ANALYSIS: The leisure sector has grown at a remarkable pace over the last few years and there have been a number of high profile insolvencies.
A weakening of the UK pound has increased the costs travel businesses face, while demand has fallen dramatically due to geopolitical risks such as war, terrorism and disease. Combined with the impact of a very seasonal trade, management teams within the travel industry have been forced to consider carefully their ability to continue to trade in such difficult and sector-specific circumstances. The sector is burdened with sector-specific regulation which can make any insolvency process slower and more difficult than in other industries, so insolvency practitioners should be aware of the challenges the holiday sector faces.
Trading on customer deposits
A travel company's cash flow is largely funded by customer deposits. The law on how to deal with customers' money when a company is in financial difficulties is well established. The leading case around customer deposits is not related to the leisure industry, but sets out when it is permissible for a business to use pre payments as a source of working capital, where debt or equity funding is unavailable owing to its financial position.
As decided in a 2004 case involving Re Uno, where directors continue to trade using customer deposits on the basis that they reasonably believe that they will find a solution to the financial difficulties, such as through substantial investment or a sale, but in the meantime continually review their financial position, obtain specialist advice and act on it, they are likely to be protected from disqualification under UK law.
Using trusts for customers' money
A widely-used way to limit the risks associated with trading using customer deposits is to hold it in a trust account, separate from the company's working capital. This will not, however, resolve an underlying cash flow issue that threatens to cause an immediate and unplanned closure of the business. There have also been issues with relying on a trust in these situations and also the risk that the trust account is deemed to be a voidable preference where monies are received and a trust is subsequently declared.
Sector regulation: the requirements on insolvency
Travel companies face greater consumer protection regulations than most other sectors because of the past collapse of travel companies which have left hundreds of thousands of travellers stranded abroad.
Travel businesses are largely regulated by the Civil Aviation Authority (CAA), Air Traffic Organisers' Licence (ATOL) and the Association of British Travel Agents (ABTA).
The CAA is the statutory corporation which oversees and regulates all aspects of civil aviation in the UK. The CAA runs the ATOL holiday financial protection scheme.
ATOL is a CAA scheme that protects customers who have purchased a flight or package holiday from a tour operator. Regulation 9 of the Civil Aviation (Air Travel Organisers' Licence) Regulations 2012 provides that all travel companies selling air holiday packages and flights in the UK are required to hold an ATOL, which is granted to the company and meets the CAA's licensing requirements.
If an ATOL holder fails, claims for refunds or repatriation costs of customers are met by the Air Travel Trust, which is funded by the ATOL Protection Contributions (APC) and ultimately backed by government guarantee.
ABTA is the UK's largest trade association for travel agents and tour operators. Members must satisfy the board of directors of ABTA that there is a bond, guarantee or such other security in place in such form and for such amount as is acceptable for the protection of monies taken by the member for the provision of travel arrangements.
Regulation on insolvency
ATOL standard terms provide that if the ATOL holder, ATOL holder's group or its directors or officers seeks, or is advised to seek, advice from an insolvency practitioner or any other person relating to the company's financial position or ability to continue to trade, the ATOL holder must inform the CAA within three working days.
ATOL holders must also inform the CAA at least 10 working days in advance of any change to financing arrangements of the ATOL holder or the ATOL holder's group with banks or other financial institutions.
The time limits are specific and short. Failure to comply may result in the CAA revoking, suspending or varying an ATOL. Such an event would result in the business immediately ceasing to trade given its inability to trade without a licence.
There is no requirement to notify ABTA where a company has been advised to take or is taking advice from an insolvency practitioner. The ABTA board, however, can terminate an ABTA membership if it is satisfied that the company is insolvent or if it fails to comply with its reporting requirements.
Regulation in practice
The power of a regulatory body in this sector should not be underestimated. However, past cases have demonstrated that the CAA will refrain from revoking an ATOL, or ABTA will maintain a membership, whilst a financial solution is pursued provided that a more positive result can be achieved.
Prior to its ultimate collapse in October 2017, it was widely reported in August 2016 that the CAA had agreed to extend Monarch Airline's ATOL after it was able to prove by the deadline set by the CAA that it had sufficient funds adequately to discharge its obligations. Further, in the recent administration of All Leisure Holidays, a travel and tour operating company, the CAA worked with the company and its advisers collaboratively until such time as a pre-pack sale was completed and a new licence was granted to the purchaser.
In complex cases such as All Leisure, where Pinsent Masons acted for the board of directors, a collaborative arrangement with key sector regulators is often the best option available to a distressed company. We will consider further below how this may impact on a restructuring and sale process.
Structuring a sale: key differences
Where an insolvent sale is pursued in the leisure industry, it is imperative to involve regulators and licensing bodies in the sale process from an early stage. The CAA will vet any proposed purchaser to decide whether to grant a new ATOL which will allow the purchaser to continue the business. This may result in limiting the pool of potential purchasers and creating a slower sale process than IPs are perhaps used to in other sectors. Where there are other regulators, such as the Financial Conduct Authority, this could further slow the process and increase costs.
The CAA will oversee the sale negotiations requiring that certain provisions are included in the sale agreement regarding advance customer bookings, it will require a purchaser to honour these, and will be present at the completion meeting itself formally to grant the purchaser's ATOL. The sale agreement should also require that up to date information is provided regularly following completion to confirm which liabilities the purchaser has discharged, in order for the IP to reduce the creditor claims in the insolvency.
Repatriation of passengers
The timing of an appointment is key to avoid a chaotic and disruptive close down. The appointment over Monarch Airlines for example, took place at 4:00am as this was the only time when all aircraft were on the ground. As difficult as it may be, IPs should identify key dates in the calendar that may create a more orderly passenger repatriation process which in turn will reduce creditor claims and limit bad press. The regulator will undertake a practical role confirming travel and where necessary, chartering flights to guarantee the safe return of passengers but where possible, reliance on such parties should be limited.
