Natalie A. Stewart – Duane Morris Banking and Finance Law

June 15, 2023February 3, 2025 by Drew D. Salvest

Re Avanti – Fixed / Floating Charge Security Under English Law

In the recent case of Re Avanti Communications Limited (in administration)[1] (Re Avanti), the court considered the nature of fixed and floating charges. Whether a charge is fixed or floating has implications for both lenders and administrators in terms of determining to what extent a chargor can recover from the charged assets and to what extent a borrower can deal with its assets.

Background of case:

In Re Avanti, the administrators applied to the court to determine whether certain assets were subject to a fixed or floating charge pursuant to debentures granted by the relevant company. As all net proceeds from the sale of fixed charge assets are paid to secured creditors, and proceeds from the sale of floating charge assets are not paid to secured creditors until those who rank ahead of them under English insolvency law (such as administrator’s costs and HMRC) have been paid in full, the characterization of the charge was crucial for determining whether the secured lenders would recover their secured debt in full. If the charges over the assets were fixed, secured creditors could recover the amount owed to them. If the charges were determined to be floating, HMRC would rank as a preferential creditor with respect to certain taxes due by the insolvent company and would receive a portion of the proceeds from the sale of the assets.

The finance documents in question contained a restriction on the disposal of the relevant assets with certain exceptions, for example an exception allowing the company to dispose of obsolete assets. Exceptions are commonly negotiated in finance documents where certain assets are dealt with by a company in its ordinary course of business or circulating capital (such as inventory).

Two-stage test:

In determining whether the assets in question were subject to a fixed or floating charge, the Judge applied the two stage test set out in Agnew v Commissioners of Inland Revenue[2].

At the first stage, the court must determine the intention of the parties and which rights and obligations were intended to be granted with respect to the relevant assets.[3] At the second stage, the court then determines whether as a matter of law, irrespective of the intention of the parties, the assets are fixed or floating, with this analysis requiring consideration of the degree of control the chargor has over the relevant assets. In this particular case, although there were exceptions to the prohibition on asset disposals, the exceptions were restrictive and did not allow disposal in the ordinary course of business, which would indicate a floating charge. Although disposals were permitted in certain circumstances, the restrictions were strictly limited. In this second stage, there is a clear distinction between assets that form part of a company’s circulating capital and assets that although they form a class (such as, for example, machinery), are not fluctuating. Assets that form part of a company’s circulating capital are more likely to be subject to a floating charge, and assets that do not fluctuate are more likely to be subject to fixed security. The ability of the company to deal with a certain class of assets does not mean these assets are subject to a floating charge – it is a matter of the degree of control that the company can exercise over the relevant assets.

Impact of case:

This case clarifies that a complete prohibition on the ability of a company to dispose of the charged assets is not required for the court to determine the assets are subject to a fixed charge. Any exceptions must be clearly drafted when a chargee is seeking to take fixed security over the relevant assets.

If you have any questions about this post, please contact Drew D. Salvest, Natalie A. Stewart, Rebecca Green any of the attorneys in our Banking and Finance Industry Group or the attorney in the firm with whom you in regular contact.

[1] Re Avanti Communications Limited (in administration) [2023] EWHC 940 (Ch)

[2] Agnew v Commissioners of Inland Revenue [2001] UKPC 28

[3] Re Avanti Communications Limited (in administration) [2023] EWHC 940 (Ch) at [26]

May 26, 2023 by Natalie A. Stewart

FCA Consultation Paper on the Proposed Changes to the UK Listing Rules

By Natalie Stewart and Tobias Clapp

On 3 May 2023, the Financial Conduct Authority (“FCA”) released a Consultation Paper which detailed proposed changes to the Listing Rules for companies listed on the London Stock Exchange Main Market and AIM. The consultation period will run until 28 June 2023. The FCA also intends to publish a further follow-up paper to address the wider changes to the rules later in 2023.

Why are the changes required?

The FCA announced the reform with the aim of streamlining the current listing rules to attract a wider range of companies to list in the UK, to improve choice for potential investors and to encourage competition. The Financial Times reported a 40% drop in UK initial public offering (IPO) listings since 2008, in spite of the government’s efforts to attract more UK listings during the same period.

