Restructuring and insolvency law in United Kingdom

1. What is the primary legislation governing insolvency and restructuring proceedings in your jurisdiction?

Statutory processes available to insolvent companies in the United Kingdom are set out in the Insolvency Act 1986 (IA 1986). Processes also available to solvent companies are governed by the Companies Act 2006 (CA 2006). This primary legislation applies throughout the United Kingdom with appropriate modifications in primary and secondary legislation. 

Until 31 December 2020 (the “transition period”), the United Kingdom remains subject to any European Union law that was in force and applicable to it on 31 January 2020; this includes Regulation (EU) 2015/848 (the Recast Insolvency Regulation) and Regulation (EU) 1215/2012 (the Recast Brussels Regulation). The United Kingdom has adopted the UNCITRAL Model Law on Cross-Border Insolvency (implemented by the Cross-Border Insolvency Regulations 2006) and, subject to legislative backlogs caused by Brexit and COVID-19, is expected to implement the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments

2. How are insolvency proceedings or restructuring proceedings initiated?

Processes available to insolvent companies are:

Administration

An insolvency practitioner takes control of a company for the purpose of (in the following order): 

  • rescuing it as a going concern
  • achieving a better result for its creditors as a whole than would have been the case had it been wound up without first being in administration, or
  • realising its assets and making distributions to certain classes of its creditors. 

An administration can, depending on the circumstances, be initiated by application to the court or by an out-of-court procedure. The company or its directors, the company’s creditors and certain other stakeholders can, subject to various conditions, initiate the process. A company need only show it is, or is about to become, unable to pay its debts. 
Because commencement of administration proceedings imposes a moratorium on all claims against a company, it is frequently used as a restructuring tool. ‘Pre-pack’ administrations, in which a pre-negotiated sale of a company’s business and assets (often to its existing stakeholders) is effected immediately on commencement of the process, are commonly used to salvage value from insolvent companies.

Liquidation

An insolvency practitioner takes control of a company for the purpose of realising its assets and making distributions to creditors, culminating in the company being wound up. Liquidation can be initiated either: 

  • out of court by the shareholders of the company passing an appropriate resolution, or
  • through the courts following presentation of a winding-up petition by a creditor(s), the company or its directors, or by certain other stakeholders.  

Under temporary measures introduced in response to the COVID-19 pandemic, no winding-up petitions may be presented in relation to statutory demands (a form of payment demand conforming to certain requirements) issued between 1 March and 30 September 2020, or where a company’s inability to pay its debts arises from the effects of the pandemic.

Receivership

A contractual right (so no court involvement) under which a secured creditor may appoint an insolvency practitioner or other receiver (assuming an enforcement trigger has arisen) to take control of and realise the assets of a company over which it holds security. In contrast to a liquidator or administrator, a receiver’s duties are owed to the appointing creditor and not to the company’s creditors as a whole. This is a much less used remedy as receivers may generally (subject to certain exceptions) not be appointed over the whole or substantially the whole of a company’s assets. Often reserved for real estate-specific enforcement by a secured creditor, although this limited kind of receivership appointment is not available under the laws of Scotland.  

Company voluntary arrangement (CVA)

An agreement, governed by the IA 1986, between a company and its creditors and supervised by an insolvency practitioner. The directors of a company (or its liquidator/administrator) issue proposals to creditors seeking to compromise creditor claims in accordance with its terms and binds all unsecured creditors (as well as any secured creditors that consent to be bound) if a 75% approval majority agrees with the terms. Although the proposals are filed with the court it does not undertake any approval process as such, relying on an insolvency practitioner agreeing that the proposals should be put to creditors for a vote.  

Scheme of arrangement

A CA 2006 process, available to solvent and insolvent companies, under which a company reaches a court-sanctioned compromise agreement with its creditors and/or shareholders or any class(es) of them. The process is commenced by an application to the court, which can be made by the company, any of its shareholders or creditors or an administrator or liquidator appointed over it.

