Insolvency professionals have watched with great interest as the Corporate Insolvency and Governance Bill (the Bill) was recently published by UK Parliament. We understand that the Bill is due to receive its second reading before UK Parliament this week. If passed, the Bill will represent the biggest change to the UK's insolvency and restructuring framework for almost twenty years and whilst the detail of the proposed changes is yet to be finalised, we consider what some of the key reforms may mean for Jersey debtors and creditors, supply chains and cross border restructurings more generally.
Jersey creditors will already be aware of the statutory moratorium that protects debtors in an administration process from legal proceedings being commenced or continued. The Bill proposes to introduce a standalone moratorium however, independent of any other restructuring process, to give debtors "formal breathing space" from creditor pressure and allow them to consider their restructuring options during this time. The moratorium will last for an initial period of 20 business days with an ability to extend for a further period of 20 business days without consent and with the possibility of further extensions of up to one year or more.
The moratorium extends to the enforcement of security (other than financial collateral or collateral security charges) and the crystallisation of floating charges. Jersey creditors with the benefit of security over an English debtor or its assets with the benefit of such moratorium will therefore be prohibited from taking action and enforcing its security whilst the moratorium is in place.
It will be interesting to see if Jersey incorporated debtors with their centre of main interests in England may also utilise the standalone, statutory moratorium, in a similar way that a Jersey incorporated company can be placed into an English law governed administration process if appropriate, via an exchange of letters of request between the courts in each jurisdiction.
Another proposal that could also directly affect Jersey creditors (and shareholders) of English companies is the new reorganisation measure proposed, which will be similar to a scheme of arrangement. This proposal allows struggling companies, or their creditors or members, to propose a new restructuring plan which will provide an alternative rescue option for companies that are suffering financially.
The ability to cram-down one or more classes of creditors or shareholders in the restructuring plan, however, makes this distinct to the scheme of arrangement. The cross-class cram down mechanism could mean that dissenting junior, or senior, Jersey creditors find themselves bound by a plan if sanctioned by the court as fair and equitable, and if the court is satisfied that such dissenting creditors would be no worse off than if the company entered an alternative insolvency procedure.
The restructuring plan could change the ways in which cross-border restructurings are structured and implemented in the UK and across Europe and with significant flexibility for junior creditor-led or even equity-led restructurings, it may become the restructuring tool of choice.
The Bill seeks to introduce provisions that will prevent suppliers of goods and services from terminating, varying or exercising any right under a contract due to its counterparty entering into an insolvency or restructuring procedure. This will mean that, subject to certain exceptions, suppliers will have to continue to supply companies in restructuring or insolvency processes, with the hope being that this will allow companies to trade through those processes.
Jersey suppliers to struggling English companies may therefore find their hands tied when considering the contractual rights available to them. Some comfort can be taken, however, from the safeguards set out in the Bill that provide, for example, for suppliers to apply to court for permission to terminate the supply contract on grounds of hardship.
Whilst the devil will be in the detail and secondary legislation could yet be introduced that may alter the proposals, the reforms highlighted above are likely to have consequences to restructuring and insolvency processes that reach beyond the confines of the UK. The proposed restructuring plan is of particular interest to Jersey insolvency professionals. We anticipate that, much like the scheme of arrangement, the proposed restructuring plan that will be used to compromise English law debt will have significant implications for cross border restructurings. Recognition of the terms of a restructuring plan, where the jurisdiction of incorporation of the company being restructured is outside of the UK, will clearly be critical. Recent Jersey authorities evidence a willingness of the Royal Court to take a pragmatic approach when it comes to assisting foreign courts with complicated international insolvencies and we expect Jersey to be a jurisdiction that will facilitate the use of this new restructuring tool, where appropriate to do so.
Originally published 2 June 2020
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