected person’, 5.04 draft regulations, 5.06–5.09 duration of powers, 5.05 evaluators, 5.10 introduction, 5.01–5.03 powers granted to Secretary of State, 5.04–5.05 ‘pre-pack pool’, 5.03 ‘relevant person’, 5.04 report by evaluator, 5.09 requirements, 5.08 ‘substantial disposal’, 5.07 restructuring plan, 3.29 Administrative receivers effect of moratorium, 2.25 Agency monitors, 2.31 Aircraft leasing arrangements termination of supply contracts, 4.29 Amendments to legislation power to make regulations, 5.53–5.55 Authorised persons restructuring plan, 3.20

Clearing houses ineligibility for moratorium, 2.07 Code of Ethics role of monitors, 2.33 Co-debtors restructuring plan, 3.110 Collateral securities effect of moratorium, 2.26 restrictions during moratorium, 2.28 Communications services termination of supply contracts, 4.06 Company voluntary arrangements (CVA) restructuring plan, 3.07 subsequent to moratorium, 2.69 Compromise or arrangement restructuring plan, 3.23–3.24 Contracts for supply of goods and services termination of supply contracts, 4.23–4.24 Contractual remuneration payment holidays, 2.23 ‘Convening’ hearings class composition courts’ approach as to schemes of arrangement, 3.59–3.61 court’s approach in VAA, 3.62–3.64 determination, 3.57–3.58 considerations, 3.43–3.45 introduction, 3.32 issues to be considered, 3.43–3.45 meetings, 3.78–3.81 minimum turnout, 3.82 notices accompanying documents, 3.67 advertisement, 3.67 explanatory statement, 3.68–3.71 interests in debt held indirectly, 3.72–3.73 method, 3.65–3.66 Practice Statement, 3.43 practice statement notice adequacy, 3.48–3.53 generally, 3.46–3.53 resolution of issues, 3.54–3.56 virtual meetings, 3.80–3.81 voting thresholds, 3.74–3.77 Coronavirus impact on CIGA, 1.08 Corporate Insolvency and Governance Act (CIGA) 2020 commencement date, 1.01 Coronavirus, and, 1.08 impact, 1.02 permanent changes essential supplies, 1.16 generally, 1.05–1.08 impact, 1.10–1.12 moratorium, 1.13–1.14 restructuring plan, 1.15

B Banks moratorium, 2.07 termination of supply contracts, 4.29 wrongful trading suspension period, 5.28 C Capital market arrangements moratorium generally, 2.08 introduction, 2.07 termination of supply contracts, 4.29 wrongful trading suspension period, 5.28 Challenges relating to moratorium conduct of directors, 2.63–2.64 conduct of monitor, 2.59–2.62 Charitable incorporated organisations eligibility for moratorium, 2.12 Class composition restructuring plan courts’ approach as to schemes of arrangement, 3.59–3.61 court’s approach in VAA, 3.62–3.64 determination, 3.57–3.58

81

Index

Corporate Insolvency and Governance Act (CIGA) 2020 – contd structure, 1.03 temporary changes, 1.09 Court orders extension of moratorium, 2.53–2.55 Creditors of company moratorium role of monitors, 2.32 restructuring plan applicants, 3.29 voting, 3.35–3.37 Cross-class cram-down courts’ approach, 3.90–3.93 general provisions, 3.86–3.89 Crystallisation of charges effect of moratorium, 2.26 CVA proposals extension of moratorium, 2.56

