Morrison Foerster’s MoFo Restructuring Round-Up provides our analysis of the statutory, regulatory, legal and business-related developments in the insolvency and restructuring world. Our goal is to provide timely, helpful, insightful and digestible content that will help you keep abreast of the trends that are shaping the industry.<h2>MORRISON FOERSTER’S BUSINESS RESTRUCTURING & INSOLVENCY GROUP</h2>We counsel clients around the globe on corporate distress. We advise debtors, creditors, creditors’ committees, ad hoc committees, secured lenders, and specialist investors and are confident in advising on significant multi-jurisdictional cases. The breadth of our practice allows us to find solutions for a broad range of participants in distressed markets and to help them find their way through their most complex issues. We are creative, pragmatic problem solvers and we know the restructuring world well.<h2>ABOUT MORRISON FOERSTER</h2>Morrison Foerster is a leading global law firm that transforms complexity into advantage for its clients. Our clients include some of the largest financial institutions, banks, consulting and accounting firms, and Fortune 100, technology, and life sciences companies. Highlighting the firm’s commitment to client service, leadership in market-changing deals and impact litigation, and values-based culture, Morrison Foerster has been repeatedly recognized as one of the top 10 firms on The American Lawyer’s A-List. Year after year, the firm receives significant recognition from Chambers and The Legal 500 across their various guides, including Global, USA, Asia‑Pacific, Europe, UK, Latin America, and FinTech Legal. Our lawyers passionately care about delivering legal excellence while living our values. Morrison Foerster has a long-standing commitment to creating a culture that respects and celebrates differences, while providing an inclusive environment. The firm has achieved Mansfield Certification Plus since 2018 as a result of successfully reaching at least 30 percent women, communities of color, and LGBTQ+ lawyer representation in a notable number of current leadership roles and committees. The firm also has a long history of commitment to the community and society through providing pro bono legal services, including litigating for civil rights and civil liberties, improving public education and fostering the wellbeing of children, advocating for veterans, promoting international human rights, enforcing the right to asylum, and safeguarding the environment.

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The Honorable James M. Peck retired from Morrison Foerster upon his appointment as an International Judge of the Singapore International Commercial Court in January 2024. While at Morrison Foerster, Judge Peck chaired Morrison Foerster’s Cross-Border Restructuring practice and also headed the firm’s Mediation practice. Before joining Morrison Foerster, Judge Peck served as a U.S. Bankruptcy Judge for the Southern District of New York from 2006 to 2014, where he presided over the chapter 11 and SIPA cases of Lehman Brothers and its affiliates and a number of other major chapter 11 and chapter 15 cases and wrote multiple legal decisions that have helped define the impact of safe harbors on qualified financial contracts.By invitation, Judge Peck is a fellow of the American College of Bankruptcy and a member of the Panel of Recognized International Market Experts in Finance. He is a past president of the International Insolvency Institute, served on the board of governors of the National Conference of Bankruptcy Judges, and was judicial chair of the American Bankruptcy Institute’s annual New York City Bankruptcy Conference. Former Judge Peck currently chairs the Business Bankruptcy Advisory Committee for the Southern District of New York.Judge Peck co-chaired the ABI’s Advisory Committee on the Safe Harbors. He is a member of the Advisory Committee of the Asian Business Law Institute, is listed as a qualified member of mediation panels maintained by INSOL International, the Singapore Mediation Center, and the Singapore International Mediation Center, and has been included on the Panel of Arbitrators for Financial Services Disputes of the Hong Kong International Arbitration Center and the Panel of Arbitrators of the Singapore International Arbitration Center.Judge Peck has been retained on a number of occasions to furnish expert witness statements for submission to the High Court in London regarding issues of New York law, comity, and the recognition of main and non-main insolvency proceedings. He is also a frequent speaker worldwide on insolvency issues and has participated as a keynote speaker and a panel chair around the globe in conferences presented by numerous international organizations and law schools. These include INSOL International, the International Bar Association, INSOL Europe, and the National Conference of Bankruptcy Judges. He has authored articles published in the American Bankruptcy Institute Journal and International Insolvency & Restructuring Report, and is an editor of a recently published book titled The Art of the Ad Hoc.Before his judicial appointment in the Southern District of New York, Judge Peck was in private practice for over 35 years, concentrating much of that time on bankruptcy law, business reorganization, and creditors’ rights.

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The Honorable James M. Peck is head of Morrison Foerster’s Cross-Border Restructuring practice. Before joining Morrison & Foerster, former Judge Peck served as a United States Bankruptcy Judge for the Southern District of New York from 2006 to 2014. During his judicial service, former Judge Peck presided over the chapter 11 and SIPA cases of Lehman Brothers and its affiliates and a number of other major chapter 11 and chapter 15 cases. As a judge, he has written multiple legal decisions that have helped to define the impact of the safe harbors on qualified financial contracts.

