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With the confirmation of Carlson Travel’s plan of reorganization within 24 hours from the company’s filing, expedited confirmations took another step toward normalization. Carlson Travel (better known as Carlson Wagonlit Travel) together with 37 affiliated entities filed bankruptcy in the Southern District of Texas (Houston Division) on the evening of Thursday, November 11, 2021. The debtors managed to schedule a joint hearing on the approval of their disclosure statement and confirmation of their prepackaged plan for Friday morning, the next day. As with all pre-packs, the debtors had solicited votes on their plan prior to filing their cases, including a pre-petition notice period for objections. The company reported that it had received acceptances from all of its bank lenders and more than 90% of its other secured debt. Earlier in 2021, Belk Inc. and affiliates accomplished a similar feat in the same Court. Others to confirm their prepackaged plans on an expedited timetable include Sunguard Availability Services Capital, Inc. and FullBeauty Brands Inc., both in 2019.

Confirmation of Carlson Travel’s plan, however, was not without dissent. The Office of the United States Trustee (or UST) filed an objection to the rapid nature of the case (as it has done in similar, expedited cases). In its objection, the UST argued that “[t]he speed of this case effectively shifts the burden to the creditor body without the protections contemplated by the Bankruptcy Code.” It focused on alleged due process violations (in the form of lack of reasonable notice) and the failure to comply with certain Bankruptcy Code requirements and norms (the filing of statements and schedules and the appointment of an unsecured creditors’ committee, for example). The UST pointed out that the plan included third party releases and broad exculpation provisions that the debtor asked the Court to approve with little opportunity for objection.

In order to achieve such a rapid confirmation, compromises were needed.  The Court raised concerns regarding due process consistent with the UST’s objection and indicated that it would approve the plan alongside a supplemental “due process preservation order.”  The order is similar to that which the Court entered in Belk’s case, extending deadlines for parties to opt-out of the plan releases, limiting exculpation, and expressly retaining jurisdiction of the Court to hear claim objections and disputes regarding executory contracts, among other things.  Additionally, the order provides for supplemental solicitation and voting rights for a tranche of creditors that had been omitted from the original prepetition solicitation and received less notice.

While not without controversy, these expedited cases provide some tangible benefits for the debtors and other parties-in-interest, including in most instances, a substantial cost savings in the form of administrative costs, US Trustee fees, and professional fees. Arguably, they also preserve value for stakeholders by minimizing disruption to the debtor’s operations that might be caused by a longer stay in bankruptcy. These savings may lead to greater recoveries for stakeholders and preserve jobs.  Of course, it remains an expensive and time consuming process as much time is spent negotiating restructuring support agreements, preparing plans and disclosure statements and consummating an out-of-court solicitation during the months prior to the filing.

Although Carlson Travel’s path through bankruptcy provides further precedent for expedited cases, it also serves as a note of caution that serious consideration must be given to the due process rights of parties-in-interest. Provisions preserving for some limited time, those parties’ rights, including those set forth in the Court’s due process protection orders, may be required. Additionally, the Court made clear that such extraordinary relief is not appropriate in all instances. Rather, a debtor’s justification for such relief must be compelling, in this instance, to preserve the value due to the nature of the debtor’s business and protect its employees.

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Hot on the heels of crises driven by shortages of carbon dioxide and HGV drivers, it is perhaps the ultimate irony that – in the month before COP 26 in Glasgow – the UK and to a lesser extent much of the rest of the world has been rocked by a series of crises in the fossil fuel driven energy market.  Whilst much of Asia is being impacted by a shortage of coal, Europe is feeling the full effects of a shortage of natural gas.  This is perhaps particularly acute in the UK for a number of reasons including reduced storage capacity, issues with one of the key grid interconnectors to France, and a spike in global demand as the world economy seeks to pick up from where it left off pre-pandemic.  The result?  Eye watering wholesale gas prices that have risen more than double since January 2021, with a 70% increase since August. Prices rocketed a further 37% in one day on 6 October.

Whatever the reasons for the shortages and increased prices in the UK, there can be little doubt that this has had a devastating impact on smaller energy companies, who are less able to put sufficient hedging in place to insulate them from such vast increases in wholesale gas prices. Casualties include Avro, Green, IglooUtility Point, People’s Energy, PfP Energy and MoneyPlus Energy, all of which have entered administration.

Upon the failure of these energy companies, their domestic customers are automatically switched to alternative suppliers under the “supplier of last resort” scheme. Energy suppliers which step in to supply in this way are not bound to honour existing customer contracts, which means the energy costs for those consumers are likely to rise almost immediately.  If people are having to spend more on their energy bills, that will impact other sectors such as retail and leisure in the run up to Christmas, a period which should be one of their busiest times of the year for trading.

In contrast, business customers of failed energy companies are required to find alternative suppliers and some are likely to be nearing the end of their current hedging arrangements. Given the massive price hikes, the costs of securing a new supply, particularly for heavy use business customers, could prove prohibitive, leading to reduced productivity and the need for restructuring of operations and finances. The impact of this on the wider economy is cause for concern and, whilst the government is reviewing the position and are under significant pressure to provide emergency loans, as yet, no comfort has been given to businesses, notwithstanding the call for price caps by the steel, glass, and paper manufacturing sectors.

Whilst much of the talk at COP 26 will rightly be around emerging technologies such as battery storage, green hydrogen and floating off-shore wind, this is of little comfort to those industries at crisis point now.

