Changes for the UK Restructuring and Insolvency Market- predictions for 2021

At the start of 2020, we considered what changes the UK restructuring and insolvency market might expect to see during the year – however no one could sensibly have predicted the significant and far reaching impact of COVID-19.

In part 1 of our blog, we look back at 2020 and look forward to what the UK restructuring market can expect in 2021 considering the new Insolvency Laws, expected Rule changes, pre-pack sales and practice and procedural points.

Insolvency Laws – all change in 2020, what about 2021?

Last year we saw the proposed corporate insolvency reforms fast tracked into the legislative books making both temporary and permanent changes to the UK’s insolvency laws. See our Quickguide on Changes to the UK Insolvency Regime – what the Act means for UK Businesses as a useful overview of the changes.

Permanent Changes – impact to date

The Corporate Insolvency and Governance Act 2020 (CIGA) introduced new insolvency tools, in the form of the new restructuring plan and moratorium, and whilst we have seen the likes of Virgin Atlantic implement a plan, only a handful of businesses have taken advantage of the new moratorium.

Recently, the court sanctioned the first ever UK cross-class cram down in relation to the plan for DeepOcean and in 2021, as the market becomes more familiar with this new tool and as the case law develops, we may see the restructuring plan being used more widely and extending into the SME market.

Temporary Measures – further extension?

Temporary measures (such as restrictions on presenting winding up petitions and suspension of wrongful trading rules) are due to expire at the end of March (April for the relaxation of wrongful trading rules). For many companies they will also have to face up to discharging the VAT that they were allowed to defer from March 2020. However, an abrupt end to the measures could see a wave of insolvencies.

Ministers recognise the potential cliff-edge and in debates in the House of Lords reveal that ‘work is ongoing to develop measures to address what we are aware is a potential issue’ – what this means, we will have to wait and see.  Perhaps a further extension of the temporary measures or a tapered approach. It is difficult to predict but a further extension will, for some companies, simply mean kicking the insolvency can further down the road

New Insolvency Rules

One thing we can expect in early 2021 are new Insolvency Rules.

CIGA introduced temporary rules to implement the new procedures but permanent rules are expected shortly although as yet, we don’t know the date for those.

Appointing administrators

One issue the new Rules might clarify is the time when an e-filed notice of appointment of administrators takes effect, particularly one filed outside of court hours, hopefully addressing the flood of cases considering this issue.

Cases such as Re Keyworker Homes (North West) Ltd, concluded that a notice of appointment could be e-filed and take effect even when filed outside normal court opening hours, but even in early 2020 the courts were still having to address issues created by e-filing notices of appointment (see our previous blog).

However, the issues created by the decision in Keyworker Homes were addressed in the Temporary Insolvency Practice Direction (TIPD).

The current TIPD sets out the time and date that the court will apply to a notice of appointment filed out of hours, however the practice direction is due to expire on 31 March 2021 and therefore unless extended (or the issue addressed in the new Rules), we could see the Courts having to grapple with this question again in 2021.

That said, it is doubtful that a Rule change or clarification would eliminate all challenges to appointment.  A failure to abide by procedural requirements will likely still require judicial consideration of the validity of an appointment – see a recent example in our blog concerning a QFCH appointment.

Changes to pre-packs

The proposed pre-pack regulations will introduce a mandatory requirement for an administrator to obtain creditor approval or an independent written opinion before proceeding with a pre-pack sale to a connected party.

Whilst we have no hint of a date when this will become mandatory, other than when parliamentary time allows, the new regulations will have to be enacted by June 2021 when the government’s power to make the regulations expires.

Practice and procedure

Remote swears and hybrid hearings

The TIPD introduced a number of temporary procedures and changes to address COVID-19 challenges including the option to swear NOIs and NOAs remotely. Given that restrictions on meeting people could be in place beyond 31 March when the temporary measures expire, an extension to the TIPD may be required to address the need to work remotely, although at this point, there is no mention that it will be.

Further, we have seen the introduction of remote and hybrid hearings in the TIPD. The ability to manage court processes remotely has been helpful, aided by CE-filing which although still only a pilot scheme will no doubt be extended beyond 6 April 2021 when the pilot scheme expires.

Finally, we have seen temporary processes for presenting and pursuing a winding up petition set out in the Insolvency Practice Direction relating to CIGA.  This introduced the ‘Coronavirus Test’ (see our previous blog).  The temporary processes remain in place until 31 March 2020, but given the government is aware of the potential cliff edge will this be extended to avoid an influx of winding up petitions?

