In our inaugural Inflight Audio podcast, Graham Tyler and Chris Knight give a high-level overview of the significant reforms brought about by the Corporate Insolvency and Governance Act (CIGA) and assess how CIGA interacts with the protections afforded to Cape Town Convention creditors.

Graham Tyler:

Chris Knight:

Thanks for the introduction, Graham, and it’s great to kick off our podcast series with something so topical.

Graham Tyler:

Chris Knight:

The reforms enacted by CIGA represent the most wide-ranging amendments to the UK corporate insolvency framework for a generation, setting it on more debtor-friendly footing. Most pertinently, although CIGA was a direct response to the pandemic and introduced certain temporary reforms in order to more easily allow companies to trade through COVID, it is the permanent reforms in three key areas that have garnered widespread attention. Specifically, the introduction of a new freestanding short-term statutory moratorium, a ban on ipso facto or termination clauses in supply contracts triggered by insolvency proceedings, and, of greatest importance, a new pre-insolvency rescue and reorganization procedure, the restructuring plan.

Graham Tyler:

As you say, the new restructuring plan probably represents the most significant reform, and we’ll look at this in more detail in a moment. However, why don’t you first give us a little more information on the other two permanent reforms you mentioned?

Chris Knight:

So, first the moratorium. With certain exceptions, a freestanding moratorium is now available to UK companies and overseas companies with a sufficient connection with the UK, which is a fairly low threshold test. The moratorium will remain in place for an initial period of 20 days, with the ability for this to be extended up to and even beyond a year in certain circumstances, provided that the monitor remains satisfied that a rescue of the company as a going concern is still achievable. This is primarily a debtor-in-possession procedure in that, although a monitor is appointed, the company directors retain the ability to exercise day-to-day management decisions.

Graham Tyler:

And what about the effect that the moratorium has?

Chris Knight:

Well, a moratorium, for so long as it applies, will prevent, firstly, forfeiture of a lease and the repossession of goods under a hire purchase agreement; second, the enforcement of security over the company’s property with certain exceptions; thirdly, the commencement of insolvency or other legal proceedings against the debtor; and fourth, reliance on supply contract termination clauses. In addition, pre-moratorium debts will also temporarily not be payable, albeit this won’t apply to bank loan debts and certain other excluded categories. Finally, the debtor will also be allowed to dispose of secure property, subject to creditor safeguards. To add, though, a moratorium is an insolvency-related event under the UK Cape Town convention regulations, and so a Cape Town creditor’s remedies will take precedence to the moratorium restrictions. As such Cape Town creditors are in a superior position to other secure creditors.

Graham Tyler:

And a brief word on these ipso facto or termination clauses?

Chris Knight:

Essentially, for so long as the company is in an insolvency procedure, the ability for a creditor to contractually terminate certain English-law-governed supply contracts, or the supply itself, or amend the terms of such contracts, will be disregarded and have no effect. This overarching prohibition is, however, subject to certain significant exceptions. For example, it won’t apply to loan agreements and finance leases, nor to where the insolvent party or counterparty is an excluded entity, which includes, most pertinently, banks. The prohibition will also not override the rights of a Cape Town creditor.

Graham Tyler:

And then of course we have this third permanent reform—the restructuring plan. As we know, this new flexible procedure draws some inspiration from U.S. Chapter 11 proceedings, and is designed to sit together with schemes and company voluntary arrangements as an important tool in the UK’s restructuring toolkit. This new reform has been inserted into the existing Companies Act alongside, and in many respects mirrors, the procedure for UK schemes of arrangement. However, there are some key differences between a restructuring plan and the scheme of arrangement, right?

Chris Knight:

There are. So, unlike schemes, a restructuring plan requires only 75 percent approval in terms of stakeholder voter value. A scheme, on the other hand, additionally requires approval by a majority in number. Restructuring plans, unlike schemes, also require two key conditions to be satisfied. First, the company will need to demonstrate that it has encountered, or is likely to encounter, financial difficulties that are affecting or will or may affect its ability to carry on business as a going concern. This, of course, can be contrasted to the ability to have a solvent scheme. Second, the restructuring plan must be for the purpose of eliminating, reducing, preventing or mitigating those financial difficulties. Like schemes, but unlike CBAs, restructuring plans will be able to compromise dissenting unsecured and secured creditors. The restructuring plan, though, also offers the possibility of compromising operational as well as financial creditors in a shift of approach for English restructuring law.

Graham Tyler:

And perhaps of most note is the fact that the restructuring plan introduces this nascent concept in the UK of cross-class cramdown. What are the conditions to that, Chris?

Chris Knight:

First, no members of the dissenting classes must be any worse off than they would be in the event of a relevant alternative, which may well be liquidation. And second, the restructuring plan must have been agreed by a number representing 75 percent in value of at least one 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. In addition, the court may decline to exercise its discretion to sanction the plan if it does not consider it just inequitable. The recently sanctioned restructuring plan of Deep Ocean, a cable-laying and trenching business, involved the first use of cross-class cramdown in the UK. Albeit, creditor approval for the plan was generally already high. With Deep Ocean, the court considered their overall creditor support and turnout, whether a fair distribution of benefits is proposed between the different classes, and certain other case fact-specific matters, including what the relevant alternative actually is, will likely also be relevant in a court determining whether to sanction cross-class cramdown.