Should you have any queries arising from the issues outlined, please contact one of our team.

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On the heels of this month’s confirmation of Purdue Pharma’s controversial plan of reorganization which contained third-party releases in favor of the Sackler family members, a new bill has been introduced in the Senate seeking an end to what some critics refer to as “bankruptcy forum shopping.”  The bill is a companion bill to H.R. 4193, introduced in the House in June under the moniker “Bankruptcy Venue Reform Act of 2021.”  The bills, if passed into law, would generally (i) require individuals to file bankruptcy in the district where their domicile, residence, or principal assets are located; (ii) require corporate debtors to file bankruptcy in the district where their principal assets or principal place of business is located (or in which there is case pending concerning an affiliate that owns, controls, or holds 50% percent or more of the outstanding voting securities of, or is the general partner of, the entity that is the subject of the later filed case); (iii) prevent corporate debtors from filing solely on the basis of their state of incorporation; (iii) prevent debtors from filing bankruptcy in a district simply because one of its affiliates has filed there; and (iv) require courts to transfer or dismiss cases filed in the wrong district.  The bill would further discourage forum shopping by giving no effect to a change in the ownership or control of an entity or to a transfer of the principal place of business or principal assets of an entity that takes place within one year before the petition date or “for the purpose of establishing venue.”

While the cry for bankruptcy venue reform is not new – similar bipartisan legislation has been introduced in each of the last two sessions of Congress, and prior to that in 2011 by Senator John Cornyn (TX)  – this time may be different.  The recent ruling by the Bankruptcy Court for the Southern District of New York approving third-party releases for members of the Sackler family may have triggered a change in sentiment among the members of Congress (and gotten the attention of their State attorney generals and constituents).  The ruling, which provides broad releases in favor of members of the family in exchange for an aggregate $4.5 billion contribution to the estate, has drawn criticism from many circles.  The United States Trustee and a number of states have appealed the confirmation of Purdue Pharma’s plan of reorganization.  Indeed, that change in sentiment is evidenced by the recently-introduced Nondebtor Release Prohibition Act of 2021 (S. 2497 & H.R. 4777) which would, among other things, prohibit the use of non-consensual third-party releases of the nature granted to the Sacklers (and any consent would be required in writing by creditors for consensual third party releases).

Proponents of bankruptcy reform legislation argue that Purdue Pharma engaged in forum shopping in order to bring its complex Chapter 11 case before Bankruptcy Judge Drain in White Plains, New York.  They assert that the company chose White Plains because the Judge  approved third party releases in the complex bankruptcy cases in the past.  Currently, the Bankruptcy Code generally allows an entity to file bankruptcy in the district where (a) its domicile, principal place of business, or principal assets for 180 days immediately preceding the date of the petition (or for a longer part of such 180 days than in any other district), or (b) a bankruptcy case concerning its affiliate, general partner, or partnership is pending.  Purdue Pharma LP, the parent of the Purdue corporate family, was organized in Delaware and based in Connecticut.  Purdue Pharma Inc., however, was organized in New York, and once it filed its petition, all other affiliates were entitled to file there as well. Under the proposed bill, Purdue Pharma Inc., as a majority-owned subsidiary of Purdue Pharma LP, could have filed in any jurisdiction where Purdue Pharma LP satisfied the venue requirements but not vice versa.

Under the current circumstances, the instant version of bankruptcy venue reform legislation is likely to get a much closer look (and maybe even a vote unlike prior attempts).  The arguments from both proponents and opponents have not changed but the emotions and political pressures may have.  We will keep our readers apprised of the legislation as it moves through Congress.

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The District Court for the Southern District of New York recently issued an important decision that provides further support for a holistic analysis when applying the Bankruptcy Code’s “safe harbors.”  In Mark Holliday, the Liquidating Trustee of the BosGen Liquidating Trust v. Credit Suisse Securities (USA) LLC, et al., 20 Civ. 5404 (Sept. 13, 2021), the District Court affirmed the Bankruptcy Court’s dismissal of the plaintiff’s state law fraudulent conveyance claims against the defendants as protected from avoidance by the “safe harbors” of Section 546(e) of the Bankruptcy Code.  In doing so, the appellate court examined the nature of the “overarching transfer” rather than a distinct element of the transaction as pled in the plaintiff’s complaint.

The claims arose from a 2006 leveraged recapitalization whereby a holding company (“Holdings”) and its operating subsidiary, Boston Generating, LLC (“BosGen”), obtained loans to fund a tender offer and a dividend to interest holders of Holdings.  The loans came in the form of two credit facilities extended to BosGen that required it to fund the purchase of certain interests in, and make a distribution to, Holdings’ members.  A national bank (“Bank A”) served as “depository” for BosGen and, at the direction of BosGen, received the proceeds of the loans and then transferred them in accordance with funds flow instructions.  A portion of those proceeds intended for use in the purchase of the membership interests and distribution was deposited in an account of Holdings at a second bank (“Bank B”).  Holdings then directed Bank B to transfer the funds to its account at yet another bank (“Bank C”) for purposes of effecting the payments to the members.