James Peck

Lorenzo is global co-chair of the firm wide Business Restructuring + Insolvency Group. Lorenzo represents debtors, creditors, and creditors’ committees in complex bankruptcy cases, workouts, and litigation. His cases have spanned the United States as well as countless industries, such as airline and cargo transportation, mortgage origination and servicing, retail, banking and finance, energy, oil and gas, and telecommunications.Lorenzo has represented the official committee of unsecured creditors in numerous recent chapter 11 cases, including Peer Street, Incora/Wesco, Clovis Oncology, Valaris, Windstream Holdings, Inc., Cloud Peak Energy, Westmoreland Coal Company, Inc., The NORDAM Group, Inc., Avaya Inc., Armstrong Energy, Inc., 21st Century Oncology Holdings, Inc., Peabody Energy, Inc., Energy Future Holdings, Corp., and UCI International, Inc.Lorenzo’s deep experience and capabilities advising on precedent-setting bankruptcy and restructuring matters have not gone unnoticed. He is listed as a leading lawyer in Chambers USA and has also been recommended by The Legal 500 US. He was also designated by Turnarounds & Workouts magazine as an Outstanding Restructuring Lawyer for his accomplishments in 2016, 2017, and 2024.

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Lorenzo is global co-chair of the firmwide Business Restructuring + Insolvency Group. Lorenzo represents debtors, creditors, and creditors’ committees in complex bankruptcy cases, workouts, and litigation. His cases have spanned the United States as well as countless industries, such as airline and cargo transportation, mortgage origination and servicing, retail, banking and finance, energy, oil and gas, and telecommunications.

Lorenzo is global co-chair of the firmwide Business Restructuring & Insolvency Group. Lorenzo represents debtors, creditors, and creditors’ committees in complex bankruptcy cases, workouts, and litigation. His cases have spanned the United States as well as countless industries, such as airline and cargo transportation, mortgage origination and servicing, retail, banking and finance, energy, oil and gas, and telecommunications.

Lorenzo Marinuzzi

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London BRIG Update December 2023

The Administrator – An Officer of the Company?

European Uptier Transactions: Six Things to Look Out For

Liquidity Crises and Fiduciary Duties of Directors of Early-Stage Companies

High Court Rules that ISDA Bankruptcy-Related Events of Default Can Be Cured in Lehman Case

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In the following blog post, the London BRIG team look back at the restructuring trends that helped shape the market in 2023, review the outlook for the upcoming year and introduce MoFo’s recent hires.<div data-reactroot=""><span style="position:relative;width:auto;padding:0 0 407.14%;height:0;top:0;left:0;bottom:0;right:0;margin:0;border:0 none" id="experience-63e2a4a4868bb" data-aspectRatio="0.24561404" data-converted-from="div"><iframe allowfullscreen="" src="https://view.ceros.com/mofo/brig-2022-trends-1-1/p/1?heightOverride=2850" style="position:absolute;top:0;left:0;bottom:0;right:0;margin:0;padding:0;border:0 none;height:1px;width:1px;min-height:100%;min-width:100%" frameBorder="0" class="ceros-experience" title="BRIG_2023 Trends" scrolling="no"></iframe><style>#embed-wrapper-690793834{padding: 0 0 2850px;}</style><style media="(min-width:48.0625em)">#embed-wrapper-690793834{padding: 0 0 2850px;}</style></div>

London BRIG Update

London BRIG Update

In the following blog post, the London BRIG team look back at the restructuring trends that helped shape the market in 2023, review the outlook for the upcoming year and introduce MoFo’s recent hires.

