Alexandra Wood, Counsel, Mayer Brown LLP
Where a company or corporate group operates in multiple jurisdictions, any restructuring will need to be planned carefully in order to be both successful and cost effective, explain Christopher Boardman QC of Radcliffe Chambers and Alexandra Wood of Mayer Brown
In a cross border situation, directors will need to understand both English domestic insolvency procedures (such as administration and company voluntary arrangement under the Insolvency Act 1986) and restructuring tools (such as schemes of arrangement and restructuring plans under the Companies Act 2006) and the processes available in the key jurisdictions in which the company and its wider group operate or to which they have a connection.
This is because the place of the company’s incorporation does not necessarily determine the jurisdiction in which insolvency or restructuring proceedings may be commenced. Hence, an English company may become the subject of insolvency or restructuring proceedings in another jurisdiction (and foreign companies can be the subject of such proceedings here) if it has (depending on the jurisdiction) more or less substantial connections with that jurisdiction.
Further, in a group structure, the place of incorporation of the parent company or key operating company may not determine the jurisdiction in which such proceedings may be commenced in respect of other group companies. It may not be possible for all the companies in a group to enter into proceedings in a single jurisdiction. Even where it is possible, there may be good reasons for different companies in a group to take advantage of different options available in different jurisdictions.
Ultimately, a group-wide restructuring may involve a combination of different insolvency and restructuring proceedings across multiple jurisdictions, involving some (but perhaps not all) of the companies in the group. Even the restructuring of an individual company can raise cross border issues if it operates in multiple jurisdictions.
What directors need to know
Key issues for directors will include:
1. Which are the key jurisdictions in which the group operates or has valuable assets or to which it has a connection?
At the heart of any business insolvency or restructuring, are the relevant assets and liabilities. If they are located in more than one jurisdiction and governed by more than one law, realising those assets and restructuring those liabilities is bound to be more challenging. Where they are distributed across more than one company, the complexities increase and the impacts of an insolvency or restructuring may need to be carefully planned.
2. What type of procedure (if any) is required in respect of each company in order to implement the proposed restructuring or winding up? For instance: a rescue procedure under which a business can trade and/or the relevant assets can be realised; a ‘cram down’ mechanism through which the relevant debts can be compromised, even in the face of opposition; and/or a liquidation process.
There can be very significant differences between the procedures available in different jurisdictions and the way in which they operate. For instance: What is the timeframe and likely costs associated with the process? Is the company protected by a moratorium (stay) against creditor action while the restructuring is implemented? If some or all of the business is to continue, what protections are available for any new funding provision? Who will manage the business through the process (existing directors or an insolvency officeholder or court appointed official)? What are the requirements for any asset sale process?
3. Under what circumstances do the courts have jurisdiction to open the restructuring or insolvency proceedings?
Whilst the English courts have a wide jurisdiction to commence formal insolvency proceedings (such as administration and liquidation) in respect of foreign companies, the courts in EU member states (other than Denmark) are bound by the EU Regulation on Insolvency Proceedings 2015 (Recast Regulation) which determines, among other things, the member state(s) in which proceedings can be commenced.
If the Recast Regulation applies, main insolvency proceedings can be opened only in the member state where the company’s centre of main interests (COMI) is located and secondary (territorial) insolvency proceedings can only be opened in any jurisdiction(s) in which the company has an ‘establishment’.
4. Will the legal consequences of insolvency proceedings commenced in respect of a company in one jurisdiction be recognised in another jurisdiction (either automatically or by way of a court application), or will ‘parallel’ proceedings need to be opened? Will it be possible to protect and ultimately realise assets located in another jurisdiction (for instance, to sell inventory or transfer shares in a foreign subsidiary)?
There is significant variation between jurisdictions as to the recognition of foreign insolvency proceedings. For instance, the Recast Regulation provides for automatic recognition, without court order, of insolvency proceedings falling within its remit. A number of jurisdictions (including the UK and the US, but not including many EU countries) have enacted legislation (the Cross-Border Insolvency Regulations 2006 and Chapter 11 of the US Bankruptcy Code) based on the provisions of the UNCITRAL Model Law on Cross-Border Insolvency, which provide a framework for the recognition, by court application, of foreign insolvency proceedings.
However, foreign insolvency proceedings may not always be recognised and, if they are not recognised, protecting and realising assets in those jurisdictions will require careful consideration and ultimately may not be cost effective.
5. If a ‘cram down’ process (such as a restructuring plan or scheme of arrangement) is being used to compromise a company’s debt, will a foreign court treat that process as having the substantive legal effect of altering the creditors’ legal rights (or will the creditor remain free to pursue the company in that foreign court)?
In particular, England (and a number of offshore jurisdictions) applies the Rule in
Gibbs (from
Antony Gibbs & Sons v La Societe Industrielle et Commerciale des Metaux (1890) LR 25 QBD 399) pursuant to which debt is treated as discharged only if either it is compromised in accordance with the law of the jurisdiction which governed the instrument giving rise to the debt; or the creditor has submitted to the court’s jurisdiction. In practice, if a company wishes to compromise English law governed debt, an English process is likely to be required.
6. From the directors’ personal perspectives: What are their duties in respect of the company or companies over which they are appointed? If those companies enter an insolvency procedure, do the directors face potential personal liability or challenge?
The position in respect of directors’ duties may differ between jurisdictions. Directors need to be aware of any specific requirements, such as the duty to avoid wrongful trading, to place a company into an insolvency process. They also need to be aware of any provisions for transaction avoidance, such as preferences and transactions at an undervalue. These provisions may be capable of being engaged in more than one jurisdiction, with differing effects.
Recent years have seen a number of jurisdictions introduce new restructuring and insolvency processes. In the UK, the new standalone moratorium and the restructuring plan were introduced by the Corporate Insolvency and Governance Act 2020.
In the EU, a number of jurisdictions have either introduced new processes or modified existing ones in order to implement the EU Directive on preventative restructuring frameworks. In the UK, the restructuring plan has been used quite regularly, not only for large restructurings but also in a recent case involving an SME.
The decision by the UK government to model the new restructuring plan on the existing scheme of arrangement has significantly facilitated this, as it affords parties a far greater degree of certainty as to the way in which the English court will view a proposed restructuring plan.
If a new process is introduced without such a precedent to draw upon, it may be unattractive to those companies which might otherwise seek to use it. Predictability of outcome is, in our experience, an important element to any insolvency or restructuring.
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