Holdings, BosGen and certain affiliates later filed bankruptcy and confirmed a liquidating chapter 11 plan in August 2012.  The plan created a liquidating trust and the liquidating trustee thereafter commenced an adversary proceeding against the defendants.  Among other causes of action, the plaintiff sought a ruling that the transfer from Bank A (BosGen’s account) to Bank B (Holdings’ account) should be avoided as a fraudulent transfer.  After much legal maneuvering, including the filing of a number of amended complaints, the Bankruptcy Court ultimately dismissed the adversary complaint in June 2020, including the fraudulent conveyance claims.  It did so on the basis that such claims were protected by Section 546(e) of the Bankruptcy Code (“Section 546(e)”). Very generally, Section 546(e) protects certain pre-petition transfers from avoidance in a bankruptcy of the transferor — including transfers that are (i) a margin payment, settlement payment or transfer, (ii) made by or to (or for the benefit of) a commodity broker, forward contract merchant, stockbroker, financial institution, financial participant, or securities clearing agency, and (iii) made in connection with a securities contract, commodity contract, or forward contract. See 11 U.S.C. § 546(e).

On appeal, the District Court considered the holding of the leading case involving a transfer executed in numerous steps, Merit Mgmt. Grp., LP v. FTI Consulting, Inc., 138 S. Ct. 883. The District Court explained that Merit required it to “determine what is the relevant transfer for the 546(e) safe harbor inquiry…” and that it must not “analyze a transfer divorced from its context.”  See Holliday at 6.  While the District Court acknowledged that Merit holds that the relevant transfer is the one that the plaintiff seeks to avoid, it need not rely on a plaintiff’s interpretation of that transfer – if challenged.  Id.  Here, the transfer at issue was defined by reference to New York law which guided the District Court to examine an allegedly fraudulent conveyance in the context of the larger plan “viewed as a whole with all its composite implications.” Id. at 7 (citation omitted). The District Court noted that many parties to the recapitalization understood that the loans were extended to BosGen, in part to fund the payments to Holdings’ members.  Accordingly, the District Court refused to limit its analysis to the transfer solely from Bank A to Bank B — and determined that the “heart” of case was the leveraged recapitalization and that the real transfer that the plaintiff sought to avoid was that from Bank A to Bank C . Id.  This was an important point of distinction, linking the whole (collapsed) transaction to a securities contract (i.e., the tender offer) for the purposes of satisfying the safe harbor contained in Section 564(e). With that critical point settled, the District Court agreed with the Bankruptcy Court’s ruling that the transfer was protected from avoidance as a “settlement payment”, made on behalf of a “financial institution” (which included BosGen as a customer of Bank A, its agent), and made in conjunction with a “securities contract.”

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Participation agreements, in the form promulgated by The Loan Syndications and Trading Association, Inc. (LSTA), are widely regarded as dependable vehicles for conveying loan ownership interests from a lender to a participant as “true sales” in the United States.  But what if the underlying credit agreement describes the participation as a financing relationship between a lender, as debtor, and participant, as creditor?  The answer is unclear as a legal matter, and the existence of such language should give market participants pause if encountered in the loan origination or secondary trading contexts.

On August 31, the LSTA issued a market advisory noting that it was concerned that certain new originations in the U.S. loan market describe participations as “debtor-creditor” relationships. (“Participation Provisions in Credit Agreements Market Advisory,” Loan Syndication and Trading Association, August 31, 2021)  This is a significant deviation from the prescribed drafting framework under the LSTA’s forms of credit agreement and model provisions, which generally permits lenders to “sell” loans by participation.  The recent increased usage of this language in U.S. credit agreements led the LSTA to recommend that loan market participants carefully review the participation-related transfer provisions found in credit agreements and be aware that deviations from LSTA language could jeopardize sale accounting treatment.  We agree with the LSTA’s recommendations.

Under generally accepted accounting principles, one of the requirements for sale accounting treatment is a finding of “legal isolation” – i.e., that a transfer of an asset would put the asset presumptively beyond the reach of the transferor and its creditors, even if the transferor becomes a debtor in bankruptcy or (if it is an insured depository institution) becomes subject to receivership or conservatorship.  Underlying this legal isolation issue is whether an asset transfer would, under relevant state and federal law, be held to be a true sale rather than a disguised secured financing (with the seller as de facto borrower, the participant as its creditor and the purportedly sold asset serving as mere collateral).  In the case of a transfer of a loan participation, this can be a complex legal question, requiring analysis of a variety of facts and circumstances surrounding a transaction against principles distilled from decades of true sale jurisprudence.  Fortunately for market participants today, most routine participations of funded loans documented on LSTA standard participation agreements are not considered controversial and can be accounted as sales without an extensive (and costly) de novo legal review.

That, however, may not be true in the context of a credit agreement with atypical transferability terms – in particular, terms that provide that any participation thereunder is not a sale but rather is a financing between the lender and participant.  Such a fact complicates analysis of a participation as a true sale, because when considering whether a true sale exists, relevant case law puts great weight on the parties’ objective intent to execute a true sale.  Would, for example, a bankruptcy court doubt that a lender (as transferor under a participation agreement) truly intended to sell its loan interests if the same lender had also agreed (as party to the credit agreement) that any participation creates a debtor-creditor relationship between the seller/lender and the participant?  Possibly.  Although not necessarily conclusive evidence, it is likely a bad fact weighing against a true sale conclusion.  Therefore, any seller seeking sale accounting treatment, or buyer seeking to avoid entanglement in a seller’s potential future insolvency proceeding, should be aware of the risk such debtor-creditor language poses.

