The European leveraged acquisition finance market (including as it relates to England and Wales and English law governed documentation) has been generally impacted by the recent economic downturn. The Ukraine invasion, high inflation and rising interest rates have meant that in 2022 new issuances of debt in the leveraged finance market have been significantly reduced from the year before. Transactions have consequently been marketed at a smaller size, and documentation terms have been tightened (in particular given a high proportion of the leveraged loans were syndicated to direct lenders).

The events in the Ukraine have also led to the development of “sanctioned lender” provisions in English acquisition finance documentation, catering for scenarios where a lender under the relevant finance documentation becomes the subject of any applicable sanctions laws (and including provisions such as providing for payments to be made under the finance documentation to any sanctioned lender to be held on trust for such lender in a suspense account, preventing transfers of the relevant debt to any sanctioned lender, and disenfranchising any sanctioned lender for the purposes of voting under the finance documentation).

In terms of ESG, a high proportion of the new debt issuances in the leveraged acquisition finance market continue to be “sustainability linked”, where margin is adjusted by reference to the relevant borrower having met (or failed to meet) certain targets around ESG related key performance indicators. Having regard to the recently published International Capital Market Association/Legal Marketing Association (ICMA/LMA) guidelines relating to sustainability-linked loans and bonds (and to allay concerns around “greenwashing”), the market has more recently seemed to be moving towards a more standardised approach to documentation.

The National Security and Investment Act 2021 (“NSIA”)

NSIA came into force on 4 January 2022 (but with partial retroactive effect for acquisitions from 12 November 2020). It provides for a new government intervention regime in UK-connected acquisitions of qualifying entities or qualifying assets on national security grounds.

NSIA applies to both UK and foreign investors. A “qualifying entity” is an entity that carries out activities in the UK or sells goods or services to people in the UK. A “qualifying asset” is land, tangible moveable property and intellectual property that is used in connection with activities carried on in the UK or is used in connection with the supply of goods or services in the UK.

NSIA applies when a “trigger event” relating to the acquisition of control in the qualifying entity or asset takes place. That is:

• an increase in the investor’s shareholding or voting rights in an entity crossing the 25%, 50% or 75% thresholds;
• the acquisition of voting rights in an entity which enables the investor to secure or prevent the passage of any class of resolution governing the affairs of the entity;
• the acquisition of “material influence” in an entity; or
• the acquisition of control over assets.

NSIA requires mandatory, pre-closing notification and review of triggered acquisitions of qualifying entities active in one of 17 identified “sensitive sectors”. The process is operated by the Department for Business, Energy and Industrial Strategy (BEIS). There is also a broad discretionary “call-in” power that applies to any qualifying transaction that may give rise to UK national security concerns and a voluntary notification system.

The call-in power is not limited to specific sectors, and the concept of “national security” is not clearly defined. The Government can approve, impose conditions, or prohibit qualifying transactions. There are also civil and criminal penalties for non-notification.

NSIA is relevant to the financing of acquisitions.  For example:

• An NSIA clearance condition will be needed where the acquisition is subject to mandatory notification. Failure to notify a transaction which is subject to mandatory notification renders the transaction void (with the obvious impact on lenders’ security).
• An acquisition not subject to mandatory notification could nevertheless be subject to government call-in for a national security assessment. The government has various remedies available to it, in the worst case, an order to unwind the transaction could be made.
• Enforcement sales may be subject to NSIA clearances.

Interest rate benchmark reform

The transition away from LIBOR is now part of the business-as-usual landscape with no new financings being benchmarked to USD LIBOR (which is scheduled to be discontinued after 30 June 2023). Sterling lending is primarily benchmarked to compounded SONIA, euro lending continues to be benchmarked to EURIBOR (which is not scheduled for discontinuation) and USD lending may be benchmarked to compounded SOFR, simple SOFR or, increasingly, term SOFR.

There are no particular high level issues or concerns to flag specifically from an English law perspective in this regard (in particular, as covered herein in more detail, English law provides for the straightforward taking and enforcement of comprehensive security over English assets, and benign financial assistance rules mean that it is likely to be possible to provide upstream guarantees and security from English guarantors).

There are no regulatory requirements for commercial lending (whether secured or unsecured) by banks or non-banks. The provision of consumer credit is regulated as are various activities associated with the issuance of corporate bonds and other debt securities.

There are no exchange control restrictions.

The National Security and Investment Act 2021 regime is equally applicable to UK and foreign lenders.  See answer to question 2.

The Economic Crime (Transparency and Enforcement) Act 2022 (“ECTA”) introduces a new register of beneficial ownership of overseas entities that own UK land. An overseas entity that owns land or which wishes to own such land must register with the UK Companies Registry (Companies House) and disclose information relating to its beneficial owners or managing officers. An overseas entity is within the scope if it owns land purchased:

• in England and Wales on or after 1 January 1999;
• in Scotland on or after 8 December 2014; and
• in Northern Ireland on or after 1 August 2022.

Economic sanctions may restrict certain foreign entities from acquiring assets and lenders will be restricted from financing sanctioned persons.  Use of proceeds may also be restricted by economic sanctions.

