Insolvency Bitesize

  • We saw the High Court reject the challenge brought by aggrieved landlords to the company’s CVA in New Look. Just a few days later, the High Court sanctioned the company’s Part 26A restructuring plan in Virgin Active leaning heavily on the cross-class cram down power to deal with multiple classes of dissenting landlords. Then came the Regis CVA challenge where this time – albeit on rather unusual facts and with limited practical consequence – landlords succeeded in revoking the CVA (which had already terminated) on a finding of unfair prejudice.
  • The decision in New Look - which is being appealed - is vindication for the structures used in plentiful landlord/tenant CVAs in recent years and underscores the ability of a CVA to arrange different deals with different sub-groups of creditors. It sheds light on “vote swamping” and unfair prejudice concerns and calls attention to how the treatment of creditors under a linked scheme of arrangement or in any wider restructuring may justify their differential treatment in the CVA. The result in Regis is less significant but serves as a timely reminder for how careful planning in all aspects of a CVA – around the selection of unimpaired critical creditors for example – should be a priority.
  • The subsequent decision in Virgin Active sent ripples across the restructuring market. The decision is difficult reading for out-of-the-money creditors whose dissenting votes will carry little weight. For in-the-money creditors, the case provides significant comfort and it also offers a potential route map for private equity groups looking to retain their interests – particularly when they are providing important support to a restructuring. Its lessons for all stakeholders on the evidential burden required to mount a challenge are vital to understand.
  • The refusal by the High Court to sanction the company’s Part 26A restructuring plan in Hurricane Energy – which would have seen existing shareholders significantly diluted – highlights the importance of establishing the ‘relevant alternative’. It also underscores that if directors are required to have regard to creditors’ interests, they should not overlook shareholders who may have a realistic prospect of equity value where an immediate insolvency process is not likely.

If you’ve not already seen our alerts on these decisions, please see What the Virgin Active Part 26A Restructuring Plan challenge means for future Restructuring Plans, What the New Look and Regis CVA challenges mean for the future shape of CVAs and Hurricane Energy: a failed cram down of a debt for equity swap. We would be happy to discuss these further with you. In this edition of Insolvency Bitesize, we cover an assortment of issues, including:

  • the latest position on a range of Covid-19 support measures and how they might affect future deals between landlords and tenants;
  • a look at how the new “connected person” test might work in practice in insolvency sales;
  • the first proposed use of the Part 26A restructuring plan by a company already in administration; and
  • the Bank of England’s first (we believe) use of its powers to recognise a third-country law bail-in of English law governed bonds.

We hope you find this edition useful. As ever, please get in touch with any questions you may have.

Topics covered in this report

1

Extending Covid-19 related support measures: what next?

The Government has confirmed that:

  • Forfeiture: the ban on forfeiture of commercial leases will be extended to 25 March 2022 - it was due to expire on 30 June 2021;
  • CRAR: the restrictions on the use of the Commercial Rent Arrears Recovery process will be extended until 25 March 2022 - the total number of days' outstanding rent required for CRAR will remain at 554 days;
  • Winding-up petitions and statutory demands: the restrictions on the use of statutory demands and winding up petitions will be extended until 30 September – they were due to expire on 30 June;
  • Wrongful trading: the suspension from liability for wrongful trading is not being extended and expired on 30 June (having applied from 1 March 2020, other than for a brief period between 1 October and 25 November) to “help return the insolvency framework to its usual functioning"; and
  • Ipso facto restrictions: the small supplier exemption from the ipso facto insolvency termination clause provisions is not being extended and expired on 30 June.
2

Who will be “connected persons” under the new insolvency sale regulations?

The new rules on “connected persons” insolvency sales and pre-packs came into force at the end of April. The Administration (Restrictions on Disposal etc to Connected Persons) Regulations 2021 provide that an administrator “must not” make a “substantial disposal” to “connected persons” within the first 8 weeks of the administration without creditor approval or obtaining a “qualifying report” from an “evaluator”. The regulations are accompanied by non-binding guidance published by the Insolvency Service.

We suspect that many insolvency sales and pre-packs will opt to use an evaluator rather than seeking creditor approval (as there are uncertainties in that process). This also seems likely given how the Pre-Pack Pool is looking to reposition itself as the evaluator of choice, certainly in the larger, more complex transactions.

3

Administrators of Amicus Finance look to use Part 26a restructuring plan to restore company as a going concern and avoid liquidation

The Amicus Finance Part 26A restructuring plan is the first plan proposed by a company already in administration. The purpose of the plan would be to return the company to a going concern. The relevant alternative is liquidation.
4

Director liability under the microscope…again

The Insolvency Service will be given powers to investigate directors of companies that have been dissolved without first having become insolvent, acting as a strong deterrent against the misuse of the dissolution process.

The new measures are included in the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill and will be retrospective in relation both to the conduct of directors occurring and to companies dissolved at any time before, as well as after, the passing of the Act. The legislation will mean that a company will not need to be restored before action can be brought against a director.

5

Bank of England recognises third-country bail-in: a first

In the first instance of the exercise of its powers, the Bank of England recently recognised the bail-in by the National Bank of Ukraine and the Ukrainian authorities, between 18 and 20 December 2016, of four English law governed loans owed by PrivatBank to UK SPV Credit Finance plc. The bail-in formed part of PrivatBank’s nationalisation.
6

Insolvency arrangements for insurers: enlarged and wider ranging write-down power proposed

The usual corporate insolvency rules are modified in the case of an insurer. However, they are largely untested with only a small handful of insurers having gone into administration and liquidation. As a result of the low number of formal failures, there is little guidance in case law or otherwise as to how an administration or other insolvency proceeding of an insurer would operate in practice - domestically or on a cross border basis.
7

Payment and electronic money instituitions - new special administration regime

The Payment and Electronic Money Institution Insolvency Regulations 2021 recently introduced a new “payment institution special administration” regime and a new “electronic money institution special administration” regime. Each procedure is aimed, among other things, at protecting consumers if such an institution were to become insolvent.
8

High court overturns decision on COMI finding deputy ICC judge had adopted the wrong approach in law and had relied on irrelevant factors

In Re Melars Group Ltd (in liquidation) [2021] EWHC 1523 (Ch), Miles J overturned an earlier decision as to a BVI-incorporated but Maltese registered company’s centre of main interests (COMI). He held that the Deputy ICC judge had adopted the wrong approach in law as to COMI by under-emphasising the importance of the registered office presumption and mis-applying the ascertainability test to particular supporting factors.
9

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