The uncertainty surrounding the COVID-19 pandemic has rocked the global economy, and companies of all types and sizes are feeling the impacts. In recent weeks, certain high-profile retailers filed for Chapter 11 bankruptcy protection. Some airlines are expected to enter bankruptcy as well, and even farmers are feeling the pinch. Overall, data suggest that bankruptcies will increase almost 25 percent from last year.

Read the full report on our sister site, EHS Law Insights.

As the COVID-19 pandemic continues, the hospitality industry is being hit particularly hard.  Reservations and travel are down, while cancellations are up.  The hotel sector in particular is facing momentous challenges, which is having a significant impact on the economy due to the fact that the hotel industry represents a significant segment of the US economy:

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As the COVID-19 pandemic continues to unfold across the country, voluntary self-isolation efforts and a proliferation of state and local “shelter-in-place” orders have brought business activity to a screeching halt.  As business leaders work feverishly to consider the options available to safeguard their companies, we recommend that they keep in mind the three C’s: Care, Cash, and Communicate.

Care

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Following the insolvency of Monarch Airlines Limited (in administration) (Monarch), a large number of employees of Monarch were made redundant. An employment tribunal has recently found of favour of a claimant who brought a claim against Monarch for its failure to comply with its employment law obligations to consult with employees before making a mass redundancy.

The decision brings back into the spotlight the obligations on a company and also insolvency practitioners when deciding to proceed with a mass redundancy programme. We previously wrote blogs on this subject in October and November 2015 involving the criminal charges brought against the former directors of City Link Limited (in administration) (City Link) for their failure to notify the Secretary of State of proposals for collective redundancies under section 193 of the Trade Union and Labour Relations (Consolidation) Act 1992 (the 1992 Act). Following a two-day trail the former directors of City Link were acquitted of those charges as the court found that the former directors could not at the relevant time have foreseen the redundancies and so were relieved of their requirement to give notice.

Case against Monarch

The case brought against Monarch considered Monarch’s failure to consult with its employees before making mass redundancies on its entry into administration. Under section 188(1) of the 1992 Act, where an employer is proposing to dismiss as redundant 20 or more employees at one establishment within a period of 90 days or less, the employer should consult about the dismissals all the persons who are appropriate representatives of any of the employees who may be affected. Under the provisions, the consultation should begin in good time but in any event, where the employer is proposing to dismiss 100 or more employees, at least 45 days – and otherwise, at least 30 days- before the first of the dismissals takes effect.

Where an employer fails to comply with its obligations under section 188, an affected employee may raise a complaint to an employment tribunal which may then make a protective award in favour of the affected employee if that complaint is “well-founded”.

The protective award will be an order that the employer pay remuneration to the affected employee for the “protected period”. The length of such period may be as the tribunal determines to be “just and equitable” in all the circumstances having regard to the seriousness of the employer’s default but not to exceed 90 days.

In making its decision in this instance, the tribunal considered the guidance Peter Gibson LJ gave in Susie Radin Ltd v GMB [2004] I.R.L.R. 400 (CA). In considering the protective award, “the employment tribunal ha[s] a wide discretion to do what is just and equitable in all the circumstances, but the focus should be on the seriousness of the employer’s default”. The tribunal in Monarch found that the relevant employee representatives were only notified of potential redundancies three days before Monarch filed for administration.

Section 189(6) of the 1992 Act does provide a defence to employers if there were “special circumstances” which rendered it not reasonably practicable for the employer to comply with any requirement of section 188, or whether the employer took all such steps towards compliance with that requirement as were reasonably practicable in those circumstances. We previously noted in our articles on section 193 (which has an analogous defence to section 188) that insolvency does not of itself constitute a “special circumstance”. In this instance, applying the guidance from the Susie Radin case, the tribunal found there were no mitigating circumstances justifying a reduction from the maximum consultation period and giving 3 days’ notice of a possible insolvency event was not consultation. It considered that Monarch’s financial position did not deteriorate so rapidly that consultation was not possible and accordingly made a protective award of 90 days’ pay for each employee. The judgment is a reminder that a gradual run-down of a company is distinct to a sudden unforeseen event necessitating the closure of the business[1].

In this instance, as the employer, Monarch, was insolvent, the second respondent, the Secretary of State for Business Energy and Industrial Strategy was liable for the protective awards, subject to its maximum liability under section 184 of the Employment Rights Act 1996.