English guarantors are capable of granting “all asset” security by means of a “debenture”. Under the debenture, fixed security can be granted over certain of the chargors’ assets and a floating charge can cover the remaining assets of the chargor. The debenture will sometimes also be subject to various exclusions, as will be set out in commercially agreed security principles.

The exact scope of the English security package in leveraged acquisition financing transactions (i.e. which assets are subject to the fixed security and whether a floating charge is provided over the remaining assets) primarily depends, however, on the commercial agreement reached between the sponsor and the lenders as well as on the nature of the business being acquired. Most commonly, the security package focuses on shares, bank accounts and receivables. These assets are usually expressed to be subject to fixed security but in strong sponsor-led transactions it is often the case that few assets are subject to the level of security agent control which is a necessary characteristic of true fixed security.

Yes, English law permits floating charges and security over future assets and for future obligations.

No.

There are limited formalities for taking security in England and most asset classes which form the core of a leveraged finance collateral pool do not require special formalities for their essential validity. To the extent that formalities for creation of security are required, they are not onerous. Certain formalities may however be required to ensure the highest degree of protection for security takers. For example, to obtain a legal mortgage over land under which the security-taker benefits from various statutory powers, the security must be expressed in a particular way, must be executed as a deed and registered at the Land Registry. To the extent that any security document (not only land security) contains a power of attorney (which is the norm), it must be executed as a deed.

Where security is created by a UK company (or limited liability partnership), the security instrument must be registered at Companies House within 21 days of creation. Registration is required irrespective of the location of the security assets (i.e., it is equally applicable to assets outside the jurisdiction as to assets within the UK). Registration can be effected via an online webfiling form or via a paper MR01 filing with Companies House. The majority of registrations are via online filing as this is a quicker process. Current filing fees are £15 for an online filing and £23 for a paper filing. Failure to properly register will render the charge void against a liquidator, administrator and any creditor of the company and the money which the charge secured becomes immediately payable. The Companies House register is not however a priorities register so further steps are likely to be required to ensure priority of security (though it may be a matter for commercial agreement as to whether these steps are taken).

Priority steps taken in respect of the main asset classes relevant to leveraged finance are:

• Shares: delivery of share certificates to the security agent. Signed but uncompleted stock transfer forms are also delivered but this is to aid enforcement rather than as a perfection/priority step.
• Intellectual property: registration of the security interest at the UK Intellectual Property Office (in relation to certain types of intellectual property such as patents, registered trademarks and registered designs).
• Receivables, insurance policies, bank accounts and other contractual rights: delivery of notice of the security interest to the relevant counterparty, insurer or account bank.
• Land: registration of the interest at the Land Registry.

There are no specific restrictions applicable to companies generally, although a director of a company must act in the way he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole (the section 172 Companies Act 2006 duty, informally described as the “corporate benefit” duty). Downstream guarantees do not usually present a problem since the benefit to a parent in guaranteeing the obligations of its subsidiary is usually self-evident, unless the subsidiary is in dire economic circumstances. Guarantees in support of a parent or sister company’s obligations however are less likely to benefit the guarantor and, unless benefit is clear (and this should be minuted when the guarantor’s board approves the guarantee), the usual approach is to obtain shareholder approval to the transaction. If the guarantee is given at a time when the company is more likely than not to be insolvent, the directors must then have regard to the interests of creditors when considering their section 172 duty to the company; this should be reflected in the board minutes.  See also question 13 below regarding financial assistance and question 26 concerning transactions voidable upon insolvency.

No.

Whether financial assistance is permissible generally depends on whether the company giving the financial assistance is a private or public company.  Even where the specific Companies Act 2006 (“CA 2006”) financial assistance prohibition does not apply, each director should consider the duties owed to the company under the CA 2006 in deciding whether to authorise the assistance; in particular, whether the transaction is consistent with a director’s duty to act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole (see question 11 above).  

Public companies: A public company is prohibited from giving financial assistance for the acquisition of its own shares or shares in any holding company (whether the holding company is a public company or private company).    

Private companies: Private companies are prohibited from giving financial assistance for the acquisition of shares in a public holding company. A private company is not prohibited from giving financial assistance for the acquisition of its own shares or shares in a private holding company.   

The financial assistance prohibitions do not apply to assistance given for the acquisition of shares in a sister company.  

The financial assistance rules apply to companies registered under the CA 2006 (or a former UK Companies Act) only. For example, the rules would not prevent a foreign public subsidiary of an English company from providing financial assistance for the acquisition of its parent company’s shares; nor would they prevent any UK company from providing financial assistance for the acquisition of shares in a foreign holding company. However, the rules in other jurisdictions would have to be considered in the context of the relevant transaction.   

To the extent that the financial assistance prohibition applies, it extends to cover any financial assistance given to reduce or discharge any liability incurred by the purchaser or another person for the purpose of the acquisition. This means that it also covers post-acquisition assistance such as guarantees and security given to support a refinancing of acquisition debt.  

Where prohibited financial assistance is given by way of guarantee, security, or upstream loan (which are the most overt types of assistance given in an acquisition finance context), there is no permissible level of assistance.     

There are limited exceptions to the financial assistance prohibitions, which would need to be considered in the context of the relevant transaction. 