Though true sale analyses are complex, the advice for lenders and participants in this context is straightforward:

  • Absent a compelling justification, urge deal counsel, agents and arrangers to use LSTA model (or other true sale compliant) language in drafting participation transfer provisions for U.S. credit agreements.
  • Prior to consummating secondary market trades that may settle by participation, carefully diligence loan documentation’s transferability provisions for “debtor-creditor” participation language.
  • If a credit agreement’s language is problematic and sale by participation remains desired, consult with accounting and legal advisors to determine (1) whether such language introduces the need to obtain a new “true sale” legal opinion to satisfy the legal isolation condition for sale accounting treatment, and (2) if so, whether such an opinion could be obtained after full consideration of the “debtor-creditor” credit agreement language, the terms of the participation agreement and other material facts and circumstances pertaining to the transaction.
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Does a lender’s demand for the appointment of a Chief Restructuring Officer (or CRO) by its borrower constitute “undue duress” for purposes of invalidating a personal guarantee? That question was before the Fifth Circuit in Lockwood International, Inc. v. Wells Fargo, National Association et al. v. Michael F. Lockwood, Case 20-40324 (5th Cir. 2021). The personal guarantee at issue was granted by the sole owner of certain entities (the “Borrowers”) that were parties to a $90 million secured revolving loan agreement with certain lenders (the “Lenders”). Not long after entering into the agreement, the Borrowers found themselves in default under a number of financial covenants. In order to address the defaults, the parties entered into an amendment which, among other things, reduced the commitment to $72 million. In connection with amendment, the Borrowers’ owner (the “Guarantor”) executed a guarantee of all obligations of the Borrowers in favor of the Lenders (the “Guarantee”). As common practice for a borrower in distress, the Borrowers also retained a CRO at the recommendation, or insistence, of the Lenders.

Following the amendment, the Borrowers were again in default. At this time, the Lenders demanded that the CRO be granted full authority over the businesses. If not, the Lenders purportedly threatened to accelerate the loans and exercise their remedies against the collateral as permitted under the loan agreement. The Guarantor and the Borrowers relented and granted the CRO control of the company’s operations. Notwithstanding the escalation of the CRO’s role, defaults persisted and the parties ultimately executed a number of forbearance agreements. As typical of such agreements, the Guarantor acknowledged the validly of his obligations and that he had no defense to enforcement, effectively ratifying the Guarantee. The Guarantor further granted a full release and waiver of claims in favor of the Lenders. Following expiration of the second forbearance, the Lenders accelerated the loans.

After much litigation between the parties and a bankruptcy filing by the Borrowers, a final claim remained – the Lenders’ breach of guarantee claim against the Guarantor. On that point, the District Court granted the Lenders’ motion for summary judgment. It considered, and rejected, the Guarantor’s affirmative defenses — fraudulent inducement, duress, unclean hands, and equitable estoppel – and ordered the Guarantor to pay more than $58 million. The Guarantor appealed to the Fifth Circuit with a focus on his claims of duress, particularly as it related to the threats of acceleration to compel the appointment of a CRO with full authority.

The Fifth Circuit explained that, in order to prevail, the Guarantor must show that the Guarantee, and each forbearance agreement, was voidable and that “the lenders obtained his signature by fraudulent means or by taking advantage of his dire financial straits.” Id. at p. 5. The Guarantor argued that “economic duress” compelled him to enter into each of the agreements. With respect to the first forbearance agreement, he argued that the Lenders threatened acceleration which would prove ruinous for the Borrowers. The Court explained, “[n]o doubt [the Guarantor] feared the looming prospect of the banks’ demanding the tens of millions of dollars that he and his companies owed. The banks used that leverage to seek something they wanted: a transfer of authority to the CRO. But using leverage is what negotiation is all about. And difficult economic circumstances do not alone give rise to duress.” Id. at p. 7. (citation omitted). Under applicable law, duress requires: “(1) a threat to do something a party has no legal right to do, (2) an illegal exaction or some fraud or deception, and (3) an imminent restraint that destroys the victim’s free agency and leaves him without a present means of protection.” Id. (citation omitted).

The decision should provide further comfort to lenders that the exercise of their leverage to extract value in face of defaults (in this case, the appointment of a CRO with full authority), should not raise to the level of undue duress needed to void otherwise valid and enforceable obligations.

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The Delaware Bankruptcy Court (“Bankruptcy Court”) recently issued a ruling that provides additional clarity regarding the treatment of “appraisal rights” in bankruptcy proceedings and the scope of section 510(b) of the Bankruptcy Code.  In In re RTI Holding Company, LLC, et al., (decided August 4, 2021) the Bankruptcy Court subordinated the general unsecured claims filed by holders of “appraisal rights” in respect of the debtors’ equity (the “Claimants”).  In general, “appraisal rights” entitle shareholders of a target company to demand that the purchase price of their shares be determined by a court after an independent valuation.  A successful exercise of such rights would require the purchaser to acquire the shares of perfecting shareholders at an enhanced price (or later fund the difference if the merger had been completed).

The debtors were a number of entities related to the Ruby Tuesday restaurant chain, including Ruby Tuesday, Inc. (“RTI”). In late 2017 the company proposed a “going private” transaction pursuant to which RTI would be merged with a subsidiary. The transaction priced RTI’s stock at $2.40 per share. The Claimants purchased shares of RTI with the expectation that they would be acquired in the merger. Following their purchase of the shares, and in accordance with Georgia law, the Claimants rejected the offer and demanded payment in excess of $5.00 per share, validly perfecting their appraisal rights. In April 2018, RTI commenced an appraisal action, seeking a determination that the fair value of shares was less than or equal to the proposed purchase price (the “Appraisal Action”). The merger was later consummated while the Appraisal Action remained pending. In October 2020, RTI and the other debtors commenced their bankruptcy cases and further activity in the Appraisal Action was stayed.