Statements of Insolvency Practice (SIPS)

SIP 3.2—Company voluntary arrangements, SIP 7—Presentation of financial information in insolvency proceedings and SIP 9—Payments to insolvency officeholders and their associates from an estate (England) will all be updated with effect from 1 April 2021.

Insolvency Practitioners should ensure they are aware of the changes ahead of then, and for other professionals it is worth noting the changes in SIP 3.2 in relation to the provision of information and the nominee’s role.

In the final part of this blog, we will discuss the Pensions Schemes Act, potential changes to directors’ duties, HMRC and cross border insolvencies.  To ensure that you receive updates, please subscribe to our blog.

 

Cannabis and Bankruptcy: 2020 in Review

In 2020, bankruptcy court doors continued to be shut to cannabis companies.  Perhaps most troubling is the continued bar for companies that are only tangentially involved in the state-legalized cannabis industry.  Although outlier cases exist, and even though courts have hinted that bankruptcy may be appropriate for some cannabis-related individuals and companies in some situations, there is a consensus now that bankruptcy is generally not available to individuals and companies engaged, directly or indirectly, in the cannabis industry.  Below are some of the most important decisions from 2020. Continue Reading

Guide for UK Corporates: Assessing Business Viability and Director Risk

2021 remains challenging for many businesses, and uncertainties about the future make it imperative for UK businesses to identify and address potential risks to their business now.

We have updated our Assessing Your Business Viability and Director Risk Guide to assist UK businesses with identifying those risk areas.  Our guide covers cash flow considerations, financial pressure points, employees, tax, Brexit and directors’ duties.  This can be used as a helpful reference point to help navigate the challenges of the next few months.

The Supreme Court Confirms That Passive Retention of Property Does Not Violate Section 362(a)(3)

On January 14, 2021, the Supreme Court unanimously held in City of Chicago v. Fulton that a creditor’s passive retention of a debtor’s property does not violate section 362(a)(3) of the Bankruptcy Code. The Court’s 8-0 decision (Justice Barrett did not participate in the consideration or decision of the case) may have the unintended effect of increasing bankruptcy costs and making it more difficult for individual debtors to achieve a “fresh start”.

 

I. Background

When a bankruptcy case is filed, certain Bankruptcy Code sections take immediate effect and have a significant impact on a debtor’s property. First, section 541(a)(1) creates the bankruptcy estate, which is comprised of “all legal or equitable interests of the debtor in property.” This includes any property made available to the estate by other provisions of the Bankruptcy Code. One such other provision is section 542, which governs the turnover of property to the debtor’s estate. Section 542 commands that, with certain exceptions, any entity in possession of a debtor’s property shall deliver the property to the debtor.

Second, a bankruptcy petition operates as an automatic stay, preventing, in relevant part, “any act to obtain possession of property of the estate…or to exercise control over property of the estate.” 11 U.S.C. § 362(a)(3). The automatic stay is one of the fundamental elements of the bankruptcy system: it protects the debtor’s assets from unilateral creditor actions during the bankruptcy case and maintains the status quo. Continue Reading

Implications of the EU-UK Trade Agreement on UK Financial Services

As expected, the market access to the EU for UK financial services firms has changed post-Brexit. As of 1 January 2021, UK financial services firms that intend to do business in the EU can no longer rely on the EU Single Market to offer their services using the EU passporting system. Therefore, the implications of the Trade and Cooperation Agreement (“Agreement“) for financial services are more severe than for example trade, and the effects come close to that of a hard Brexit.

The Agreement deals with market access for financial services firms in a similar way to other EU Foreign Trade Agreements with third countries in that they must comply with EU legal obligations on market access, including authorisation requirements and supervision. Continue Reading

Breathing space for individuals may lead to constricted cashflow for UK businesses

The Debt Respite Scheme (Breathing Space) comes into force on 4 May 2021. This allows individuals to obtain “breathing space” from creditors under certain circumstances.

A breathing space can be obtained if:

  • An individual cannot or is unlikely to be able to repay their debts and a debt adviser considers a breathing space appropriate – the standard breathing space
  • An approved Mental Health Professional certifies that a person is receiving mental health crisis treatment – the mental health breathing space

If a business is owed money by an individual, they may receive notice that an individual has the benefit of breathing space. Whilst this is in force, that business will be unable to take certain steps (i.e. enforcement/ recovery action, contacting the debtor to request payment and charging interest/ fees/ penalties/ charges during the breathing space). Continue Reading

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