A link to the employment tribunal judgment can be found here.

[1] Clarks of Hove v Bakers Union [1978] I.R.L.R. 366

On 9 May 2019 the Airline Insolvency Review (the AIR), chaired by Peter Bucks, published its Final Report on passenger protections in the context of airline insolvencies, having been commissioned by the Chancellor of the Exchequer in November 2017 following the high-profile collapse of Monarch Airlines. Chief among the report’s recommendations are the implementation of a privately funded repatriation scheme, a new Special Administration Regime for airlines, and the commercialisation of the protection that currently exists under EU regulatory framework for customers who have purchased flights as part of a package, or together with other travel products (ATOL protection).

When Monarch entered administration in October 2017, there were 110,000 passengers situated overseas and 300,000 future bookings were lost. Faced with the prospect of passengers having to wait weeks to return home, the Government instructed the Civil Aviation Authority (the CAA) to repatriate not only the ATOL protected consumers, but all overseas passengers. The consequence of that decision was a £60 million taxpayer bill, which the Government has since struggled to recoup.

Consequently, the AIR was established to consider: i) new forms of repatriation and refund protection; and ii) methods of placing the ATOL scheme on a more commercial footing. The report notes from its outset that significant gaps exist in the protection against airline insolvencies currently afforded to UK air passengers. Indeed, whilst 80% of passengers benefit from some form of protection against financial loss, only one quarter of passengers are fully protected by virtue of the pre-existing ATOL scheme. The ATOL scheme is operated by the CAA and is funded, in part, by contributions  from licenced travel companies (ATOL holders). Whilst the ATOL scheme has been effective in mitigating the financial losses sustained as a result of minor airline failures, such as FlyBMI and Wow Air both earlier this year, the Monarch collapse demonstrated the scheme’s limitations in the context of large airline failures. Without Government intervention, the majority of passengers would have been left to arrange emergency travel and accommodation for themselves. The need for a scheme that is capable of withstanding such failures is further borne out by the precarious reality that only 13 airlines service 80% of UK travellers, whilst the AIR estimates the risk of an insolvency amongst the top 17 airlines within the next year at 13%.

The AIR’s key recommendations are:

The FPS would be a comprehensive private sector initiative to protect UK air passengers in the event of airline or travel company insolvencies and would be coordinated by the CAA. Under the FPS, funding would be administered by the CAA to effect the same-day repatriation of passengers by both the affected airline and assisting airlines. The FPS is proposed to extend to all UK-originating passengers who have return flights to the UK with an airline that becomes insolvent. It should be noted that the FPS would not cover refunds for lost bookings.

According to the report, the FPS would be funded exclusively by the private sector, with each airline that operates in the UK being required to provide financial protection based on the estimated cost of repatriating its own passengers. The AIR recommends that the majority of funding should be met through requiring airlines to grant security via financial instruments that can be relied on to pay out in the event of an airline’s insolvency, which would be supplemented by a small central fund to cover the remainder of the airlines’ exposure. To ensure universal participation, the report also recommends that the licences of all airlines operating in the UK should be conditional on making this financial contribution.

These costs are almost certain to be passed indirectly to consumers. Promisingly, however, the report estimates that the FPS would cost no more than 50 pence for each protected passenger. It should also be recognised that this proposed funding arrangement, which is clearly underpinned by the AIR’s guiding principle to ensure that the beneficiaries pay, is aimed at ensuring sufficient funds are available to avoid taxpayer bailouts. As such, the proposal is a welcome development in the context of ongoing market turbulence.

The report emphasises that, in order to optimise the benefits of the FPS, legislative and regulatory  ‘toolkits’ must be developed to enable airlines to continue to operate aircraft for a limited time after they enter insolvency.

In relation to the legislative toolkit, the report’s primary recommendation is the implementation of a Special Administration Regime (SAR) for airlines. Amongst other things, this would involve temporarily changing the legislative purpose of an airline’s administration to the repatriation of its passengers, imposing a moratorium on creditors’ actions, and arranging payments agreements with staff and suppliers to ensure costs associated with repatriation would be paid as expenses of the administration.

With regard to the regulatory toolkit, the report advances a proposal to grant additional powers to the CAA to enable it to manage repatriation processes effectively. These include the power to require annual certification of financial fitness, grant licenses to insolvent airlines, impose license conditions to encourage repatriating airlines to mitigate consumer risks, and create rules to require the provision of information by insolvent airlines.