The Claimants filed general unsecured claims in the bankruptcy cases. The debtors filed a plan of reorganization which subordinated the Claimants’ claims to those of other unsecured creditors (and provided for no distribution on account thereof).  Section 510(b) of the Bankruptcy Code provides that “… a claim arising from rescission of a purchase or sale of a security of the debtor or of an affiliate of the debtor, for damages arising from the purchase or sale of such a security… shall be subordinated to all claims or interests that are senior to or equal the claim or interest represented by such security, except that if such security is common stock, such claim has the same priority as common stock”  (emphasis added).  The language of section 510(b) is ambiguous, leaving courts to interpret the required nexus between the ownership of the security and the nature of the related claim.  See Baroda Hill Inv. V. Telegroup, Inc., 281 F.3d 133 (3d Cir. 2002).

After reviewing the limited case law, the Bankruptcy Court applied a “but for” test.  Would the claims exist but for the Claimants’ prior ownership of the shares? The court determined that they would not – the claims arose under a Georgia law that is available only to shareholders, and would not exist but for the ownership of the stock. But the court went further. It explained that subordination of a claim must also serve the purpose of Section 510(b) of the Bankruptcy Code. This section is intended to prevent shareholders from achieving recovery as creditors, eliminating the risk inherent in equities. In its consideration, the court focused on the Claimants’ acquisition of the shares following the announcement of the pending merger. The court believed that this timing exhibited their intent to assume the risks of an equity holder, and not those of a creditor.  The court determined that, if it rejected subordination, it would effectively be ruling that the Claimants’ assertions of value were correct, eliminating the risk that the court would have ruled in favor of RTI.  Such a result, the court explained, would be contrary to the intent of section 510(b).

The ruling in RTI Holding Company provides guidance to market participants regarding the scope of section 510(b), particularly in the context of appraisal rights. Subordination of a claim under this section is appropriate (i) if the claim would not have arisen “but for” the ownership of securities and (ii) such subordination furthers the policies of section 510(b). Both prongs leave room for interpretation.  In the instant case, for example, had the Appraisal Action concluded prior to the bankruptcy, resulting in a judgment in favor of the Claimants, the Bankruptcy Court may have come to a different conclusion. In addition, Bankruptcy Court may also have come to a different conclusion had the Claimants held the shares prior to the announcement of the merger. Market participants will have to continue to navigate murky waters awaiting the next challenge to the subordination of claims relating to appraisal rights.

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By Cathryn Williams, Paul Muscutt and Beth Bradley of the London Crowell Restructuring Team.

The Insolvency Act 1986 (HMRC Debts: Priority on Insolvency) Regulations 2020 (SI 2929/983) (the Regulations) were made on 11 September 2020 and will come into force on 1 December 2020.

As a result of the changes brought about by the Regulations, when distributing the assets of a company that enters an insolvency process on or after 1 December 2020, HMRC’s claim for unpaid taxes collected by companies on behalf of HMRC, including:

  • PAYE Income Tax;
  • Construction Industry Scheme Deductions;
  • Employee National Insurance contributions;
  • student loan repayments; and
  • VAT,

will move up the hierarchy to rank ahead of floating charge holders in the payment waterfall. Note that the return of Crown Preference is not a return to pre-2002 when all tax debts enjoyed preferential status; taxes due by corporates themselves (including corporation tax and capital gains tax) will remain as ordinary unsecured debts and will, therefore, continue to rank behind the claims of floating charge holders.

As HMRC will be a secondary preferential creditor, in most cases it is likely there will be less realisations available in an administration or liquidation for distribution to floating charge holders. The change will also likely result in less realisations being available for distribution to unsecured creditors via the prescribed part.

The Regulations follow previous legislative changes that have already diminished the position of floating charge holders. In April 2020, realisations from floating charge assets available to a floating charge holder were reduced following the increase in the prescribed part from £600,000 to £800,000. Further, following the introduction of the Corporate Insolvency and Governance Act 2020 in June this year, floating charge holders are prevented from appointing an administrator and/or imposing restrictions on the disposal of floating charge assets whilst a company is in moratorium and there are further implications on floating charge realisations if insolvency proceedings start within 12 weeks of the end of the moratorium (for further information on the moratorium, see our previous post here

The Regulations add to the uncertainty of recovery faced by floating charge holders and unsecured creditors in insolvency situations. These changes may further impact upon the economy as a whole, if the appetite of lenders to make available facilities (particularly asset based lenders, where floating charge security forms an important part of their security package) is diminished as a result. The changes may well result in the reduction or withdrawal of funding. For more information on what lenders can do to protect their position in light of the changes see our client alert

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By Cathryn Williams, Paul Muscutt, Andrew Knight and Beth Bradley


Following our recent post ( on the new Corporate Insolvency and Governance Act 2020 (“the Act”), we now take a closer look at the moratorium and the effects on priority between pre-existing and moratorium lenders.

The New Moratorium – an Overview

The moratorium is intended to give companies breathing space by preventing creditors from taking enforcement action for an initial period of 20 business days. The process is led by a company’s directors and is overseen by an insolvency practitioner in the role of “monitor” who is an insolvency practitioner and an officer of the court.


