Prof. Theodore Konstadinides and Dr. Anastasia Karatzia acted as the UK national rapporteurs for theFédération Internationale Pour Le Droit Européen (FIDE) Congress 2020, one of the most significant conferences on EU law which brings together academics, advocates, judges and representatives from the EU institutions.
The Congress is an occasion to exchange views and expertise on EU law. Prof. Konstadinides and Dr. Karatzia were selected as the national rapporteurs for one of the three topics of the conference: National Courts and the Enforcement of EU Law: The Pivotal Role of National Courts in the EU Legal Order.
In their report, the authors explore pertinent questions about the interaction between UK national courts and the Court of Justice of the European Union concerning issues such as the preliminary reference procedure, the principle of supremacy, presumption of mutual trust, and the judicial independence of national courts and tribunals.
The Congress Publications, which include Prof. Konstadinides’ and Dr. Karatzia’s report, were published in July 2020 and are available digitally as Open Access resource here.
A year after the introduction of the UK Advertising Standards Authority’s (ASA) new rule on gender stereotyping, a new study evaluates the regulator’s approach to depictions of harmful gender stereotypes in advertisements.
Dr Alexandros Antoniou and Dr Dimitris Akrivos from the School of Law are the authors of ‘Gender portrayals in advertising: stereotypes, inclusive marketing and regulation’. Their study, which was recently published in the Journal of Media Law, a leading journal in the field, offers an in-depth socio-legal analysis of the ASA’s modern practice which systematises for the first time the regulator’s rulings in the field of gender stereotyping.
For a long time, academic research has highlighted the impact gender stereotypical advertising images can have on people’s aspirations, professional performance and mental well-being. In response to long-standing concerns around the matter, the ASA introduced in June 2019 a new advertising rule and guidance into its harm and offensiveness framework. The new rule, which came into effect on 14 June 2019, states: ‘Advertisements must not include gender stereotypes that are likely to cause harm, or serious or widespread offence’. Academic discussion has not until now queried whether the actions taken by the ASA constitute a satisfactory response to the problem.
Their new article brings a new perspective in the ASA’s approach by paying close attention to the complex structure of gender stereotypes and the interaction between their multiple components. More specifically, Dr Antoniou and Dr Akrivos’ research looks at how the ASA has dealt with different forms of gender stereotyping, including sexualisation and objectification; body image; gender roles, behaviours and characteristics; and the ridiculing of those who do not conform to gender norms.
The authors argue that, although the ASA’s new rule and guidelines constitute a step in the right direction, they represent a missed opportunity to take bolder action against ads that objectify or inappropriately sexualise individuals. Dr Antoniou and Dr Akrivos stated: “the new ASA guiding principles need to be revisited in order to go beyond the traditional male/female binary”. They recommend that the new guidance on gender representation in marketing communications needs to reflect the multi-faceted nature and fluidity of modern gender identities. “We propose the introduction of a new concept requiring advertisers to give ‘due weight and consideration’ to the diversity of modern masculinities and femininities”.
The University of Essex’s press release on the study can be found here. The research also featured in an article on the global marketing magazine Campaign and a piece on the LGBTQ magazine GScene.
Dr Samantha Davey has recently published a book with Hart, entitled ‘A Failure of Proportion: Non-Consensual Adoption in England and Wales’. This book is the result of PhD research which was funded by the Arts and Humanities Research Council. It explored the topic of adoption – specifically the issue of adoption without parental consent.
The central question Samantha sets out to address in her book, is as follows: in what circumstances is it proportionate to remove children from their parents into care and place them for adoption?
In England and Wales, and most other jurisdictions, adoptions are final and irrevocable. Adoption, in these circumstances, is non-consensual, signals not only the end of the legal relationship between children and parents but the end of familial relationships. Once an adoption is finalised, it is very rare for it to be revoked and unusual for direct contact to take place between children and their parents.
Dr Davey’s book explores an area of law which has sparked considerable debate amongst academics, practitioners and the judiciary nationally and internationally. The emphasis of her book is on the circumstances in which non-consensual adoption may be regarded as a proportionate measure and when less severe forms of intervention, such as long-term foster care or kinship care, may also meet children’s needs while providing protection to children’s rights under the European Convention on Human Rights.
The book builds on existing literature on adoption law but takes the discussion in new directions, placing an emphasis on the need to closely scrutinise children’s and parents’ rights at all stages of the adoption process. A unique feature of this book is its emphasis on routinely incorporating key provisions from the United Nations Convention on the Rights of the Child into analysis when determining whether an adoption order is a proportionate measure.
Note: the hyperlinks to the relevant webpages are in their original languages – French and German.
On 13 May 2020, the French Parliament passed a new bill geared to combatting online hate speech. Disputed from the outset, the bill was, on 18 June 2020, subsequently ruled by the Conseil constitutionnel – the Court that reviews legislation to ensure compliance with the French Constitution – to be partially, even largely, unconstitutional. Indeed, the ruling effectively quashed seven of the bill’s provisions, and made substantial amendments to several others, notably paragraphs I and II of Article 1. Small wonder that Bruno Retailleau, Vendéan Senator and president of ‘Les Républicains’, spoke of the ruling – in fitting French manner – as having “totally decapitated” the bill.
What is afoot here? And what does this mean for the French government’s efforts to regulate online content?
What was in the Original Bill?
Before reviewing the Conseil constitutionnel ruling, let us first consider the rationale and content of the original bill.
Named for its main sponsor, MP Laetitia Avia of Emmanuel Macron’s ‘La République en Marche’ party, the law was largely inspired by the German Netzwerkdurchsetzungsgesetz (NetzDG), which came into effect in October 2018 and which foresees significant fines for online platforms that do not remove “manifestly illicit” content within a stipulated timeframe of 24 hours after it being reported.
The ‘Loi Avia’ was designed in the light of the NetzDG to update the current legislative framework supplied by the Law on Confidence in the Digital Economy (Loi pour la confiance dans l’économie numérique, LCEN) of 2004, notably by reinforcing the contribution of digital providers and platforms to the struggle against online hate. Its central provision, set out in Article 1, was to command online platforms falling under the purview of the bill “to render inaccessible, within 24 hours of notification by one or more persons, any content manifestly constituting of the offences” stipulated in this and other laws – that is, content that violates France’s hate speech provisions. According to the bill, platforms were also obliged to adopt “appropriate resources to prevent the redistribution” of content deemed manifestly illegal (article 2). The scope of the law was to extend to “operators of online platforms […] offering an online public communication service based on connecting multiple parties for the purpose of sharing public content or based on classifying or referencing content by means of computer algorithms, which is offered or placed online by third parties, where this activity on French territory exceeds a threshold, determined by decree” (article 1). Where, precisely, this threshold lay was to be decided subsequently. Notably, the bill covered social media platforms and search engines, but not internet service providers. Failure to comply with the new law would incur a criminal fine of up to 250’000 euros for individuals and 1’250’000 euros for corporations. In addition, an administrative penalty of up to 20 million euros or 4% of a company’s global annual turnover could be imposed for “serious and recurrent” failures.