No. However, it should be noted that where the financial assistance prohibition applies by reason of the acquisition target being a public company, the normal means by which the prohibition is avoided is to re-register the public company as a private company (following the acquisition) by means of a special resolution (75%) of the members and application to Companies House for re-registration.

An application to the court to cancel the resolution may be made by dissenting members (generally, the holders of not less in aggregate than 5% in nominal value of the company’s issued share capital or any class of the company’s issued share capital) within 28 days after the passing of the resolution. The granting of financial assistance is therefore deferred until the objection period has expired.

Yes. To the extent that financial assistance issues arise, security and guarantees can be given for non-financial assistance purposes, but it is very important that the relevant obligations are segregated.

Yes, it is routine practice for security to be granted in favour of a security trustee which will hold that security for a potentially changing group of lenders, and which may enforce the security for their benefit. There is no need for the security agent to itself be one of the lenders.

No.

The established methods of effecting a legal transfer of loans are assignment or novation. A template assignment agreement and transfer certificate (for novation) are typically scheduled to the facility agreement.

Assignment may be used to transfer rights only (i.e., a lender’s interest in drawn loans, not in undrawn commitments). No borrower consent to assignment is required unless the facility agreement requires it. Where consent is required, or if the facility agreement otherwise specifies conditions to an assignment, then those conditions must be satisfied for the assignment to be effective against the borrower. The benefit of security can be assigned with the loan rights (though use of a security trust renders this unnecessary, see below). A legal assignment is effected by complying with formalities specified in section 136 Law of Property Act 1925. That is, the assignor must make an absolute assignment of its rights, in writing, signed by it and of which notice of assignment is given to the debtor.

Novation may be used to transfer both rights and obligations. This operates by extinguishing the rights and obligations of the existing lender and replacing them with identical rights and obligations of the transferee lender. The consent of the other parties to the contract is required but this is effectively obtained in advance in the facilities agreement, where transfers by novation are permitted subject to the satisfaction of prescribed conditions. The benefit of security is preserved for the transferee by using a security trust.

Transfers of loan rights and obligations may also be transferred by “assignment and assumption”. This is an assignment of rights coupled with a variation of the existing agreement to the effect that the transferee agrees to assume the transferor lender’s obligations and the borrower releases the transferor from those obligations. Borrower consent is required as per novation and security is preserved using the security trust. This method of transfer is mainly used to support transactions where part of the collateral pool is in jurisdictions where transfers via novation would discharge security; it isn’t a necessary mechanic for the preservation of English security.

Security for the financing obligations is typically granted in favour of an entity (a security trustee) on the basis that the grantee will hold that security on trust for the lenders (and any other relevant creditors in respect of the secured obligations) from time to time. This mechanic means that transfers of loan interests will automatically result in the transferee obtaining a right to share in the security as it will become a beneficiary of the security trust.

There are other methods of transferring economic interests in loans, the most common of which are funded and risk participations, and the use of credit derivatives. In these circumstances there is no actual transfer of loans or of undrawn commitments; the grantor of the economic interest remains the lender of record, and the grantee obtains no direct interest in the security. The transfer of economic interests may however be subject to contractual restrictions in the facility agreement.

Priority rules are often asset specific. This means that whilst a company may grant security over all its English assets in a single security instrument, there is no single step which can be taken to ensure the priority of security over all of the assets which are the subject of that instrument.

Priority rules generally protect the rights of security-takers who publicise their security (so that it is evident to a person who makes diligent enquiries) and will allow for the overreaching of the rights of those who do not. Publicity is typically established by one of more of the following methods:

• registration in asset registries (applicable, for example, to land and certain intellectual property). It should be noted that, while registration of security created by UK companies and LLPs at the UK Companies Registry is an essential step to ensure validity of the security against third party creditors and insolvency officers, that register is not a priority register;
• possession (relevant to tangible assets and for some documentary intangibles);
• by giving notice (for example, to an account bank or to a contract counterparty).

An important priority principle is that a security-provider cannot vest a greater title in a security-taker than it possesses.  This often manifests itself as “first in time of creation wins”.  However, there are important exceptions to this principle:

• the priority of an equitable security interest may be displaced if a bona fide subsequent security-taker takes a legal interest for value in the same asset without notice of the prior interest. This rule applies, for example, to equitable security over shares where a security-taker will take possession of share certificates to put third parties on notice of its interest;
• where a security interest is registerable in a specified asset registry, priorities between competing security interests may be determined by the date of registration of the security interests and not by the date of creation;
• priority between competing security interests in assets which are contractual rights (e.g., receivables or claims against an account bank) is governed by the first to give notice to the debtor/account bank. This rule will not apply though where a subsequent security-taker has notice of the prior unnotified interest;
• the priority of a floating charge, prior to its crystallisation, may be postponed to a subsequent fixed charge if created without notice of any prohibition on the creation of that security.

Certain priority rules (and exceptions) will only apply where the “equities are equal”. That is, unless the conduct of one party might make it inequitable to do so.

Creditors can contractually agree to vary the priority that would otherwise apply to their security interests.

Subordination

Subordination of creditor claims is generally achieved by either or both structural and contractual subordination.