Graham Tyler:

Now a restructuring plan does have the ability to play a role on international restructurings, where non-English companies may use the new procedure provided they have a sufficient connection with the UK. You’ve already mentioned, Chris, that the bar for this has not been set particularly high and is likely to be satisfied by, for example, the debtor having a branch office and employees in the UK or even where English law is the governing law of major contracts. It’s also the case that, under the English law Gibbs rule, debt obligations governed by English law can only be discharged by an English process, so to be fully effective any restructuring of English law obligations will need to involve some form of UK process. What are your thoughts, Chris, on a sanctioned restructuring being recognized outside of the UK?

Chris Knight:

Well, following Brexit and also the English court Gategroup judgment this year, recognition and enforcement of UK restructuring plans across the EU will not be automatic, but rather the position will be determined by local law of the different member states. This potentially adds a layer of uncertainty and costs, which may put off some debtors. Turning to the U.S. though, the UK restructuring plan should, like UK schemes of arrangement, be recognized under U.S. Chapter 15, as was the case with Virgin’s restructuring plan.

Graham Tyler:

We need to mention Cape Town and the interaction between the restructuring plan and scheme of arrangement on the one hand, and the Cape Town Convention on the other. Specifically, as we know, the question has arisen as to whether a dissenting Cape Town creditor may be exempted from being included in and bound by a plan or scheme on the basis that such arrangements can be considered to constitute insolvency proceedings for the purpose of the convention. There may be a difference of opinion by practitioners and professionals alike on this. Are you able to briefly explain the reason for these differences?

Chris Knight:

Sure. For either a restructuring plan or scheme to fall within the definition of insolvency proceedings for the purpose of the convention and the UK regulations, it must constitute a collective judicial proceeding, and the debtor’s assets must be subject to control or supervision by a court. The convention text also requires that the plan or scheme must be for the purpose of reorganization. Certain practitioners have, or at least had, expressed doubt as to whether these tests could be satisfied, at least all of the time, in a restructuring plan or scheme context, in particular pointing to the court’s limited sanctioning role and that restructuring plans and schemes are not otherwise classified as insolvency proceedings in the UK or associated international regulations.

Graham Tyler:

So where are we now with this Cape Town question?

Chris Knight:

Graham Tyler:

Chris Knight:

Exactly, and the expert opinion concludes that restructuring plans and schemes of arrangement devised in an insolvency setting are insolvency proceedings for the purpose of the Cape Town Convention. As such, the opinion concludes the English courts are highly unlikely to sanction such a plan or scheme which propose non-consensually to affect Cape Town creditors’ rights.

Graham Tyler:

That said, while any annotations or opinions the AWG make or Commission may be taken into account by judges and courts, they are not binding. So while the leasing and financing community may take comfort from the direction in which we seem to be heading, clarification on the point by the English courts would be welcome, and it seems likely that this point will be litigated at some stage. So, Chris, just quickly, if a restructuring plan or scheme of arrangement was held by a court to constitute insolvency proceedings for the purpose of the Cape Town Convention, where does that leave us? Some have suggested that this could afford individual creditors with the right to veto a sanctioned restructuring plan or scheme, but that seems to go beyond what the Cape Town Convention had intended and could surely also undermine the ability for a company to effectively utilize a plan or scheme.

Chris Knight:

Right, and the implication is likely not the that airlines that wish to restructure their debt will be unable to fully benefit from a restructuring plan or scheme of arrangement. In fact, it should be possible for a plan or scheme to comply with the provisions of the Cape Town Convention and related UK regulations when, as part of the plan or scheme creditors are afforded the genuine ability to terminate the lease, repossess the aircraft and engines, and recover a termination payment. It would then be open to a Cape Town creditor to select this option rather than having a lease modification automatically imposed upon it. The argument goes that this tallies with alternative A of the Cape Town Convention and Regulation 37 of the related UK regulations on the basis that these provisions can be read to prevent non-consensual lease modification unless the creditor is offered the option of the return of the relevant aircraft object. Where this is offered, a dissenting Cape Town creditor’s rights are therefore said to be respected.

Graham Tyler:

Thanks for that, Chris. Well, everybody, that’s all we have time for. We hope that you’ve enjoyed this, and if so, please give it a big thumbs-up on whatever media platform you’ve listened to it on. Chris, it’s been a pleasure, and I for one look forward to seeing how things continue to pan out with the new reforms introduced by CIGA, in particular whether the restructuring plan becomes the default go-to restructuring tool in the UK, whether we’ll see any more guidance on cross-class cramdown parameters, and who knows, maybe we’ll have an English court hand down a definitive judgment on the Cape Town insolvency proceedings before too long.

Chris Knight:

Thanks, Graham, and I agree; I’ve really enjoyed this inaugural Pillsbury Inflight Audio podcast, and I look forward to the next one dealing with the similarities and differences between, and advantages and disadvantages of, the U.S. Chapter 11 process and the part 26(a) restructuring plan.