This past week has seen the return to work for many with attention now focusing to the year ahead. But what does 2019 promise for UK restructuring and insolvency specialists? Here we dust off our crystal ball and highlight a few immediate observations.
1. Final countdown to Brexit
In making any forecast for the year, it would be entirely remiss to ignore Brexit altogether, but with the UK Parliament’s vote on Theresa May’s Brexit deal scheduled for next week and still a myriad of outcomes possible, there seems little point in adding to the speculation as to what may or may not happen as a result of Brexit. Suffice it to say, insofar as the future of the UK’s cross-border insolvency regime with the EU is concerned, it’s very much a case of heads or tails. If ‘heads’ i.e. the UK chooses to withdraw from the EU without a deal, the Insolvency (Amendment) (EU Exit) Regulations 2018 will come into force, effectively transplanting the Recast Insolvency Regulation (EU/2015/848) into English law with effect from 29 March 2019 (albeit without the crucial reciprocal recognition arrangements for UK insolvency appointments across the EU). Alternatively, if ‘tails’ i.e. the UK exits the EU with a deal, we can expect further negotiations to determine the extent to which the UK retains any of the benefits and obligations under the European Insolvency Regulation 2000 (EC/1346/2000) and the Recast Insolvency Regulation (EU/2015/848) during any transition period. More on this will inevitably follow!
2. New domestic insolvency legislation
Last October we reported on the UK Government’s response to two separate consultations, in which it announced a number of domestic insolvency reforms. Following that announcement, we can likely expect legislation to follow this year which is designed to introduce new insolvency tools covering the following:
- An extendable, 28-day moratorium (similar to the administration moratorium) to enable solvent companies to explore restructuring options.
- An option for companies to propose a restructuring plan. This will share some similarities with schemes of arrangement, but with the potential to cram down dissenting classes of creditors.
As we mentioned in our October alert, corporate governance reforms are also expected, including an extension of the investigative regime under the Company Directors Disqualification Act 1986 to cover former directors of dissolved companies.
Two other legislative reforms are worth flagging:
- A new insolvency regime for further education providers - a sector that is attracting quite a lot of attention from insolvency practitioners - is expected to enter force on 31 January 2019.
- A new statutory moratorium for individuals is expected to be made available, together with a new statutory debt repayment plan.
By way of completeness, and to the surprise of many (including, it seems, the Insolvency Service), the Chancellor announced plans in his October Budget last year to reintroduce elements of Crown preference and to tackle tax avoidance through phoenixism, albeit with effect from 2020.
And perhaps looking a little further ahead, back on 27 December (around the same time as HMV announced it was again entering administration) the Government published its response to the Law Commission’s Report on consumer prepayments on retail insolvency which focused on whether consumers who lose deposits or gift vouchers when retailers become insolvent are in need of greater protection. The response indicates that the Government intends to introduce legislation to protect the money consumers put into Christmas Savings Clubs, although it has no plans to re-visit the hierarchy of creditors on insolvency.
3. CVAs to remain popular
For many in the R&I sector, 2018 was the year of the company voluntary arrangements (CVA), as many well-known businesses, particularly those which function within the retail and casual dining spaces, resorted to this restructuring tool. Examples of businesses which implemented CVAs over the last 12 months have included House of Fraser, Carpetright, Homebase and GBK. Given that many businesses in the retail, leisure and casual dining sectors are continuing to experience a rise in operating costs and a downfall in trading performance, we can likely expect 2019 to continue to see further examples of CVAs. But as creditors grow more familiar with these insolvency procedures, we might also expect to see more challenges to CVAs too. In particular, once a CVA has been approved by the requisite majority of creditors, there is a 28-day statutory challenge period which affords creditors an opportunity to challenge the CVA on the basis of unfair prejudice or some kind of material irregularity. CVAs have never been popular with landlord creditors and it will be interesting to see if landlords (and perhaps other creditors) make more challenges to CVAs during 2019.
4. New regulations in respect of insolvency practitioners
Some developments in the regulation of insolvency practitioners (IPs) are expected during 2019. Three potential changes are worth highlighting as follows:
- A decision of the Insolvency Service is expected on whether it will remove the role of regulating IPs from the professional bodies (including the ICAEW and the IPA).
- The Government is expected to make an announcement on whether it plans to introduce regulations to impose conditions on sales to connected parties in administration including via pre-packs.
- New guidance to IPs is expected on how to deal with large scale redundancies.
5. Antony Gibbs re-visited
And finally, we wanted to flag one case which is currently working its way through the English Courts, and is worth keeping an eye on during 2019. This is a potential appeal to the Supreme Court in the ongoing Sberbank proceedings (OJSC International Bank of Azerbaijan, Re). The issue is whether the English Courts have, notwithstanding “the rule in Antony Gibbs”, power to give effect to foreign restructuring proceedings which compromise English law debts, without the approval of the relevant creditors. According to the common law rule known as Antony Gibbs, contractual debt obligations can only be discharged under the law applicable to the contract in question. As such, until now it has only been possible to compromise English law obligations non-consensually under English law. Watch this space to see if the Supreme Court comes to a different view.