The Process of Adoption
It is worth reflecting for a moment on the particular process by which the bill was first adopted. In May 2019, the Government decided to apply the ‘procedure accelerée’ (accelerated procedure) foreseen in Article 45 of the French Constitution. This decrees that, after a reading by each of the two chambers of Parliament – the Assemblée nationale (roughly equivalent to the House of Commons) and the Sénat (House of Lords) – and in the case of no agreement being reached on a common text, the Prime Minister or the Presidents of the two Houses can convene a joint committee, comprising equal members from each House, to propose a compromise text on debated issues. This is what occurred here: the two parliamentary chambers could not find an accord on the text of the bill and a commission was constituted. This failed, however, to yield a compromise text acceptable to both sides, and so the ‘normal’ legislative procedure resumed – the original text as amended and adopted by the Sénat went back to the Assemblée nationale, which made its own modifications, and this new text was then returned to the Sénat for further amendment.
As the process stalled in this back and forth between the chambers, the Government eventually decided to give a final reading before the Assemblée nationale – again in line with constitutional provisions – and the bill was adopted in May 2020. All of which is to say that, as a consequence of such wrangling, the bill was passed only by one of the two parliamentary chambers, albeit it the more ‘democratic’ one. Given the nature of the bill, and the current “state of health emergency” in place in France, one can readily question how well- or ill-advised this move was on the part of the Government. What seems clear, though, is that it lent an air of almost inevitability to subsequent challenge and dispute. Following adoption, on 18 May, 60 members of the senate submitted an appeal to the Conseil constitutionnel to contest the constitutionality of the bill.
The Conseil Constitutionnel Ruling
The arguments put forward by the challengers to the bill – and those upheld by the Conseil constitutionnel – were, unsurprisingly, connected to the matter of legitimate and illegitimate restrictions to freedom of expression. Unsurprising, as these concerns were already at the forefront of jurisprudential and public debates and discussions during the bill’s drafting.
Citing the 1789 “Declaration of the Rights of Man and of the Citizen”, the Conseil constitutionnel determined in its ruling that both Paragraph 1 (demanding the removal of content relating to terrorism and child pornography within the hour) and Paragraph 2 (requiring the removal of hateful content within 24 hours) of Article 1 constitute an “infringement on the exercise of freedom of expression and communication that is unnecessary, inappropriate and disproportionate”. The follow-through from this determination on Article 1 was to render an entire raft of subsequent provisions unconstitutional. The removal window in both scenarios was, the council held, “particularly brief”, and the severity of the proposed sanctions would “only incite online platform operators to remove flagged content, whether obviously unlawful or not,” especially in the absence of specific cause that exonerates from responsibility. With no judicial intervention foreseen, it would be for platform administrators (as private actors) to determine whether or not particular content is unlawful – a situation that would, in the verdict of the council, likely encourage an excessively censorious approach and the removal of materials that are in fact lawful.
What remains of the bill after the ruling is modest. Perhaps most notable is the acceptance of a proposal to create an official online hate speech watchdog (article 16). While by no means inconsequential, this and other minor provisions represent a meagre return when set in the context of the bill’s ambitious aim to overhaul the legislative landscape for dealing with online hate speech.
And Now?
So where does this leave the government’s efforts to police online content? Clearly, this is a substantial setback. While the bill was officially enacted, the ruling of the council stripped it of almost all meaningful impact. If not quite in tatters, the government’s strategy is tarnished, and there is obvious need for a rethink. Not that there is any sign of submission – in a statement following the ruling, Laetitia Avia vowed not to give up the fight, and asserted that the judgement offered a “roadmap to improve a plan that we knew to be unprecedented and therefore perfectible.” Thus the show will go on. But the implications of the ruling should not be downplayed. These may also extend beyond national borders – the government had hoped that the new bill might provide a template for the European Commission’s Digital Services Act, scheduled to be put forward by the end of the year. The Commission said that it “took note” of the council’s ruling.
Both of itself and as part of France’s extended efforts to regulate speech across diverse contexts, this recent chapter is variously revealing of the idiosyncrasies of our jurisprudence and constitutional arrangements, of the relationship the French state maintains with its citizens, and of its approach to balancing free speech with anti-discrimination concerns and the fight against harmful content (which differs markedly from the US, for example). It has also proved another flashpoint in ongoing debates on possible limits to freedom of expression and the dilemma of hate speech. That this is a fraught and thorny issue barely needs restating. Nor does its importance. The question of where to set the line between permissible and impermissible speech is contentious, daunting and potentially confusing – most reflective minds would probably admit to being pulled in different directions at different times and in different contexts. Just as we bristle at attempts to muzzle freedom of expression, so we do at the harms caused by hateful speech. Marking that boundary was, is, and will likely always remain, a tightrope walk. How the French government opts to move forward in the coming months will be an interesting watch.
While the impact of COVID-19 responses on human rights has elicited global attention and concern, much analysis has focused on tests of legitimacy for restrictions of civil and political rights, such as freedom of movement, freedom of association and privacy. Despite calls by the UN Secretary-General and the WHO to place the right to health at the centre of COVID-19 responses, this human right has been marginalized by Governments, as well as in many human rights analyses.
The Comment highlights that the human right to the enjoyment of the highest attainable standard of physical and mental health, protected in international human rights treaties, provides binding normative guidance for health-care systems, broader social responses, and global solidarity in the COVID-19 response. For example, the obligations on States deriving from the right to health require that States provide testing systems, personal protective equipment for frontline service providers, and health care, both for those suffering from COVID-19, as well as other essential healthcare services. It also requires actions beyond the health sector, to address social determinants of health which may be impacted by COVID 19, including through social distancing policies, which have a disproportionate impact on vulnerable and marginalized communities. Further, it requires States to protect vulnerable and marginalized communities, and to ensure that these communities participate in the design and implementation of COVID-19 responses.
One of the original features of international human rights law is that it supports both domestic and transboundary obligations. Thus, in the context of COVID-19, States must engage in international cooperation to support a coordinated global response, which has relevance across a range of fields such as the development of vaccines, economic sanctions, debt obligations and intellectual property. The right to health, as well as other rights, thus have an important role to play in responding to the call of the UN Secretary General for global solidarity in the COVID-19 response.
The Comment was originally published in 2020 by The Lancet, vol 359, p 1888.
India should rewrite outdated, colonial laws and empower local people so that embankments work for communities and nature.
Cyclone Amphan has devastated millions of lives in the Sundarbans, a tidal forest on the shore of the Bay of Bengal. The Sundarbans lies in the southern part of the Ganges Delta, crossing both India and Bangladesh. It is an area of global importance, as the largest mangrove forest on Earth and a significant carbon sink.
Although famous for its biodiversity and ecology, the region is home to 5 million people and one of the most deprived areas. Since 2007, there have been at least 15 major cyclones in the region. On 20 May 2020, Cyclone Amphan made landfall, in the midst of the COVID-19 pandemic.
Beyond disaster relief, ‘rebuilding’ the Sundarbans will be a monumental task – one that cannot repeat past mistakes. It must be attuned to a climate-stressed world where rising sea levels and cyclones will continue to batter the region, which is the largest delta and mangrove forest on earth.
The region has long been in a state of structural dysfunction, bringing great harm and impoverishment to millions. This impoverishment is not a natural state or determined purely by the fragile ecology. Rather, it is the result of human agency, policies, laws and institutions.