The proposal of a comprehensive repatriation scheme raises question marks over the ongoing application of the ATOL scheme. AIR anticipates these questions in its report by making recommendations to enhance the commerciality of the ATOL scheme. These recommendations largely seek to distance the Secretary of State’s involvement in the Air Travel Trust (the ATT), being the body that finances ATOL protection through a combination of consumer contributions, insurance policies, and credit facilities. In particular, the report recommends the following changes:

The question remains as to whether the ATOL scheme would remain viable alongside the FPS. As the report recognises, the risk of overlapping protection is significant. The AIR seeks to address this by suggesting that the FPS would not cover ATOL protected consumers. However, assuming airlines will build the cost of FPS protection into their pricing structures, this in turn raises the question of whether consumers could be persuaded to forego FPS protection in favour of ‘gold standard’ ATOL protection.

The recommendations of the AIR represent a welcome enhancement to the protection available to consumers that find themselves stranded abroad on the failure of their airline.

The introduction of the SAR, in particular, has the potential to provide passengers with a seamless repatriation service if the insolvent airline’s fleet of aircraft are able to operate during insolvency to provide repatriation flights. How this will work in practice will remain to be seen, as the success of such an undertaking is likely to depend largely on the cooperation of creditors who might otherwise seek to repossess aircraft whilst they are outside of the jurisdiction of the English courts, and therefore outside of the protection of the SAR’s moratorium.

How effective these measures are will only be truly understood once tested, however they represent a timely enhancement to the current framework in light of the financial volatility experienced recently within the airline sector.

The full report can be accessed here: http://www.gov.uk/government/publications/airline-insolvency-review-final-report

Reed Smith LLP provided legal advice to the Airline Insolvency Review on a number of the aspects covered in the Final Report.

It is well established that the type of recognition granted by the recognising court under the UNCITRAL Model Law will depend on whether the originating proceedings are ‘foreign main’ or ‘foreign non-main’ proceedings, which in turn hinges on the centre of main interests (COMI) of the insolvent entity.

In a ground-breaking case, the English court has followed the precedent set down by the US Bankruptcy Court in undertaking this COMI analysis at the date of the recognition petition, rather than the date that the insolvency proceedings were initiated. This has the scope to significantly simplify the recognition of cross-border insolvencies going forward, particularly in respect of Chapter 11 recognitions in the UK.

The UNCITRAL Model Law

The Model Law has been enacted into the English statute book as the Cross Border Insolvency Regulations 2006 (the CBIR), which states (using the wording of the Model Law) that:

““foreign main proceeding” means a foreign proceeding taking place in the State where the debtor has the centre of its main interests”; and

““foreign non-main proceeding” means a foreign proceeding, other than a foreign main proceeding, taking place in a State where the debtor has an establishment…”

 COMI for these purposes has the same interpretation as under the Recast Insolvency Regulation, with the rebuttable presumption being that COMI will be in the jurisdiction of the debtor’s registered office. The analysis of whether or not that presumption can be rebutted is largely a fact-based one.

Recently, Reed Smith assisted Toisa Limited (Toisa), a debtor in a Chapter 11 case, in seeking recognition of those Chapter 11 proceedings before the English court under the CBIR. The application came before ICC Judge Burton on Friday 29 March. Having been presented with evidence regarding the COMI of the debtor, the Judge raised the question of when is the appropriate date to consider the COMI of the insolvent entity for the purposes of the CBIR.

The English Approach

The English courts have not previously considered this question in significant detail in reported cases, albeit they appear to have leaned towards the view that that the appropriate time to conduct the COMI analysis is at the date of the initiation of the insolvency proceedings for which recognition is being sort. For example, in the recent case of Videology Ltd., re Cross-Border Insolvency Regulations 2006  it was discussed (although such consideration did not affect the overall judgment) that the appropriate question when considering an application under the CBIR was whether the foreign proceedings for which recognition is sought are in the place that was the debtor’s COMI when such proceedings were commenced.

