An Assessment of the UK Restructuring Moratorium
by | posted in: Bankruptcy Roundtable Updates, International and Comparative | 0

By Jennifer Payne (Linklaters Professor of Corporate Finance Law, University of Oxford)

Jennifer Payne

In a recent paper I analyze the introduction of a restructuring moratorium into the UK by the Corporate Insolvency and Governance Act 2020 (2020 Act). This is one of a number of permanent measures introduced by the 2020 Act that are intended to facilitate the rescue of financially distressed but viable companies. The introduction of these measures was prompted by the financial problems arising from the COVID-19 pandemic, but the restructuring moratorium has its foundations in a set of 2018 Government proposals and a 2016 Insolvency Service consultation paper.

A number of jurisdictions have introduced reforms to their debt restructuring regimes in recent years, often based on the US Chapter 11 procedure which many regard as the ‘gold standard’ of restructuring mechanisms. These include the 2017 debt restructuring reforms introduced in Singapore and the EU’s recent Restructuring Directive (Directive 2019/1023). The inclusion of a restructuring moratorium is a consistent feature in these reforms. This paper compares the UK restructuring moratorium with those introduced elsewhere and assesses whether it will be a valuable tool for financially distressed companies. This paper argues that the constraints and limitations placed on the UK restructuring moratorium, for creditor protection and other reasons, limit the potential value of this mechanism for financially distressed companies to a significant extent and that many companies will therefore have to continue to look elsewhere for protection from creditors seeking to disrupt their restructurings.

Moratoria have existed as integral aspects of mechanisms such as US Chapter 11 and UK administration for some time but the existence of a broad moratorium for use in conjunction with restructuring mechanisms is new in the UK. Moratoria are traditionally regarded as having two benefits. The first is to deal with the ‘common pool’ problem. If there is no stay, then creditors may seize assets that are useful for the carrying on of the debtor’s business and this could jeopardize the prospects of a successful restructuring. The second is that a moratorium can deal with the ‘anti-commons’ problem, i.e. it can block actions by individual creditors who are seeking to frustrate the wishes of the majority. A balance is required between the benefits to the company and the creditors as a whole on the one hand and the rights of the individual creditors on the other.

The 2020 Act introduces a new Part A1 into the Insolvency Act 1986. This provides a restructuring moratorium that is standalone and is not a precursor to an insolvency process, although it can be used in that way. It is available to be used alongside restructuring processes including schemes of arrangement, Company Voluntary Arrangement (CVAs) and the new restructuring plans (or ‘super schemes’) introduced into Part 26A of the Companies Act 2006 by the 2020 Act.  In contrast to the moratorium attached to administration, the UK restructuring moratorium is debtor-in-possession and allows directors to continue to run a company, subject to the appointment of a licensed insolvency practitioner (the monitor) and other restrictions. Broadly, the effect is to impose both a constraint on the ability of creditors to assert their debt claims against the company and a constraint on initiating insolvency proceedings and other legal processes, complemented by restraints on ipso facto clauses.

Given that moratoria involve a significant constraint on creditors’ legal rights, they can be justified only where the imposition can be regarded as beneficial to the creditors as a whole, in order to rescue a viable (albeit financially distressed) business. One concern is that they can be used by directors to prop up a company which is not economically viable and is not capable of rescue. Another is that directors may utilise a restructuring to shake off liabilities which the company is capable of meeting. A number of protections are introduced by the 2020 Act to deal with these concerns, including a limit on the length of the moratorium (20 days, extendable for a further 20 days without creditor consent), eligibility requirements, the appointment of an insolvency practitioner (a monitor), a restriction on the availability of the moratorium to certain companies, and the ability of creditors to challenge the moratorium in certain circumstances. While there is no doubt that restructuring mechanisms and the moratoria that attach to them can be misused by companies and powerful financial creditors, the balance may have tipped too far in these provisions, rendering the UK restructuring moratorium much less valuable for companies than might have been hoped.

A version of this note first appeared in the Oxford Business Law Blog.