In a welcome clarification for administrators, the UK Supreme Court in the recent case of R (on the application of Palmer) v Northern Derbyshire Magistrates’ Court<a href="#_ftn1" dir="ltr">[1]</a>, held that an administrator appointed under the Insolvency Act 1986 (IA 1986) is not an “officer” of the company for the purposes of section 194(3) of the Trade Union and Labour Relations (Consolidation) Act 1992 (TULRCA). Accordingly, an administrator was not liable to be prosecuted for failing to give notice to the Secretary of State of a proposed collective redundancy under section 194(1) TULRCA.What does TULRCA say?Section 193(2) of TULRCA mandates that an employer proposing to dismiss as redundant 20 or more employees at one establishment within a 90-day period needs to give notice to the Secretary of State at least 30 days before such dismissals are to take effect<a href="#_ftn2" dir="ltr">[2]</a>. Notice is given on form HR1. Failure to notify constitutes a criminal offence under section 194 of TULRCA.  Additionally, and crucially, section 194(3) states:Where an offence under this section committed by a body corporate is proved to have been committed with the consent or connivance of, or to be attributable to neglect on the part of, any director, manager, secretary or other similar officer of the body corporate, or any person purporting to act in any such capacity, he as well as the body corporate is guilty of the offence and liable to be proceeded against and punished accordingly.FactsMr Palmer was one of three joint administrators appointed to West Coast Capital (USC) Ltd on 13 January 2015 and the following day made 84 employees redundant. The HR1 form was not filed until 4 February 2015. Proceedings were bought against Mr Palmer under section 194 of TULCRA for failing to notify.Both the Northern Derbyshire Magistrates' Court and Divisional Court held that an administrator was an officer for the purposes of section 194(3) of TULCRA not least because an administrator is appointed to manage the affairs, business and property of the company. Accordingly, Mr Palmer could be prosecuted for failing to notify. Mr Palmer appealed to the Supreme Court.Supreme Court decisionThe Supreme Court allowed Mr Palmer’s appeal and held that an administrator was not an officer of the company within the meaning of section 194(3) of TULCRA.In coming to this decision, the Court noted that in the absence of a definition of “officer” contained in TULCRA and there being no generally accepted definition, recourse was to the IA 1986 pursuant to which administrators are appointed. The court noted there were nearly 120 references to officer in the IA 1986 as originally enacted and some 170 in its current form. None of the references suggested that an administrator was an officer of the company. Importantly, some of the references clearly showed that an administrator was not an officer of the company.  The Court rejected the Divisional Court’s functional test approach, which looked at the words “other similar officer” to capture anyone responsible for managing the business of the company (and would therefore include an administrator). To the Supreme Court, Parliament would have used different language (and has done so in other legislation) if it had intended for the test to be functional. The Supreme Court further noted that long before section 194 TULRCA, the Court of Appeal held that managers and receivers appointed under a debenture were not officers of the company, even though in most cases they would have complete control over the day-to-day running of the business of the company.Who are “officers” then?The Supreme Court adopted what it called the “normal” meaning of “officer”, with the test being whether the person is “an officer within the constitutional structure of the body corporate”. So, whilst this does not include an administrator, it would include the company’s directors, managers, and secretaries.What are the implications?Redundancies can be a necessary part of saving a business as a going concern and/or to enable a sale of the distressed company to occur. Often it is left to the administrator to decide on and implement the redundancies in a short time frame, with the additional pressure that, if the administrator does not implement redundancies, they could be deemed to have accepted the employment contracts, which could then be considered an expense of the administration.The Supreme Court’s finding that an administrator is not an officer for the purposes of sections 193 and 194 of TULRCA comes as welcome relief to insolvency practitioners that they will not incur criminal liability for failing to submit the HR1 form in discharging their statutory duties where collective redundancies are necessary.This means that:<div data-reactroot=""><img src="https://media2.mofo.com/v3/images/blt5775cc69c999c255/blt93e10e1506077ad2/656770e16f7bf41c5282fa1d/231129-graphic.PNG?format=auto&amp;quality=60" alt="graphic"/></div>Albert Khazen, London Trainee Solicitor, contributed to the drafting of this alert.<a href="#_ftnref1" dir="ltr">[1]</a> R (on the application of Palmer) v Northern Derbyshire Magistrates’ Court [2023] UKSC 38.<a href="#_ftnref2">[2]</a> The notice period is 45 days when the proposal is to dismiss 100 or more employees.

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Of Counsel

Oliver Spratt is Of Counsel based in the London office of Morrison Foerster. 

Oliver Spratt

In a welcome clarification for administrators, the UK Supreme Court in the recent case of R (on the application of Palmer) v Northern Derbyshire Magistrates’ Court