The Chapter 15 Approach

In contrast, this question had been considered previously by the US Bankruptcy Court in the context of Chapter 15 recognition cases, Chapter 15 being the enactment of the Model Law into US law. The US Second Circuit has taken the view in Morning Mist Holdings Ltd v. Krys (Re Fairfield Sentry Ltd) 714 F3d137 (2d Cir. 2013) that the appropriate time to analyse the COMI of the debtor entity is at the time of the Chapter 15 recognition petition, rather than at the time of the initiation of the overseas insolvency proceedings.

Toisa

Toisa entered Chapter 11 proceedings in January 2017, and since that date it had been managed exclusively from New York, all creditors corresponded with management based in New York, and all strategic decisions and board meetings were held in New York. Overall, there was little argument that since the initiation of the Chapter 11 proceedings, Toisa’s COMI was anywhere other than the United States of America. However, prior to the initiation of Chapter 11, the evidence regarding COMI was not so conclusive. Toisa’s registered office was (and still is) in Bermuda, and its assets and employees were located around the world albeit that many decisions had been taken out of New York even prior to the Chapter 11 filing, and significant assets had been located in the United States.

It was submitted to the court that, for the following reasons, the Chapter 15 approach should be favoured over the historic approach of the English courts:

It was, however, also noted as a counter-argument, that the guide to enactment and interpretation that accompanied the Model Law clearly states that when assessing an entity’s COMI the appropriate date is the date of commencement of the foreign proceedings, and not the date of the recognition application.

Having weighed the evidence ICC Judge Burton was of the view that the appropriate date on which to determine the COMI of the debtor for the purpose of recognition under the CBIR was the date of the recognition petition, rejecting the argument that the date of the initiation of the underlying insolvency proceedings was the appropriate time. This has the scope to significantly simplify the process of obtaining recognition orders before the English Courts, particularly in circumstances where a period of time has elapsed between the overseas insolvency proceedings commencing and the seeking of recognition.

Togut, Segal & Segal LLP are lead counsel for Toisa in relation to the Chapter 11 and wider group restructuring, and Reed Smith LLP have been engaged to advise on English-law aspects of this. Reed Smith retained Adam Goodison of South Square for the application.

Re Stronghold Insurance Company Limited [2018] EWHC 2909 (Ch)

Mr Justice Hildyard, who continues to amass expertise on schemes of arrangements, recently ruled against convening a single meeting of creditors on a scheme of arrangement proposed by Stronghold Insurance Company Limited (Stronghold) (the Scheme). Hildyard J found that where the appropriate comparator to the scheme was a solvent run-off of the company, creditors with incurred but not reported (IBNR) claims had rights which were so uncertain and contingent that they could not form a single class of voters alongside creditors whose claims had accrued. Accordingly, two classes of creditors were appropriate for voting purposes. In delivering his judgment, Hildyard J also expressed some concern on how creditors were adhering to the Practice Statement on Schemes of Arrangement. He reminded creditors that unless they had good reasons for doing so, creditors should raise and properly develop and argue any concerns on class composition at the first court hearing and should not be tempted to reserve their position on class issues until the sanction hearing.

Background

Stronghold is an insurance company with a long-tail business exposure, particularly in asbestos pollution and health hazard liabilities. It has been in run-off since 1985. Stronghold’s regulators, the PRA and the FCA (the Regulators), ruled that it no longer met the minimum capital requirements imposed by Directive 2009/138/EC (Solvency II) and requested that Stronghold produce an exit plan to end its run-off. Stronghold proposed the Scheme because a capital injection, sale, transfer or liquidation were all not considered viable or reasonably practicable. The purpose of the Scheme was to settle or compromise all of Stronghold’s outstanding obligations, known as a cut-off and estimation scheme. Trade creditors and creditors whose claims had been previously agreed but had not been paid were not included in the Scheme.

Stronghold submitted that the Scheme would provide creditors with a number of benefits that might not be available to those creditors in a liquidation, namely that the Scheme would use a market-driven estimation methodology in calculating claims and there was no assurance that a liquidator would adopt such an approach in assessing the correct amount for any liquidation proof.