 

Financially Distressed Companies, Restructuring and Creditors’ Interests: What is a Director to Do?
by | posted in: Bankruptcy Roundtable Updates, Corporate Governance, Fiduciary Duties, International and Comparative | 0

By Andrew Keay (University of Leeds)

Out of court restructuring is a popular and, according to many, optimal way of resolving the circumstances of insolvent companies in the UK, and probably more so since the advent in the UK of the Enterprises Act 2002. One concern that some commentators have raised is the fact that the opportunities to engage in such restructuring are likely to be reduced given the way that the courts have approached claims that directors who have initiated restructuring strategies are liable for breach of duty in failing to take into account the interests of company creditors when their company is insolvent or near to it (as applied by section 172(3) of the Companies Act 2006 in the UK). Allied to this is the concern that if directors are not granted freedom to use their discretion in entering into a restructuring process companies might be placed into administration or liquidation when they have some prospect of continuing to trade and to do so profitably, because directors may choose to be risk averse in placing a company into administration or liquidation rather than take the risk of being held liable for breach of the duty if they attempt restructuring. This paper examines whether the aforementioned concerns are realistic, given the law, and, if they are, what directors should be doing to ensure that they do not breach the obligation in relation to creditors. These are important issues as little consideration has been given in the UK to the issue of liability of directors for breach of duty in the wake of a restructuring. The issues are considered in light of section 172(3) of the Companies Act 2006 which makes the director’s duty to promote the success of the company for the benefit of the shareholders (as under section 172(1) and providing for what is known as ‘enlightened shareholder value’) subject to any rule of law that requires directors to consider the interests of creditors. It is a rule of law in the UK (and in many Commonwealth countries and Ireland) that when their company is insolvent or in dire financial distress directors must take into account the interests of creditors.

The paper finds that while directors might be subject to liability in entering into restructuring attempts, this is only going to occur in limited cases and so there should not be particular concern over liability. This is because first of all courts will not hold directors liable if they acted in good faith and took into account the interests of creditors, and regarded these interests as paramount in their considerations. Even if the directors failed to take into account the interests of creditors or failed to make them paramount, they will not be liable where the court finds that the honest and intelligent director, taking into account creditors’ interests, would have entered into the restructuring in any event on the basis that it would benefit creditors. Obviously if directors restructure in such a way as to benefit themselves or specific creditors, or they have improper motives, then liability is more likely to ensue. But, where the directors have acted reasonably then they should be safe from challenge.

The full article is available here.

The Impact of Brexit on Debt Restructuring and Insolvency Practice
by | posted in: Bankruptcy Administration and Jurisdiction, International and Comparative | 0

By Manuel Penades and Michael Schillig (King’s College London – The Dickson Poon School of Law).

With its flexible restructuring framework and experienced courts, England has become the foremost restructuring destination in Europe. A restructuring typically combines a scheme of arrangement with a pre-pack administration. Under the former, lenders exchange their debt for equity or new debt in a new corporate holding structure; the latter facilitates the transfer of the business to this new holding structure. The effectiveness of these restructuring measures in all EU Member States is currently guaranteed by the combined effect of the European Insolvency Regulation (EIR), the Judgments Regulation (Brussels Ibis), and the Regulation on the law applicable to contractual obligations (Rome I).

This regime currently ensures the availability of English-law pre-pack administration and other insolvency procedures to many EU debtors. The EIR ties exclusive jurisdiction and applicable insolvency law to the debtor’s Centre of Main Interests (COMI). Insolvency measures issued by the opening court are automatically recognised and enforced throughout the EU. Subject to a COMI transfer to England, any debtor can benefit from English insolvency and restructuring mechanisms (including pre-pack administration) and their automatic EU-wide effect.

Post-Brexit, the EIR will cease to apply in the UK and insolvencies opened therein will lose their automatic EU effect. English domestic law alone will be insufficient to achieve this result. Only a new international instrument, probably in the form of a convention, could maintain the effectiveness of the current practice.

By contrast, schemes of arrangement are not covered by the EIR and their enforceability across the EU is currently ensured by Brussels Ibis and/or Rome I. The UK will be able to retain the Rome I regime through a unilateral instrument, but not the Brussels Ibis, which requires reciprocity, like the EIR.

Given that schemes and insolvency procedures are usually combined, absent new international instruments, Brexit is likely to result in significant uncertainty and disruption for European restructuring practice.

The article is available here.