Whilst commonplace in the U.S., uptier transactions in which a borrower teams up with a subset of creditors to issue new “super priority” debt by amending or exchanging existing debt documents, have not been widely used in Europe. However, with increasing macro economic pressures and financial market instability, we may see more European borrowers taking advantage of flexibility in cov-lite debt documentation to implement liability management transactions as an alternative to, or even as part of, more formal restructurings. Differences in documentation, legal principles, and availability of other restructuring tools may mean liability management transactions might not occur in Europe in the same way as in the U.S. Here we set out some key things to look out for in European deals when considering uptier transactions. Intercreditor Arrangements<span class="embedded-entry redactor-component inline-entry" type="entry" data-sys-entry-uid="blt9287899135cba8a8" data-sys-entry-locale="en-us" data-sys-content-type-uid="image_content" sys-style-type="inline"><img class="dangerously-set-container__img-right" src="https://media2.mofo.com/v3/images/blt5775cc69c999c255/blt6fa70714cfbc3ec8/6525d4c857e2334b7246292b/231010-file-icon.jpg?format=auto&amp;quality=60" alt="File icon" data-reactroot="">Watch out for European intercreditor agreements which set out the ranking and priority of each creditor class and can be difficult to amend without each class consenting. This can create an impediment, although not insurmountable through use of a turnover arrangement. Some intercreditors can provide for super priority debt via a “hollow” (i.e., unutilized) tranche so amendments may not be required. Document Terms and Majorities<span class="embedded-entry redactor-component inline-entry" type="entry" data-sys-entry-uid="bltd58a8854b763234b" data-sys-entry-locale="en-us" data-sys-content-type-uid="image_content" sys-style-type="inline"><img class="dangerously-set-container__img-right" src="https://media2.mofo.com/v3/images/blt5775cc69c999c255/blt0e5ef79a39786bc9/6525d4c801a3378ccf5ea400/231010-checklist-icon.jpg?format=auto&amp;quality=60" alt="Checklist icon" data-reactroot="">There will need to be debt capacity in the debt documents or an ability to amend the same with majority consent. Some European credit agreements will incorporate indenture style covenants and allow this. In other credit agreements, permissions can be more tightly drafted and require greater majorities (such as 66 2/3% or more) to effect amendments.Debt Buy Backs<span class="embedded-entry redactor-component inline-entry" type="entry" data-sys-entry-uid="bltce02ffe98e1d29b8" data-sys-entry-locale="en-us" data-sys-content-type-uid="image_content" sys-style-type="inline"><img class="dangerously-set-container__img-right" src="https://media2.mofo.com/v3/images/blt5775cc69c999c255/bltc0c3ce4705bfb592/6525d4c8b8038ab45830c705/231010-money-icon.jpg?format=auto&amp;quality=60" alt="Money icon" data-reactroot="">Check whether the credit agreement allows the borrower to buy back debt from a subset of creditors. It is not uncommon to find restrictions that require the borrower to make open market purchases on a pro rata basis to ensure all creditors in the loan facility are treated equally. Exit Consents<span class="embedded-entry redactor-component inline-entry" type="entry" data-sys-entry-uid="bltf0fce322163cf684" data-sys-entry-locale="en-us" data-sys-content-type-uid="image_content" sys-style-type="inline"><img class="dangerously-set-container__img-right" src="https://media2.mofo.com/v3/images/blt5775cc69c999c255/bltcf09d23f4c84a349/6525d4c8fabb8d6771dc8070/231010-external-icon.jpg?format=auto&amp;quality=60" alt="External link icon" data-reactroot="">Exit consents can fall foul of English law. In one extreme case, an exit consent was considered an abuse of power by the majority on the minority, where the non-consenting minority recoveries were reduced to 0.00001% of their face value. An exit consent which does not impact recovery but removes other protections might be treated differently. Alternative Processes<span class="embedded-entry redactor-component inline-entry" type="entry" data-sys-entry-uid="blt6963eea09ffa4631" data-sys-entry-locale="en-us" data-sys-content-type-uid="image_content" sys-style-type="inline"><img class="dangerously-set-container__img-right" src="https://media2.mofo.com/v3/images/blt5775cc69c999c255/blt5c0dbdac35f44f4a/6525d4c8b4577d81425d1117/231010-arrows-icon.jpg?format=auto&amp;quality=60" alt="Arrows icon" data-reactroot="">The availability of other non-bankruptcy restructuring tools such as UK schemes of arrangement and restructuring plans, which have manageable voting thresholds, ability to cram down, flexibility to provide new money, and are less open to challenge once sanctioned, make them very attractive alternatives to liability management transactions. Bridge Financing<span class="embedded-entry redactor-component inline-entry" type="entry" data-sys-entry-uid="blt06d16b9f039934d4" data-sys-entry-locale="en-us" data-sys-content-type-uid="image_content" sys-style-type="inline"><img class="dangerously-set-container__img-right" src="https://media2.mofo.com/v3/images/blt5775cc69c999c255/blt0ee42de5f8258351/6525d4c8b4577d7e5b5d1119/231010-person-icon.jpg?format=auto&amp;quality=60" alt="Person icon" data-reactroot="">An uptier transaction could be used to provide much needed liquidity in anticipation of a full-scale restructuring. This bridge or “debtor-in-possession” style priority funding provided by an ad-hoc majority, can be less contentious when it leads to a wider financial restructuring that protects value for the creditors as a whole.

European Uptier Transactions: Six Things to Look Out For

Whilst commonplace in the U.S., uptier transactions in which a borrower teams up with a subset of creditors to issue new “super priority” debt by amending or exchanging existing debt documents, have not been widely used in Europe.