Problematic laws and governance
After a disaster several things usually happen. There is a cry for funding, some (usually inadequate) funding provision, followed by reconstruction. In the Sundarbans, this involves building embankments.
The embankments of the Sundarbans protect the islands where people live and are vital to their safety and livelihoods. When an embankment is breached, saline water enters farmland and food can no longer be grown. A downward spiral often follows, as people move into further marginalised activities (such as collecting prawn seedlings), or migrate under precarious conditions.
Embankment law in the state of West Bengal has not changed much since the colonial era: the Bengal Embankment Act is almost 140 years old. Today this legislation operates in a completely different social and ecological reality.
Colonial laws vest complete power in the state bureaucracy, the Irrigation & Waterways Department (IWD). Under the law, the embankments are government property. The department is the ultimate arbiter of where, when and how embankments are built and maintained. These decisions are life-and-death issues for the people who live in the Sundarbans.
Research has shown a high level of apathy towards development in the region from local government bureaucracy, especially the IWD. The state chooses whether or not to respond, with local people unable to take part in any meaningful sense, in the decisions that govern their lives. For example, studies found that this centralised control was at the heart of poorly built infrastructure and the misuse of resources after Cyclone Aila in 2009.
Decisions about embankments could be democratically controlled, through legislative reforms, by the communities whose lives depend on their maintenance. Communities need to be empowered – both through the provision of resources and legal power – to create an environment where people and nature can thrive together.
Need for different technology
In recent years, a lot of money has been spent on constructing concrete embankments. These embankments are unfit for the surrounding environment. Research has found that concrete structures disrupt the natural ecology of the islands without offering protection when a strong cyclone hits – in 2012 Anurag Danda, then head of the WWF-India’s Sundarbans and climate adaptation programme, said such structures had been washed away twice at the island of Mousuni.
There is also an urgent need to update the science and knowledge embedded in the way embankments are built. The Bengal Embankment Act assumes a fixed distinction between land and water, as the British based the law on the geography of their own rivers.
But in the delta which makes up large parts of eastern India, the border between land and water is constantly changing. Concrete embankments assume a clear demarcation, but this is not possible in the region.
Architects in other parts of South Asia have been researching new ways of designing in flood-prone and coastal areas, which are cognisant of the local ecology, changing climate and social needs. These approaches try to work with water and floods – for example, embracing overflows into land at certain times and places, overturning many centuries of seeing water as a threat. Many experts are now calling for these ideas to be engaged with in the Sundarbans. The state’s role should be to facilitate the interaction of such experts with democratically empowered local populations.
Embankments (left) can displace people, who become more vulnerable as they are forced to rebuild their huts (right) outside the area the embankment protects (image by Megnaa Mehtta)
Building a better future
The state government has consistently failed to prioritise coastal planning. It only managed to produce a draft coastal zone map after numerous outcries and orders by the National Green Tribunal, India’s dedicated environmental court. The West Bengal government’s approach to formulating a coastal zone management plan also lacked meaningful public participation.
Recently, the Indian government pushed through a series of reforms that allow more “development” in areas such as the Sundarbans, where mangroves are recognised as a crucial buffer against cyclones and storms in a climate-stressed world. An investigation found that the reforms ignored 90% of public representations made nationwide. This demonstrates how coastal areas have always been ruled from the top down.
There is also widespread flouting of environmental rules to create ‘eco-tourism’ in the region. The badly planned construction of roads, resorts and jetties leads to massive habitat destruction. Moreover, infrastructure for tourism, such as hotels and restaurants, takes priority in the allocation of vital resources like water, with groundwater being diverted from local people and farmland.
Meanwhile, while local people have forestry rights, conservation concerns are often used as an excuse to deny their rights and criminalise their activities.
In 1979, the state carried out a massacre of hundreds of Dalits (people in the lowest group in the Hindu caste system) in Marichjhapi – ostensibly to protect the forest. For decades, interest in the Sundarbans has been limited to protecting tigers or forests, largely at the expense of communities. Recently, a planned relocation of populations in the Sundarbans to create buffer zones has been advocated by some researchers.
The overall approach could be described (to use the words of Nivedita Menon, the professor of political and feminist theory, from a different context) as privileging ‘the environment over people, and development over the environment’.
Mangroves, migration, embankments and eco-tourism will all have some role to play in rebuilding efforts. But, a reframing (and decolonising) of governance and law is long overdue. The rights of residents need to be reflected in law and policy. Ignoring the voices of the suffering has been central to the story of the Sundarbans. It must not be repeated now.
A version of this piece first appeared on thethirdpole.net and is reproduced here with permission and thanks.
Liverpool Street Station, London; photo by Ben Garratt
Lee Marsons, PhD Candidate and Graduate Teaching Assistant, School of Law, University of Essex
As part of my compilation of resources on Covid-19 for the UK Administrative Justice Institute (UKAJI), I have been paying close attention to the publication of delegated legislation throughout this crisis. My main sources for this have been legislation.gov.uk, the Gazette, and the gov.uk website. One of my growing concerns has been the number of times where I have observed a delay between new regulations being signed by a Minister and coming into force, and the regulations becoming publicly available on any of these websites.
The risk with this delay is that a Minister has created a new criminal offence – or at least has modified an offence created by previous regulations – without a member of the public being able to discern the offence’s specifics so that they may remain within the law. This concern is underlined when we realise that, since many of these regulations have been authorised by Ministers without recourse to Parliament in the immediate term, not even the elected representatives of the public may have knowledge of these offences so as to advise their constituents accordingly. As yet, I am unaware of an actual case, but with 15,715 fixed penalty notices having been issued as of 8 June 2020, there remains the real risk that a person has been, or will be, fined and prosecuted by the police where that person has had no ability to specifically discern the scope and contents of the regulation under which they have been sanctioned. Whatever theory of the rule of law one prefers, this state of affairs is troubling for those concerned with legal certainty for the individual vis-à-vis the punitive and coercive powers of the executive.
“now debating the coronavirus No. 3 regulations which…have in some cases already been superseded by the No. 4 regulations, which were laid before the House on Friday and in some cases came into force almost immediately afterwards, with some regulations coming into force on Saturday.”
This was a concern because:
“the regulations are actually quite complicated and not everybody will understand them in great detail, [and] because they are the law a breach of them is actually an offence. We are creating criminal offences here, and when we do that it is important that we let people know what the offence is and how they can make sure that they remain within the law. I suspect that if we were to do a survey among Members of Parliament, even they probably would not get all the regulations correct. They are quite difficult to follow, given that they start off with a set of regulations that is then amended over and over again. It is quite a challenge to work out what the current legal position is.”
Such are the risks to legal certainty in situations, like now, where major restrictions on ordinary liberties are achieved via statutory instruments which, while coming into force and creating offences immediately upon ministerial signature, may not be disseminated to the public – and are certainly not approved by Parliament – until some time later.
Protections in England, Wales, and Scotland
In England, Wales, and Scotland, there is at least the possibility that a person prosecuted in these circumstances would have a defence under s. 3(2) of the Statutory Instruments Act 1946, which reads that:
“In any proceedings against any person for an offence consisting of a contravention of any…statutory instrument, it shall be a defence to prove that the instrument had not been issued by or under the authority of His Majesty’s Stationery Office at the date of the alleged contravention unless it is proved that at that date reasonable steps had been taken for the purpose of bringing the purport of the instrument to the notice of the public, or of persons likely to be affected by it, or of the person charged.”