Structural Subordination

Structural subordination applies on insolvency and itself relies on the statutory rules for payment of creditors on insolvency. It arises where the finance for a corporate group is provided at different levels within the corporate structure. Typically, the senior creditor lends to an asset rich operating company which is lower in the group structure than the holding company into which the junior creditor lends. If the holding company and its operating subsidiaries become insolvent, the creditors of the operating subsidiaries will be paid out first before any distribution is made to the holding company (as shareholder) on the basis that all the company’s debt claims must be paid before distributions can be made to shareholders. The creditors of the operating companies are therefore de facto senior to the creditors of the holding company, by reason of the structural level at which they have lent to the group.

Contractual Subordination and Turnover

In contractual subordination, the senior creditor and junior creditor claims are against the same company but the order in which claims will be paid is agreed by contract. Contractual subordination can take various forms and may regulate payments both pre and post the debtor’s insolvency. In practice, contractual subordination typically takes the form of the junior creditor agreeing that the debtor need make no payments in respect of the junior claim until the senior creditor’s claim has been paid in full. The debtor is party to the agreement and covenants not to pay the junior claim until it has satisfied the senior claim. This is coupled with a contractual turnover obligation whereby the junior creditor agrees that if it receives any payments in relation to its claim, it will pay those amounts to the senior creditor until the senior claim has been satisfied in full (“turnover”) and, pending turnover, agrees to hold those amounts on trust for the senior creditor. Accordingly, the senior creditor gets the benefit of both its claim and the junior creditor’s claim in the winding up of the debtor.

Contractual subordination provisions are generally enforceable under English law and will survive the insolvency of the debtor. The statutory rules as to pari passu treatment of creditor claims on insolvency cannot be contracted out of, however the pari passu rule is not breached by a subordination agreement which has the effect of deferring a creditor’s claim (which is the norm) as opposed to purporting to grant an advantage over other creditors with which it ranks pari passu on insolvency.

No, English law does not have a concept of equitable subordination.

Note however that on a liquidation, any distribution to a shareholder cannot offend the contributory rule that a shareholder must discharge its obligations as a shareholder before it is entitled to receive anything as a creditor.

Choice of law

English law gives effect to the parties’ own choice of governing law by virtue of the retained EC Regulation 593/2008 (Rome I) and EC Regulation 864/2007 (Rome II) each of which became part of the domestic law of the UK (with minor modifications) at the end of the Brexit transition period and are known as “UK Rome I” and “UK Rome II”. These Regulations apply regardless of the jurisdiction where the parties are established or the governing law which is chosen.

Both UK Rome I and UK Rome II provide for exclusions from their scope (notably certain matters linked to negotiable instruments, matters to do with company law and matters to do with relations between the settlors, trustees and beneficiaries of trusts created voluntarily). Rome I also excludes certain insurance contracts and arbitration and choice of courts agreements. Where a Regulation does not apply, common law rules as to applicable law will be relevant.

Submission to a foreign jurisdiction

There is no prohibition on an English party agreeing to submit to the jurisdiction of a foreign court. Where a party to a contract has expressly submitted to the jurisdiction of a foreign court, (and assuming the submission is valid under its governing law) then in deciding whether to accept or decline jurisdiction in relation to a relevant dispute, the English courts may have regard to the terms of the submission (as well as any common law rules or international conventions or treaties that may be relevant in the circumstances). It should be noted that on any jurisdiction challenge to stay proceedings in England, the English court would have a wider discretion to refuse an application for a stay in the case of a non-exclusive clause, than if the submission were to the exclusive jurisdiction of a foreign court.

Waiver of immunity

A waiver of immunity given in a loan context is typically enforceable. The general position is that a State is not immune as respects (a) proceedings in respect of which it has submitted to the jurisdiction of the United Kingdom courts, (b) proceedings relating to commercial transactions entered into by it or (c) proceedings relating to contracts (commercial or not) which are to be performed (wholly or partly) in the UK.

However, no relief may be given against a State by way of injunction or order for specific performance, and a State’s property is immune from proceedings to enforce a judgment or arbitration award, unless it has consented to the proceedings in writing or the relevant property is in use or intended for use for commercial purposes. A consent can be given at the time of entering the relevant contract and a “waiver of immunity” may constitute an effective consent for these purposes if suitably worded.

Enforcement of foreign judgments

The procedure for the enforcement of a judgment of a foreign court in England is determined by reference to the applicable reciprocal enforcement arrangements in place with the relevant state or, where no such arrangements exist, the common law. It is worth noting that:

• the Hague Convention on Choice of Court Agreements provides for reciprocal recognition of UK judgments and those of the courts of EU countries but only where the agreement which is the subject of the judgment includes an exclusive jurisdiction clause; and
• there are no reciprocal arrangements between the USA and the UK; judgments from the USA may be enforced by means of a common law action for a summary judgment relying on the foreign judgment as creating a debt.

In neither situation, however, does the English court examine the merits of the dispute.

Whether a foreign judgment will be enforceable or not in England will also depend on the type of judgment in question. As a general rule, money judgments (subject to what is said below) are usually enforceable, whereas the enforceability of a non-monetary judgment will depend on the precise nature of that judgment and the jurisdiction of origin.