Essential supplies – contd application of provisions Insolvency Act 1986 s 233, 4.07 Insolvency Act 1986 s 233A, 4.10 Insolvency Act 1986 s 233B, 4.13–4.15 banking services, 4.29 capital market arrangements, 4.29 CIGA regime application, 4.07 general provisions, 4.13–4.32 policy intention, 4.04–4.05 practical operation, 4.33–4.37 purpose, 4.02 relevant supplies, 4.06 communications services, 4.06 contracts for supply of goods and services, 4.23–4.24 derivative contracts, 4.29 electricity supply, 4.06 excluded contracts generally, 4.29 small suppliers, 4.30–4.31 financial service providers, 4.29 foreign suppliers, 4.32 gas supply, 4.06 guarantees, and, 4.21 Insolvency Act 1986 s 233, 4.06–4.09 Insolvency Act 1986 s 233A, 4.10–4.12 Insolvency Act 1986 s 233B application of provisions, 4.13–4.15 contracts for supply of goods and services, 4.23–4.24 excluded contracts, 4.29–4.31 foreign suppliers, 4.32 protections, 4.25 restrictions, 4.16–4.22 small suppliers, 4.30–4.31 termination, 4.26–4.28 insurers, 4.29 introduction, 4.01–4.05 ‘ipso facto’ clauses, 4.03 netting arrangements, 4.29 past breach terminations, 4.18–4.20 payment of pre-insolvency debts, 4.22 personal guarantee by office-holder, 4.08 policy intention, 4.04–4.05 potential impact of provisions, 1.16 pre-CIGA regime effect of CIGA, 4.02 Insolvency Act 1986 s 233, 4.06–4.09 Insolvency Act 1986 s 233A, 4.10–4.12 introduction, 4.01 protections for suppliers circumstances in which still terminate, 4.26–4.28 excluded contracts, 4.29–4.31 introduction, 4.25 small suppliers, 4.30–4.31 relevant insolvency procedure, 4.16–4.17 relevant supplies, 4.06 reliance by supplier on other breaches, 4.37 restrictions on termination CIGA regime, 4.13–4.37 introduction, 4.01–4.05 pre-CIGA regime, 4.06–4.12 retention of title, 4.36 small suppliers, 4.30–4.3

D Debts effect of moratorium, 2.21–2.24 Defects restructuring plan, 3.104 Derivative contracts termination of supply contracts, 4.29 Diligence effect of moratorium, 2.26 Directors challenges relating to a moratorium action against director, 2.63–2.64 action by director, 2.59–2.62 Disposal of property effect of moratorium, 2.29–2.30 Distress effect of moratorium, 2.26 Duration of moratorium early termination, 2.57–2.58 extension court order, by, 2.53–2.55 introduction, 2.43 proposal for CVA pending, while, 2.56 with creditor’s consent, 2.46–2.52 without creditor’s consent, 2.44–2.45 initial period, 2.43 E Early termination duration of moratorium, 2.57–2.58 Electricity supply termination of contracts, 4.06 Electronic money institutions moratorium, 2.07 wrongful trading suspension period, 5.28 Employment pay payment holidays, 2.23 Employment tribunal proceedings effect of moratorium, 2.26 Enforcement proceedings effect of moratorium, 2.25–2.26 Essential supplies ability of supplier to enforce, 4.33–4.35 aircraft leasing arrangements, 4.29

82

Index

I Initial period duration of moratorium, 2.43 Insolvency Code of Ethics role of monitors, 2.33 Insolvency Service guidance role of monitors, 2.34–2.35 Insurance companies moratorium, 2.07 termination of supply contracts, 4.29 wrongful trading suspension period, 5.28 Investment banks and firms wrongful trading suspension period, 5.28 ‘Ipso facto’ clauses termination of supply contracts, 4.03

Essential supplies – contd statutory basis, 4.01 supplies affected, 4.06 supply of goods and services contracts, 4.23–4.24 termination circumstances, 4.26–4.28 water supplies, 4.06 Extension of moratorium court order, by, 2.53–2.55 introduction, 2.43 proposal for CVA pending, while, 2.56 with creditor’s consent, 2.46–2.52 without creditor’s consent, 2.44–2.45 F Fair representation of classes restructuring plan, 3.96 Fairness restructuring plan, 3.97–3.103 Financial collateral arrangements effect of moratorium, 2.26 restrictions during moratorium, 2.28 Financial institutions ineligibility for moratorium, 2.07 Financial instruments payment holidays, 2.23 Financial Services and Markets Act 2000 ineligibility for moratorium, 2.07 ineligibility for restructuring plans, 3.20–3.21 Financial service providers termination of supply contracts, 4.29 wrongful trading suspension period, 5.28 Floating charges effect of moratorium, 2.26 Foreign companies moratorium, 2.10–2.11 restructuring plans EU Judgments Regulation, 3.121–3.122 interaction of EU regulations, 3.117–3.126 jurisdiction of English courts, 3.112–3.116 recognition in foreign jurisdictions, 3.127–3.130 relevant exceptions, 3.123–3.126 rights of members of company, 3.131–3.133 Foreign suppliers termination of supply contracts, 4.32 Forfeiture effect of moratorium, 2.26

