With the passing of the Moveable Transactions (Scotland) Act (MTSA) (likely to pass into law in 2024) the way in which we take security over rights and assets in Scotland will be brought firmly into the 21st century, doing away with the need to rely on statutes from as long ago as 1862 and a smattering of case law which has fostered uncertainty in the market for almost as long.

We have emerged from the COVID-19 pandemic amidst war, political instability, strikes and double-digit inflation rates that haven’t been seen since the early 1980s. With interest rates likely to continue to rise during the first half of 2023 and pay increases falling short of inflation, consumer confidence remains low. Companies’ margins are being squeezed by rising interest rates and when combined with increased debt burdens, supply chain difficulties and labour shortages it is no surprise that the number of insolvencies across the UK is increasing.

On October 17, 2022, Justice Andrea Masley of the NY Supreme Court issued a decision and order denying all but one of the motion to dismiss claims filed by Boardriders, Oaktree Capital (an equity holder, term lender, and “Sponsor” under the credit agreement), and an ad hoc group of lenders (the “Participating Lenders”) that participated in an “uptiering” transaction that included new money investments and roll-ups of existing term loan debt into new priming debt that would sit at the top of the company’s capital structure.

On October 14, 2022, the Fifth Circuit issued its decision in Ultra Petroleum, granting favorable outcomes to “unimpaired” creditors that challenged the company’s plan of reorganization and argued for payment (i) of a ~$200 million make-whole and (ii) post-petition interest at the contractual rate, not the Federal Judgment Rate. At issue on appeal was the Chapter 11 plan proposed by the “massively solvent” debtors—Ultra Petroleum Corp. (HoldCo) and its affiliates, including subsidiary Ultra Resources, Inc.

On July 6, Delaware Bankruptcy Court Judge Craig T. Goldblatt issued a memorandum opinion in the bankruptcy cases of TPC Group, Inc., growing the corpus of recent court decisions tackling “uptiering” and other similar transactions that have been dubbed by some practitioners and investors as “creditor-on-creditor violence.” This topic has been a hot button issue for a few years, playing out in a number of high profile scenarios, from J.Crew and Travelport to Serta Simmons and TriMark, among others.

1. State of the Restructuring Market

1.1 Market Trends and Changes

State of the Restructuring and Insolvency Market

There were 27,359 insolvencies in France as of the end of September 2021, down 25.1% from the same period in 2020, and down 47.9% from September 2019. Such reduction is relatively stable across all sectors, including those most severely affected by the health-related restrictions, such as accommodation and food services (down 44.2% year-on-year) and trade (down 28.1% year on year).

Fewer Insolvencies for More Opportunities

At the end of 2021, corporate bankruptcies (for most company sizes and in most sectors) were at their lowest level compared to the pre-COVID-19 figures from 2019, with a 50% drop in insolvency proceedings and a 10% decrease in pre-insolvency situations. This was largely due to the temporary impact of government emergency measures and support, including:

The UK Government has announced changes to the regime for winding-up petitions. With effect from 1 October 2021, some of the protections currently afforded to businesses against aggressive debt recovery action are being phased out.

The changes are intended to avoid a 'cliff edge' for debtor companies when the current measures lapse at the end of September 2021, and have a tapering effect to avoid the flood of winding-up petitions that might otherwise be expected.

What are the current restrictions (in place until 30 September 2021)?

Scottish landlords enjoy a preferential right of security known as “landlord’s hypothec” in respect of any unpaid rent arrears due in the event that their tenants enters administration or liquidation. The landlord's right of hypothec is unique to Scots Law and is not available to landlords in respect of properties south of the border. For reasons we will go on to discuss, the current legal framework on landlord’s hypothec is not particularly well developed and is widely criticised as being unsatisfactory.

On August 26, 2020, the Court of Appeals for the Third Circuit held that the Bankruptcy Code does not require subordination agreements to be strictly enforced in order for a court to confirm a cramdown plan, so long as the plan does not discriminate unfairly.