Third party release – An essential element of insolvency rescue?

Over time that equal treatment principle has been modified for policy reasons born of economic considerations: the introduction of statutory priorities, the recognition of priorities within priorities, and, to take an obvious example, the preservation of certain security rights. The concept of third party release can be said to be a development of just such a kind, originating and taking its most obvious form in the binding of minority creditors in the wider interest.

Perhaps the earliest example of contractual release in modern insolvency law was the deed of arrangement,_[1] an alternative to bankruptcy. Approval of a deed of arrangement, which was essentially a contract, required the consent of a simple majority of creditors in number and value._[2] There were a number of difficulties attendant on entering into a deed of arrangement which meant that it was a poor instrument of debtor rehabilitation; but those difficulties did not generally stem from the ability of a majority to bind a minority, thereby imposing what might be viewed as a form of involuntary release.

The introduction of voluntary arrangements (both for companies and individuals)_[3] in the Insolvency Act 1985 represented a great leap forward. These were introduced  as a result of proposals made in 1982 by the Report of the Review Committee on Insolvency Law and Practice (Cmnd 8558), generally known as the “Cork Report,” which made a number of significant recommendations for the reform of UK insolvency law. Whilst the individual voluntary arrangement (IVA)_[4] originally required an application to the court for an interim order_[5], the company voluntary arrangement (CVA)_[6] did not. Both processes do, however, require the involvement of a licensed insolvency practitioner, initially called the nominee and, after approval, the supervisor (although the two do not have to be the same person).  For present purposes, however, what is important is the introduction of the concept of what became known as “statutory binding,” derived from provisions in the Insolvency Act stating that the effect of approval of the proposed arrangement with or without modifications by a 75% majority) was to bind every person entitled to vote as if they were a party to the arrangement._[7] (Note, however, the decision of the Court of Appeal in Johnson v Davies_[8] in which it held that the IVA did not release co-debtors) and the various “guarantee stripping” CVA cases, such as Mourant & Co. Trustees Ltd v Sixty UK Limited ,_[9] in which the courts revoked the approval of CVAs which did not adequately compensate landlords for the loss of parent company guarantees.

Both CVAs and IVAs have made a considerable contribution to restructuring and rehabilitation since they were introduced in 1986 and as they have subsequently developed, this in spite of the fact that the perceived abuse of IVAs (in particular in the form of bulk provision by IVA factories of what was intended to be a bespoke product) and the effectiveness or otherwise of CVAs have been the subject of considerable research and debate. Alongside their development, however, the English and Welsh law scheme of arrangement has flourished_[10].

The origins of schemes can be traced to the Companies Act 1862, but developed through the Companies Act 1985 to the Companies Act 2006 of today_[11].

The provisions of Part 26 Companies Act 2006 apply where a compromise or arrangement is proposed between a company and its creditors, or any class of them, or its members, or any class of them._[12] An “arrangement” includes a reorganisation of the company’s share capital by the consolidation of shares of different classes or by the division of shares into shares of different classes, or by both of those methods; and “company” includes a company within the meaning of the Act and any company liable to be wound up under the Insolvency Act (or its Northern Ireland equivalent). The court is involved at two stages in the process: the first at which it considers whether to approve the convening of a meeting or (where there is more than one class) meetings of creditors; the second at which it decides whether or not to sanction the scheme. A scheme requires approval by at least 75% in value of each class of the members or creditors who vote on it who must also be a majority in number of each class.

The development of modern schemes owes much to the courts, which have enabled schemes to be used creatively and flexibly._[13] Recent years have seen their widespread use, both freestanding or in conjunction with other restructuring tools, and increasingly often for complex international restructurings.