In considering the Scheme, Hildyard J applied a two-stage test. The first stage focuses on rights: if there is no difference in the respective rights of creditors, the fact that they may have opposing commercial interests is irrelevant. This test requires consideration of (i) the rights of creditors in the absence of the scheme and (ii) any new rights creditors obtain from the scheme. The second stage considers an assessment of whether the differences in the rights of groups of creditors and their treatment under the scheme are so different as to make it impossible for them to consult together with a view to their common interest. In his judgment, Hildyard J referred to Re British Aviation Insurance Co Ltd [2006] 1 BCLC 665 (the BAIC case) which also considered whether accrued claims should be in the same class as IBNR claimants. In the BAIC case, Lewison J considered that when assessing whether all the policyholders should form a single class, the starting point was to identify the appropriate comparator: that is, what would be the alternative if the scheme does not proceed. The court noted that should an insurance company face imminent liquidation if a scheme does not proceed, IBNR claims would be estimated in accordance with the Insolvency Rules. Liquidators may well be open to discussion about a market-driven estimation model and interest among creditors may accordingly be sufficiently close to allow them to be in the same class. However, where the company is solvent and likely to remain so, the IBNR creditors may benefit from its continuance that they cannot be realistically be expected to discuss with other scheme creditors a scheme which offers an immediate advantage to those creditors but virtually none to them.

While noting that the evidence in this matter was somewhat ambivalent on whether liquidation or continued solvent run-off should be the appropriate comparator, the court concluded that the most likely alternative to the Scheme in the near and mid-term was that Stronghold would continue in solvent run-off. This was the appropriate comparator, particularly given that the Regulators had failed to determine what regulatory enforcement it would take to enforce Solvency II.

In the context of this comparator it was considered that the rights of policyholders with notified but outstanding claims were not the same as policyholders with IBNR claims. Hildyard J considered that given the basic fact that an IBNR claim was inherently (a) uncertain even as to its occurrence, as to the range of events that may give rise to an insurance liability and also to the range of magnitude of any exposure and (b) therefore likely also to be subject to much greater ranges in any estimation process, signified that any outstanding claim gives a scheme creditor a qualitatively different right from an IBNR claim and that this should be the prima facie position unless there was evidence that liquidation was imminent and the alternative to the scheme.

The court acknowledged that while there were a number of factors which might allow IBNR creditors and other creditors to still have a sufficient common interest to be able to vote in the same class, the court reached its decision that absent further guidance from the Regulators as to what they would do if the Scheme failed, a separate class of Scheme creditors “with predominantly IBNR claims” would be required.

While Hildyard J acknowledged that the court would retain some flexibility in considering the jurisdiction of schemes at the convening stage of the court process, the “inaccurate perception” that all issues affecting the jurisdiction of the court would be dealt with at the first stage was incorrect, and the fact a skeleton argument for the first hearing mentioned a particular jurisdiction issue does not mean the court is satisfied on jurisdiction. Further, he stressed that consideration on the fairness of the proposed scheme should be the principal focus of the sanction hearing and not the convening hearing.

Following consultations on insolvency and corporate governance in 2017 and 2018, the Government recently published its response setting out some notable proposed changes to the existing insolvency and corporate governance legislation. Following the high profile failures of Carillion and BHS, the Government’s response is largely aimed at encouraging the recovery of viable companies, improving transparency and promoting responsible directorship. This article will primarily look at the proposed changes focused on facilitating a rescue culture.

The response proposes the following changes to the insolvency legislation:

Introduction of a restructuring moratorium

A key proposed change is the introduction of a pre-administration moratorium for financially distressed companies whilst they consider their options for restructuring. Unlike the CVA moratorium available to small companies, the moratorium would be available to nearly all companies that meet certain eligibility requirements and qualifying conditions, including that the company will become insolvent if no action is taken and that, on the balance of probabilities, rescue is more likely than not. A company, which is already insolvent, will not be eligible for the moratorium.

For a company to enter into the new moratorium, notice must be given to all creditors and necessary filings made at court. The consent of the monitor, who has objectively assessed that the eligibility test and qualifying conditions are met, must also be filed with the court.

The moratorium will initially last for a period of 28 days, which may be extended by the company for a further 28 days. The monitor must confirm that the qualifying conditions are still met prior to the company applying for an extension. Further, the Government believes that in certain circumstances it should be possible to extend the moratorium beyond 56 days, provided there remains a good prospect of achieving a better outcome for creditors than might otherwise be possible. The extension beyond 56 days will require the consent of more than 50% of value of both secured and unsecured creditors, except where seeking such consent is impracticable.