(1) the company must be incorporated under the Companies Act 2006 or otherwise capable of being wound up under the Insolvency Act 1986;

(2) the directors consider the company is, or is likely to become, unable to pay its debts;

(3) the monitor considers the moratorium would result in the rescue of the company as a going concern;

(4) the company must not have been subject to insolvency proceedings or have been in a moratorium, CVA or administration within the past 12 months.

Certain companies are specifically excluded from using the moratorium, including banks, insurance companies and parties to capital market arrangements.

There are two routes into a moratorium:

  1. In-court process: directors may apply to the court where either there is an outstanding winding up petition or the company is an overseas company (note that until 30 September 2020 the directors can use the out-of-court process below even if there is an outstanding winding up petition, although this temporary exemption does not apply to overseas companies). The moratorium commences when the court order is made.
  2. Out-of-court process: directors file the relevant documents in court including the monitors’ certification. The moratorium commences when the documents are filed with the court.

Duration of moratorium?

The moratorium initially lasts for 20 business days (the “initial period”). However, provided certain conditions are met, the initial period may be extended:

  1. by the directors, without the consent of creditors, for a further 20 business days after the end of the initial period (note that the extension must be applied for before the initial period ends);
  2. by the directors, with creditor consent, for a maximum period of 364 days, including the initial period. Extension with creditor consent may occur more than once;
  3. by the court, on application by the directors, for which there is no maximum period and which may occur more than once.

Effects of moratorium:

The moratorium allows the directors to retain control of the company, which cannot be placed into an insolvency procedure except at their instigation.

Other aspects of the moratorium broadly follow the administration moratorium: landlords cannot forfeit without court permission; security cannot be enforced without court permission (other than certain types of financial collateral); no steps may be taken to repossess goods in the company’s possession under hire-purchase agreements without court permission; and legal processes against the company cannot be commenced or continue without court permission (except certain employment claims).

Significantly, floating charge holders cannot give notice to crystallise their floating charge or otherwise restrict the disposal of floating charge assets during the moratorium. If a floating charge holder’s ability to crystallise their charge is time-limited and expires during the moratorium, this time is extended to as soon as reasonably practicable after the end of the moratorium or (if later) the day on which the floating charge holder is notified of the end of the moratorium.

The Act provides that new security granted during the moratorium can only be enforced if the grant of that security was agreed to by the monitor, but this is in any event subject to the rule, mentioned above, that security (other than certain types of financial collateral) cannot be enforced during the moratorium without court permission.

The Act imposes certain restrictions on a company during the moratorium:

  • Obtaining credit: the company must inform a potential provider of credit of more than £500 that the moratorium is in force; the company and the directors commit an offence if they fail to do so.
  • Granting security: new security can only be granted or created with the monitor’s consent, which should be given only if the monitor thinks it will support the rescue of the company.
  • Entering into market contracts: the company may not enter into market contracts, financial collateral arrangements and certain other market arrangements. The company and the directors commit a criminal offence if they do so.
  • Payment of certain pre-moratorium debts: the company may not pay pre-moratorium debts that are subject to a payment holiday (see further below) which (in total) exceed the greater of £5,000 or 1% of the company’s total unsecured debts at the start of the moratorium, unless one of the following applies:
    • the monitor consents;
    • payment is pursuant to a court order or required in relation to a court-sanctioned disposal of hire-purchase or charged property.
  • Disposal of property: the company may dispose of its property if one of the following applies:
    • the monitor consents;
    • the disposal is made in the ordinary course of business;
    • the disposal is pursuant to a court order.

Termination of the moratorium:

The monitor can terminate the moratorium by filing a notice at court and they must do so if they are of the opinion that:

  1. the moratorium is no longer likely to result in the rescue of the company as a going concern;
  2. the objective of rescuing the company as a going concern has been achieved;
  3. the monitor cannot carry out his or her functions because the directors have not provided the monitor with necessary information;
  4. the company is unable to pay moratorium debts that have fallen due or pre-moratorium debts without a payment holiday (see further below). As most pre-existing lending will fall within the definition of moratorium debts or pre-moratorium debts without a payment holiday, incumbent lenders may have an element of control over the process; if the moratorium constitutes an event of default that automatically accelerates or permits the lender to opt to accelerate the entire debt, then the monitor may have to bring the moratorium to an end if the company is not in a position immediately to pay such debts. This is likely given that, in order to enter the moratorium, the directors have confirmed that the company is, or is likely to become unable to, pay its debts.

The moratorium will also terminate automatically if:

  1. the company enters into an insolvency process;
  2. a restructuring plan or scheme of arrangement is sanctioned;
  3. c court order to that effect is made;
  4. the term of the moratorium expires.

Categories of Debt:

The Act divides the company’s debts into the following three categories:

  1. Pre-moratorium debt with a payment holiday

With important exceptions (see below), companies in moratorium benefit from a “payment holiday” under the moratorium provisions for debts that existed before the moratorium or, if the debt did not itself exist, the obligation under which the company becomes liable to pay that debt existed before the moratorium.