In the few cases to have considered s. 3(2), the provision is understood to provide a defence where there has been no act of publication or dissemination of the statutory instrument after its approval. As Streatfield J observed in R v Sheer Metalcraft [1954] 1 QB 586:
“There does not appear to be any definition of what is meant by “issue,” but presumably it does mean…that the making of an instrument is one thing and the issue of it is another. If it is made it can be contravened; if it has not been issued that provides a defence to a person charged with its contravention. It is then upon the Crown to prove that, although it has not been issued, reasonable steps have been taken for the purpose of bringing the instrument to the notice of the public or persons likely to be affected by it.”
Similar views were expressed by Lord Goddard in Simmonds v Newell [1953] 1 WLR 826, which concerned a statutory instrument which had been approved by a Minister but not made entirely publicly available:
“The Solicitor-General agrees that if this matter is not contained in the instrument, in order that people may know whether they are committing offences or not, it must be shown that proper steps have been taken to bring it to the notice of people in the trade that these prices exist. That is certainly a very reasonable attitude for the Solicitor-General to take up, because it is not desirable, in criminal matters, that people should be prosecuted for breaches of orders unless the orders can fairly be said to be known to the public. It is clear from the case stated that there never was evidence before the justices that the steps that the section requires to be proved by the prosecution had ever been taken and that the defendants were therefore entitled to rely on that as a defence.”
3) In proceedings against a person for an offence consisting of a contravention of a Scottish statutory instrument, it is a defence to prove that, at the date of the alleged contravention, the instrument had not been published by the Queen’s Printer.
(4) The defence mentioned in subsection (3) is not available if it is proved that reasonable steps had been taken before that date by or on behalf of the responsible authority to bring the purport of the instrument to the notice of –
(a) the public,
(b) persons likely to be affected by it, or
(c) the person charged.
Therefore, it seems a reasonable argument that where a Minister in England, Wales, and Scotland has created or modified an offence by statutory instrument and this information has not been made available to the public – perhaps, as I am considering here, because of a delay in disseminating the instrument – a person would have a defence against prosecution under these provisions during that period where the information was unknown.
However, it is unlikely to be as simple as this in reality. One complicating feature of these provisions is their demand that the purport of the instrument is brought to the notice of the public, rather than the instrument itself. This raises the question as to whether the daily broadcast press conferences attended by Secretaries of State, media interviews given by Ministers, and the guidance documents produced by Departments would make the purport of the instrument sufficiently clear, though the instrument itself is not yet public. It seems to me that there is no abstract answer to this question, it would be a matter of fact and degree in the circumstances of the case and would depend on whether Ministers have announced the major features of the offence to the public, perhaps alongside an indication of possible sanctions. Consequently, while these provisions provide no absolute bar against a prosecution in circumstances where a statutory instrument had yet to be published, it at least provides the possibility of a defence depending on the extent of the information given by Ministers about the offence through other channels, such as television or guidance documents.
Protections in Northern Ireland
In Northern Ireland the position is substantially more complex. The defence under s. 3(2) would not be available because, but for in specific circumstances, s. 13 of the 1946 Act declares that the Act does not extend to Northern Ireland. Nor is it obvious that Northern Ireland has an equivalent provision to s. 3(2) elsewhere. The best that I have discovered is Article 5(2)(b) of the Statutory Rules (Northern Ireland) Order 1979, which requires a Minister, ‘as soon as may be after the making of those rules to arrange for the publication of those rules or of notice of the making of those rules in the Belfast Gazette’. This is different to s. 3(2) because Article 5(2)(b) provides no actual defence to a prosecution, only an obligation on a Minister making those rules to publish them in a particular place.
Article 5(2)(c) provides that some statutory rules may be exempt from the requirements of Article 5(2)(b), namely those listed in Schedule 3 of the Order. These include the Public Health Acts Amendment Act 1907 and the Public Health (Ireland) Act 1878, but Schedule 3 does not mention the Public Health Act (Northern Ireland) 1967 nor the Coronavirus Act 2020, the parent legislation for most of the statutory rules made. Alternatively, s.8 of Schedule 3 also exempts statutory rules of a temporary nature which in the opinion of the Minister are likely to cease to be in force within three months after they are made. It is conceivable that a Minister might think this, but in my view that would be a major – and problematic – assumption to make in the coronavirus context. Therefore, without more, I assume that there is a requirement to make public in the Gazette any statutory rule related to coronavirus.
Where this has not been complied with, though there is no statutory defence, Lim Chin Aik v R [1963] AC 160 might be a helpful authority for a defence at common law. In this case, Lord Evershed, sitting in the Privy Council, commented that the traditional maxim ignorantia juris non excusat – ignorance of the law is no excuse – could not apply where there was no possibility for a person to carry out inquiries as to what the law affecting them was. Nevertheless, I am not certain that this is a conclusive authority for at least two reasons. First, these comments were obiter given that the main issue in the case was the mens rea of a Singaporean immigration offence. And second, there is no direct analogy to coronavirus rules because Lim Chin Aik concerned an order directed against a specific person that was not disclosed to that individual, rather than a general offence applying to all persons.
In addition, despite there being an obligation for a Northern Irish Minister to publish the relevant statutory rules, I am not convinced that a failure to do so would render a statutory rule ultra vires and, therefore, any relevant offence made void. There is no authority for this proposition from the courts (Westlaw, at least, identifies no cases at all on Article 5(2)(b)) or in the Order itself. As such, I can see no particular reason to be confident either of a common law defence or of the statutory rule being ultra vires.
All that said, the Human Rights Act 1998 may assist. In the qualified rights contained in Articles 8 to 11 of Schedule 1, any restriction on those rights must be ‘prescribed by law’. There is a plausible argument that a statutory rule that had not been published but had led to a conviction would not be ‘prescribed by law’ and, therefore, would violate one of the relevant qualified rights. I am assuming that since being prosecuted or fined for breach of the regulations may restrict a person’s ordinary movement and assembly, worship, business activities, family contact, and other social conduct, there may well be at least a modest interference with the rights to respect for private and family life (Article 8), freedom of assembly, association, and protest (Articles 10 and 11), and freedom of religion (Article 9).
In Huvig v France (1990) 12 EHRR 528, the European Court of Human Rights identified four questions from earlier cases which provide a test for deciding if any given interference with a right is ‘prescribed by law’:
Does the domestic legal system sanction the infraction?
Is the relevant legal provision accessible to the individual?
Is the legal provision sufficiently precise to enable the individual reasonably to foresee the consequences which a given action may entail?
Does the law provide adequate safeguards against arbitrary interference with the respective substantive rights?
The most relevant question here is question two – is the relevant legal provision accessible to the individual? In Sunday Times v United Kingdom (1979) 2 EHRR 245, the European Court held that accessibility means that the individual, ‘must be able to have an indication that is adequate in the circumstances of the legal rules applicable to a given case’. As an example, in Silver v United Kingdom [1983] 5 EHRR 347, the Court held that the Standing Orders and Circular Instructions which the Home Secretary issued to prison governors failed the accessibility test since they were not published, were not available to prisoners, nor were their contents explained in cell cards.