Notwithstanding that a final and conclusive judgment against a defendant for the payment of a fixed sum of money will typically be capable of enforcement (either without issuance of new proceedings where there is a reciprocal regime or by means of a separate action for summary judgment), enforcement may be refused on various grounds, including that:

• the relevant foreign court is not recognised by English law as having jurisdiction to give the judgment;
• the judgment was contrary to English public policy or involves multiplying the assessed losses or damages sustained;
• the judgment was on a matter involving the same parties which was the subject of a previous final and conclusive judgment by another court having jurisdiction over the matter; or
• the judgment is subject to appeal.

The security document and related documentation such as the intercreditor or security trust deed usually contain detailed provisions on the rights and procedure for enforcement, so these should be reviewed as an initial step. In the event there are no such provisions, the main procedures available under statutory and common law are (i) appointing a receiver; (ii) appointing an administrator; and appointing an administrative receiver. The lenders will usually first make a formal demand for payment to avoid any later arguments that there was such an express or implied obligation to make such demand before enforcement.

Appointment of a Receiver

A lender appoints a receiver so that the receiver takes charge of the assets in order to realise them, usually this is by way of a sale to a third party purchaser. The proceeds of the sale will then be distributed to the appointing lender. Lenders that hold fixed charge security can appoint a receiver either under express powers contained in the underlying security document or pursuant to statutory powers under section 101 of the Law of Property Act 1925. A receiver is likely to have wider powers as expressly included in a security document, than they do when relying on the statute. In exercising its powers, a receiver has various duties but its primary duty is to its appointer however, they have a duty to act in good faith and deal fairly and equitably with the borrower.

Appointment of an Administrator

Please see the answer to the question above with respect to how a lender can appoint an administrator and their purpose. An administrator is an agent of the company and an officer of the court and must carry out its duties with a view to satisfying the interests of the creditors as a whole and not just the appointing lender(s).

Appointment of an Administrative Receiver

The ability to appoint administrative receivers has been significantly limited by legislation. An administrative receiver is usually an individual appointed by a creditor that holds security over all or substantially all of the property of the company, which when created was a floating charge. The floating charge must be part of one of the statutory exceptions, which include, among others, capital market arrangements, public private partnerships, project financings. The administrative receiver must be a licensed practitioner and the principal duties are owed to the appointing creditor.

Financial Collateral Regulations 2003

Finally, the Financial Collateral Arrangements (No.2) Regulations 2003 (the “Financial Collateral Regulations 2003”) provides a different regime for enforcing security taken over financial collateral (this is usually liquid/easily transferable security like cash, listed shares, bonds and credit claims). Specifically, this means that certain provisions of the IA 1986 do not apply (for example in a scenario where the company is in administration or subject to a CVA, neither the consent of the administrator nor permission of the court is required to enforce security). Additionally, it gives lenders the ability to appropriate the collateral (the right to become the absolute owner of the collateral in the event the security becomes enforceable) if the security falls within the Financial Collateral Regulations 2003 (pursuant to regulation 17 of the Financial Collateral Regulations 2003). This means they are free to deal with the collateral in the manner they wish, however, there are obligations to ensure that when valuing the collateral it must be in a commercially reasonable manner. In the exercise of this power, a lender does not need the leave of court.

Focusing exclusively on corporate insolvency in England and Wales, the following procedures are the most common methods used by restructuring lawyers and insolvency practitioners in assisting companies in distress: (i) administration; (ii) company voluntary arrangements (“CVA”); (iii) scheme of arrangement (“Scheme”); and (iv) restructuring plan (“RPs”).

These procedures are largely governed by the core corporate insolvency legislation in England and Wales, the Insolvency Act 1986 (“IA 1986”) which is supplemented by the Insolvency (England and Wales) Rules 2016. Other legislation also feeds in such as the Companies Act 2006, Financial Collateral Arrangements (No. 2) Regulations 2003, the Company Directors Disqualification Act 1986 and legislation relating to cross-border insolvency such as the UNCITRAL Model Law on Cross-Border Insolvency 1997, the Cross-Border Insolvency Regulations and (post-Brexit where the EU Recast Insolvency Regulation no longer applies in full), the Retained Insolvency Regulation.

Taking each rescue procedure in turn:

Administration

Administration is the process of appointing an administrator (a qualified insolvency practitioner) which provides the distressed company with “breathing space” via the automatic protection of a statutory moratorium and thereby provides the company with time for it to be either rescued, reorganised or have its assets realised. Administration can be commenced by court order (following the filing of an administration application) or more commonly through the ‘out-of-court route’ (i.e. no court hearing is held) whereby administration documents are filed by either (i) the company’s directors, (ii) the company itself or (iii) a holder of a qualifying floating charge (such as the security agent or trustee). During an administration, the administrator will run the company and business in accordance with the statutory purposes (under the IA 1986) and their purpose will be to either rescue the company as a going concern, or where this is not possible, achieve a better outcome for creditors as a whole than on a winding-up of the company. Subject to the granting of an extension, the appointment will last for one year. Administrations can be combined with other rescue procedures.

