Restructuring & Insolvency Comparative Guide

• Published date: 21 May 2020
• Author: Mr James Watson
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Financial Restructuring, Corporate and Company Law, Directors and Officers, Insolvency/Bankruptcy, Shareholders
• Law Firm: Kirkland & Ellis International LLP

1 Legal framework

1.1 What domestic legislation governs restructuring and insolvency matters in your jurisdiction?

The main domestic legislation governing restructuring and insolvency matters in England and Wales comprises the Insolvency Act 1986 and the Insolvency (England and Wales) Rules 2016. This is supplemented by other legislation and principles of common law. The Company Directors Disqualification Act 1986 is applicable to directors of insolvent companies and schemes of arrangement are a creature of the Companies Act 2006.

1.2 What international / cross-border instruments relating to restructuring and insolvency have effect in your jurisdiction?

EU law governs jurisdiction and recognition in cross-border restructuring and insolvency cases within the European Union, which presently includes the United Kingdom. The main instrument in this regard is EU Regulation 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast) (the 'Recast Insolvency Regulation'). If the United Kingdom leaves the European Union, the Recast Insolvency Regulation will cease to apply in, and with respect to, this jurisdiction unless there is agreement to the contrary.

A new EU directive on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures (the 'Harmonisation Directive') has entered into force and must be implemented by each EU member state by July 2021. If the United Kingdom has left the European Union by this time (as seems likely at the time of writing), the Harmonisation Directive will not be required to be transposed into the national legislation of England and Wales (however, see question 8).

The United Kingdom has also enacted the UNCITRAL Model Law on Cross-Border Insolvency, which is implemented in England and Wales by the Cross-Border Insolvency Regulations 2006.

1.3 Do any special regimes apply in specific sectors?

The United Kingdom has over 30 special or modified insolvency regimes, which typically apply to systemically important or sensitive sectors and prioritise continued service provision and smooth handover of control over conventional creditor-focused priorities (the regimes do generally follow the usual rules and principles, but subject to modified objectives and powers).

These special regimes apply to specific sectors and types of companies such as financial institutions, certain regulated entities (including utilities) and charities. Notably, a special rescue and insolvency procedure for banks is governed by the Banking Act 2009.

1.4 Is the restructuring and insolvency regime in your jurisdiction perceived to be more creditor friendly or debtor friendly?

The United Kingdom has historically been perceived as creditor friendly (in particular for senior secured creditors), but it is extremely effective for both creditors and debtors. The English courts have traditionally been the forum of choice for resolving disputes relating to major international financial and other contracts, as the system is seen as flexible and commercially oriented while also offering certainty and predictability - with considerable deference to the commercial terms agreed by the parties - and the highest possible reputation for independence and lack of corruption.

One notable creditor-friendly aspect is the comparative ease of enforcement (in terms of appointment of an officeholder, if necessary, and implementation of a sale) through receivership and administration - and, in particular, the ability of secured creditors to pick the identity of the receiver or (if they have a qualifying floating charge) the administrator. This facilitates 'pre-pack' asset sales (see question 7.1).

In recent years, overseas debtors have looked to take advantage of the English regime, including taking steps to establish jurisdiction in England and Wales (eg, by moving their centre of main interests (CoMI), amending the governing law of their debt documents or otherwise). This has partly been driven by the historic absence or inadequacy of restructuring tools in their home jurisdictions. UK schemes of arrangement have offered a flexible debtor-in-possession tool without the cost and court involvement associated with processes in some other jurisdictions and with a low jurisdictional threshold, as English CoMI is not a prerequisite.

Conversely, the popularity of England and Wales as a jurisdiction of choice could diminish as a result of improvements in the restructuring and insolvency regimes in other jurisdictions (including pursuant to the Harmonisation Directive) and potential recognition issues with UK schemes and insolvency proceedings after Brexit.

1.5 How well established is the legal regime and infrastructure relevant to restructuring and insolvency in your jurisdiction (e.g. extent of recent legislative changes, availability of specialist judges / courts / advisers)?

The legal framework is generally stable and well regarded, and the United Kingdom has an established restructuring culture. The main legislative instrument, the Insolvency Act 1986, is over 30 years old, while the legislative provisions relating to administration (the primary rescue proceeding) were overhauled almost 20 years ago. While there have been recent changes to the Insolvency Rules, these have not dramatically changed the laws and have only clarified the process.

High-profile cross-border restructurings are frequently conducted using English law governed documents or English proceedings. Schemes of arrangement have been a particularly popular tool in this context. There is a track record stretching back well over a decade of using schemes to implement debt restructurings, including on a cross-border basis.

Several specialist judges are available to preside over more complex insolvency proceedings and a specialist court for insolvency matters is available within the High Courts of Justice in London. Specialist lawyers, financial advisers and distressed investors are also prevalent within the United Kingdom.

However, Brexit has introduced uncertainty. As noted above, absent their continued application by agreement, the Recast Insolvency Regulation and its counterpart relating to the recognition of civil and commercial judgments, the recast Brussels Regulation, will cease to apply in and with respect to the United Kingdom, which poses a risk to the recognition of UK insolvency processes and schemes, respectively.

Reforms which echo a number of features of the new restructuring process contemplated by the Harmonisation Directive are also contemplated in the United Kingdom. See question 8 for further details.

2 Security

2.1 What principal forms of security interest are taken over assets in your jurisdiction?

The type of security granted over an asset in England and Wales largely depends on whether legal title (ie, ownership in the ordinary sense) to the secured asset is to be transferred to the secured party. Security can take the form of a mortgage or security assignment (transfer of title, security provider retains possession) or a charge (no transfer of title, security provider retains possession). There are also other types of security which apply where the secured party takes possession of the secured asset (eg, liens and pledges).

To create a mortgage, the legal or beneficial title to the secured asset must be transferred to the secured party. Mortgages are most commonly granted over real estate, but are also taken over movable property such as ships and aircraft.

A charge may be either 'fixed' or 'floating'. The former requires the security provider (the chargor) to hold the charged asset to the order of the secured party (the chargee). The latter is a powerful tool, with no equivalent in many other jurisdictions, allowing security to be taken over future assets and high turnover assets such as cash, inventory and stock. The chargor is permitted to deal with assets subject to a floating charge in the ordinary course of its business.

However, secured creditors will usually seek to take fixed charge security where possible. Insolvency officeholders and preferential creditors have a priority entitlement to floating charge recoveries, and a 'prescribed part' of the recoveries is also set aside and distributed to the debtor's unsecured creditors. Certain legal requirements must be satisfied for a charge to be considered fixed; among other things, the chargee must have the requisite degree of control over the relevant assets (ie, meaning that the chargor cannot freely deal with them). If these requirements are not fulfilled, an English court can recharacterise a fixed charge as floating.

2.2 How can those security interests be enforced (and what factors could complicate or prevent this process)?

Enforcement options depend on the nature of the security and the provisions of the security document, among other matters.

Receivership: A secured creditor may enforce its security by appointing a receiver (usually an insolvency practitioner) over the specific secured asset(s), in accordance with the terms of the security document and usually without court involvement. The receiver will typically have broad powers (specified in the security document and legislation), including a power of sale. A receiver must secure the best price reasonably obtainable in the circumstances; no public auction is needed unless required by the security document. Administrative receivership - where a receiver is appointed over all of the company's property - is now available only in limited circumstances.

Mortgagee in possession: A creditor may also exercise its power of sale under the security document (if it has a legal mortgage or if the terms of the security document otherwise permit), without needing to apply to court and use the proceeds to settle the secured liabilities. A mortgagee in possession has the same duties as a receiver with respect to securing the best...