The decline in UK IPO activity over the past 15 years has been compounded in more recent years as well, with 2022 seeing a £15 billion reduction in equity raised from IPOs from the previous year. It is right that the adverse macroeconomic and geopolitical environment during 2022 directly contributed to the stagnation of UK IPO activity. While many other countries saw a similar trend of a reduction in IPOs, it is clear that the UK saw greater declines than most. More recently, Arm Ltd, a Japanese owned and Cambridge based microchip designer, has indicated it will choose the New York Stock Exchange for its floatation (as opposed to the London Stock Exchange) citing the onerous rules imposed by the FCA as the primary reason for the decision.

What changes are being considered

The most substantive change being proposed is to the listing segments for equity shares in commercial companies. Currently there are two listing segments: the first for standard listings and the second for premium listings. The proposed amendment would combine these two segments into a single segment, thereby harmonising the method of listing for all equity shares in commercial companies. While this proposal would see a slight increase in the regulatory impact on standard listed issuers, it would have a marked decrease on the requirements currently imposed on premium listed companies. This amendment would make the UK system more similar to other jurisdictions such as the USA, who favour a more disclosure-based approach. The FCA has stated that this could lead to greater risk of failure for younger companies and could encourage companies to pursue risker transactions after listing; however, this will be likely offset by the wider benefits of a more diverse range of companies listing in London and greater investment opportunities generally. With more varied types of companies being able to consider floating on the Stock Exchange, investors will benefit from a broader choice of investment options.

In order to facilitate the creation of the new combined listing segment while still maintaining market integrity, the FCA will allow existing issuers to transition from their current listing category into the new combined segment. The FCA has promised to provide sufficient time to prepare and implement these changes to all issuers that require it. The length of time companies will be given to transition has yet to be published.

Following the creation of a combined listing segment, the current sponsorship regime will also be subject to lighter regulation. While a sponsor declaration will still be required for an IPO, the role of a sponsor will be greatly reduced after the IPO is complete. The role of sponsors post IPO will be limited primarily to providing opinions when an issuer wishes to undertake a related party transaction or assisting in relation to significant transactions. This also means that the sponsor’s declaration in relation to significant transactions will no longer be required and will be replaced by a prescribed content requirement, which requires the issuer to provide an announcement to the market instead. These changes are designed to relax the current regime imposed on companies that would have previously been considered a premium listing while not imposing any further burden on companies that would have been considered standard listings, as these companies were already subject to similar obligations under the UK Market Abuse Regulation. Ultimately, the FCA’s goal in reforming the role of sponsors is to ensure consistency of treatment for all commercial companies and therefore safeguarding market integrity through focused high-quality expert advice from sponsors.

As detailed above, issuers listing in the new combined listing segment will be required to adhere to the related party transaction rules. These rules will represent yet another relaxation of requirements on companies that would have previously been categorised as premium listings, as it removes the need for independent shareholder approval and an FCA-approved circular in certain circumstances. Sponsors will however still be required to provide a fairness opinion.

Currently, a company that wishes to undertake an IPO must be able to provide three years of consistent records, a financial statement representing 75% of their business and a clean working capital statement. This requirement will be removed, allowing for more companies to be eligible to list on the London Stock Exchange’s Main Market with the desire that this will attract younger companies in more preferred industries such as technology or companies with non-conventional corporate structures which would have previous been precluded from listing.

The combined listing segment will also require all issuers to provide a FCA-approved circular to obtain a majority shareholder approval (75% or more in this case) at the point of delisting. The consequential loss of transparency that delisting involves for investors investing in companies that would have previously been standard listed companies will now be offset by the mandatory provision of this circular.

Conclusion

The FCA has stated that the decision by any firm to list on a particular market is based on a number of factors such as availability of capital and taxation. The UK has also in the past been considered to have a complex regulatory environment for listing companies on the London Stock Exchange. The changes to these regulations and listing rules above are part of a wider plan to provide more transparency for investors and sponsor oversight to ensure FCA standards are maintained. Further changes to eligibility requirements will encourage early-stage companies to consider an IPO and the removal of mandatory shareholder votes on certain transactions will allow companies pursuing activities such as acquisitions to do so more freely.