New IA 1986 moratorium 

Under amendments to the IA 1986 implemented on 26 July 2020 (contained in the Corporate Insolvency and Governance Act 2020 (CIGA)), a new moratorium process (the “New Moratorium”) is now available to eligible companies. The moratorium commences when the directors of the company file certain documents with the court, and lasts for 20 days (unless subsequently extended) under the supervision of an insolvency practitioner. This is a free-standing breathing space to allow for restructuring options to be considered

Restructuring Plan

The CIGA also amended the CA 2006 to introduce a new restructuring plan (the “Restructuring Plan”), similar to a scheme of arrangement but including, among other things, an ability to cram down dissenting classes of creditors under certain circumstances. (By contrast, a scheme of arrangement will not be sanctioned by the court where a creditor class votes against the proposal.) Like a scheme of arrangement, the Restructuring Plan will be overseen by, and require the sanction of, the court, but will only be available to companies facing or likely to face financial difficulties that affect, or may affect, its going concern status.

A company is deemed to be insolvent when:

  • it has failed to satisfy a statutory demand for a sum greater than £750
  • a creditor has attempted, unsuccessfully, to enforce a judgment debt against it 
  • it is shown, to the satisfaction of the court, that it is unable to pay its debts as they fall due (cash flow test), and/or
  • it is shown, to the satisfaction of the court, that it has liabilities that outweigh its assets (balance sheet test).

The balance sheet test includes consideration of future and contingent liabilities, meaning that the assessment of a company’s solvency on this basis can be nuanced; a company may, for example, be deemed to be insolvent despite passing the cash flow test.

There is no direct legal sanction for being insolvent but the stimulus for a company seeking the protection of an insolvency filing is often the risk of director liability.

4. Which different types of restructuring / insolvency proceedings exist and what are their characteristics?

See point 2 above.

5. Are there several types of creditors and what is the effect of a difference?

The principal categories of creditor are secured, unsecured and preferential, with each containing certain sub-categories.
Security ranking is unaffected by the commencement of an administration or liquidation although enforcement rights may be suspended. Because disposal of company assets can only take place subject to the release of some kinds of security held over them, secured creditors will invariably exert significant influence in any restructuring negotiations.

Where distributions are to be made in an administration or liquidation, creditors rank for payment in the following descending order of priority:

  • creditors with fixed security over specific assets
  • expenses of the insolvency process (including the insolvency practitioner’s fees, and any legal or other professional fees)
  • certain ‘preferential’ creditors, including employees and the United Kingdom’s tax authority
  • creditors with floating security over changeable classes of assets
  • unsecured creditors
  • interest on certain debts incurred during the insolvency process, and 
  • shareholders.

Claims for unsecured debts rank equally among each other. In practice, it is comparatively rare in insolvency proceedings for significant recoveries to be made by unsecured creditors, and even more so for shareholders.

6. Is there any obligation to initiate restructuring / insolvency proceedings? For whom does this obligation exist and under what conditions? What are the consequences if this obligation is violated?

While there is no standalone duty to initiate a restructuring or insolvency process, the directors of a company that has no reasonable prospect of avoiding insolvency owe their duties to that company’s creditors (to the exclusion of its shareholders, to whom those duties are ordinarily owed). In these circumstances, entry into a formal insolvency process is often the only way for directors to avoid exposure to risks of wrongful trading, fraudulent trading and other breaches of duty or misfeasance. Simply resigning from the board of the distressed company will not absolve directors of possible liability, which is personal and restitutionary (and, in the case of certain discrete offences, may attract criminal liability and/or disqualification).

Until 30 September 2020, as a further response to the COVID-19 pandemic, the wrongful trading provisions governing directors’ duties in relation to insolvent companies have been amended although not removed. The court is to assume that a director guilty of wrongful trading is not liable to contribute to creditor shortfalls where the conduct complained of took place up to 30 September 2020. Directors must remain vigilant, however, as other duties and obligations remain unaffected and the court’s assumption may be capable of rebuttal. 

7. What are the main duties of the representative bodies in connection with restructuring / insolvency proceedings?

Generally, UK law does not require action by representative bodies specific to restructurings and insolvency. 

Not in a formal sense. In practical terms, in circumstances where for example employee engagement is essential to the prospects of an insolvency or restructuring proposal (for example, where retaining a business’s workforce has a significant effect on its viability or sale value), communication or consultation with employee representatives (if appointed) may be desirable and, in some circumstances, a requirement of employment legislation.

