The outlook for UK restructuring plans at home and abroad
This article was first published in December 2023 by Law360.
The scheme's more powerful cousin, the restructuring plan, with its ability to cram down entire classes of dissenting creditors, has bolstered the UK's position in the global restructuring market.
The so-called rule in Gibbs, derived from the 1890 decision of the Queen's Bench Division of the High Court in Antony Gibbs & Sons v. La Société Industrielle et Commerciale des Metaux, is a significant reason for the continued use of English schemes of arrangement and now restructuring plans in cross-border restructurings.1
The rule provides that, so far as English law is concerned, a debt governed by English law cannot be compromised or discharged by a foreign law unless the relevant creditor submits to that foreign jurisdiction. Due to the widespread use of English law in loan and bond documents, many companies are only able to restructure their debts if they use an English law procedure — either alone or in parallel with a foreign restructuring procedure.
Despite its 19th century origins and inconsistency with notions of modified universalism and comity between courts, it is unlikely that the Gibbs rule will disappear in the foreseeable future.
Although the UK government consulted on the adoption of the United Nations Commission On International Trade Law's Model Law on Recognition and Enforcement of Insolvency-Related Judgments with Guide to Enactment, which would have undermined the Gibbs rule, it decided against adoption, at least for now, due to uncertainty about dispensing with the rule in Gibbs.
The English court therefore continues to uphold the rule, with the most notable recent example being the 2018 decision by the England and Wales Court of Appeal in Bakhshiyeva v. Sberbank of Russia.2
In contrast to the protectionism of the Gibbs rule, English courts have taken an open and flexible approach in allowing foreign companies to make use of English schemes and restructuring plans as restructuring tools. A foreign company need only have a sufficient connection to the UK in order to make use of an English law scheme or restructuring plan.
Having English law as the governing law of a company's finance documents may be enough to provide this sufficient connection. This is so even when the governing law has been changed to English law with the deliberate intention of bringing the company within the jurisdiction of the English court.
More recently, a technique has been developed that uses a newly incorporated English company as a special purpose vehicle, or SPV, for the restructuring plan.
The SPV unilaterally assumes the primary obligation for the debts that are to be restructured. The restructuring plan then seeks to compromise the liabilities of not only the SPV but also its co-obligors.
In the absence of the compromises of the co-obligors' liabilities, the co-obligors may have indemnity or subrogation claims against the SPV. Therefore, unless these so-called ricochet claims are also compromised, the purpose of the restructuring plan is undermined.
Notwithstanding the artificiality of the structure, the English court has accepted the use of SPVs and compromises of co-obligors' liabilities in both schemes of arrangements and restructuring plans.
This has increased the flexibility of restructuring plans, for example by allowing debt incurred by different companies within a group to be restructured under a single process.
Innovations such as the use of SPVs to act as the co-obligors of debt that is intended to be restructured, combined with the familiarity of decades of case law, have helped to keep restructuring plans — and to some extent schemes of arrangement — as attractive tools for cross-border restructurings.
The UK's position as a restructuring center is not a cemented primacy. English law lacks both the means to provide priority to new debtor-in-possession finance and an effective stay-outside administration — the new standalone moratorium under Part A1 of the Insolvency Act has significant shortcomings.
Accordingly, it is unlikely to displace the use of Chapter 11 where there is a strong US element. However, there may be occasional cases where an English restructuring plan is preferred, perhaps on the grounds of costs or of an English plan's added flexibility due to its not having an absolute priority rule that forbids payment to junior stakeholders when more senior stakeholders have not been paid in full.
It remains to be seen whether the UK's competitive edge in European restructuring narrows. In response to the Preventative Restructuring Directive,3 some European Union restructuring procedures have been adopted in European Union member states such as the German Act on the Stabilization and Restructuring Framework for Businesses and the Dutch Wet Homologatie Onderhands Akkoord scheme.
As these become more commonly used, the initial uncertainty surrounding their practical application will wear off. The restructuring procedures of the EU member states also have the advantage of being automatically recognized across the EU under the EU Insolvency Regulations.
However, despite concerns at the loss of EU-wide recognition for UK restructuring and insolvency procedures, it has still been possible to obtain recognition of English schemes and restructuring plans post-Brexit on a member-state by member-state basis.
Although the restructuring plan may be seen as a success in the field of cross-border restructurings, its domestic success is perhaps more qualified. It has predominately been used as a tool for large-cap restructurings.
A few restructuring plans of small and medium-sized enterprises have been successfully implemented, notably Amicus Finance PLC and Houst Ltd. However, despite SMEs being disproportionately more likely to experience financial distress, a restructuring plan is rarely proposed as a viable solution for SMEs.
The cost of a restructuring plan is certainly part of the explanation for its relatively rare use by SMEs. At least two court hearings are built into the restructuring plan process, which brings with it the attendant costs of instructing counsel and preparing for hearings, particularly if the restructuring plan is challenged by a creditor, which is often the case.
Professor Peter Walton and Dr. Lézelle Jacobs from the University of Wolverhampton, in their final evaluation report on the Corporate Governance and Insolvency Act, suggested that costs may be reduced in simpler cases by allowing a restructuring plan process to be dealt with in a single hearing or for the convening stage to be dealt with on paper.4
These are, perhaps, unlikely reforms. A restructuring plan is not necessarily any simpler for having been proposed by an SME.
Great Annual Savings Co. Ltd. and Nasmyth Group Ltd. were both mid-sized companies that proposed restructuring plans that raised novel issues about the treatment of tax debts owed to His Majesty's Revenue and Customs. These were hard fought restructuring plans that the court ultimately refused to sanction.
Furthermore, the relatively infrequent use of restructuring plans by SMEs is also in part due to the debt structure of SMEs. Unlike larger companies that may have a large and unwieldy syndicate of lenders or bondholders, SMEs are likely to have only one or two secured lenders.
It is therefore more likely that an SME can and will often need to reach a consensual restructuring with its secured lenders without needing to use a formal process.
An SME may consider using a restructuring plan to compromise its trade creditors or landlords, though as these are unsecured creditors, they can be compromised through a company voluntary arrangement, which is typically cheaper to implement than a restructuring plan.
Certain taxes that a company collects on behalf of HMRC, notably value-added tax, and employees' pay-as-you-earn tax and national insurance contributions, are preferential debts.
This means that a company voluntary arrangement cannot be used to compromise these debts. This often leaves the HMRC as the main creditor that an SME will want to use a restructuring plan to compromise.
In principle, a restructuring plan could compromise the HMRC. However, the failure of the Great Annual Savings Co. Ltd. and the Nasmyth Group Ltd. restructuring plans indicate that it may be more complex and difficult to do so. This will inevitably put many SMEs off attempting a restructuring plan.
So, even if restructuring plans could be made cheaper, it is unlikely that they will become more than a niche tool for distressed domestic SMEs. In contrast, restructuring plans are likely to remain a popular choice for cross-border restructurings.
1 Antony Gibbs & Sons v La Societe Industrielle et Commerciale des Metaux (1890) 25 QBD 399.
2 Bakhshiyeva v Sberbank of Russia  EWCA Civ 2802.
3 Directive (EU) 2019/1023 of the European Parliament and of the Council of June 20, 2019.
4 Corporate Insolvency and Governance Act 2020 evaluation reports