The UK government announced on 26 August 2018 that it will legislate to update the restructuring and insolvency systems, with the aim of the UK retaining the gold standard regime. The reforms are a response to international developments (with countries such as Spain and the Netherlands recently introducing updated insolvency systems) and some domestic corporate collapses which have put the UK system under stress.
The reforms are wide-ranging. Headline changes will include:
- the introduction of a new standalone restructuring procedure
- a new moratorium procedure
- prohibiting suppliers from terminating contracts on the grounds of insolvency
- attacks on "value extraction schemes" by which third parties have been able to strip out value from a distressed business
- greater accountability for directors of distressed companies
New restructuring procedure
- This will closely resemble the existing scheme of arrangement procedure but crucially allows a cross-class cramdown.
- The approval of more than 75% in value of voting creditors will be required in each class of creditor; plus more than half of the value of unconnected creditors (in each class) must vote in support.
- Significantly, the new procedure will allow for a cross-class cramdown of dissenting creditors. It 'will represent a streamlined procedure in which dissenting classes of creditors, most importantly those who are 'out of the money', may be bound to an arrangement that is in the best interests of all stakeholders'.
- The new procedure adopts a variation on the Absolute Priority Rule familiar in US Chapter 11. A dissenting class of creditor must be satisfied in full before a more junior class receives or retains anything under the restructuring plan. However, the court may approve a plan which departs from this absolute priority approach where it considers (a) it is necessary to achieve the aims of the restructuring and (b) is just and equitable in all the circumstances. This is intended to create a high threshold but also to allow flexibility. So, the new restructuring procedure may allow a restructuring which is rejected by a class of senior creditors but approved by junior creditors.
- To provide further protection, at least one class of impaired creditors (i.e. creditors who will not receive their full entitlement) must approve the plan for the court to confirm a cross-class cramdown.
New moratorium procedure and protections regarding supplies of goods and services/licences
- A preliminary moratorium be available to all companies as a standalone gateway, to give them time to consider options for rescue.
- The moratorium is modelled on the administration moratorium, and will be triggered by out-of-court filings with a 'monitor' (a licensed insolvency practitioner) appointed who must notify all creditors.
- A company is eligible if it will become insolvent if action is not taken; rescue must be more likely than not (to be determined by the monitor).
- An initial 28 day period is extendable by the monitor for a further 28 days (and can be extended further if approved by more than 50% of secured creditors by value and more than 50% of unsecured creditors by value).
- The moratorium will not be available if the company has been subject to administration, a company voluntary arrangement or a moratorium in the previous 12 months.
- A company is not eligible if it is already unable to pay debts as they fall due and the monitor must terminate the moratorium if the company is no longer able to pay debts as they fall due during the moratorium. The wrongful trading provisions in the Insolvency Act 1986 are unaffected by the moratorium.
- Contractual termination provisions for supplies of goods and services and for licences will no longer allow a supplier/licensor to terminate on grounds that the other party has entered a formal insolvency process (or the new moratorium). However, a supplier can apply to court to be exempted if it can establish undue hardship as a result of having to continue to supply.
Proposals include the following:
- liability for parent company directors selling a subsidiary that enters an insolvency process within 12 months of sale, if they did not have a reasonable belief of a 'no worse' outcome for the subsidiary’s 'stakeholders' than if it had been placed into an insolvency process
- this creates a new duty on the part of parent company's directors to the creditors of a subsidiary, adding to the complexity of a director's role
- lowering the bar for proving extortionate credit transactions so as to capture 'value extraction schemes', which have been criticised for enabling short-term investors in distressed companies to get an unfair advantage over other creditors
- introducing the presumption of insolvency for preference payments to connected parties (ie shareholders) in alignment with the presumption for transactions at an undervalue
- extending the director disqualification process to directors of dissolved companies.