For these reasons, in circumstances where a Northern Irish statutory rule which had yet to be published led to a criminal conviction, it is likely that there would be a violation of one or more of the qualified rights under Articles 8-11 and, on that basis, the conviction would be unlawful given that under s. 6 of the 1998 Act, public authorities have an obligation to act compatibly with those rights. Nevertheless, where Northern Irish Ministers had not published the rules but had informed the public through other means – such as press conferences, interviews, and guidance – a Minister could still reasonably argue that, despite the failure to publish, the individual was still aware in principle of the relevant offence through other channels.
In sum, there is no easy answer to the concerns raised in this piece. There is no authority for any absolute prohibition or bar on prosecution in circumstances where a coronavirus related statutory instrument created or modified an offence, that offence was enforced, but the instrument had not yet been made available to the public. Nevertheless, at least in England, Scotland, and Wales, a person is likely to have a defence under s. 3(2) of the Statutory Instruments Act 1946 or under s. 41(3)-(4) of the Interpretation and Legislative Reform (Scotland) Act 2010 against such a prosecution. In Northern Ireland, where there is no equivalent provision, a person may still be able to use the Human Rights Act 1998 as a ‘shield’ against such a prosecution, on the basis that it would violate one of the qualified rights under Articles 8 to 11 to suffer a conviction in these circumstances. Hopefully these debates will never have to be tested in the courts because no person has been fined or prosecuted in these circumstances, but it is not obvious to me that this is so and legal advisors to those convicted under coronavirus regulations ought to bear this complication in mind.
The author would like to thank Grainne McKeever, Conor McCormick, Brice Dickson, James Chalmers, Benjamin Lewis, and Rich Greenhill for their helpful comments on this issue. Incidentally, if any readers are aware of a potential Northern Irish equivalent to s. 3(2) of the Statutory Instruments Act 1946, please do contact the author.
This post was first published on the UKAJI blog and is reproduced here with permission and thanks.
Failure is a fact of life in any sphere of human activity.[1] Each individual can share stories of their personal failures in life. Some of these failures make us stronger, more successful and resilient in the long run.
Beside events that only affect us in the personal sphere, there are other more “tangible” failures, which affect our profession, assets and capacity to generate income.
In this respect, companies are no different from human beings. Companies – even successful ones – may fail to invent, launch and promote a new product on the market or simply generate enough cash to cover development costs of a product that otherwise met the consumers’ favour. If failure is not limited to a single product, it may threaten the survival of the company.
However, failure may also be determined by external factors, such as a sudden lack of demand from the consumer’s side (as in the aftermath of the Covid-19 pandemic) or an unexpected increase in interest rates. These external factors – either alone or coupled with other causes – may push a company into a formal insolvency proceeding.
More frequently than not, companies that are pushed into insolvency for the pressure exerted by external factors may still be viable. Yet, the only people who have the expertise and knowledge, as well as the courage to invest in a failing business, are usually the existing owners and directors of the ailing company.
Under English law, one of the most popular methods by means of which existing owners buy back an insolvent company, thus preserving its core business and as many jobs as possible, is called pre-pack administration (‘pre-pack’).
In a “pre-pack”, a prospective buyer and key creditors conclude an agreement on the sale or restructuring of the company in advance of statutory administration procedures. In a “connected pre-pack”, the buyer is usually the seller – the owners buy back a significant portion of the company minus a sizeable amount of its existing debt.
Clearly, connected pre-packs raise issues of transparency, fairness and valuation of the debtor’s assets. Creditors may feel that they are paid a pittance while the existing owners are set free without punishment and retain the control of assets that could have generated more money if liquidated in a competitive procedure, such as through a properly advertised auction procedure.
To allay the fears of disgruntled creditors, the Government introduced in 2015 the Pre-Pack Pool (‘the Pool’). The Pool is an independent body of experienced business people that gives an opinion on whether the connected pre-pack sale is reasonable and in the best interests of creditors.
The Pool has proven effective in dealing with connected pre-packs, as evidenced by the most recent sale of Go Outdoors. In this case, the debtor was sold back by its previous owner JD Sports by means of a deal cleared by the Pool in less than 24 hours. The Pool has risen to prominence, to the extent that it has been taken as a model for recent innovations in other jurisdictions, such as the business panel in Italian alert procedures. Dr. Vaccari is working on a paper (due to be published in August 2020 in the International Insolvency Review) which will disclose the links between the English Pool and the Italian panel.
Furthermore, Dr. Vaccari has already analysed in two recent articles [2] the reasons behind the low uptake rate of this voluntary measure (less than 10% of eligible cases are referred to the Pool) and how the Pool should be reformed to deal more effectively with the risks associated with connected pre-packs.
The Corporate Insolvency and Governance Act 2020, which came into effect on 25 June 2020 (‘the Act’), presented the perfect opportunity to deal with the issues associated with connected pre-packs. It is, however, disappointing to see that the Government and Parliament have turned a blind eye on connected pre-packs and have been deaf to the requests from the industry to make the referral to the Pool compulsory in these procedures.
The Act includes several measures that are likely to make the English framework more rescue-oriented and efficient, such as a new restructuring procedure and the ban on the enforceability of ipso facto clauses. Unfortunately, no ink was spilled for a very useful mechanism on the brink of collapse.
It is to be hoped that the Pool’s latest cry for help will not end up in being a late pious expectation of salvation by means of Parliamentary intervention. There are valid reasons to believe that such an intervention is forthcoming, as section 8 of the Act revives the Government’s power to review connected pre-packs and related instruments, included the Pool. This power, originally granted by the Small Business Enterprise and Employment Act 2015, lapsed in May 2020 but has now been extended to the end of June 2021.
The publications mentioned in this article are available on Westlaw, Researchgate.net and Academia.edu. Dr. Vaccari regularly discusses insolvency matters on Twitter and LinkedIn.
Notes:
[1] V Finch and D Milman, Corporate Insolvency Law: Perspectives and Principles (3rd edn, CUP 2017) 123.
[2] E Vaccari, ‘Pre-Pack Pool: Is It Worth It?’ (2018) 29(12) I.C.C.L.R. 697; E Vaccari ‘English Pre-Packaged Corporate Rescue Procedures: Is there a Case for Propping Industry Self-Regulation and Industry-Led Measures such as the Pre-Pack Pool?’ (2020) 31(3) I.C.C.L.R. 169.
I. The Corporate Insolvency and Governance Act 2020
On 25 June 2020, the Corporate Insolvency and Governance Act 2020(‘the Act’) completed its progress in the Parliament and received Royal Assent. The Act has unanimously been hailed by the insolvency community as the most significant regulatory reform in the United Kingdom in the past 20 years.
The Act represents the culmination of a debate on regulatory reforms commenced in 2016 and continued in 2018. This debate was made more urgent by the need not to fall behind the European Union and by the inadequacies of the system evidenced by recent corporate scandals (Carillion) and systemic failures (airline industry).
While some of the measures are the result of long-planned reforms the Government has previously consulted upon, some changes are temporary in nature and they are designed to provide companies with the breathing space and flexibility needed to deal with the economic impact of the Covid-19 pandemic.
This blog-post briefly discusses the relevance and impact of the time-limited measures introduced by the Act. The Act’s long-term regulatory reforms were discussed in a separate post here.