L Legal process effect of moratorium, 2.26 Licensed insolvency practitioners monitors, 2.33 Limited liability partnerships (LLP) moratorium eligibility, 2.12 restructuring plan, 3.22 Limited partnerships ineligibility for moratorium, 2.12 Liquidation moratorium effect, 2.25 subsequent proceedings, 2.65–2.68 restructuring plan, 3.29 M Market charges effect of moratorium, 2.26 restrictions during moratorium, 2.28 Market contracts restrictions during moratorium, 2.28 Monitors agency, and, 2.31 challenges to conduct, 2.59–2.62 Insolvency Service guidance, 2.34–2.35 licensed practitioners, 2.33 powers, 2.35–2.39 remuneration, 2.40–2.42 role guidance, 2.34–2.35 statutory requirements, 2.31–2.33 status, 2.31 statutory requirements, 2.33 Moratorium application to court for order, 2.18–2.20 background, 2.01 challenges conduct of directors, 2.63–2.64 conduct of monitor, 2.59–2.62 charitable incorporated organisations, 2.13 duration early termination, 2.57–2.58 extension, 2.44–2.56 initial period, 2.43 early termination, 2.57–2.58

G Gas supply termination of supply contracts, 4.06 General partnerships ineligibility for moratorium, 2.12 Goods or services supplied payment holidays, 2.23 Guarantees termination of supply contracts, 4.21 Guarantors restructuring plan, 3.110 H Hire-purchase agreements disposal of property, 2.29–2.30 effect of moratorium, 2.26

83

Index

O Obtaining credit restrictions during moratorium, 2.28 Overseas companies ineligibility for moratorium, 2.07

Moratorium – contd effect debts affected, 2.21–2.24 disposal of property, 2.29–2.30 protection from other proceedings, 2.25–2.26 restrictions on company, 2.27–2.28 eligible companies charitable incorporated organisations, 2.13 exclusions, 2.07 foreign companies, 2.10–2.11 generally, 2.06–2.09 limited liability partnerships, 2.12 extension court order, by, 2.53–2.55 introduction, 2.43 proposal for CVA pending, while, 2.56 with creditor’s consent, 2.46–2.52 without creditor’s consent, 2.44–2.45 foreign companies, 2.10–2.11 ineligible companies, 2.07–2.08 Insolvency Act 1986 Part A1, and, 2.02 intention, 2.01 interaction with administration, 2.05 introduction, 2.01–2.04 limited liability partnerships, 2.12 meaning, 2.01–2.03 monitor agency, and, 2.31 challenges to conduct, 2.59–2.62 Insolvency Service guidance, 2.34–2.35 licensed practitioners, 2.33 powers, 2.35–2.39 remuneration, 2.40–2.42 role, 2.31–2.34 status, 2.31 statutory requirements, 2.33 moratorium debts, 2.21–2.24 ‘out-of-court’ procedure, 2.16–2.17 potential impact of provisions, 1.13–1.14 pre-moratorium debts, 2.21–2.2 procedure application to court, 2.18–2.20 introduction, 2.14–2.15 ‘out-of-court’ route, 2.16–2.17 restructuring plan, and, 3.34 subsequent procedures administration, 2.65–2.68 CVA, 2.69 liquidation, 2.65–2.68 restructuring plan, 2.69 scheme of arrangement, 2.69 US Bankruptcy Code Chapter 11, and, 2.03 use, 2.04–2.05