It is important also to note the comparatively recent appearance on the scene of the restructuring plan_[14] for companies in financial difficulty. Closely allied to the Part 26 scheme of arrangement, and governed by a similar procedure, it is for use only by companies facing or likely to find themselves facing financial difficulties. It also differs from a Part 26 scheme in that voting is by reference only to the value of  creditors’ debt or members’ shares (a 75% vote in favour is required), not to number; and a dissenting class of creditors can be bound (“by what is sometimes called “cross-class cram down” but is simply another form of statutory binding) if the court is satisfied that none of the members of the dissenting class would be worse off than under a relevant alternative; and at least 75% by value of a class of creditors or members, which would receive a payment or have a genuine economic interest if the relevant alternative were pursued, had still voted in favour of the plan.

The flexibility of a scheme of arrangement includes the possibility of provision for a third party release;_[15] indeed the need for such a release is often integral to the success of the scheme. Release is commonly provided contractually and may take a number of forms (e.g. an agreement between and among the creditors themselves or instruments such as “entitlement letters” or “account holder letters”). Release may also come in the form of releasing third parties from liability to scheme creditors in connection with the restructuring. A well known example of a case involving the release of third party liabilities is Re T&N Ltd,_[16] a scheme proposed by administrators which aimed, among other things, to deal with complex claims arising out of asbestos related personal injury liabilities. Whilst that case was firmly rooted in the English/Welsh jurisdiction, Re La Seda de Barcelona_[17]concerned a scheme by a Spanish parent corporation which included the release of a company from its liabilities as guarantor, even though it was not a party to the scheme, because the terms of release resulted in the requisite element of “give and take”._[18]

Subject to the usual policy considerations, there would appear to be no reason why an English court would not recognise the foreign equivalent of a scheme providing for a third party release. Whether a foreign court will recognise a release provided for by a scheme sanctioned by an English court is necessarily a matter of the law of the foreign jurisdiction. A positive example of a US court doing so is In re Avanti Communs. Grp., PLC_[19] in which the court granted recognition of a UK scheme with third party releases which did not receive full creditor consent._[20] Whether a scheme is likely to be recognised in other jurisdictions may be a critical consideration for the exercise of the court’s discretion in relation to a scheme (as to which see Re DTEK Energy BV [2021] EWHC 1551 (Ch), a case in which the schemes in issue provided for the cancellation of a series of New York law governed notes, the discharge of certain  bank facility debts and the release of attendant guarantee and suretyship obligations).

But third party release is not to be taken for granted in the US. In In re Vitro SAB de CV,_[21]  the court declined to grant a third party release in a Chapter 15 case, although the reasoning in that case rested very much on what was considered to be “insider-creditor voting.”_[22] More recently in June 2024 in the much publicised case of Harrington v Purdue Pharma LP_[23] the court held that the Bankruptcy Code did not allow as part of a plan of reorganisation under Chapter 11 a release that purported to discharge claims against a non-debtor without the consent of affected claimants, rejecting the argument that s 1123(b)(6) of the Code gave the bankruptcy court the “power to discharge the debts of a non-debtor without the consent of affected non-debtor claimants” and that the history of bankruptcy law provided no support for any proposition to the contrary:

“[A] bankruptcy court’s powers are not limitless and do not endow it with the power to extinguish without their consent claims held by non-debtors (here, the opioid victims) against other non-debtors (here, the Sacklers),” said Justice Gorsuch, giving the majority opinion of the court.

In a dissenting judgment, Justice Kavanaugh (with whom the Chief Justice, Justice Sotomayor and Justice Kagan joined) said:

“Today’s decision is wrong on the law and devastating for more than 100,000 opioid victims and their families. The Court’s decision rewrites the text of the U. S. Bankruptcy Code and restricts the long-established authority of bankruptcy courts.”

But he also accepted:

“A non-debtor release must be ‘appropriate’ given all of the facts and circumstances of the case. And as the history of non-debtor releases illustrates, the appropriateness requirement confines the use of non-debtor releases to narrow and relatively rare circumstances where the releases are necessary to help victims and creditors achieve fair and equitable recovery.”