Identifying where key assets are or will be located on the date of appointment will have been undertaken prior to appointment. This should also include an analysis of the extent to which the asset is at risk on appointment, for example, whether a creditor can arrest, detain or exercise any other right over the asset, and whether it will be located in a jurisdiction which is "sympathetic" to UK insolvency law, particularly if the asset is located outside the EU.
An arrested or detained asset will inevitably frustrate any sale process, require time and fees to secure a release and in the meantime, the asset is likely to decrease in value. Action to protect assets should be identified and taken quickly. IPs will need to consider how to protect assets abroad and obtain recognition in a jurisdiction outside the EU.
UNCITRAL Model Law
Where insolvency proceedings fall outside the EU, the UNCITRAL Model Law on Cross-Border Insolvency may apply if it or similar provisions have been enacted locally. UNCITRAL Model Law, which does not have automatic effect, was adopted in the UK by the Cross-Border Insolvency Regulations 2006 (SI 2006/1030) (CBIR).
UNCITRAL Model Law aims to promote recognition and assistance on cross-border insolvencies and to create co-operation and co-ordination.
The CBIR applies in a range of circumstances, including when assistance is sought in a foreign jurisdiction in connection with an appointment under UK insolvency law. This is known as an "outbound request" and the CBIR governs the application process.
Applications by officeholders appointed in the UK to take any action in a foreign state must comply with the enacting law of the relevant foreign state where they intend to act. Authorities in a foreign state are not, however, obliged to recognise the IP's appointment and the scope of any recognition order granted will ultimately depend on the law of that particular state. Further barriers may arise if the relevant jurisdiction in which the assets are located has not adopted UNCITRAL Model Law.
Recognition in foreign states
Where UNCITRAL Model Law does not apply and no similar legislation has been enacted there may not be a basis on which the relevant country can provide assistance to a foreign court in an insolvency matter and it may not be able to apply its own laws or the law of the requesting country.
Many countries, however, have enacted local laws and take a pragmatic approach to cross-border insolvency issues. Others may recognise foreign insolvency proceedings on an ad hoc and case by case basis. An ad hoc approach to considering recognition orders can create uncertainty in the likelihood of successfully obtaining an order and in predicting what conditions or undertakings might be required by the particular court hearing the application.
A further consideration on making an application for recognition is what order the insolvency practitioners seek to achieve their purpose and, realistically speaking, what order the officeholders are likely to be granted in the relevant jurisdiction and given the particular circumstances of the case. If the underlying purpose is protection of an asset by way of a moratorium, any order granted will ultimately reflect the way in which the relevant court has approached recognition orders in the past.
Order of priority
Insolvency law is, on the whole, a prescriptive and well established area of law. Certain areas of technical law, such as aviation and maritime law can, however, complicate matters by interacting with the Insolvency Act 1986 and the Insolvency (England and Wales) Rules 2016 and in some cases, can alter it so that it appears to be re-written. For example, maritime law subverts the usual order of priority and introduces the principle of sister-ship claims which essentially links creditors from one asset and awards them rights of enforcement against another where vessels are owned or chartered by the same entity.
A previously unsecured creditor is elevated to secured interest status where it issues an in rem claim against a vessel, as opposed to a claim against its registered owners, in England prior to appointment. This is, however, the position under English law – in rem actions are a matter of local law.
When dealing with such actions, it may well be necessary to apply to court to confirm whether payment should be made to a particular creditor, although IPs should remain cautious of this approach so as to not surrender their discretion by applying for directions.
Intellectual property is a further area of technical law which is likely to be of relevance in a leisure sector insolvency. IPs should take all steps available to protect themselves as potential data controllers and data processors, given the more stringent sanctions coming into force in May 2018.
In All Leisure Holidays Ltd (in Administration)  EWHC 870 (Ch) the court took a pragmatic approach in granting permission to limit disclosure in the statement of affairs in an application by the administrators. The administrators submitted that it would prejudice the conduct of the administration if a full statement of affairs were filed containing the names, addresses and debts of all customers. It was also tabled that disclosure would breach the Data Protection Act 1998.
Judge Purle dismissed the data protection concerns, given the exemption under section 35 of the Data Protection Act 1998 which provides that disclosure is required under "any enactment". However, given the "commercial sensitivity" of the information the order for limited disclosure was justified and granted. This is a commercial and pragmatic decision of the court and reassurance for practitioners seeking to protect a valuable asset such as data.
The leisure sector is currently in the forefront of the insolvency world. One of the most interesting developments arising from the Monarch Airlines administration was the sale by the administrators of certain of the airline's take off and landing slots it considered itself entitled to be allocated by Airport Coordination Limited. On 22 November 2017, the Court of Appeal overturned the decision of the High Court in deciding that the airline was entitled to be allocated future slots despite being in administration which, as an asset, it could sell to recoup sums for its secured creditors. The slots in dispute were reportedly worth £60 million, and it is possible that regulation may be enacted to address this issue with certainty.
The collapse of Monarch also led the UK chancellor to announce an independent review into consumer protection in the event of airline or travel company failure in his last budget.
Insolvency practitioners involved with a distressed business in the leisure sector should:
- encourage specialist legal advice where customer deposits are being relied upon to trade.
- engage with key regulators as early as possible and identify their likely involvement in the insolvency process.
- review the location of assets on appointment and assess if this is a sympathetic foreign jurisdiction.
- Identify any foreign or technical law that may apply and which could impact on the operation of the Insolvency Act 1986 and Insolvency (England and Wales) Rules 2016.