It is proposed that the directors of the company will remain in control during the moratorium; however, a monitor will be appointed to support the integrity of the moratorium process and ensure creditors are protected. The monitor will be responsible for approving any sale or disposal of assets outside the normal course of business as well as determining whether the eligibility and qualifying requirements are satisfied throughout the moratorium and terminating the moratorium if they are not satisfied. A monitor may provide additional services to the company during the moratorium period e.g. restructuring advice or being appointed as a CVA supervisor. However, a monitor cannot take an appointment as either an administrator or liquidator in the 12 months following the expiry of the moratorium.

At any time during the moratorium, creditors will have a right to challenge the moratorium on the basis that the qualifying criteria are no longer met or that the moratorium unfairly prejudices the creditor. The Government intends to take a similar approach as in administration and an application to court will need to be made to lift the moratorium. Generally, the court has been reluctant to interfere with the administration process and lift an administration moratorium, which suggests that it may also be reluctant to lift a pre-administration moratorium. Most significantly, secured creditors will be prevented from enforcing their security during the moratorium period and although, this is the same as in the current administration moratorium in that instance, the IP is generally receptive to requests from secured creditors to enforce their security. The question arises as to whether despite the ability to apply to court to lift the moratorium; a secured creditor will have any real ability to enforce its security during this pre-administration moratorium where the company is working towards rescue.

Costs incurred during the moratorium will be treated in the same way as an expenses in administration and super-priority status will be given to unpaid moratorium costs in any future administration, with highest priority being given to suppliers who are prevented from enforcing their termination clauses (as discussed further below), followed by other costs and the unpaid fees.

The rationale behind limiting the moratorium only to companies who are solvent is to encourage companies to deal with financial difficulties at an early stage however; in practice, it may be difficult to meet this criteria. Will a company be able to take advantage of this moratorium if it becomes unlikely that it will make certain payments during the moratorium period or will creditors be required to enter standstill arrangements during this period so that a company remains ‘solvent’?

Prohibition on enforcement of ipso facto clause

The Government have proposed a prohibition on suppliers enforcing a termination clause under a contract on the grounds that a counterparty has entered into a formal insolvency procedure, the new moratorium or a restructuring plan (referred to as an ipso facto clause). This prohibition will not apply to certain types of financial products and services, however it is intended that contractual licenses will be covered (other than those issued by public authorities).

Suppliers will, in exceptional cases, be allowed to exercise a right to rely on the termination clause on the grounds of undue financial hardship. To do so, they will need permission of the court, which will consider whether continuing the supply will more likely than not lead to the supplier’s insolvency and the reasonableness of the termination.

A new flexible restructuring plan

In addition to and independent of a moratorium, there is a proposal to introduce a new restructuring process which will allow a company to bind all creditors, including a junior class of creditors through a cross-class cram down provision. In order to protect minority creditor interests, a two-fold test requiring 75% in value, plus more than half the total value of unconnected creditors must vote in support. The restructuring plan legislation will further provide that a dissenting class of creditors must be satisfied in full before a junior class receive any distribution or keep any interest under the restructuring plan, however this can be departed from where it is vital to agree an effective and workable restructuring plan. Further, no cram down can occur unless at least one class of creditors who will not receive payment in full has voted in favour of the restructuring plan. The Government have proposed that the test for determining the fairness of a plan which is being crammed down will be whether the outcome is better than the outcome under the next best alternative, which could either be administration or liquidation and may ultimately be determined by the court.

The new restructuring process will be available to all companies (both solvent and insolvent) except those involved in specific financial market transactions or similar undertakings. The restructuring process closely resembles that for a scheme of arrangement, whereby a restructuring plan proposal will be sent to creditors and shareholders, as well as filed at court. The court will examine the classes of creditors and shareholders, who may challenge the formation of the classes. Upon satisfaction that the classes are appropriately constituted, the court will confirm that a vote on the proposal may be conducted ahead of a second hearing. Creditors and shareholders will then vote on the proposals and will be able to submit a counter-proposal or a challenge to the court. If no such challenge or counter-proposal is put forward, the court will decide whether to confirm the restructuring plan. Once confirmed, the restructuring plan is binding on all affected parties, although there will be a right to appeal. It is not clear from the Government’s response what the jurisdictional requirements will be for a company to apply for the new restructuring plan.