Company voluntary arrangement (“CVA”)

A CVA is an arrangement put in place between the company and its creditors under Part I of the IA 1986. The purpose of a CVA is to allow a company to come to a binding arrangement or compromise with its unsecured creditors. If the proposed arrangement is approved by at least 75% by value of the creditors who vote in the decision procedure it will come into effect, unless those voting against the proposal include more than 50% by value of the unconnected creditors who can vote on the proposal. A CVA cannot bind secured or preferential creditors without their consent. A CVA may be used in conjunction with an administration.

Scheme of arrangement (“Scheme”)

A scheme of arrangement is similar to a CVA but must be sanctioned by the court. It is governed under Part 26 of the Companies Act 2006 and therefore not strictly a ‘rescue procedure’ available to distressed companies only. The proposed arrangement is approved by the affirmative vote of at least 75% by value (and 50% by number) of each class of creditors or members present and voting. Once approved by the relevant classes, the Scheme must be sanctioned by the court. A Scheme may be used in conjunction with an administration.

Restructuring plan (“RP”)

The latest tool was introduced by the Corporate Insolvency and Governance Act 2020 (“CIGA 2020”) and is similar to a Scheme but only available for companies facing financial difficulty. The main difference between a Scheme and RP is that an RP has the ability to cross class clam-down – this means if at least 75% in value of one “in the money” class votes for the plan (but note unlike in a Scheme, there is no requirement for the RP to be approved by a majority in number), the compromise can be imposed on a dissenting class subject to the court being satisfied that: (i) none of the dissenting class would be worse off in the relevant alternative (the “no worse-off test”); and (ii) at least 75% by value of a class of creditors or members that would receive payment or have a genuine economic interest if the relevant alternative was pursued voted in favour of the plan. As with Schemes, the court has discretion as to whether to sanction an RP and may not sanction where the court considers the proposal or the process not to be just and equitable.

Last resort: winding-up and liquidation

As a last resort, a company can be wound up or liquidated, usually through the appointment of a liquidator who will be the official receiver or an insolvency practitioner. The liquidator will collect the assets, sell them and distribute the proceeds (in accordance with statutory law). There are two types of liquidation: (i) compulsory (by court order usually by a creditor); and (ii) voluntary (by resolution of the company) which can be a members’ voluntary liquidation (requiring a declaration of solvency) or a creditor’s voluntary liquidation (no solvency declaration).

Administration brings about a statutory moratorium set out in paragraphs 42-44 of Schedule B1 to the IA 1986, which inhibits (i) enforcement of security over the company’s property, (ii) repossession of good under a hire-purchase agreement, (iii) exercise by a landlord of a right of forfeiture by peaceable re-entry in relation to premises let to the company and (iv) instituting or continuing legal process (including legal proceedings, execution, distress and diligence), in each case without the consent of the administrator or permission of the court. Furthermore, a supplier of goods or services to the company (subject to certain exceptions) will not be entitled to rely on contractual provisions to terminate its supply arrangements with the company. The rationale for this is that during the administration process, the moratorium provides “breathing space” for the administrator to reorganise the company or realise assets.

In respect to compulsory liquidations, a creditor can enforce its security as there is no automatic moratorium, however there is a stay on the commencement of continuation of proceedings against the company without the leave of court. However, the stay does not extend to a forfeiture of a lease, nor to any regulatory action by the Financial Conduct Authority. With respect to creditors voluntary liquidations, again there is no automatic stay however a stay may be granted under general discretionary powers of the court.

RPs and Schemes do not benefit from automatic moratoriums.

CIGA 2020 introduced a standalone moratorium (Part A1 moratorium) which gives directors of certain companies the ability to apply for a temporary stay. Initially, it only lasts for 20 business days but can be extended. The directors are able to continue to run the company and retain control but their actions are reviewed by a monitor (usually a qualified insolvency practitioner).

Broadly, the Insolvency Act 1986 and the Insolvency (England and Wales) Rules 2016 (SI 2016/1024) prescribe that in England and Wales the order in which creditors are paid on an insolvency are:

first, creditors with fixed security over the company’s assets;

second, to satisfy the expenses of the insolvent estate;

third, to any preferential creditors of the company (that is certain employee claims, contributions to pension schemes and tax liabilities each as prescribed by statute);

fourth, the prescribed part. The prescribed part is an amount set aside for the unsecured creditors of a company as prescribed by statute and calculated as a percentage of the value of the company’s property which is subject to any floating charges, subject to an overall cap of £800,000 where the charge was created on or after 6 April 2020;

fifth, creditors who hold security which, at the time of creation, was a floating charge;

sixth, to any unsecured creditor of the company; and

finally, to the shareholders of the company.

Certain antecedent transactions entered into by an insolvent company before it goes into a formal insolvency process can be challenged under the Insolvency Act 1986 (IA 1986).

Although England and Wales is regarded as a relatively creditor-friendly jurisdiction, the enforcement of security should be used only as a last resort. The lender(s) will first need to be certain the security has, in fact, become enforceable, they have the right to enforce, what rights these are and when they can be exercised, and therefore the preliminary exercise often involves a comprehensive security review undertaken by lenders’ legal counsel.