If you have any questions about this post, please contact Natalie A. Stewart or any of the attorneys in our Banking and Finance Industry Group with whom you are in regular contact.

May 16, 2023February 3, 2025 by Drew D. Salvest

UK Retail Disclosure Update

Background

The Financial Conduct Authority (“FCA”) is seeking to overhaul the current retail investor disclosure regime that is based on EU rules and is no longer viewed as fit for purpose in the UK.

The FCA published a discussion paper in December 2022 seeking feedback on new disclosure rules to ensure retail investors are able to get clear and useful information, such as the costs involved with investing and investment risk, in order to better facilitate investment decisions.

On 9 December 2022, His Majesty’s Treasury (the “Treasury”) published a consultation paper on the future of retail disclosure in the UK, further indicating the UK’s intention to replace the EU retail disclosure rules with a new regime.

Treasury Consultation Paper on PRIIPs and UK Retail Disclosure

The Treasury’s consultation paper set out the government’s intentions to repeal the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation (“PRIIPs Regulation”) as it is not “fit for purpose” and sought views on a new framework to replace it.

The PRIIPs Regulation was introduced in 2018 in the EU with the goal of providing retailers with a standardised single document that they could use to compare packaged retail investment products or “PRIIPs” in the EU retail market.

The PRIIPs Regulation requires PRIIP manufacturers to produce a “Key Information Document” (KID) and to publish this KID on their website. Anyone advising a retail investor on a PRIIP or selling a PRIIP to a retail investor must provide the investor with this KID before any transaction is concluded. Financial services firms have raised issues with the highly prescriptive format of the KID and how this reduces flexibility in communicating with clients. Many firms provide their own “fact sheets” in addition to the KID, leading to non-standardised documents being provided to clients which can be confusing for investors and a burden for firms. The Treasury is of the view retail investors should receive disclosure information in a standardized format that can be tailored by firms, something that is not currently permitted by the PRIIPs Regulation.

Another issue raised in the paper is the impact of the PRIIPs Regulation on investment products created in other jurisdictions and the cost of compliance and liability risks. The Treasury outlines that these costs can dissuade firms from making these products available to retail investors in the UK. An example provided in the paper is that following the introduction of the PRIIPs Regulation, many firms did not produce a KID for their corporate bonds due to the extra cost and possible liability risk. This led to fewer corporate bond products being available for purchase by retail investors. The Treasury is seeking to improve accessibility as the requirement to produce a KID has restricted choice for retail investors.

The paper sets out the government’s intentions to revoke the PRIIPs Regulation and to remove the Undertaking for Collective Investment in Transferable Securities (UCITS) disclosure requirements so that the FCA will become responsible for establishing a future retail disclosure regime. As set out in the paper, the Treasury do not intend to keep any PRIIPs or UCITS disclosure requirements in legislation but rather intend for future disclosure requirements to be included in the FCA Handbook.

FCA Future Disclosure Framework Discussion Paper:

The PRIIPs Regulation will be repealed by the Financial Services and Markets Bill (the “FSM Bill”), which is currently before Parliament and likely to become law in 2023. Rules relating to retail disclosure are currently set out in various legislation and FCA rules, resulting in a complex regulatory landscape. The FSM Bill repeals retained EU law in financial services, including the PRIIPs legislation and the UCITS disclosure requirements.

Under the new UK regime, the responsibility for regulatory oversight and development of future retail disclosure rules will become a matter for the FCA. The FCA will determine the format and presentation requirements for disclosure and regulatory requirements related to retail disclosure will be maintained in FCA rules rather than in legislation. The FCA will be tasked with integrating UCITS and PRIIPs disclosure into a clear UK retail disclosure framework before the 2026 exemption end date.