Value extraction schemes

In recent years, there have been certain high profile sophisticated schemes where companies extracted value from a company for the benefit of shareholders shortly before the insolvency of that company. The Government intends to enhance the recovery powers of IPs by allowing them to apply to the court to reverse a transaction (or series of transactions) which unfairly removed value from the company for the benefit of shareholders but to the detriment of creditors in the lead up to a company’s insolvency. The Government believes that such transactions will only occur with connected parties and proposes that this lookback period should mirror that which is in place for the existing recovery provisions in relation to transactions with connected parties, being 2 years.

Corporate Governance

The response paper also made a number of proposals in relation to the corporate governance of a company leading up to the insolvency of a company. For example, the Government proposes increasing enforcement powers against directors of dissolved companies. In addition, they are increasingly concerned with the sale of distressed subsidiaries and as such intend to develop guidance for considerations to be made prior to such sale. Finally, the Government highlighted the need to work with the investment community to strengthen and increase the efficiency of shareholder stewardship in large group companies.

Conclusion

The UK insolvency framework has traditionally been creditor friendly; however, the response paper paves the way for a shift in focus to a more debtor friendly framework. Overall, the proposed amendments are positive and highlight the Government’s goal of increasing the possibility of rescue of a distressed, but viable company. However, timing of the proposed amendments is unclear and although the response provides that legislation will be enacted as soon as parliamentary time allows, Brexit related legislation may slow it down by several years.

Former world number one and three-time Wimbledon champion Boris Becker, who was declared bankrupt by an order dated 21 June 2017, is claiming diplomatic immunity against ongoing bankruptcy proceedings in the High Court. Mr Becker claims his role as sports attaché to the Central African Republic (CAR) makes him immune from further actions against his assets over debts owed to private bank Arbuthnot Latham and other creditors.

The trustees of Mr Becker’s estate applied on 31 May 2018 to have Mr Becker’s bankruptcy continue as they consider he has failed to comply with his obligations. The Insolvency Act 1986 provides for an automatic discharge from bankruptcy after 12 months from the bankruptcy commencement, subject to an order being made suspending the discharge. In June Mr Becker’s lawyers made submissions claiming diplomatic immunity based on Mr Becker’s purported appointment as the CAR sporting, cultural and humanitarian attaché to the European Union in April 2018. Mr Becker’s claim is that the appointment entitles him to immunity pursuant to the Diplomatic Privileges Act 1964 (DPA), which gives effect to the 1961 Vienna Convention on Diplomatic Relations (VCDR).  Specifically, Article 31 of the VCDR grants a “diplomatic agent” immunity from the criminal, civil and administrative jurisdiction of the receiving State, with limited exceptions. At a hearing in June, the parties agreed that the discharge from bankruptcy should be suspended, with the Individual Insolvency Register recording “discharge suspended indefinitely” subject to the fulfilment of conditions specified in the order made by the Court and effective from 18 June 2018.

Injunctive relief

The trustees in bankruptcy were due to hold an auction of Mr Becker’s trophies and memorabilia on 28 June 2018. Mr Becker’s legal team applied for an injunction to prevent the auction proceeding, with claims that the sale would strip their client of his personal dignity as it was deliberately timed to coincide with the start of Wimbledon. On 27 June 2018, the trustees in bankruptcy agreed to postpone the auction with an agreed order to that effect being approved by Deputy Insolvency and Companies Court Judge Catherine Addy QC. It is unclear when the auction will now take place.

Diplomatic immunity

The scope of state and diplomatic immunity has recently been considered by the UK Supreme Court in the context of employment claims brought in the English courts by members of the service staff of diplomatic missions (see Benkharbouche v. Secretary of State for Foreign & Commonwealth Affairs, Libya v. Janah [2017] UKSC 62 and Reyes v. Al-Malki & Anor [2017] UKSC 61). Diplomatic law, governed by international law, confers extensive privileges and immunities on the individual diplomat and the sending State in respect of its mission. These constitute an exception to the general rule that aliens resident in a State are subject to its jurisdiction. The principal codification of these privileges and immunities is contained in the VCDR, which is given effect in the UK by the DPA. Schedule 1 to the DPA details the articles of the VCDR having the force of law in the UK.

Diplomatic agents are inviolable. Article 29 of the VCDR provides that a diplomatic agent shall not be liable to any form of arrest or detention, and the UK shall treat them with due respect and take all appropriate steps to prevent any attack on their person, freedom or dignity. Relevantly, Article 31(1) of the VCDR grants diplomatic agents immunity from the criminal, civil and administrative jurisdictions of the receiving State. There are limited exceptions to that immunity in the case of:

The last exception to diplomatic immunity may be the subject of submissions by the trustees in bankruptcy in the upcoming hearing against Mr Becker.