Another point for consideration is whether the security is created as a fixed charge security or floating charge security. Fixed charges can, in some circumstances be re-characterised as a floating charge even if the security document purports it to be fixed. Fixed charges will take priority over a floating charge, even where the floating charge is granted earlier in time than the fixed charge. In addition, one of the key differences between fixed and floating charge security is that certain costs, expenses and preferential creditors come ahead of the holder of a floating charge in respect of any realisations from those assets in an insolvency proceeding, which is not the case for fixed charge holders.

The UK charges withholding tax on payments of yearly interest which have a UK source at the rate of 20%. The obligation to withhold is on the person by or through whom payment is being made. No withholding tax is charged on fees. Further, there is no stamp or registration tax or other cost of taking UK security in a lending context, and typically withholding tax is the most significant tax consideration in UK lending transactions.

The most used exemptions to the basic withholding obligation in the UK loan markets are:

• the UK corporate exemption (for UK company taxpayers and UK branches of foreign lenders that are subject to UK corporation tax on lending profits);
• the exemption for payment of interest advanced by a bank that is within the charge to UK corporation tax;
• the Qualifying Private Placement exemption (only applicable per the rules in relevant legislation) which applies to “private placements” which have a value over £10 million and a term shorter than 50 years. In order to use this exemption a lender must be able to provide a valid “QPP Certificate” (as defined in legislation). There are jurisdictional, as well as certain other, concerns with lenders providing valid QPP Certificates and the position should be checked before this route is considered;
• the Quoted Eurobond exemption for interest paid under a Quoted Eurobond as defined in statute. A Quoted Eurobond is typically a security issued by a company listed on a recognised stock exchange (a list of recognised stock exchanges is kept by HMRC) which carries a right to interest;
• an exemption under a double tax treaty (this is only relevant for lenders who are foreign lenders lending into the UK – please see answer to question 29 below).

Whilst payments of interest by a borrower are clearly categorizable, payments by guarantors are not. It is uncertain whether guarantee payments are deemed as interest for UK withholding tax purposes.

There is, however, a 20% withholding tax charge on “annual payments” which may be applicable to certain guarantee payments. There is not a settled view as to whether guarantee payments can be brought to charge as an annual payment.

Foreign lenders lending into the UK are able to avail themselves of the following exemptions (described above in question 28):

• the UK corporate exemption (for UK branches of foreign lenders);
• the exemption (or reduction, as the case may be) made available under a double tax treaty (provided that the terms of such treaty and the UK’s double tax treaty passporting regime are met and appropriate clearances are received from HMRC);
• the Qualifying Private Placement exemption; and
• the Quoted Eurobond exemption.

The double tax treaty mechanism (as used per the DTTP Scheme) is the most common exemption used by foreign lenders, and has been significantly streamlined by HMRC since its introduction. The DTTP Scheme requires a lender and borrower to fill out certain forms. LMA language in this instance is helpful in that it allows a lender to fall under the scheme once the lender alone has completed its formalities.

Foreign credit funds should be aware that the application of relevant double tax treaties and the Qualifying Private Placement exemption may be less straightforward, and should seek advice on this subject when lending to the UK. If no reliefs or exemptions are available, then such funds may wish to explore whether any tax credits are available for underlying investors in their own jurisdiction for any UK tax withheld at source.

The principal regulatory framework for the acquisition of a public company in the United Kingdom is the City Code on Takeovers and Mergers (the Code), as administered by the Panel on Takeovers and Mergers (the Panel). The Code has statutory force in the UK and the Panel has statutory powers in respect of all transactions to which the Code applies.

The Code lays down six general principles and 38 detailed rules (including interpretative notes). The Panel also publishes practice statements to offer guidance in relation to the Code from time to time. It is important to note that it is the spirit, as well as the precise language, of the Code that needs to be observed.

The Code aims to ensure that: (i) target company shareholders are treated fairly and not denied an opportunity to decide on the merits of an offer and (ii) the shareholders of each class are treated equally by any bidder. It is also designed to promote, alongside other regimes, the integrity of the financial markets.

Other key pieces of legislation that are relevant to a public takeover include:

• the Companies Act 2006 which sets out the procedures relating to schemes of arrangement and the squeeze-out of minorities following a takeover;
• the UK Market Abuse Regulation which prohibits actions such as insider dealing;
• the Financial Services and Markets Act 2000 which requires disclosure of certain information from issuers and its senior managers and directors in connection with a public takeover; and
• the Criminal Justice Act 1993 which has criminalised the act of engaging, or encouraging others to engage, in certain dealings in securities whilst possessing inside information.

The relevant timetable will differ depending on whether the offer is being made by way of a contractual offer or scheme of arrangement.

The below sets out certain key milestones for each approach. This assumes that there is no competing offer and that the timetable need not be suspended for the purposes of satisfying a condition. Extensions to some of these dates may be granted in certain circumstances with the consent of the target company and/or the Panel.

Days are calendar days unless indicated otherwise.