II. Time-Limited Measures
The most significant changes affecting insolvency rules are: (i) a suspension of statutory demands and restrictions on winding-up petitions;[1] (ii) a suspension of liability for wrongful trading;[2] and (iii) an extension to end of June 2021 to the power to legislate on sales to connected persons, which was granted by the Small Business, Enterprise and Employment Act 2015 (‘SBEEA 2015’) but expired in May 2020.[3]
The Act also allows for temporary flexibility regarding other administrative burdens, such as the holding of annual general meetings (AGMs) and filing requirements. These temporary measures, however, fall outside the remit of this blog-post as they do not deal with insolvency provisions.
With reference to statutory demands and winding-up petitions, the Coronavirus Act 2020 introduced a moratorium on commercial landlords to enforce the forfeiture of commercial leases for unpaid rent. This measure was designed to protect companies unable to trade during the lock-down period introduced by the Government to limit the spread of Covid-19.
However, landlords sidestepped this original ban by serving statutory demands on businesses followed by winding-up petitions. The Corporate Insolvency and Governance Act 2020 addresses this loophole by introducing temporary provisions to void statutory demands made between 1 March and 30 September 2020.
Statutory demands can still be served as this may trigger a termination clause under an existing contract. However:
service of a statutory demand without the treat of a winding-up petition is of limited benefit;
defaults in debtor’s facility documents or commercial contracts are usually equally triggered by ordinary as opposed to statutory demands;
even if these clauses are triggered, the creditor might still not be able to enforce the termination as such option might be prevented by the newly enforced ban on ipso facto clauses discussed here.
The Act also restricts winding-up petitions based on statutory demands from 27 April to 30 September 2020. For the same period, it also prevents creditors from presenting a winding-up petition unless they have reasonable grounds to believe that: (a) the Covid-19 pandemic has not had a “financial effect” on the debtor company; or (b) the facts by reference to which the relevant ground applies would have arisen even if the Covid-19 pandemic had not had a financial effect on the company.
These temporary measures are intended to prevent aggressive creditor actions against otherwise viable companies that are struggling because of the consequences of the Covid-19 pandemic.
As mentioned before, creditors can still commence a winding-up petition if they prove that the Covid-19 pandemic had no “financial effect” on the debtor. This bar is very low, as in virtually all sectors of the economy the Covid-19 pandemic produced financial effects on the debtors. This is particularly true for the worst affected sectors, such as the airline industry, non-essential retail, hospitality and leisure sectors (where revenue has been nil or restricted as a result of the lockdown and social distancing measures). Still, creditors may be able to submit a winding-up petition based on aged and undisputed debts that pre-date the Covid-19 pandemic.
As for the suspension of liability for wrongful trading, the Act suspends the liability arising from wrongful trading (sections 214 and 246ZB of the Insolvency Act 1986) in the period 1 March to 30 September 2020.
Under wrongful trading provisions, directors face personal liability on debts incurred by their company. This is, if they decided to continue trading while they knew or ought to have known that the company was unlikely to avoid entering insolvent liquidation or administration. For directors who may have previously rushed to liquidate their businesses with these provisions in mind, this suspension should help delay that process.
III. Preliminary Assessment
There is no doubt that the Act complements the Coronavirus Act 2020 with a series of more measures designed to provide companies with the much-needed temporary relief to cope with the impact of the Covid-19 pandemic.
However, all that glitters is not gold.
With reference to the use of statutory demands and winding-up petitions, the Business Secretary originally advocated for the introduction of these measures to safeguard the UK high street against aggressive debt recovery actions during the Covid-19 pandemic (Alok Sharma, 23 April 2020). However, the temporary provisions as enacted are not sector specific. They apply to any registered or unregistered company that can be the subject of a winding-up petition. They also apply in relation to any debt owed by a debtor company, not just rent or other commercial lease liabilities. As a result, there is the risk that this temporary protection is used in a strategic manner by otherwise non-distressed firms as a leverage in negotiations with their creditors, in order to reduce outstanding and future liabilities arising from ongoing executory contracts.
Additionally, while the Act does not introduce a blanket ban on presenting winding-up petitions, the Government, some professionals and non-specialist publications are suggesting the contrary, thus causing potential confusion in the business community.
The Act also provides that if a winding-up order has been made in relation to a debtor in the period between 27 April 2020 and the day before the Act came into force, the order is void if it does not meet the new requirements for the making of an order. The retrospective nature of this provision can lead to significant challenges in practice. For instance, if the procedure has already commenced, it is not clear what happens to the debts incurred during the procedure, as they normally enjoy a super-priority status. However, it is expected that few orders were made on this basis in the past few weeks, as the judiciary was aware of the content of the Bill and enforced a ban on winding-up petitions before the Act was passed.[4]
Dr. Vaccari has already evidenced in a paper published by the University of Essex[5] and at the St Petersburg’s International Legal Forum the limits of the other, most significant temporary measures introduced by the Act, i.e. the suspension of liability for wrongful trading.
The comments made in the House of Lords debates indicate that the Government was aware of some of the limits evidenced in the above-mentioned papers. The Government stressed in these debates that its intention is that there should be no liability for wrongful trading until 30 September 2020. However, under the Act courts are only instructed “to assume that the [director] is not responsible for any worsening of the financial position of the company or its creditors that occurs during the relevant period”.[6] Therefore, applicants may still seem to have the power to demonstrate that the directors acted in breach of the wrongful trading provisions as outlined in sections 214 and 246ZB of the Insolvency Act 1986 for actions taken before the end of September of this year.
The Act does not affect the several other provisions. These include the rules on fraudulent trading[7] and transactions defrauding creditors,[8] on undervalue or preferential transactions,[9] as well as the director disqualification regime[10] and the general directors’ duties.[11] All these rules, therefore, continue to apply. Particularly, the common law duty of directors to give consideration to the interests of creditors when a company is in the zone of insolvency[12] is preserved and remains in full force.
Sections 12(3) and (4) of the Act clarify that the suspension of liability for wrongful trading does not apply to a variety of companies. These include (among others) insurance companies, banks (including investment banks and firms), building societies, friendly societies, credit unions, public-private partnership project companies and overseas companies with corresponding functions. In other words, a good deal of medium and large enterprises are excluded from the scope of this provision without any apparent justification.
Additionally, unlike the provisions on statutory demands and winding-up petitions, the rules on wrongful trading state that there is no requirement to show that the company’s worsening financial position was due to the Covid-19 pandemic.
The Act adopts a blanket approach: liability for losses incurred in the relevant period is waived, irrespective of whether the losses are incurred because of the Covid-19 pandemic. This blanket approach raises issues of potential abuse of the law if the office holders cannot hold the directors accountable for losses that are not caused by the Covid-19 pandemic.
As a result of all these considerations (and the others mentioned in the publication cited above), a measure in theory designed to “remove the threat of personal liability” caused by the Covid-19 pandemic on businesses (Alok Sharma, 28 March 2020) is likely to lift significant restrictions on the arbitrary exercise of powers by rogue directors. This is likely to significantly and negatively affect creditors’ rights and the rule of law. It is highly unlikely that the suspension of liability for wrongful trading results in being a “jail-free card” (although it is salient to note that we are discussing civil, as opposed to criminal, liability issues).
