Rescue financing abandoned

The Government have dropped the idea of introducing rescue finance, with super-priority for new lenders to troubled companies, for the time being.

The Insolvency Service announced this today in response to the consultation, “Encouraging Company Rescue”.  You can see the range of replies to the consultation here; (name-check my firm, CMS Cameron McKenna ).

It seems there was a more positive reaction to the suggestion of a moratorium for companies that need a breathing space in order to agree restructuring proposals with their creditors.  We can expect more detailed proposals to be published in due course.

An article with more detail will shortly be published on www.law-now.com .

Constructive trusteeship in complex restructurings

An Australian restructuring case, despite minor differences of law, has relevance for banks taking security under English law for borrowing from complex corporate structures.  The case shows how much care banks should exercise to avoid liability as constructive trustees.  The judgment runs to 2,643 pages and I don’t pretend to have read it.  But you might like to be aware of some commentary by Australian law firms, Dibbs Barker and Allens Arthur Robinson, that show banks should stick to their existing routines in bank lending practices, get proper minutes from companies, scrutinise benefit and security arrangements and be aware of directors’ responsibilities when their company is on the brink of insolvency.  One gem to emerge from this is an attempted description of insolvency: “insurmountable endemic liquidity”.

CVAs: the future?

JJB Sports plc has been the first listed UK company to use a CVA successfully.  They have announced that 99% of the retailer’s unsecured creditors had approved a company voluntary arrangement which will facilitate a restructuring of JJB’s business.  It is believed that the restructuring will protect around 12,000 jobs by allowing JJB to survive as a corporate entity, while implementing a managed store closure programme.

This CVA is the first of this scale to pass without challenge or opposition from landlords who appear to have been persuaded by the fact the CVA provides for landlords to receive around £10,000,000 (or six months rent) and the landlords will accept rent on a monthly, rather than a quarterly basis.

Proposals for dealing with troubled companies

The law of corporate insolvency will be changed as indicated by the recent Budget speech (April 2009). Legislation to improve companies’ access to funding is planned. The Insolvency Service will start a consultation in June. The proposals would give viable large and medium sized companies the same opportunity now available to small companies for a moratorium while trying to come to an agreement with creditors.

The Insolvency Service will also consult on changes that would help give all companies access to additional funds to get back on their feet. New money lent to companies in Company Voluntary Arrangements or administration would be given priority. This could make it more attractive to lend to such companies allowing them to access extra funding when they need it most.

The overall aim of the Insolvency Service in making these proposals is to ensure that company rescues are encouraged to take place when they are appropriate. They also want to protect creditors as far as possible.

The Budget showed that the Insolvency Service will be investigating pre-pack sales. It will publish the first of a series of regular reports on its monitoring of the operation of pre-pack sales. The Statement of Insolvency Practice 16 issued earlier this year (see Bank Law Blog’s January 2009 post on pre-packs and SIP 16.) requires administrators to provide creditors with detailed reports explaining their decisions for a pre-pack administration as soon as they are appointed. Scrutiny of these reports by The Insolvency Service is designed to ensure that creditors are not being treated unfairly through the abuse of pre-pack sales.

Recent reforms of corporate insolvency law have included the introduction of Debt Relief Orders (6 April 2009), changes to rules on advertising, allowing more discretion to insolvency office-holders and work is in hand to modernise insolvency processes, including more use of electronic communications.

As yet, there are no published details on these proposals.

Banking Bill

The Banking Bill is on its final parliamentary stretch and in theory expects to receive Royal Assent by tomorrow, 12 February 2009.  It is now in the process of debate quaintly called “ping-pong”.  Both Houses must agree on the text of the Bill and there are still issues to resolve before they can agree on every word.  You can see the arguments on e.g., issues relating to the use of public money to fund the banks and on the definition of the insolvency of investment banks set out on Hansard. 

The current version of the Bill can be found here.

Pre-packaged administration

A new rule affects “pre-packaged sales” or “pre-packs” - arrangements to sell a company’s business or assets to a buyer before an administrator is appointed. The administrator effects the sale on his appointment. Unsecured creditors have no chance for involvement in the sale of the business or assets before it takes place. The method has been in vogue for some time but is contentious.

To try to remedy one of the perceived evils, a new Statement of Insolvency Practice addressed to administrators involved in pre-packaged sales aims to require administrators to provide creditors with information about the sale such as the name of the buyer of the business and the price paid.

The new guidelines require practitioners to:

· Keep a detailed record of the reasons why a pre-packaged sale has been chosen as the best course of action for creditors.

· Make it clear to the directors of the company that they have been appointed to advise the company, and not the directors on their personal positions, where that is the case.

· Encourage the directors of the company to take independent advice, in particular if any of the directors proposes to acquire assets in the sale.

The Statement of Insolvency Practice 16 (E&W) (SIP 16) took effect on 1st January 2009.

The Banking Bill

Roomfuls of people are playing games of “Pass the parcel of debt” for years.  Sometimes one room joins up with another roomful and they swap, paying each other as they go, and interchange with other rooms.  The music stops in some rooms.   What are those parcels worth when they are opened?  The Telegraph’s analaysis “The decade of debt is coming to a bloody end” gives an explanation of the financial position, although I think it ought to have included the huge pile of securitised consumer debt. 

Desperate times.  A new Banking Bill was laid before Parliament on 7 October 2008.  Events are happening faster than the legislators and consultees can react.  The creation of a Bank Reconstruction Fund reported in the FT (“Treasury readies fund to aid banks“) is not – yet – built into the draft Bill.  