Contractual offer

• Day -28 – Announcement: must comply with the disclosure requirements of the Code and include the “cash confirmation”. The financing documents for the bid will also be made publicly available at this time.
• Day 0 – Publication of Offer Document: must be made available by the bidder to all relevant persons and posted online (within 28 days of Announcement).
• Day 21 – First Possible Offer Closing Date: the offer must remain open for acceptance until at least Day 21.
• Business day following Day 21 – Announcement of Acceptances: the bidder must announce the level of acceptances (and on certain dates thereafter as required by the Code).
• Day 53 – Competing Offer Deadline: the last date for any potential competing bidder to make an offer or withdraw.
• Day 60 – Unconditional Date: the last date for all conditions to be fulfilled, including the acceptance condition.
• Day 74 – Final Offer Closing Date: an offer must remain open for acceptance until the later of Day 21 and 14 days after the Unconditional Date.
• Within 14 days of the Offer Closing Date – Payment of Consideration: this is the last date on which consideration may be sent to shareholders.
• Withdrawal – a target shareholder can withdraw their acceptance (unless the contractual offer is unconditional from the outset) until the earlier of (i) the date on which the minimum acceptance condition is satisfied and (ii) the last day on which the conditions to the contractual offer must be satisfied or waived.

Scheme of arrangement

• Day -28 – Announcement: must comply with the disclosure requirements of the Code and include the “cash confirmation”. The financing documents for the bid will also be made publicly available at this time. Issue claim form with the Court to commence the scheme.
• Prior to Day 0 – Directions Hearing: Court hearing of claim form seeking directions for convening of target shareholders’ meetings and sanction of the Court to the scheme if approved by shareholders.
• Day 0 – Publication of Scheme Document: posted by the target company to all relevant persons and made available online (within 28 days of Announcement).
• Day 14 – Competing Offer Deadline: normally the last day for any potential competing bidder to clarify its position. Panel has flexibility to extend this deadline until prior to the Court Sanction Hearing.
• Day 21 – Scheme Meetings: the earliest date for Court and shareholder meetings to approve the scheme and any relevant resolutions.
• Business day following Day 21 – Announcement of Results: target company must make an announcement of the results of the Scheme Meetings.
• Prior to Court Sanction Hearing: bidder to confirm to the target company and the Panel that all of the conditions to the bid have been satisfied or waived (other than those that can only be satisfied following sanction of the scheme).
• Day +[●] – Court Sanction Hearing (S): Court hearing to grant order sanctioning the scheme.
• S to S +[1/2]: the Court order sanctioning the scheme is filed with the Registrar of Companies and the scheme becomes effective.
• Within 14 days of the Scheme Effective Date – Payment of Consideration: this is the last date on which consideration may be sent to shareholders.

Minimum Acceptance Condition

Generally, the minimum acceptance condition required by the Code for an offer is the acquisition of shares representing more than 50% of the voting rights in the target company (in certain exceptional cases the Panel may agree to a lower acceptance condition). In the case of a mandatory offer, the required acceptance condition is 50% (plus one share). Customarily in the market, however, the minimum acceptance condition is most often set at 75% (being the level at which the target company can be de-listed and grant upstream guarantees and security – see question 33 below).

In the case of a scheme of arrangement, the scheme must be approved by a majority in number of the voting shareholders representing at least 75% in value of the shares held by the voting shareholders. If approved, the scheme will deliver 100% of the target company shares to the bidder.

Squeeze-Out

Chapter 3 of Part 28 of the Companies Act 2006 provides a statutory procedure for the squeeze-out of minority shareholders following completion of a takeover offer. This allows a bidder to compulsorily purchase all remaining shares in the target company provided that, by virtue of the takeover offer, it has acquired or unconditionally contracted to acquire both:

1. not less than 90% in value of the shares to which the takeover offer relates; and
2. not less than 90% of the voting rights carried by those shares.

Taking the above actions in turn, the following levels of acceptance of voting shares are required (assuming that the bidder holds no shares in the target company other than through the offer):

1. pass special resolutions: 75%
2. de-list the target company: 75%
3. effect a squeeze-out: see above
4. grant upstream guarantees and security: any upstream guarantee and security from the target company can be put in place only after the target company has been re-registered as a private company. To take the target company private, a special resolution will be required.

The Code provides that, at the time the bidder announces a firm intention to make an offer it must have every reason to believe it can and will continue to be able to implement the offer. Where the offer is for cash, or includes an element of cash, the announcement must include confirmation by the financial adviser that resources are available to the bidder to satisfy full acceptance of the offer (the cash confirmation). In practice, any financial agreements required for the offer must be secured prior to the firm intention announcement being made. The Code also specifies that the documents relating to any such financing must be made publicly available by no later than 12 noon on the business day after the announcement of a firm intention to make an offer.

In addition to the minimum acceptance condition mentioned above, there are additional conditions to which an offer will commonly be subject. The bidder is required under the Code to use all reasonable efforts to ensure the conditions are satisfied.

Common conditions to an offer fall into the following categories:

1. the minimum acceptance condition (or, in the case of a Scheme, the Scheme becoming effective);
2. any relevant or required approvals from shareholders (e.g the issuance of consideration securities);
3. any legal or regulatory approvals or regulatory filings / clearances required from regulatory authorities in relevant jurisdictions; and
4. conditions that relate to the target company’s operation of its business, principally designed to ensure there has been no material adverse change in the position and affairs of the target company.

Outside of the conditions described in a) to b) (which may be invoked without the consent of the Panel), the circumstances under which the bidder is permitted to invoke a condition are extremely limited and generally restricted to situations of material significance to the bidder.