A final contentious aspect is represented by the power granted to the Secretary of State to temporarily (for up to six months) amend corporate insolvency primary and secondary legislation and related measures to deal with the consequences of the Covid-19 pandemic on companies. This power is virtually unrestricted as no effective check-and-balance system is put into place.
IV. Concluding Remarks
The Act provides much-needed temporary relief for distressed companies. However, given the speed with which the Act has been passed, the complexity of the legislation, and some questionable legislative choices, there are undoubtedly areas of ambiguity and potential challenge.
The extent to the Act will help companies navigate through the Covid-19 pandemic is far from clear. More importantly, the legislation, whilst very welcome for debtors, does not deal with the substantive problem of debt being built up and long-term balance sheet issues.
In fact, the Act provides no solution for debtors once the restrictions expire. At that point (end of September 2020), the debtors may have significant arrears of debt. These issues are particularly acute in those sectors of the economy that have been worst affected by the Covid-19 pandemic. As a result, these time-restricted measures may have the unintended effect of postponing the unavoidable, reducing returns to creditors and resulting in a spike of liquidation-oriented procedures in the last quarter of this year.
[4] Re A Company (Injunction to Restrain Presentation of Petition) [2020] EWHC 1406 (Ch), [2020] 6 WLUK 13 – restraining the presentation of a winding-up petition against a company which had been unable to pay its rent as a result of the Covid-19 pandemic by taking into account the likelihood of the change in the law represented by the relevant provisions of the Corporate Insolvency and Governance Bill 2020.
[5] The paper makes reference to the Bill, but the wording of the relevant provisions has not changed in the Act.
[11] Chapter 2, Companies Act 2006. These include the duties to act within their powers, to exercise independent judgement, to avoid conflicts of interest and to exercise reasonable care, skill and diligence.
I. The Corporate Insolvency and Governance Act 2020
On 25 June 2020, the Corporate Insolvency and Governance Act 2020 (‘the Act’) completed its progress in the Parliament and received Royal Assent. The Act has unanimously been hailed by the insolvency community as the most significant regulatory reform in the United Kingdom in the past 20 years.
The Act represents the culmination of a debate on regulatory reforms commenced in 2016 and continued in 2018. This debate was made more urgent by the need not to fall behind the European Union and by the inadequacies of the system evidenced by recent corporate scandals (Carillion) and systemic failures (airline industry). While some of the measures are the result of long-planned reforms the Government has previously consulted upon, some changes are temporary in nature and they are designed to provide companies with the breathing space and flexibility needed to deal with the economic impact of the Covid-19 pandemic.
This blog post briefly discusses the relevance and impact of the long-term regulatory reforms introduced by the Act. Time-restricted measures are discussed in a separate blog-post.
II. Long-Term Reforms
The most significant changes in the area are: (i) a short free-standing company moratorium;[1] (ii) a new restructuring plan procedure;[2] (iii) a general ban on the enforceability of ipso facto clauses.[3]
The moratorium gives struggling businesses a 20-business day opportunity to consider a rescue plan, extendable by the directors for a further 20 business days or, with creditor consent, up to a year.
The moratorium is triggered by the directors of the ailing company filing the relevant documents at court (out-of-court process) or by an order of the court following the debtor’s application (in-court process). The latter is of primary interest for overseas companies or where the debtor has been served with a winding-up petition.
The aim of the moratorium is to facilitate the rescue of the company (as opposed to the rescue of only the business) through a company voluntary arrangement (‘CVA’), a restructuring plan, an informal workout or another formal insolvency procedure (e.g. pre-packaged administration).
During this period, the company remains under the control of its directors (debtor-in-possession procedure), but there are restrictions on the transactions that the companies can complete during a moratorium. For instance, new security can only be granted with the monitor’s consent and if they think the grant of the security will support the rescue of the company. Disposal of company’s property is only admissible if it is made in the ordinary course of business, with the monitor’s consent or following a court order. Other restrictions apply to loans of more than £500, certain transactions (e.g. collateral security) and payments for pre-moratorium debts.
No legal action can be taken against the debtor’s assets without leave of the court. There can be no enforcement of security (except financial collateral or collateral security charges) and no repossession of goods under hire-purchase agreements or retention-of-title clauses. In addition, during a moratorium, the holder of an uncrystallised floating charge on the property of the company is prohibited from giving notice which would have the effect of either (i) causing the floating charge to crystallise; or (ii) restricting the disposal of the property of the company. All these restrictions provide debtors with powerful tools to continue trading normally during moratorium.
Similar to what happens in other insolvency procedures (including the new restructuring plan), landlords cannot exercise their rights of forfeiture and may be forced to accept a reduction in their rents. This raises concerns that other landlords will follow Intu Groupinto administration procedures because the reduced rents (if and when paid) would be insufficient to meet their long-term liabilities.
The moratorium process is overseen by a monitor who must be a licenced insolvency practitioner (‘IP’). During this process:
the monitor must remain of the view that a rescue of the company as a going concern is possible, otherwise the moratorium must be brought to an early termination;
certain pre-moratorium debts are subject to a “payment holiday”;
other pre-moratorium debts and all debts incurred during the moratorium must be paid in full as they fall due (or even earlier in case of pre-moratorium debt subject to acceleration).
In particular, the debtor must continue to pay certain of its debts, including new supplies and rent in respect of the moratorium period, as well as amounts due under financial contracts.
Financial contracts usually include acceleration clauses that are triggered by any insolvency event, including the moratorium described above. The early version of the Bill granted super priority status to these debts, if the debtor entered into an insolvency proceeding shortly after the moratorium. Amendments in the House of Lords removed the super priority status to the accelerated portion of these debts. At the same time, financial lenders can still accelerate the payments of these debts, causing the early termination of the moratorium and the rescue attempts because financial debts are not subject to a payment holiday.
Debts incurred under the moratorium are given priority ranking if the debtor falls into a formal insolvency procedure within 12 weeks from the end of the moratorium. The Act provides for the right to challenge the monitor’s or the directors’ actions, decisions or failure to act on the grounds of (actual or prospective) unfair harm to the applicant. There is also a right for a subsequently appointed office holder to challenge the monitor’s remuneration as excessive. Finally, the Act creates new offences of fraud during, or in anticipation of, a moratorium and false representation to obtain a moratorium.
The restructuring plan procedure is a powerful and flexible court-supervised restructuring process. This debtor-in-possession procedure allows struggling companies, or their creditors or members, to propose a new restructuring plan to rescue the company or part of its business, enable complex debt arrangements to be restructured and support the injection of new rescue finance.
The court involvement is limited to two hearings. In the first one, the courts are asked to convene the meeting and examine the proposed class composition. In the second hearing, the courts sanction the vote and approve the plan if the statutory conditions for approval are met and if it is just and equitable to do so. The sanctioned plan is binding on both secured and unsecured creditors.
The restructuring plan procedure is available to all companies that are encountering, or are likely to encounter, financial difficulties that are affecting, or will or may affect, their ability to carry on business as a going concern.[4] There is, therefore, no need for the debtor to be insolvent. As long as there is some form of compromise or arrangement to deal with the company’s financial difficulties, the plan is virtually a blank canvas.