In Grant & Ors v FR Acquisitions Corporation (Europe) Ltd & Anor (Re Lehman Brothers International (Europe)) [2022] EWHC 2532 (Ch), the English High Court ruled on an application for directions (the “Application”) made by the administrators (the “Administrators”) of Lehman Brothers International (Europe) (LBIE) relating to the construction and effect of certain bankruptcy-related events of default (“Events of Default”) specified under the ISDA Master Agreements (as defined below), specifically:<ul><li>Whether certain bankruptcy-related Events of Default specified under Section 5(a)(vii)<a href="https://www.mofo.com/resources/insights/230209-high-court-rules-that-isda-bankruptcy#_ftn1">[1]</a> can be cured, so that they are no longer “continuing” for the purposes of Section 2(a)(iii), and that a party relying on such a provision to suspend its obligation to perform can no longer do so; and</li><li>Whether certain events in connection with the administration can be construed as constituting Events of Default and, if so, whether they are “continuing” for the purposes of Section 2(a)(iii).</li></ul>Read the <a href="https://www.mofo.com/resources/insights/230209-high-court-rules-that-isda-bankruptcy" target="_blank">full client alert</a>.

High Court Rules that ISDA Bankruptcy-Related Events of Default Can Be Cured in Lehman Case

In Grant & Ors v FR Acquisitions Corporation (Europe) Ltd & Anor (Re Lehman Brothers International (Europe)) [2022] EWHC 2532 (Ch), the English High Court ruled on an application for directions (the “Application”) made by the administrators (the “Administrators”) of Lehman Brothers International (Europe) (LBIE) relating to the construction and effect of certain bankruptcy-related events of default (“Events of Default”) specified under the ISDA Master Agreements (as defined below), specifically:

In the following blog post, the London BRIG team look back at the restructuring trends that helped shape the market in 2022, review the outlook for the upcoming year and introduce MoFo’s recent hires who expand the team's BRIG and related capabilities.Understanding and talking about issues in the market is just part of the value we bring to our clients and contacts. We produce a range of engaging resources from client alerts, to thought pieces on the BRIG blog, and interactive content. Here are a few recent highlights:<div data-reactroot=""><span style="position:relative;width:auto;padding:0 0 407.14%;height:0;top:0;left:0;bottom:0;right:0;margin:0;border:0 none" id="experience-63e2a4a4868bb" data-aspectRatio="0.24561404" data-converted-from="div"><iframe allowfullscreen="" src="https://view.ceros.com/mofo/brig-2022-trends?heightOverride=2850" style="position:absolute;top:0;left:0;bottom:0;right:0;margin:0;padding:0;border:0 none;height:1px;width:1px;min-height:100%;min-width:100%" frameBorder="0" class="ceros-experience" title="BRIG_2022 Trends" scrolling="no"></iframe><style>#embed-wrapper-591892369{padding: 0 0 2850px;}</style><style media="(min-width:48.0625em)">#embed-wrapper-591892369{padding: 0 0 2850px;}</style></div>

London BRIG Update

In the following blog post, the London BRIG team look back at the restructuring trends that helped shape the market in 2022, review the outlook for the upcoming year and introduce MoFo’s recent hires who expand the team's BRIG and related capabilities.

For background on the Act and the National Security and Investment (NSI) regime, please see our <a href="https://www.mofo.com/resources/insights/201116-foreign-direct-investment">November 2020 Client Alert</a>, <a href="https://www.mofo.com/resources/insights/210817-uk-national-security-investment-act">August 2021 Client Alert</a>, and <a href="https://www.mofo.com/resources/insights/220405-national-security-investment-act">April 2022 Client Alert</a>.On 19 July 2022, the UK government’s Department for Business, Energy & Industrial Strategy released <a href="https://www.gov.uk/government/publications/national-security-and-investment-nsi-act-market-guidance-notes/national-security-and-investment-market-guidance-notes-july-2022">Market Guidance Notes</a> on the NSI Act (which took effect on 4 January 2022). The NSI Act creates powers for the UK government to intervene in, and scrutinize, business transactions in order to protect national security. The NSI regime’s key features are mandatory notification requirements of transactions in 17 specified sensitive sectors, voluntary notification requirements for certain transactions that give rise to national security concerns, and call-in powers under which the government can ‘call-in’ transactions across all sectors of the economy on national security grounds (see our April 2022 Client Alert at the link above).The new Market Guidance Notes are of particular importance for insolvency practitioners, as they clarify that the appointment of liquidators and receivers may constitute an acquisition requiring mandatory notification under the NSI Act. The same is not true for administrators or creditors, who are afforded mandatory notification carve-outs.The guidance sets out two scenarios in which mandatory notification is required:<ol><li>If the liquidator or receiver is appointed for an entity that has a shareholding of over 25% in another entity operating in a sensitive sector and, during the insolvency process, the liquidator acquires control of the shares’ voting rights; or</li><li>If an individual becomes bankrupt and holds over 25% of the shareholding in an entity in a sensitive sector and the trustee in bankruptcy acquires the shares during the insolvency process. </li></ol>All guidance on this far-reaching legislation is welcome and insolvency practitioners need to think carefully as to whether mandatory notification may be required of them.

