INSOLVENCY AND CORPORATE REORGANISATION Survey 2014

Lead contributors: John Houghton, Howard Lam and Mitchell Seider

Insolvency and Corporate Reorganisation Survey 2014

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Section 1: CREDITORS’ RIGHTS

1.1 When may a company seek relief from creditors? Must a company be insolvent?Certain corporate restructuring procedures such as voluntary arrangements (CVAs) under the Insolvency Act 1986 (IA) or schemes of arrangement under the Companies Act 2006 (a process involving a compromise or other arrangement with creditors or members) do not require a company to be insolvent, although in most restructuring cases the company will be tinker-ing on the brink of insolvency.

Both insolvent and prospectively insolvent companies can apply for ad-ministration and liquidation.

1.2 Does an automatic stay against creditor action arise upon filing of a bankruptcy case?

Once a (voluntary) liquidation petition is presented, the company or a creditor must apply to the court for a stay of any pending proceedings. Once a winding-up order has been made (involuntary liquidation), an au-tomatic stay on creditor actions comes into force. No stays come into force on the enforcement of security, repossession of goods sold or hired and cancellation of contracts or leases.

Administration is the corporate rehabilitation proceeding. The order (and usually the petition itself ) generally operates as a stay on all legal proceedings and liquidation petitions by creditors whilst the administrator seeks to achieve the purposes for which the administration order has been granted. The stay on creditor action includes (unless the court or administrator consents to action) a freeze on steps to enforce any security except in the case of security interests created by or arising under a financial collateral arrangement.

The directors of a company or administrators in an administration may propose a CVA with creditors on which creditors and shareholders vote. The proposal does not stay execution proceedings or freeze the enforce-ment of security (except in the case of small companies, where a 28-day moratorium applies).

For schemes of arrangement, there is no automatic stay. However, in a recent (fact-specific) case the High Court exercised its general discretion under the Civil Procedure Rules to order a stay of proceedings brought by two lenders to recover their debt, to allow the debtor to continue its ad-vanced negotiations for a scheme with the rest of the lender constituency.

1.3 Who administers the estate following commencement of a voluntary bankruptcy case?

Liquidation – there is no debtor in possession; the liquidator administers the estate and all directors’ powers will cease unless the company in general meeting or the liquidator sanctions their continuance.

Administration – there is no debtor in possession. The business is run by the administrator who is a qualified insolvency practitioner. Technically, the board remains in place until removed and the directors have an ongoing duty to cooperate with the administrator.

CVA –management remains in place with an insolvency practitioner put-ting together and implementing the proposal.

Scheme of arrangement – the management stays in place.

Section 2: DEBTORS’ RIGHTS

2.1 Does the debtor have an exclusive right to propose a reorganisation plan?

Administration – the administrator, as agent of the debtor company, must prepare a statement of how he proposes to conduct the administration, indicating which of the statutory purposes he intends to achieve and how. Where the proposal is rejected by creditors, the administrator must seek court directions.

CVA – only the directors of the company or an administrator or liquidator appointed to the company can propose the CVA. However, creditors are likely to be consulted before the formal launch to ensure they support the CVA and will vote it through.

Scheme of arrangement – the debtor does not have the exclusive right; other interested parties, including shareholders and creditors, can apply to court for permission to call meetings to approve a scheme of arrangement (al-though in practice this is rare).

United Kingdom

John Houghton, Latham & Watkins, London

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2.2 What are the voting requirements for approval of a plan?

Administration – the administrator’s proposal must be approved by more than 50% in value of those creditors attending the meeting and voting, although it would be invalid if 50% in value of creditors who are uncon-nected to the company vote against it.

CVA – must be approved by creditors compromising of 75% in value of company’s creditors present and voting at the meeting of creditors in per-son or by proxy and 50% in value of creditors that are unconnected with the company.

Scheme of Arrangement – must be approved by a majority in number and in excess of 75% in value of the creditors in each class.

2.3 May a plan be approved above the objection of a creditor or a class of creditors (ie does the concept of a cram-down exist)?

Administration – once the administrator’s proposals are accepted by a ma-jority of creditors, any dissenting creditors can be crammed-down. Certain preferential claims will be prioritised in the plan.

CVA – cram-down is available, however, secured and preferential creditors may block any proposal that adversely impacts their security and preferen-tial rights, respectively.

Scheme of Arrangement – the ability to bind all affected creditors, includ-ing secured creditors, makes Schemes a powerful cram-down tool, often availed of by foreign companies.

2.4 Is post-petition financing able to receive super-priority status?

Liquidation/Administration – a liquidator has the power to raise any mon-ey required and an administrator has the power to raise or borrow money, in both cases on the security of the company’s assets. Such credit would have priority over ordinary unsecured creditors and any floating charge re-alisations, but not over pre-existing fixed charge security (unless permitted under the relevant documentation or consented to by the relevant parties).

Scheme/CVA/restructuring – in an informal restructuring, or one imple-mented by a Scheme or CVA (outside administration), post-petition fi-nancing and its ranking is a matter for negotiation.