The new law will be needed for any unfortunate bank that cannot be rescued by the Government.  For over a year, the Government have been mulling plans for legislation to cope with bank insolvency.  Last February, the found they needed to rush out the Banking (Special Provisions) Act 2008 to cope with the foundering of Northern Rock.  (The Act is not specfic to the Rock and, originally with a short shelf-life, has been extended to February 2009.)  Now the Banking Bill has been published which creates a permanent statutory regime for dealing with insolvent banks.   

Failing banks

The Bill creates “stabilisation powers” in a “Special Resolution Regime” (SRR) that gives the tri-partite authorities, the FSA, the Bank of England and HM Treasury a method to deal with banks in financial difficulty.  The stabilisation powers are the powers to effect the transfer of shares by law.  Under the SRR, there is a “power to protect certain interests” – security interests, set-off, close-out or netting arrangements.  There are three stabilisation options: transfer to a private sector purchaser, transfer to a bridge bank or transfer to temporary public sector ownership.

Depositor protection

A new Bank Insolvency Procedure (BIP) sets out the way to wind up a failed bank and to make rapid Financial Services Compensation Scheme payments to claimants (or to another bank).

There are new powers for HM Treasury in relation to the use of the Financial Services Compensation Scheme to contribute to the cost of the Special Resolution Regime.  The Schemes rules are governed by the FSA and the rules were changed by the FSA on 7 October to increase the protection of consumer deposits to 100% of the first £50,000.  Bank directors who have deposited their cash with their own bank are not covered.

Bank administration

There is a new bank administration procedure.  A court-appointed administrator would administer the affairs of an insolvent residual bank where the rest of the bank is transferred to a private sector purchaser or a bridge bank under the SRR.

Payment systems to be regulated

The Bill will give the Bank of England a formal regulatory role in bank payment systems.  Payment systems are different networks for the transfer of money (or credit) between members of the systems.  They are governed by their own rules and at the moment are not subject to formal regulation.  The FSA has a statutory responsibility for Recognised Clearing Houses which have payment systems.

Scottish and Northern Irish banknotes

The Bill then turns (Part 6) to the issue of banknotes by Scottish and Northern Irish banks.  The banks have been allowed to issue their own notes for over 150 years but the Bank of England does not stand behind them: the notes are a liability of the issuing bank. The Bill permits the banks to continue to issue them but only in accordance with the Bill (issues relating to backing assets) and existing legislation is amended.

No disclosure of funding recipients

There are some provisions relating to the governance of the Bank of England, including a provsion which means the Bank does not have to disclose to whom it provides emergency liquidity. 

Building Societies

The Bill allows (s 229) HM Treasury to modify the Building Societies Act 1986 to allow financial assistance to be given to building societies.

Registration of charges

If the Bank of England or another central bank including the European Central Bank are granted a charge, the charge does not have to be registered under Part 25 of the Companies Act 2006 (registration of charges) (s230).  Along with non-reporting of emergency funding provision, this presumably is to keep bail-outs shrouded in a discreet veil.

“Funds attached” rule

The Bill abolishes (s 231) the “funds attached” rule of Scottish cheques.  The rule is that where a cheque is presented to the drawee for payment, it operates as an assignation (the Scottish term for assignment) of the sum for which it is drawn in favour of the holder of the bill.  The Bills of Exchange Act 1882 is amended and section 11 of the Law Reform (Misc Provs) (Scotland) Act 1985 ceases to have effect.  This section will come into effect 2 months after Royal Assent is granted to the Bill.

Financial Collateral

Right at the end of the Bill is the section on Financial Collateral Arrangements (s 232) which allows HM Treasury to make regulations about security, not limited to the Financial Collateral Arrangements Directive and to allow HM Treasury to make any provision that it thinks necessary to make financial collateral arrangements “commercially useful and effective”.  These can be retrospective.  And I see the Government have taken the opportunity to smooth over an issue a small band of us have been raising since the introduction of the Financial Collateral Arrangements (no 2) Regulations 2003: that the regulations were ultra vires because they went beyond the sope of the original Directive.   s 232 (5) provides for the regulations to be treated as having effect despite any lack of vires.

Events are moving fast – and move faster every weekend in the breathing space from the markets and their dense red screens.  The Government has got used in the space of a week to planning to deal with high-profile banks by shoring them up with cash, not by drafting infinitely complex legislative provisions to deal with the insolvency of putative, but presumably relatively insignificant institutions, in an orderly manner.   There is a black humour to be found in para 533 to the notes to the Bill, where “the Government anticipates that the provisions in this Bill will lessen the risk posed to public expenditure by the need to resolve failing banks.”

Insolvency set-off – building societies

The Financial Markets Law Committee have published their December 2007 paper proposing that the mandatory insolvency set-off rule should be applied to building societies and incorporated friendly societies.   Insolvency Rule 4.90 doesn’t apply to them at present.  This leads to uncertainty in the financial markets when such entities are counter-parties because participants can’t provide clean legal opinions on transactions not being able accurately to analyse the credit risk. 

Delay on new Insolvency Rules

The Insolvency Service have said the timetable for introducing new Insolvency Rules that update the 1986 ones has slipped back to 1 October 2009.  The details are here. 

Empty property rates relief for companies in administration

The Government (the Department for Communities and Local Government) have announced a permanent exemption from empty property rates for companies in admininstration that redresses the anomaly shown up by the Trident case, that companies in liquidation, but not administration, have such an exemption.  It has also been decided that empty listed buildings like shops, offices and visitor attractions should continue to qualify for tax concessions because of the extra work required to bring them back into beneficial use. It is aimed to bring these new provisions into effect on 1 April 2008.