P Partnerships eligibility for moratorium, 2.12 Payment holidays pre-moratorium debts, 2.23 Payment institutions wrongful trading suspension period, 5.28 Peaceable re-entry effect of moratorium, 2.26 Pension Protection Fund (PPF) moratorium, 2.32 restructuring plans, 3.134–3.138 Pensions Regulator moratorium, 2.32 restructuring plans, 3.134 Personal guarantee by office-holder termination of supply contracts, 4.08 Pre-moratorium debts effect of moratorium, 2.21–2.24 procedures subsequent to moratorium, 2.65–2.67 Pre-packaged administration sales ‘associate’, 5.04 background, 5.01–5.02 ‘company connected’, 5.04 ‘connected person’, 5.04 draft regulations, 5.06–5.09 duration of powers, 5.05 evaluators qualifications, 5.10 reporting function, 5.09 introduction, 5.01–5.03 powers granted to Secretary of State draft regulations, 5.06–5.09 generally, 5.04–5.05 ‘pre-pack pool’, 5.03 ‘relevant person’, 5.04 report by evaluator, 5.09 requirements, 5.08 ‘substantial disposal’, 5.07 Protection from other proceedings effect of moratorium, 2.25–2.26 Public-private partnership project companies moratorium, 2.07 wrongful trading suspension period, 5.28 R Recognised investment exchanges moratorium, 2.07 wrongful trading suspension period, 5.28 Reconstructions restructuring plan, and, 3.139–3.140 Redundancy payments payment holidays, 2.23 Re-entry by landlords effect of moratorium, 2.26 Registrar of Companies role of monitors, 2.32

N Netting arrangements termination of supply contracts, 4.29 Notice of meeting restructuring plan accompanying documents, 3.67 advertisement, 3.67 explanatory statement, 3.68–3.71 interests in debt held indirectly, 3.72–3.73 method, 3.65–3.66

84

Index

Regulatory approvals restructuring plan, 3.111 Remuneration of monitor generally, 2.40–2.42 payment holidays, 2.23 Rent payment holidays, 2.23 Repossession of goods effect of moratorium, 2.26 Restrictions on company effect of moratorium, 2.27–2.28 Restructuring plan administrators, 3.29 applications applicants, 3.29–3.30 moratorium, 3.34 procedure, 3.31–3.33 ‘authorised persons’, and, 3.20 ‘blot’, 3.104 class composition courts’ approach as to schemes of arrangement, 3.59–3.61 court’s approach in VAA, 3.62–3.64 determination, 3.57–3.58 co-debtors, and, 3.110 commencement date, 3.107–3.109 Companies Act 2006 Part 26A, 3.02 ‘company’, 3.13–3.17 comparison of restructuring processes, 3.07 ‘compromise’ or ‘arrangement’, 3.23–3.24 conditional plans, 3.111 convening hearings adequacy of notice, 3.48–3.53 class composition, 3.57–3.64 considerations, 3.43–3.45 introduction, 3.32 issues to be considered, 3.43–3.45 meetings, 3.78–3.81 minimum turnout, 3.82 notices, 3.65–3.73 Practice Statement, 3.43 practice statement notice, 3.46–3.53 resolution of issues, 3.54–3.56 virtual meetings, 3.80–3.81 voting thresholds, 3.74–3.77 creditors applicants, 3.29 voting, 3.35–3.37 cross-class cram-down courts’ approach, 3.90–3.93 general provisions, 3.86–3.89 defects, 3.104 design other considerations, 3.28 statutory requirements, 3.23–3.27 effect of co-debtor or guarantor, 3.110 effective date, 3.107–3.109 eligibility ‘company’, 3.13–3.17 financial difficulties, 3.18–3.19 limited liability partnerships, 3.22 eliminate, reduce or prevent or mitigate effect of financial difficulties, 3.23, 3.27 excluded companies, 3.20–3.21 fair representation of classes, 3.96