The Supreme Court’s decision caused some consternation in professional insolvency circles. Whilst it makes clear that non-consensual third party releases are not possible (at least under Chapter 11), it leaves open the position as to consensual third party releases, which, it seems, are likely to remain enforceable, although what constitutes “consent” might be open to argument.

The unsettled position in US bankruptcy law contrasts with the largely settled practice of the English and Welsh courts, which is similar in a number of other common law jurisdictions.

Third party release is recognised as a feature of the Irish scheme of arrangement,_[24] and schemes providing for it have been sanctioned in a number of cases._[25] In In re Ballantyne plc the Irish Court drew on Australian authority, specifically Re Opes Prime Stockbroking Ltd,_[26] which drew on the rights affected and the relationship between the company and the creditors concerned._[27] Among a host of examples, one might usefully note further Australian cases such as Lehman Brothers Australia Limited (in liquidation) (No 2,)_[28] Wingecarribee Shire Council v Lehman Brothers Australia Ltd (In Liq) (No 9),_[29] Hall v Slater and Gordon Ltd_[30] and Re Ovato Print Pty Ltd._[31]In Singapore too there appears to be a degree of judicial support for third party release as a feature of creditors’ schemes. The Singapore Court of Appeal recognised the practical attraction of what has become known as “the nexus test” in Pathfinder Strategic Credit LP v Empire Capital Resources Pte Ltd_[32]although the scheme ultimately failed. In Re Unity Group Holdings International Ltd_[33] the Hong Kong court sanctioned a scheme of arrangement incorporating releases of debts of third party obligors guaranteed by the scheme company without requiring a deed of contribution in accordance with previous practice.

Plainly the provision in a scheme or restructuring plan for third party release is not without its difficulties and remains a matter of controversy, albeit more so in some jurisdictions (notably the USA) than in others with closer historical connections with the UK. Those difficulties appear, however, to be rooted in very specific matters of interpretation and tradition (as in Harrington v Purdue) rather than wider considerations. The general drift in the direction of acceptance of third party release is plain.

Third party release may be straightforward (as it often is in the case of creditors relinquishing guarantee and co-obligor rights for good commercial reasons). It may be argued that depriving a creditor of precisely the steps it has taken to secure its lending as best it can by recourse to the assumption by third parties of a voluntary obligation is inherently unfair, but that may equally be seen as no more than the melancholy consequence of financial failure in which all must take less than they might have expected had all gone well. Third party release may be less straightforward in complex international restructurings (where it might come up against a wall of policy) and even more so in cases aiming to compromise class actions or mass tort litigation of the kind prevalent in the USA to which non-commercial considerations may play a part. Parties to a class action or victims of serious tort claims are not always concerned solely with recovering damages: they are often seeking the truth of what went on, public vindication of their claims or some altruistic outcome that a restructuring process is not equipped to provide. In such a context, third party release may take on the appearance of unfairness. From the more commercial standpoint of the restructuring specialist, however, such concern takes second place to imperatives such as the survival of the business in whole or in part or in perhaps in some new form, the preservation of jobs and similar commercial or economic considerations. Concepts of fairness are honoured in the drafting of the scheme or plan in question, the need carefully and fairly to define the creditor classes for voting purposes, and the desirability of reaching consensus without controversy or challenge at the convening or sanction stages. Fairness is underpinned by the role of the court at each of those stages, although again the court is largely concerned with commercial rather than any wider form of fairness. But those are policy considerations for legislators; they are not for the courts.

Against that background, the concept of third party release is likely to continue to develop positively in support of corporate rescue, and that is something that insolvency and restructuring professionals should continue to promote.

[1] Introduced by the Deeds of Arrangement Act 1887, more recently provided for by the Deeds of Arrangement Act 1914 and  and the Deeds of Arrangement Rules 1925, amended by the Administration of Justice Act 1925 and the Insolvency Acts 1985 and 1986. The Deeds of Arrangement legislation was repealed in 2015.

[2] Deeds of Arrangement Act 1914 s 3(1).