The FCA published the discussion paper “Future Disclosure Framework” as a first step in developing a new regulatory retail investment framework. The FCA sought feedback from financial services firms and consumers to create a disclosure regime that applies to all retail products including UCITS, PRIIPs, non-PRIIPs packaged products and some NURS.

It is noted by the FCA that the disclosure regulations were designed with paper-based disclosure in mind rather than digital disclosure and given the trend in online investment, feedback was sought on the delivery, presentation and content of retail disclosure. The FCA notes that “for example, most firms provide disclosure as a single PDF prior to the point of sale. Research suggests consumers do not engage with disclosure when it is provided this way.” Providing information to retail consumers in the right format is a priority for the FCA to support consumer choice.

Final Remarks:

Following Brexit, the UK has signaled a clear intention to repeal retained EU law in retail disclosure and create clear detail disclosure rules regulated by the FCA, rather than the patchwork of regulations and laws that currently exists. The priority of both the Treasury and FCA has been made clear – to adapt to the digital age and allow financial services firms to be more flexible, while still operating within a standardized framework.

August 26, 2022 by Natalie A. Stewart

The UK Recovery Loan Scheme

The British Business Bank’s (“BBB”) Coronavirus Business Interruption Loan Scheme (“CBILS”) was first introduced in April 2021. The new iteration of the Scheme, the Recovery Loan Scheme (“RLS”) launched in August 2022 and will run until 2024.

Following on from our previous article regarding the CBILS, our follow-up article provides updated guidance regarding the new iteration of the Scheme, and examines the amendments that have been made to the Scheme.

Background

The RLS is a government-backed scheme aimed at supporting access to finance for businesses in the United Kingdom, operated by the BBB on behalf of the Secretary of State for Business, Energy & Industrial Strategy. The Scheme’s accredited lenders provide support by means of either a loan, overdraft, invoice finance facility or asset finance facility[1]. The Scheme’s aim is to provide financial aid to businesses that have been affected by Covid-19. The loan can be used for any legitimate business purposes, such as managing cashflow, investment and growth. The eligibility criteria for availing of the Scheme remains the same: small and medium businesses with an annual turnover of up to £45 million. Previously, the CBILS required that the borrower must confirm that it has been negatively impacted by Covid-19.

New Developments

As an update to the previous Scheme, the Covid impact criterion is absent in the new iteration of the Scheme. In the eligibility section of the BBB’s website, it states that there is “No Covid-19 impact test required: Unlike the previous iteration of the scheme, for most borrowers, there is no requirement to confirm they have been affected by Covid-19”^[2]. It is unknown whether the absence of the requirement is in direct response to market feedback on the CBILS, however, the lack of the impact requirement is likely due to the ongoing effect that the pandemic has had on the economy, as observed through the ongoing supply chain issues and the cost of living crisis.

Previously, the Scheme supported loans of up £10 million for individual businesses and £30 million across a group, and also provided accredited lenders with a government-backed guarantee of 80 per cent on losses that may arise on facilities of up to £10 million. By contrast, the new iteration will support lending of up to £2 million for borrowers outside the scope of the Northern Ireland Protocol. Borrowers within the scope of the Northern Ireland Protocol may apply for lending of up to approximately £1 million, (subject to aid limit restrictions), and will provide the lender with a 70 per cent government-backed guarantee[3].

The BBB states that businesses that took out a previous CBILS facility before 30 June 2022 are not prevented from accessing the new iteration of the Scheme[4]. However, there is a possibility that businesses may not be eligible to receive the maximum amount.

The BBB also states that the term loans and asset finance facilities are available from three months up to six years, with overdrafts and invoice finance available from three months up to three years[5].

Lenders in the Scheme and the Application Process

When considering a prospective lender, the BBB’s website offers two filter options: ‘Filter by Financial Variant’ and ‘Filter by Region’. The current list of accredited lenders is detailed below:

The new iteration’s list of accredited lenders is short in comparison to the previous list affiliated with the RLS (but does include RBS, HSBC, Lloyds Bank and Natwest among others) and availability varies by region. However, it is likely that the list of accredited lenders will expand over time.