The National Security and Investment Act 2021: The UK Government Updates the Consequences of the Appointment of Liquidators and Receivers

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The National Security and Investment Act 2021: The UK Government Updates the Consequences of the Appointment of Liquidators and Receivers

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For background on the Act and the National Security and Investment (NSI) regime, please see our November 2020 Client Alert, August 2021 Client Alert, and April 2022 Client Alert.

Is the rule in Gibbs justifiable in the context of modern international insolvency laws or is England clinging to an outdated rule simply to keep restructurings here? The rule stems from an 1890 Court of Appeal Case, which holds that only English courts can validate the compromise or discharge of English law governed debt. The rule cuts across the trend of increased cross-border cooperation in insolvency matters – commonly described as the “modified universalist” approach and critics see the rule as a relic of a more Anglo-centric approach to insolvency law. This outdated philosophy does not mirror the globalization of commerce and law, and thus arguably contrasts universalism with territorialism.Nonetheless, the rule in Gibbs remains good law, at least in the UK and Hong Kong. There have been international developments; the UNCITRAL Model Law on the Recognition and Enforcement of Insolvency-Related Judgments 2018 (“IRJ Model Law”) complements the 1997 Model Law on Cross-Border Insolvency (implemented in the UK through the Cross-Border Insolvency Regulations 2006 (CBIR 2006) and adopted by 23 other countries). The UNCITRAL Model Laws make foreign restructurings binding in other jurisdictions that have adopted the model laws. But the scope of the 1997 Model Law is limited in the UK. In the most recent Court of Appeal affirmation of the rule in Gibbs, the 2018 case of the International Bank of Azerbaijan, the court ruled that the UNCITRAL Model Law 1997 (through the CBIR 2006) is merely procedural and cannot interfere with how the Gibbs rule protects substantive English law contract rights.Seemingly, the newer IRJ Model Law (not yet enacted as part of English law) asserts universalism more than territorialism, most notably, perhaps, the rule in Gibbs – i.e., Article 13 of the IRJ Model Law specifically provides that recognition and enforcement of insolvency-related judgments is mandatory. However, in the <a href="https://www.gov.uk/government/consultations/implementation-of-two-uncitral-model-laws-on-insolvency/implementation-of-two-uncitral-model-laws-on-insolvency-consultation">recent</a> UK Government Consultation, published on July 7, 2022, on the IRJ Model Law, the UK government sets its face against implementing the IRJ Model Law in full. It has no intention of undermining the Gibbs rule, as it provides “certainty to contracting parties” and makes English law attractive for international use.Application of the Gibbs rule is actually more nuanced than simply not recognizing adjustment of an English governed debt by a non-English court. In a recent Hong Kong judgment of June 6, 2022 after sanctioning a scheme for Rare Earth Magnesium Technology, the Hong Kong courts clarified that the Gibbs rule did not prevent the recognition of a “foreign” insolvency procedure (in this case a U.S. Chapter 15 procedure). Had the foreign scheme purported to compromise substantive legal rights of parties to an agreement, only then would the rule in Gibbs be engaged.Arguably modified universalism may have reached its zenith if it overlooks trusted legal mechanisms. Proponents of the rule in Gibbs argue that parties choose English law to govern their debts because one of the incidents of their choice is that it falls to the English courts to adjudicate changes to those debts. They’re exercising a freedom to contract. While the principle that parties should be able to insist on the law of their choice and the courts of a particular jurisdiction having sole authority to compromise their debt – there’s still a sneaking feeling that this also serves the purpose of forcing international restructuring business to be conducted in the English jurisdiction, and baked into that is an irritating belief in the superiority of the English court. Authored by Howard Morris. Sakshi Rai, London Trainee Solicitor, and Guy Wilcock, a summer intern at the London MoFo office, have contributed to the drafting of this alert.

Substance over Form: How the Rule in Gibbs lives on

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Substance over Form: How the Rule in Gibbs lives on

Is the rule in Gibbs justifiable in the context of modern international insolvency laws or is England clinging to an outdated rule simply to keep restructurings here? The rule stems from an 1890 Court of Appeal Case, which holds that only English courts can validate the compromise or discharge of English law governed debt. 