Restructuring plan – contd fairness, 3.97–3.103 features, 3.03 financial difficulties, 3.18–3.19 foreign companies EU Judgments Regulation, 3.121–3.122 interaction of EU regulations, 3.117–3.126 jurisdiction of English courts, 3.112–3.116 recognition in foreign jurisdictions, 3.127–3.130 relevant exceptions, 3.123–3.126 rights of members of company, 3.131–3.133 guarantors, and, 3.110 interaction with CVAs, 3.07 interaction with schemes of arrangement case law, 3.04–3.05 common features, 3.03 comparison, 3.07 differences, 3.06 introduction, 3.03 introduction 3.01–3.12 jurisdictional issues foreign companies, 3.112–3.133 generally, 3.105–3.106 limited liability partnerships, 3.22 liquidators, 3.29 meaning, 3.01–3.02 members applicants, 3.29 voting, 3.35–3.37 moratorium, and, 3.34 notice of meeting accompanying documents, 3.67 advertisement, 3.67 explanatory statement, 3.68–3.71 interests in debt held indirectly, 3.72–3.73 method, 3.65–3.66 orders, 3.107–3.111 pension schemes, 3.134–3.138 potential impact of provisions, 1.15 procedure applicants, 3.29–3.30 convening hearing, 3.43–3.64 flowchart, 3.31 hearings, 3.32–3.33 moratorium, 3.34 notices of meetings, 3.65–3.73 order, 3.107–3.111 sanction hearing, 3.83–3.106 voting, 3.35–3.42 voting thresholds, 3.74–3.82 purpose to eliminate, reduce or prevent or mitigate effect of financial difficulties, 3.23, 3.27 reconstructions, and, 3.139–3.140 regulatory approvals, and, 3.111 sanction hearing ‘blot’ on the Plan, 3.104 compliance with statutory provisions, 3.94–3.95 considerations, 3.83–3.85 cross-class cram-down, 3.86–3.93 defects, 3.104 fair representation of classes, 3.96 fairness of Plan, 3.97–3.103 introduction, 3.32 issues to be considered, 3.83–3.85

85

Index

Restructuring plan – contd sanction hearing – contd jurisdictional issues, 3.105–3.106 orders, 3.107–3.111 stakeholders who are affected, 3.35–3.37 stakeholders with no economic interest, 3.38 statutory basis, 3.01–3.02 statutory requirements, 3.23–3.27 subsequent to moratorium, 2.69 use, 3.07–3.08 Virgin Atlantic Airways Limited, 3.08–3.12 voting creditors affected, 3.35–3.37 members affected, 3.35–3.37 moratorium creditors, 3.42 stakeholders who are affected, 3.35–3.37 stakeholders with no economic interest, 3.38 Retention of title termination of supply contracts, 4.36

Temporary provisions – contd pre-packaged administration sales – contd introduction, 5.01–5.03 powers granted to Secretary of State, 5.04–5.05 ‘pre-pack pool’, 5.03 ‘relevant person’, 5.04 report by evaluator, 5.09 requirements, 5.08 ‘substantial disposal’, 5.07 winding-up petition suspension antecedent transaction hardening periods, 5.51–5.52 background, 5.32–5.33 circumstances in which order sought, 5.34–5.35 ‘company’, 5.34 general provisions, 5.42–5.49 inability to pay its debts, 5.35 introduction, 5.32–5.33 ‘onset of insolvency’, 5.51 other restrictions, 5.44–5.49 prohibition on basis of statutory demand, 5.43 ‘relevant period’, 5.43 service of statutory demand, 5.36–5.39 statutory basis, 5.42 unregistered companies, 5.40–5.41, 5.50 winding up regime, 5.34–5.41 wrongful trading suspension period background, 5.11–5.14 director’s liability, 5.21–5.23 duration, 5.14 excluded entities, 5.28–5.29 general provisions, 5.24–5.29 introduction, 5.11–5.14 operation, 5.24–5.27 practical effect, 5.30–5.31 ‘relevant period’, 5.25 wrongful trading regime, 5.15–5.20 Termination of supply contracts ability of supplier to enforce, 4.33–4.35 aircraft leasing arrangements, 4.29 application of provisions Insolvency Act 1986 s 233, 4.07 Insolvency Act 1986 s 233A, 4.10 Insolvency Act 1986 s 233B, 4.13–4.15 banking services, 4.29 capital market arrangements, 4.29 CIGA regime application, 4.07 general provisions, 4.13–4.32 policy intention, 4.04–4.05 practical operation, 4.33–4.37 purpose, 4.02 relevant supplies, 4.06 communications services, 4.06 contracts for supply of goods and services, 4.23–4.24 derivative contracts, 4.29 electricity supply, 4.06 excluded contracts generally, 4.29 small suppliers, 4.30–4.31 financial service providers, 4.29 foreign suppliers, 4.32 gas supply, 4.06 guarantees, and, 4.21 Insolvency Act 1986 s 233, 4.06–4.09