2.5 Can the debtor sell all or a portion of its assets through a going concern reorganisation plan or otherwise?

A sale may be done via a trading administration or by way of pre-pack ad-ministration. In a pre-pack administration, the debtor company together with an administrator in waiting will negotiate a sale of the company as a going concern or of all or part of the company’s assets before the ap-pointment of the administrator. The administrator is appointed and sells to the third party, usually after a short period of marketing of the business/assets. The other sale mechanism is via a trading administration, where the administrator runs the business as a going concern for the purpose of exploring what exit offers the best return to creditors; one of the options of which is a sale of the business post a market testing exercise (with the idea of generating a robust valuation).

There is no specific legislation on credit-bidding but it is a generally accepted tool in the UK market, especially in the context of debt-for-equity restructurings, but only insofar as it is permitted under the finance documentation.

Legislation does not prohibit or permit the use of stalking-horse bids. 2.6 What are the duties of directors of an insolvent company? Once a company is of doubtful solvency, a duty shift takes place whereby the directors must look after the interests of the creditors above those of the shareholders.

Apart from rarely proved personal liability of directors for fraudulent trad-ing, the IA established personal liability of directors for wrongful trad-ing. If the company has gone into insolvent liquidation and the directors “knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation” they could be held liable unless they can show that they took “every step with a view to minimising the potential loss to the company’s creditors he ought to have taken”.

Both objective and subjective standards are applied to each director; ob-jectively, have they discharged their duties in accordance with what might reasonably be expected of a director of (e.g.) that size of company? Sub-jectively, does that particular director possess qualities or a position where more might be expected of him/her?

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Section 3: CONTRACTS AND SUBORDINATION

3.1 How are executory contracts treated?

Liquidation – a liquidator has the express power to disclaim onerous prop-erty, including unprofitable executory contracts without needing leave of the court.

Administration – an administrator cannot reject unprofitable or burden-some executory contracts. In practice however, an administrator may choose not to comply with contracts entered into by the company before adminis-tration, leaving the counterparty with an unsecured claim for damages.

3.2 Is contractual subordination enforceable?

Yes – recent case law also confirmed that contractual subordination provi-sions are valid on the insolvency of the debtor.

Section 4: OTHER MATERIAL CONCERNS

4.1 What other major stakeholders (eg governmental or regulatory institutions) could have a material impact on the outcome of the reorganisation?In an out-of-court restructuring, ad-hoc creditors’ committees usually act as the key negotiating and consulting body. Other key governmental stake-holders include:

• TheFinancialConductAuthority,fromwhichapprovalmaybeneededon the basis the transaction constitutes a “related party transaction” un-der the UK Listing Rules;

• ThePensionRegulator,whohaspowerstoissuefinancialsupportdirec-

tives and contribution notices;

• HM Revenue & Customs, which although it has lost its preferentialstatus as a creditor, is known to challenge restructurings and reorganisa-tions that appear unfair; and

• Sometimesinrelationtoanexitbywayofabusinesssale,clearanceandinput from UK and EU competition authorities may be required.

John HoughtonLatham&WatkinsT: +44 20 7710 1847E: john.houghton@lw.comW: www.lw.com

About the author

John Houghton is the global co-chair of the insolvency practice and head of the European restructuring, insolvency and workouts practice at Latham & Watkins. He specialises in advising creditors, sponsors, corporatesand insolvency practitioners on all areas of international restructurings, insolvency and general corporate recovery. He also advises parties seeking to invest funds into existing insolvencies and restructurings. Houghton has been, and remains, involved in some of the most high-profile and complex cross-border corporate and financial restructurings over the past years. He is a member of R3 (the insolvency professional body), the Insolvency Lawyers Association, INSOL Europe and is a fellow of the Association of Business

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CROSS-JURISDICTIONAL ANALYSIS

Key

Generally favourable to creditors

Neutral or neither favourable to creditors or debtors

Generally favourable to debtors

Creditors’ rights

Debtors’ rights

Contracts and subordination

Au

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Ad

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lan

Vo

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g r

eq

uir

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Cra

m-d

ow

ns

Po

st-p

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inan

cin

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Ass

et

sale

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Exe

cu

tory

co

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acts

Co

ntr

actu

al s

ub

ord

inat

ion

AustriaBinder Grösswang

BrazilFelsberg Advogados

CroatiaMacesic & Partners

CyprusAndreas Neocleous & Co

Czech RepublicBBH

FranceAllen & Overy

GermanyDentons

GreeceKaratzas & Partners

Hong KongLatham & Watkins

IndonesiaDNC Advocates At Work

IrelandDillon Eustace

MexicoCreel García-Cuéllar Aiza y Enriquez

NorwayKvale Advokatfi rma

PhilippinesSyCip Salazar Hernandez & Gatmaitan

RussiaClifford Chance

South KoreaYoon & Yang

SpainBaker & McKenzie

SwitzerlandMeyerlustenberger Lachenal

UKLatham & Watkins

USLatham & Watkins

NA

NA

CREDITORS’ DEBTORS’ CONTRACTS & RIGHTS RIGHTS SUBORDINATION