There has been a series of warnings of an upcoming financial downturn; just too many strains on and impediments to the domestic and global economy, with inflation galloping and interest rates following, it seems – as the markets certainly believe – a downturn is coming or is already here. That is why the financial markets and central banks have responded with equal fear and, and in the case of the central banks, they are deploying or about to deploy their remaining might to avert recession or minimise its effects. And in a financial downturn loans go into default: What will lenders do?RefinancingBefore the global financial crisis in 2007–2008, borrowers typically refinanced their syndicated facilities a couple of years before maturity. There was significant liquidity available and low interest rates (i.e., cheap credit). While the financial crisis caused a significant amount of company collapses (affecting smaller companies more than larger ones) a lot of companies survived the financial crisis. This was in the face of the level of leveraged loans made between 2005 and 2007, which led to a “refinancing wall”, a wave of maturities falling due between 2012 and 2014. Lenders were unwilling to enter into new facilities but they were also pessimistic about the likely returns from an immediate insolvency process or enforcement. This led to a ubiquitous approach or strategy.Amend and extendAs an alternative to refinancing, many lenders were ready to “amend and extend” their facilities for a higher margin, additional fees, and, in some cases, the amendment of financial covenants. With an abundance of easy credit and a belief that asset values would rise year on year, which has at least been the case until recently, what was to be lost by postponing default? Hence the “amend and extend” deal, also waggishly called, not inaccurately, a “pray and delay”, became common.The amendment of U.S. loan agreements typically required lower levels of consent (majority consent plus the consent of the extending lenders) than UK or European loan agreements. Many UK and European loan agreements required unanimous consent, or super-majority consent, to amend and extend, particularly in the case of investment grade loans. So getting lender consent could be difficult. In some loan agreements there were facility change mechanisms allowing an existing tranche of debt to be increased or an additional tranche to be added. A borrower wishing to amend and extend its facility using the facility change mechanism would usually require consent from each extending lender, in addition to the majority of lenders (being 66 ⅔ percent) or a greater percentage as set out in the loan agreement. Interestingly, the level of consent required in UK and European loan agreements now often falls within a range which is lower than it used to be 15 years ago.Liquidity is now tightening, and while there is no refinancing wall that is equivalent to the one overcome a decade ago, it is becoming more costly to refinance. Particularly in leveraged credits, lenders are becoming less willing to form a view of where a leveraged borrower may be in the coming years, that its assets will be worth more and accordingly the option to amend and extend is less likely to be offered. Notably, amend and extend activity in Europe decreased in FY21, with 137 deals, in comparison to FY20, which saw 159 deals.Current market sentiment – are we reaching tipping point?With interest rates and inflation increasing, it is becoming more expensive to refinance and to service debt. Lenders will be carefully considering both the creditworthiness of a borrower and whether its business is sufficiently resilient to tackle troubling times. Lenders can no longer have confidence that the value of the borrower and its assets will continue to rise. Understandably, there is hesitation to lend. A debtor company should be considering whether it can afford to borrow based on the margin it must pay. As a response to distress and over-leverage problems, “amend and extend” had a data based rationalisation, yet it was still too much like the panglossian philosophy of Charles Dickens’ Mr Micawber when facing bankruptcy that “something will turn up”.

Will Creditors Amend and Extend or Enforce With(out) Remorse?

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Will Creditors Amend and Extend or Enforce With(out) Remorse?

There has been a series of warnings of an upcoming financial downturn; just too many strains on and impediments to the domestic and global economy, with inflation galloping and interest rates following, it seems – as the markets certainly believe – a downturn is coming or is already here.

On 6 April 2022, the English High Court made an administrative order in respect of the UK arm (VTB Capital) of Russia’s second largest bank, VTB Bank. VTB Capital is a designated entity under the UK sanctions regime, which has led to extensive asset freezes since the onset of the Ukraine invasion. Despite this, VTB Capital was one of the first sanctioned entities to be granted a general licence for its winding down by the UK Office for Financial Sanctions Implementation (UK OFSI). The general licence has not however made it easier for the Russian-owned bank to find funding to facilitate the wind-down of its business. Although the bank is balance sheet solvent, the skeleton argument made by VTB Capital at the High Court highlighted that it was unable to pay its employees, suppliers, and other creditors, thus making VTB Capital’s directors’ plea for an administration ‘urgent’.Usually, under the UK insolvency regime, banks like VTB Capital would be subject to a ‘special administration’, as special interests related to consumers or financial regulators have to be borne in mind in addition to those of the company’s creditors. However, as Mr. Justice Fancourt noted in the High Court, VTB Capital as in the ‘unusual’ position that it was already undergoing the wind-down of its affairs by the time Western nations started imposing more extensive and stringent sanctions on Russian-owned entities after 24 February 2022. It has been <a target="_blank" href="https://www.ft.com/content/27adf446-517a-4c4b-89e8-dee8757252e9">reported</a> that since the annexation of Crimea in 2014, VTB Capital anticipated there would be sanctions and began reducing its London operations. After boasting that it had over 500 London employees in 2014, its staff has now been reduced to only 120 in 2022. This example stands in contrast to the UK administrations of Russian banks Sova Capital and Sberbank, both of which are in administration under the special administration regime and had to begin their insolvency proceedings as a result of being hard hit by financial sanctions, rather than having prior plans to wind down.According to its skeleton argument, VTB Capital had already been in discussions with the Prudential Regulation Authority, the Bank of England, and the Financial Conduct Authority regarding its plans. As a result, despite being balance sheet solvent, the English High Court has allowed for this unusual case of ordinary administration for the bank. The decision is subject to the bank being granted a further licence from the U.S. Office of Foreign Assets Control, the U.S. equivalent of the UK OFSI. Once the bank’s administrators have been granted this licence, they will be free to open a bank account to continue the payments required for the relevant wind-down of VTB Capital.Authored by Howard Phillip Morris. Trainee Solicitor, Sakshi Rai, contributed to the drafting of this alert.