[3] See, as to company voluntary arrangements, Andrew Keay and Peter Walton, Company Voluntary Arrangements: Law and Practice (Edward Elgar, 2025) and, as to individual voluntary arrangements, Alaric Watson, Individual Voluntary Arrangements (Edward Elgar, 2022).

[4] Now governed by Part VIII of the Second Group of Parts of the Insolvency Act 1986 and (previously) by the relevant provisions of the Insolvency Rules 1986, and currently by the Insolvency (England and Wales) Rules 2016.

[5] This is no longer the case.

[6] Governed by Chapter I of the First Group of Parts.

[7] Insolvency Act 1986 s 5(2) (for CVAs); s 260(2) (IVAs). For early discussion of the concept of statutory binding see R A Securities Ltd v Mercantile Credit Co Ltd [1995] 3 All ER 581 and Davis v Martin-Sklan [1995] 2 BCLC 483.

[8] [1998] BPIR 607.

[9] [2010] EWHC 1890 (Ch)

[10] See generally, as to schemes of arrangement and restructuring plans Pilkington on Creditor Schemes of Arrangement and Restructuring Plans (3^rd edn) (Sweet & Maxwell, 2022).

[11] Companies Act 2006 Part 26.

[12] Schemes are thus often described as being creditor schemes or shareholder schemes. Only the former are considered here.

[13] Part 26 contains just seven sections (ss 895-901). These are supplemented by the Practice Statement (Companies: Schemes of Arrangement) [2002] 1 WLR 1345; but the light touch statutory and other regulation of the regime has almost certainly contributed substantially to the ability of schemes to accommodate a wide range of situations requiring restructuring of one form or another.

[14] Introduced as Part 26A Companies Act 2006 by the Corporate Insolvency and Governance Act 2020.

[15] I.e. a release taking the form of a total or partial discharge or variation of a claim against a third party, such as a co-obligor, guarantor or collateral provider of a principal debtor.

[16] [2006] EWHC 1447 (Ch).

[17] [2010] EWHC 1364 (Ch).

[18] Following Re T&N Ltd supra.

[19] No. 18-10458, 2018 Bankr. LEXIS 1078 (Bankr. S.D.N.Y. Apr. 9, 2018).

[20] For a fuller account of the case see Daniel A. Lowenthal, Chapter 15: US Court Respects UK Scheme of Arrangement: Third-Party Releases Enforced (https://www.pbwt.com/bankruptcy-update-blog/chapter-15-us-court-respects-uk-scheme-of-arrangement-third-party-releases-enforced) 5 June 2018.

[21] 701 F.3d 1031 (5th Cir. 2012).

[22] For discussion of the case see Maurizio Anglani, In re Vitro Fifth Circuit Declines to Enforce Mexican Plan of Reorganization and Crafts New Framework for Foreign Debtor Relief (https://www.abi.org/member-resources/blog/in-re-vitro-fifth-circuit-declines-to-enforce-mexican-plan-of reorganization)

[23] 603 U.S. 204 (2024).

[24] Governed by  the Companies Act 2014 Part 9.

[25] See, for example, In re Ballantyne plc [2019] IEHC 407, In re Nordic Aviation Capital DAC [2020] IEHC 445, In re EFE 21 Renewable Energy Limited [2023] IEHC 690 and In re Arctic Aviation DAC & Ors [2021] IEHC 272

[26] (2009) 258 ALR and (on appeal) (2009) 259 ALR 298.

[27] As to the relevant Australian law see the Corporations Act 2001 Part 5.1.

[28] [2013] FCA 965.

[29] [2013] FCA 1350.

[30] [2018] FCA 2071.

[31] [2020] NSWSC 1882.

[32] [2019] 2 SLR 77 (CA).

[33] [2022] HKCFI 3419.

Meet the team:

1. 

   • Robert Paterson

   • Partner
   • Insolvency & Restructuring

   Visit Robert's profile

View the whole team