Under RLS, lenders are required to undertake their standard credit, fraud, Anti-Money Laundering (AML) and Know Your Customer (KYC) checks for all applicants[6]. Once an application has been submitted to an accredited lender, the lender will determine whether they can offer a commercial facility on better terms than the RLS facility. If they are able to offer better terms, they will do so. Otherwise, the lender, at their discretion, may elect to use the RLS to support an application. If one’s application with a lender is rejected, a borrower is not prohibited from applying to other RLS-accredited lenders.

For More Information

If you have any questions about this blog, please contact Drew D. Salvest, Natalie A. Stewart, Rebecca Green, Helen Ryan, any of the attorneys in our Banking and Finance Industry Group or the attorney in the firm with whom you are in regular contact.

[1] https://www.ukfinance.org.uk/covid-19/business-support/recovery-loan-scheme-qa-businesses

[2] https://www.british-business-bank.co.uk/ourpartners/recovery-loan-scheme/for-businesses/

[3] https://www.british-business-bank.co.uk/ourpartners/recovery-loan-scheme/for-businesses/

[4] https://www.british-business-bank.co.uk/ourpartners/recovery-loan-scheme/

[5] https://www.british-business-bank.co.uk/ourpartners/recovery-loan-scheme/

[6] https://blogs.duanemorris.com/london/2020/03/31/new-covid-19-uk-government-financing-options-available/

December 2, 2021 by Natalie A. Stewart

LIBOR Transition: Feedback from FCA Consultation on Synthetic LIBOR

Further to our recent blog post on synthetic LIBOR, the Financial Conduct Authority (the “FCA”) has published its feedback statement on its consultation regarding the legacy use of 1, 3 and 6 month sterling LIBOR from 1 January 2022. The feedback consisted of 36 responses from market participants, with the majority of respondents agreeing with all aspects of the FCA’s proposals. The FCA has confirmed that it will permit legacy use of synthetic Sterling LIBOR by supervised entities, aside from cleared derivatives.

The FCA confirmed that one, three and six-month synthetic Sterling LIBOR will be calculated as the sum of the applicable one, three or six-month Term SONIA Reference Rates provided by IBA and the fixed spread adjustment applicable as part of the ISDA IBOR fallback for one, three or six-month Sterling LIBOR, which is published for the purposes of the ISDA IBOR Fallbacks Supplement and Protocol. IBA will be required to continue publishing synthetic Sterling LIBOR for all applicable London business days, except London public holidays.

It is of note that some market participants queried the use of forward-looking term RFR as a component for synthetic LIBOR, suggesting the use of RFRs “in-arrears” instead in order to align with ISDA fallbacks. The FCA’s response to this suggestion was that RFRs “in-arrears” are not suitable for contracts which require the interest rate to be identified up-front, and as such contracts are not realistically able to be amended to work using RFRs “in-arrears”, the use of such rates in the calculation of synthetic LIBOR could have the potential to cause market disruption.

Duane Morris’ LIBOR Transition Team: Roger S. Chari, Chair, Joel N. Ephross, Amelia (Amy) H. Huskins, Phuong (Michelle) Ngo and Natalie A. Stewart.

November 11, 2021 by Natalie A. Stewart

LIBOR Transition: Synthetic Sterling LIBOR for limited tough legacy loans

As the cessation of LIBOR panels draws closer, the Financial Conduct Authority (the “FCA”) has been looking at ways to mitigate market disruption in respect of tough legacy loans which link to LIBOR but expire after LIBOR is discontinued. As a result, the FCA will require ICE Benchmark Administration to publish a synthetic Sterling LIBOR for the duration of 2022.

Despite at first instance appearing to be a solution for products which have yet to be amended for the cessation of LIBOR, synthetic LIBOR is only intended to be used for certain tough legacy contracts. To learn more about how synthetic LIBOR will work in practice and the legacy contracts which are likely to be able to utilize synthetic LIBOR, check out our Alert here.

Duane Morris’ LIBOR Transition Team: Roger S. Chari, Chair, Joel N. Ephross, Amelia (Amy) H. Huskins, Phuong (Michelle) Ngo and Natalie A. Stewart.