  1. Pre-moratorium debt without payment holiday

(a)        Relevant debts

Certain pre-moratorium debts that are not subject to a payment holiday and must continue to be paid during the moratorium. These are debts that fell due before, or fall due during, the moratorium and relate to:

  • the monitor’s remuneration or expenses;
  • goods or services supplied during the moratorium;
  • rent in respect of a period during the moratorium;
  • wages or salary arising under a contract of employment, insofar as they relate to a period of employment before or during the moratorium;
  • redundancy payments;
  • debts or other liabilities arising under a contract or other instrument involving financial services. Importantly, this includes a loan agreement, with the consequence that, unless otherwise agreed, capital and interest payments due to lenders are still payable during the moratorium and a failure to make such payments may force the monitor to terminate the moratorium (see further below).

(b)       Priority pre-moratorium debt

Priority pre-moratorium debt includes all pre-moratorium debt without a payment holiday (i.e. everything listed in (a) above) but excludes “relevant accelerated debt”. Relevant accelerated debt is any pre-moratorium debt that falls due: (1) between the date on which the monitor’s statement (that the moratorium is likely to result in the rescue of the company) is made and the last day of the moratorium and (2) as a result of the operation or exercise of an acceleration or early termination clause.

The exclusion of “relevant accelerated debt” from the category of debts having super priority in a subsequent insolvency was a late amendment to the Bill as it made its way through Parliament.   It was introduced to address concerns that financial creditors could accelerate pre-moratorium debt without a payment holiday during the moratorium, cause the moratorium to fail and by so doing obtain super-priority status for the full amount owed to them.

  1. Moratorium debt

Moratorium debt includes any new debt that arises during the moratorium (other than by reason of an obligation incurred before the moratorium came into force) or a debt to which the company becomes or may become subject after the end of the moratorium by reason of an obligation incurred during the moratorium.


Super-priority in a subsequent Liquidation

Where proceedings for the winding up of a company begin within 12 weeks following the end of the moratorium, the liquidator must make a distribution to the creditors of the company in respect of moratorium debts and priority-pre moratorium debts (which does not include relevant accelerated debt) in priority to all other claims, save for the prescribed fees and expenses of the official receiver acting in any capacity in relation to the company. The liquidator must realise any property required to enable them to make such distributions.

Super-priority in a subsequent Administration

If within the 12 week period following the end of the moratorium the company enters administration, the administrator must make a priority distribution in respect of unpaid moratorium debts and priority-pre moratorium debts (which does not include relevant accelerated debt).  This distribution is paid out after fixed charges but in priority to insolvency practitioner expenses and remuneration, preferential creditors, the prescribed part and any party holding existing floating charge security.

The implications of these new priority arrangements are (1) that any new lender coming in to fund the company during the moratorium will have an enhanced priority for any sums due to them at the end of the moratorium and (2) this will dilute the availability of floating charge assets to pre-existing secured lenders given that they come last in the queue.

CVAs/Schemes of Arrangement

If a CVA or scheme of arrangement occurs within 12 weeks of the termination of the moratorium, note that moratorium debts and priority pre-moratorium debts cannot be compromised in the CVA/scheme.

What if there are insufficient assets to pay moratorium debt and priority pre-moratorium debt in full?

The Act provides that moratorium debts and priority pre-moratorium debts are payable in the following order of priority:

  1. first, amounts payable in respect of goods or services supplied during the moratorium under a contract where, but for the new rules protecting supplies of goods and services, the supplier would not have had to make that supply;
  2. second, wages or salary arising under a contract of employment;
  3. third, other debts or other liabilities apart from the monitor’s remuneration or expenses;
  4. fourth, the monitor’s remuneration or expenses.

The above priority provisions may leave very limited floating charge proceeds available to pay the costs and expenses of the subsequently appointed administrators or liquidators and preferential debts. If the proceeds are insufficient to pay these priority sums in full, given that the monitor’s unpaid fees rank last in the waterfall, the monitor may also find himself unpaid.

New Lending during moratorium

To the extent that new loans are advanced to the company during the moratorium which are unpaid at the end of the moratorium, such loans will have super-priority (as moratorium debt) and will be paid out of realisations ahead of a lender holding existing floating charge security. If the moratorium debt is significant, this may have a serious impact on the likelihood of an existing secured lender making any recovery in respect of its floating charge security.

How can existing lenders best safeguard their position?

As noted above, debts due to a lender fall within the definition of pre-moratorium debts without a payment holiday which the company must continue to pay during the moratorium. If the lender does not support the moratorium, it may be possible for the lender to accelerate its debt or request immediate repayment of “on demand” facilities. The company is likely to be unable to satisfy such demand, and as such, the monitor will have little option but to terminate the moratorium. Note, however, our comments above that this accelerated debt is not included in the super-priority which follows an insolvency within 12 weeks of the end of the moratorium.

Note that if a debt is accelerated before the monitor’s statement is filed, it would not fall within the definition of relevant accelerated debt. As such, whilst it could not prevent directors filing for a moratorium, that debt would be a priority pre-moratorium debt and would be payable on a priority basis in the event of an administration or liquidation commencing within 12 weeks of the end of the moratorium.

We recommend that going forward, lenders include a requirement in all new or restated facility documents that (1) the company must consult with them prior to any monitor’s statement being filed, and (2) the identity of the monitor has to be agreed with the lender prior to them being appointed. This will allow lenders to retain an element of control both in relation to the moratorium procedure and also ensure that they can accelerate their debt or take enforcement action against the company.

The Act leaves questions unanswered and we anticipate that many issues will arise in its implementation. The effect of the Act has been to rush through significant changes to the priority of the distribution of a company’s assets without any serious efforts to engage with lenders to work out the implications it may have on a lender’s appetite to lend.