In addition, Article 31(3) of the VCDR provides that no measures of execution may be taken in respect of a “diplomatic agent” except in the limited circumstances referred to above, and provided the measures concerned can be taken without infringing the inviolability of the agent’s person or residence. The immunity from jurisdiction may, however, be expressly waived by the sending State pursuant to Article 32 of the VCDR. In the case at hand, assuming Mr Becker meets the definition of “diplomatic agent” and is entitled to diplomatic immunity, the CAR may waive his immunity from the civil jurisdiction, enabling the bankruptcy proceedings to proceed. If the High Court is satisfied that Mr Becker is entitled to diplomatic immunity (and the CAR does not waive any immunity), the bankruptcy proceedings will be dismissed. As stated by Lord Sumption in Reyes v. Al-Malki & Anor [2017] UKSC 61 at [49]:

“An action brought against persons entitled to diplomatic immunity is not a nullity. It is merely to be dismissed. There are therefore valid proceedings currently on foot. Diplomatic immunity is a procedural immunity. The procedural incidents of litigation normally fall to be determined by a court as at the time of the hearing. Thus a waiver of immunity after the commencement of proceedings would dispose of any diplomatic immunity which previously existed.”

Notably, on termination of a diplomat’s office, a diplomatic agent loses their personal immunity and can be sued for personal debts contracted, but retains immunity ratione materiae for any acts they performed on behalf of the State they represented (see Article 39 of the VCDR). For example, in Shaw v. Shaw [1979] 3 All ER 1, a wife filed a petition for a dissolution of her marriage to a diplomat attached to the U.S. embassy. At the time her husband was immune from suit, but the petition was allowed to proceed once the husband’s posting came to an end and he left the United Kingdom.

Diplomatic agent

Mr Becker’s case will arguably turn on whether he meets the definition of “diplomatic agent” (and does not fall foul of the limited exceptions) and, if so, whether any express waiver of immunity has been provided by the CAR. Relevantly, Article 1(e) of the VCDR provides that a “diplomatic agent” is the head of the mission (e.g. an ambassador or high commissioner) or a member of the diplomatic staff of the mission. “Members of the diplomatic staff” are separately defined as “members of the staff of the mission having diplomatic rank” (see Article 1(d)). Mr Becker claims his CAR passport is evidence of his diplomatic status. The validity of this claim was questioned by the CAR foreign minister, but the minister was subsequently contradicted by the CAR embassy in Brussels, which confirmed Mr Becker’s status as a diplomat and that he retains an office in Brussels to carry out his work. As noted earlier, if Mr Becker is recognised as a “diplomatic agent” by the Court and there has been no express waiver by the CAR, he would be immune from suit, and the bankruptcy proceedings would be dismissed. This will be the subject of a further hearing anticipated to be held after 5 October 2018.

The outcome of the October hearing will no doubt be eagerly awaited by Mr Becker and diplomats in the UK. The issue of diplomatic immunity in the context of bankruptcy proceedings has not been considered widely and is therefore of interest. The growing trend to assert diplomatic status to shield persons from proceedings has been the subject of criticism in recent years. An update on these proceedings will be provided following the hearing.

These are just a few of the big high street names which have sought to compromise their obligations to creditors in recent months via a company voluntary arrangement (CVA).

CVAs are designed as a flexible method by which companies can seek to contractually alter their position regarding different creditors – each CVA will be different, but it is typical, for example, for unsecured trade creditors to be treated differently to landlords. It’s worth noting that secured creditors are not bound by a CVA, unless they agree to this.

Following the upsurge in the use of CVAs for high profile companies in recent months, the Pension Protection Fund (PPF) has issued a guidance note (available here) on CVAs. This applies when one of the creditors is a defined benefit pension scheme.

The guidance note contains some useful insight into the PPF’s approach to CVAs, summarised briefly below:

As with any insolvency process, engaging with key stakeholders early on is of crucial importance. The guidance note provides an overview of the factors the PPF will consider when reviewing CVA proposals, which should provide a steer for those considering or proposing a CVA as to areas of concern to be addressed when formulating the CVA proposals where there is a defined benefit pension scheme involved.