9. What are the main duties of shareholders in connection with restructuring / insolvency proceedings?

Shareholders usually have no formal duties in restructuring or insolvency proceedings but see point 10 below. A CVA proposal must be provided to shareholders to vote on, but the vote of creditors on the proposals will prevail. Also, a scheme of arrangement or restructuring plan may envisage a reorganisation of share capital, in which case shareholders will be required to agree. 

10. Are the shareholders of a company involved in restructuring / insolvency proceedings?

Shareholders rank at the bottom of the distribution waterfall in an administration or liquidation (see point 5 above) and very rarely receive a dividend; their influence in restructuring or insolvency proceedings is usually, therefore, limited (although see point 8 above where they may be formally involved). However, certain contractual arrangements (such as shareholders’ agreements) may complicate reorganisation or disposal of assets, with the result that it may be necessary to engage with shareholders. Also balance sheet restructuring may need shareholder cooperation, for example debt for equity conversions.

11. Is a solvent liquidation of the company an alternative to regular insolvency proceedings?

No. To initiate a solvent liquidation, the company’s directors must make a declaration of solvency to the effect that the company will be able to pay all its liabilities in full including interest within 12 months of commencement. Solvent liquidation is therefore, by definition, incompatible with currently available insolvency processes. A liquidation which starts as a solvent winding-up may progress to insolvent liquidation if, as a matter of fact, the company is unable to pay its liabilities in full within this timescale. 

Yes. Schemes of arrangement, CVAs and the Restructuring Plan (each outlined in point 2 above) provide certain preventive debtor-in-possession mechanisms to distressed companies, supported where appropriate by the New Moratorium.

Many of the protections that will be afforded to companies under Directive (EU) 2019/1023 (the “Preventive Restructuring Directive”), once implemented by respective Member States, can be found in the provisions of the IA 1986 and CA 2006. These include the ability to cram down certain dissenting classes of creditors (a feature of the Restructuring Plan), and the invalidation of certain clauses allowing suppliers to terminate contracts by reason of a company’s insolvency.

13. What is the average success rate after completed restructuring / insolvency proceedings?

CVAs

Success rates for CVAs are mixed, with around 60% being terminated early and invariably leading to administration or liquidation. Landlords, commonly among the most heavily compromised classes of creditors in CVAs, have increasingly sought to oppose them, often demanding more favourable terms, such as upside sharing agreements, as a condition to their consent. Despite widely acknowledged shortcomings and calls for legislative reform, CVAs are generally still considered a viable option for a company with a credible rescue plan and a need for breathing space, and have traditionally been well used in the retail, leisure and casual dining sectors.

Schemes of arrangement

Schemes of arrangement are invariably successful once implemented, although their vulnerability to rejection by stakeholders at the voting stage means that failure generally takes place before implementation. The implementation process for schemes of arrangement is comparatively more expensive and time-consuming than that of CVAs, given the need for court involvement and construction of creditor classes. Additionally, the lack of a moratorium in a scheme of arrangement can render them less attractive, something that the new CIGA processes seek to address.

Administration

Use of administration as a restructuring tool has tended to focus on the sale of company assets, whether by pre-pack sale or through a gradual realisation and wind-down. However, in the context of the COVID-19 crisis and the damage inflicted on a wide range of previously viable businesses, there is developing interest in a ‘light-touch’ administration model more focused on rescuing the business as a going concern, with existing management continuing to remain involved. This involves administrators delegating certain powers to the company’s directors, allowing them to continue to trade the company under the protection of the moratorium and seeking to effect a turnaround.

New Moratorium and Restructuring Plan

The New Moratorium and Restructuring Plan are responses to calls for more proactive restructuring processes similar to US Chapter 11, and they are designed to help promote rescue measures being implemented earlier in the distress curve; although the CIGA measures stopped short of introducing debtor in possession financing. Given the bleak outlook for the United Kingdom’s commercial environment in the context of COVID-19, we would expect to see ample data on the use and effectiveness of the new CIGA processes in the near future.

Picture of Peter Wiltshire
Peter Wiltshire
Partner
London