S Salaries payment holidays, 2.23 Schemes of arrangement moratorium subsequent proceedings, 2.69 restructuring plan case law, 3.04–3.05 common features, 3.03 comparison, 3.07 differences, 3.06 introduction, 3.03 Securitisation companies moratorium, 2.07 wrongful trading suspension period, 5.28 Security restrictions during moratorium, 2.28 Security interests disposal of property, 2.29–2.30 Small suppliers termination of supply contracts, 4.30–4.3 Social housing providers ineligibility for moratorium, 2.13 Super-priority procedures subsequent to moratorium, 2.65 Supply of goods and services contracts termination of supply contracts, 4.23–4.24 System charges effect of moratorium, 2.26 restrictions during moratorium, 2.28 T Temporary provisions amendments to legislation power to make regulations, 5.53–5.55 introduction, 1.09 pre-packaged administration sales ‘associate’, 5.04 background, 5.01–5.02 ‘company connected’, 5.04 ‘connected person’, 5.04 draft regulations, 5.06–5.09 duration of powers, 5.05 evaluators, 5.10

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Index

V Voluntary liquidation effect of moratorium, 2.25 Voting restructuring plan creditors affected, 3.35–3.37 members affected, 3.35–3.37 moratorium creditors, 3.42 stakeholders who are affected, 3.35–3.37 stakeholders with no economic interest, 3.38

Termination of supply contracts – contd Insolvency Act 1986 s 233A, 4.10–4.12 Insolvency Act 1986 s 233B application of provisions, 4.13–4.15 contracts for supply of goods and services, 4.23–4.24 excluded contracts, 4.29–4.31 foreign suppliers, 4.32 protections, 4.25 restrictions, 4.16–4.22 small suppliers, 4.30–4.31 termination, 4.26–4.28 insurers, 4.29 introduction, 4.01–4.05 ‘ipso facto’ clauses, 4.03 netting arrangements, 4.29 past breach terminations, 4.18–4.20 payment of pre-insolvency debts, 4.22 personal guarantee by office-holder, 4.08 policy intention, 4.04–4.05 potential impact of provisions, 1.16 pre-CIGA regime effect of CIGA, 4.02 Insolvency Act 1986 s 233, 4.06–4.09 Insolvency Act 1986 s 233A, 4.10–4.12 introduction, 4.01 protections for suppliers circumstances in which still terminate, 4.26–4.28 excluded contracts, 4.29–4.31 introduction, 4.25 small suppliers, 4.30–4.31 relevant insolvency procedure, 4.16–4.17 relevant supplies, 4.06 reliance by supplier on other breaches, 4.37 restrictions on termination CIGA regime, 4.13–4.37 introduction, 4.01–4.05 pre-CIGA regime, 4.06–4.12 retention of title, 4.36 small suppliers, 4.30–4.3 statutory basis, 4.01 supplies affected, 4.06 supply of goods and services contracts, 4.23–4.24 termination circumstances, 4.26–4.28 water supplies, 4.06 Transfer orders restrictions during moratorium, 2.28

W Wages payment holidays, 2.23 Water supply termination of supply contracts, 4.06 Winding up petitions antecedent transaction hardening periods generally, 5.51–5.52 ‘onset of insolvency’, 5.51 background, 5.32–5.33 circumstances in which order sought, 5.34–5.35 ‘company’, 5.34 effect of moratorium, 2.25 general regime, 5.34–5.41 inability to pay its debts, 5.35 introduction, 5.32–5.33 service of statutory demand, 5.36–5.39 statutory basis, 5.42 suspension period background, 5.32–5.33 excluded circumstances, 5.45 general provisions, 5.42–5.49 hardening periods for antecedent transactions, 5.51–5.52 ‘onset of insolvency’, 5.51 other restrictions, 5.44–5.49 prohibition on basis of statutory demand, 5.43 purpose, 5.32 ‘relevant period’, 5.43 unregistered companies, 5.50 temporary restrictions, 5.42–5.49 unregistered companies, 5.40–5.41 Wrongful trading background, 5.11–5.14 director’s liability, 5.21–5.23 general regime, 5.15–5.20 introduction, 5.11–5.14 suspension period background, 5.11–5.13 excluded entities, 5.28–5.29 expiry, 5.14 general provisions, 5.24–5.27 operation, 5.24–5.27 practical effect, 5.30–5.31 ‘relevant period’, 5.25

U Unfairly harmed challenges to conduct of monitor, 2.59–2.62 US Bankruptcy Code Chapter 11 moratorium, and, 2.03

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