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The Curious Case of VTB Bank’s UK Administration

The Curious Case of VTB Bank’s UK Administration

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On 6 April 2022, the English High Court made an administrative order in respect of the UK arm (VTB Capital) of Russia’s second largest bank, VTB Bank. VTB Capit

As Russia’s invasion of Ukraine continues, governments around the world are coordinating and responding with increasingly severe sanctions and export controls on Russian entities, institutions, and individuals. Insolvency practitioners first wonder whether sanctioned entities, or entities connected to sanctioned individuals, can enter into an insolvency procedure and, if so, how does the insolvency practitioner accept an appointment and get paid? Demystifying these grey areas necessitates an overview of the UK sanctions regime and the carve-outs allowing sanctioned entities to continue with financial dealings in distressed circumstances.General Overview of the UK Sanctions RegimeIt is the Sanctions and Anti-Money Laundering Act 2018 (the “Sanctions Act”) that enables regulations for specific sanctions targets to be made, and provides criminal penalties for any breach. Under the Sanctions Act, the Russia (Sanctions) (EU Exit) Regulations 2019 (the “Sanctions Regulations”) were made to enable the Secretary of State to designate persons as subject to restrictions under the Sanctions Act. The Sanctions Regulations were further amended in 2022 in light of the current Ukraine war to widen the ambit of sectors and entities that can become designated under the Sanctions Regulations.The restrictions that can be imposed under these sanctions are wide-ranging, however the most notable for the commercial sector are the financial sanctions. This includes a blanket prohibition for dealing with any funds or assets of a sanctioned entity.Carve-Outs Under the Sanctions RegimeUnder the Sanctions Regulations, the UK Office for Financial Sanctions Implementation (UK OFSI) has the power to grant licences for specific purposes, or general licences, that enable sanctioned entities to continue an activity without breaching the sanction imposed on them. Licence applications are submitted by applicants on a form which is sent to the UK OFSI. The sanctioned entities must identify the legal basis for why they need to continue a financial activity despite the prohibition for dealing. The UK OFSI has granted some licences, most notably for Chelsea Football Club, which has been allowed to continue playing its games but subject to restrictive conditions in contrast to the general perception of free-spending EFL Premier League clubs. In the realm of insolvency proceedings, a general licence was granted for the wind-down of Russian-owned VTB Capital illustrating how to pursue an insolvency proceeding for a sanctioned entity.Entering into Insolvency Proceedings as a Sanctioned EntityGiven the novelty of the situation, there are few precedents to provide a roadmap as to how sanctioned entities are to be dealt with in an insolvency proceeding. English Courts have extensive powers to appoint a ‘receiver’ in cases where it appears ‘just and convenient’ to do so. However, it is unlikely that this is an unlimited right of the Court. The need for a legal basis to ground the general licence carve-out under the Sanctions Regulations supports an argument that a licence is necessary to appoint a receiver.Sanctioned Russian bank Sberbank CIB has gone into <a target="_blank" href="https://www.fca.org.uk/news/news-stories/sberbank-cib-uk-limited-goes-special-administration">special administration</a>, whereas VTB Capital has gone into a regular administration as it was farther down the road towards closing its business. The administration<del>s</del> of these sanctioned banks illustrates that financial sanctions will not in and of themselves stop insolvency processes from going ahead.Please see our comprehensive <a target="_blank" href="https://www.mofo.com/special-content/sanctions/">Sanctions Resource Center</a>, with particular highlights on the firm’s highly regarded National Security team, led by Sanctions expert John Smith, former director of the U.S. Office of Foreign Assets Control, the U.S. sanctions entity, and our <a target="_blank" href="https://www.mofo.com/resources/events/220303-new-russia-sanctions-details-impact.html">webinar</a> on the new Russia sanctions, which further dissects the details.Authored by Howard Phillip Morris. Trainee Solicitor, Sakshi Rai, contributed to the drafting of this alert.

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The Insolvency Practitioner’s Playbook: Making Sense of the UK Sanctions Regime

The Insolvency Practitioner’s Playbook: Making Sense of the UK Sanctions Regime

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As Russia’s invasion of Ukraine continues, governments around the world are coordinating and responding with increasingly severe sanctions and export controls o