Such procedure is modelled after the successful schemes of arrangement.[5] For the plan to be approved, it must receive the assent of 75 percent in value of each class of creditors. It is salient to note that two requirements applicable to schemes and CVAs have not been replicated with reference to the new restructuring plan procedure, thus making it easier to achieve the requisite majority. These are the requirements that more than half in value of unconnected creditors and that the majority in number vote in favour of the plan.
To further facilitate the approval of the plan, the new restructuring procedure features a cross-class cram-down. The cram-down mechanism allows dissenting classes of creditors to be bound by the plan, if sanctioned by the court as fair and equitable, and if the court is satisfied that those creditors would be no worse off than if the company entered an alternative insolvency procedure. The plan, however, needs to have received the assent of at least one class of creditors who would receive a payment, or have a genuine economic interest in the company, in the event of the relevant alternative.
The House of Lords’ removal of the protections initially included for creditors with aircraft-related interests means that that they can be compromised by a scheme or restructuring plan. This is welcome news for the distressed airline industry, which can now make use of those processes.
The new restructuring plan procedure is a more powerful and flexible mechanism than the existing schemes and CVAs. Unlike CVAs, it can bind secured creditors and creditors’ rights are not diluted, as they vote in classes of uniform interests rather than as a whole. Unlike schemes, dissenting classes can be bound by the plan. Additionally, the majority threshold is lower compared to the analogous requirements for the approval of schemes and CVAs.
The Act also widens the scope of the restriction on the enforceability of termination clauses from essential suppliers (sections 233-233A of the Insolvency Act 1986) to all kinds of suppliers. This measure applies where a company has entered an insolvency or restructuring procedure or obtains a moratorium during this period of crisis. As a result of this, the company’s suppliers will not be able to rely on contractual terms to stop supplying, or doing “any other thing” such as varying the contract terms with the company (for example: increasing the price of supplies), because the debtor becomes subject to a relevant insolvency procedure. Suppliers are also banned from insisting on payment of sums falling due prior to the insolvency as a condition of continued supply. The Government granted a wider protection than other jurisdictions (namely, the USA and Australia) by extending the ban to the termination of a contract or supply to breaches which occurred prior to the relevant insolvency procedure.
The customer is required to pay for any supplies made once it is in the insolvency process. The measure contains safeguards to ensure that suppliers can be relieved of the requirement to supply if it causes hardship to their business. Suppliers also retain the power to terminate these contracts for breaches that occurred after the commencement of the insolvency procedure and – in any case – with the permission of the office holder or director (depending on the procedure).
Up until 30 September 2020, small suppliers are exempt from the proposed changes and can (if they choose) terminate the supply contract. This is a temporary exemption designed to address the current difficulties faced by UK companies as a consequence of the Covid-19 pandemic, while permanent exclusions apply for the benefit of certain financial contracts and institutions.
III. Preliminary Assessment
There is no doubt that the Act represents a significant, much-needed overhaul of the English corporate insolvency framework. It is most likely that the reforms briefly described in this blog will enhance the corporate rescue attitude of the English framework; the attractiveness of this system for foreign enterprises; as well as the country’s standing in the Doing Business Report, particularly with reference to the “Resolving Insolvency” indicator.
However, all that glitters is not gold.
With reference to the company moratorium, while it provides a payment holiday for certain types of pre-moratorium debts, its scope does not extend to loans, liabilities arising under a contract/instrument involving financial services, as well as rents, wages, salaries and redundancy payments. The carve-out of such debts means that a company could still require access to significant funds during a moratorium. As a result, the moratorium could be of limited use where the company is subject to significant financing arrangements for which a payment holiday is not granted.
Another significant carve-out is with reference to the “rent in respect of a period during the moratorium”. However, this could lead to strategically timed moratoria, especially if the rent is payable in arrears (which is frequently the case in commercial contracts). In this case, the debtor might file soon after the quarterly payment for the pre-moratorium period is due. In this way, the debtor would avoid making any rent payment for the pre-moratorium period and would postpone any rent payment for the moratorium period for another four months.
The absence of any super-priority status of funding provided during the moratorium and the possibility for lenders to accelerate their debt in a moratorium may present serious obstacles to the use of such procedure by distressed companies (even if the House of Lord removed the super-priority status for accelerated financial debts, as outlined above).
With reference to the restructuring planprocedure, valuation will be a key aspect in the new process, as it will play a pivotal role to address any complaints from crammed down creditors as well as to assess which creditors are out of the money and can be excluded from the voting process. However, as Dr. Vaccari evidenced in two previous papers,[6] valuation is an extremely controversial process.
There is also the risk of reverse cram-down, or “cram-up”. This is when the restructuring plan procedure is used in a strategic manner by junior classes of creditors and/or the company’s members to “impose” a plan on dissenting senior creditors. Courts could in theory discourage this practice by not sanctioning plans that are not “just and equitable”. However, English courts have proven reluctant to interfere with business judgments. Additionally, the absence of any absolute priority rule – which was nevertheless touted when the reforms were first announced in August 2018 – may further promote a liberal judicial approach in the sanctioning hearing.
With reference to termination clauses, the Act provides no definition of what “hardship” and “any other thing” mean. Hardship is the major exclusion that suppliers can invoke to terminate a contract. “Any other thing” refers to the actions that suppliers are banned to take because the debtor entered into a relevant insolvency procedure. These are key concepts and the lack of statutory guidance on them is likely to represent an area of future dispute to be resolved by the courts.
The new discipline of termination clauses applies to the relevant insolvency procedures commenced on or after the day on which the Act came into force (27 June 2020). As a result, they will apply in respect of contracts entered into before as well as after that date, with the result of significantly restricting (for pre-Act contracts) the autonomy of the signatory parties as well as the predictability of such contracts. This vulnus to the principle of freedom of contract is particularly striking and surprising, considering that the latest changes to termination clauses introduced by the SBEEA 2015 apply to contracts entered into or after the date in which the SBEEA 2015 entered into force (1 October 2015).
To conclude on this topic, the Government introduced a long list of excluded companies and particular types of contracts. The latter include certain financial institutions and various financial and capital-markets contracts. Critically, these broad exclusions capture lending contracts, with the result that there is no obligation to continue to supply finance to companies in a relevant insolvency procedure.
IV. Concluding Remarks
There is no doubt that the Corporate Insolvency and Governance Act 2020 represents the most significant reform of the English corporate insolvency framework since the reforms introduced by the Enterprise Act 2002. As evidenced in this blog paper, the Act provides very useful additions to the restructuring toolkit and much-needed temporary and long-term relief for distressed businesses.
However, given the speed with which the Act has been passed, the complexity of the legislation, and some questionable legislative choices, there are undoubtedly areas of ambiguity and potential challenge. It is far from clear to what extent the Act will make the English framework more flexible, efficient and resilient to sudden changes of the economic environment.
The publications mentioned in this article are available on Westlaw, Researchgate.net and Academia.edu. Dr. Vaccari regularly discusses insolvency matters on Twitter and LinkedIn.
[6] E Vaccari, ‘Broken Companies or Broken System? Charting the English Insolvency Valuation Framework in Search for Fairness’ (2020) 35(4) JIBLR 135; E Vaccari, ‘Promoting Fairness in English Insolvency Valuation Cases’ (2020) 29(2) Int. Insolv. Rev. 1.
Essex Law Research Blog 