Photo of Cathryn WilliamsPhoto of Paul Muscutt

By Cathryn Williams, Paul Muscutt and Beth Bradley

The full implications of COVID-19 may not be known for some time, but it has had an immediate impact upon UK insolvency law. The government has expedited the Corporate Insolvency and Governance Act 2020 (“the Act”) through Parliament in order to support distressed businesses and assist with the UK’s economic recovery. The Bill upon which the Act is based was only published on 20 May 2020, received  Royal Assent on 25 June 2020 and thus became effective on 26 June 2020.

The speed at which the Bill passed through Parliament left little opportunity for meaningful consideration or critique. The vast majority of the Act’s provisions take effect from 26 June and we highlight below the key provisions.


The Act creates a moratorium to provide struggling businesses with breathing space.  The moratorium is initiated by a company’s directors and a “monitor” filing papers at court which confirm (1) that the company is, or is likely to become, unable to pay its debts as they fall due and (2) that it is likely that the moratorium will result in a rescue of the company as a going concern.

The moratorium initially lasts 20 business days, commencing the day after the moratorium comes into effect. It can be extended for a further 20 business days by the directors making a further filing and for up to 12 months with creditor (or court) consent. During the moratorium, only the directors can take steps to place the company into an insolvency procedure.

Certain companies are excluded, including those subject to current or recent insolvency proceedings (within the past 12 months) and certain financial institutions.

The moratorium provisions give rise to 2 real concerns for existing secured lenders. First, the Act introduces a new “super priority” in relation to moratorium debts in the event that the company enters administration or liquidation within 12 weeks of the end of the moratorium. Such debts must be paid out of floating charge assets in priority to any distribution from those assets being made to the secured lender. This will significantly dilute the lender’s security in the event a new lender advances sums to the company during the moratorium. Further, the Act prevents a lender holding a floating charge from enforcing or crystallising that charge during the moratorium. If the lender seeks to accelerate payment of its debt during the moratorium period, that debt does not rank for super priority in the event of a subsequent administration or liquidation within the 12 weeks period following the end of the moratorium.

Restructuring Plan

The Act enables the court to sanction a restructuring plan of a company (the “Plan“) that binds all creditors. Perhaps the most ground-breaking reform brought about by the Act is the notion of the “Cross-Class Cram-Down”, whereby the court can impose the Plan on dissenting creditors, provided that the court is satisfied that:

  1. A) if the Plan were to be sanctioned, none of the members of the dissenting class would be any worse off that they would be in the event of the “relevant alternative”; and
  2. B) the Plan has been agreed by a number representing 75% in value of a class of creditors or members who would receive a payment, or have a genuine economic interest in the company, in the event of the “relevant alternative”.

The “relevant alternative” is whatever the court considers would be most likely to occur in relation to the company if the Plan were not sanctioned – i.e. an administration or liquidation.

It appears that a Plan will not have automatic recognition in EU states under the European Insolvency Regulation and so even if a Plan is sanctioned by the Court, steps will have to be taken in those jurisdictions to have the Plan recognised.

Temporary Measures

The Act introduces temporary measures until at least 30 September to alleviate the pressure that the COVID-19 pandemic has placed upon UK businesses. The temporary measures include:

  • Wrongful Trading
    • The Act temporarily removes the threat of personal liability for wrongful trading from directors who try to keep their companies afloat through the pandemic.
    • The measures apply to any worsening of the company’s financial position in the period between 1 March and 30 September 2020.
    • This measure does not apply to excluded companies, including certain financial services firms.
  • Ban on statutory demands and winding-up orders
    • Creditors are temporarily prohibited from serving statutory demands and filing winding-up petitions where a company cannot pay its debts owing to coronavirus.
    • Measures aim to safeguard companies against debt recovery actions during the pandemic and allow them the opportunity to seek agreements with their wider creditor group.
    • The ban applies to winding up petitions presented from 27 April to 30 September 2020.
  • Annual General Meetings (“AGMs“)
    • The Act gives greater flexibility to hold Annual General Meetings and other meetings in a safe and practicable manner, including by way of virtual meetings, regardless of whether the constitution of the company would ordinarily permit such remote meetings.
    • Measure applies to companies under a duty to hold an AGM between 26 March and 30 September 2020.
  • Filing deadlines at Companies House
    • The Act grants an automatic extension to public companies whose original accounts filing deadline fell before 30 June 2020.
    • The Act also provides the Secretary of State with the power to make further extensions to key filing deadlines at Companies House, including the deadline for private companies to file their reports and accounts.

Termination Clauses

Subject to certain conditions, the Act prohibits suppliers from enforcing terms in contracts for goods or services which provide for automatic termination or permit the supplier to terminate the contract solely on the basis of the counter-party entering a relevant insolvency procedure.

The aim is to prevent suppliers from jeopardising the rescue of a business and to ensure that businesses can continue trading even if subject to a relevant insolvency procedure.

Will the Act achieve its aims?

The Act makes rapid and wide-ranging changes to UK insolvency legislation. We can only wait and see how the measures will work in practice, given the speed at which they have been rushed through Parliament. The impact of the new moratorium upon existing secured lenders may have unintended consequences for the appetite of lenders to fund certain assets. We can only wait and see whether the new measures will improve a company’s ability to work its way through financial difficulties

We will be providing a more detailed update for lenders on the new moratorium and its effects shortly.