The National Security and Investment Act 2021 creates a new screening regime for transactions which might raise national security concerns in the UK. It passed into law on 29 April 2021 and is expected to come into effect by autumn 2021.
However, as the Act has retrospective effect from November 2020, insolvency practitioners need to understand the implications for insolvency sales taking place now. We have summarised the headline issues for insolvency practitioners below.
The Act establishes a new regime for the scrutiny of and intervention in acquisitions and investments in order to protect national security. It relates specifically to transactions involving 17 “sensitive” sectors – which trigger a mandatory notification to the Secretary of State – and also more generally to any transaction that may fall outside of these sectors but still raises national security concerns. A link to those 17 sectors are detailed in the 'next steps' section of this update.
The regime is expected to come into effect in autumn 2021, but the UK Government will be able to look back at relevant transactions that have taken place since 11 November 2020.
There is no exemption for sales of the business or assets of a company in an insolvency process. If the assets being sold and the transaction being contemplated both qualify for the purposes of the Act, then until further guidance or case law is forthcoming on insolvency sales, a voluntary notification will be advisable to prevent the transaction being subsequently “called in”.
The Secretary of State has emphasised that they do “not ordinarily expect national security risks to arise from the routine provision of goods or services between businesses” and that “asset acquisitions made by an individual for purposes that are wholly or mainly outside the individual’s trade, business or craft are (with the exception of land and some items on the export control list) not within scope of the regime”. However until a course of dealing is established, voluntary notifications are advised.
Of course, if one of the assets being sold is shares or voting rights in a “qualifying entity”, the notification regime becomes mandatory in nature (see more below).
If the transaction is intended to complete before the regime comes into effect, the proposed seller or the proposed buyer should contact the Investment Security Unit (ISU) for their views on whether the transaction is likely to be retrospectively called in. This opinion will not be binding but may give some comfort. If an insolvency practitioner is not already in office at the time of notification, they will have no standing to make the notification, but would be well advised to vet it before it is submitted.
After the regime comes into effect if there is concern over whether a voluntary notification might be triggered ideally the seller should do this and the application should be vetted by the putative insolvency practitioner (if not already in office). The advantage of making a voluntary application is certainty: if the ISU approves a transaction in advance it will not issue a “call-in” notice after completion.
If the transaction will – or might – trigger a mandatory notification (because, for example, the sales involves the shares of a “qualifying entity”) the proposed buyer must submit a clearance application to the ISU (or query to the ISU if the transaction is due to occur before the regime comes into force), otherwise the sale will be void. Only a buyer can submit a mandatory application, however IPs will be concerned to see that this has been done.
The ISU has 30 working days to decide whether to clear the transaction or undertake an in-depth review. If it decides to undertake a review it has a further 45 working days to carry this out. There is no mechanism for expediting clearance applications.
As noted above, voluntary notification of an asset sale preclude the Secretary of State from subsequently “calling in” the sale. However, if a business or asset sale is not notified, the orders which the Secretary of State may make on a subsequent calling in include ordering a person “to do, or not to do, particular things”, or imposing supervision of specified persons’ conduct. Although the orders made will be necessary and proportionate, if the Secretary of State decides that a risk to national security has arisen, they are wide enough to allow the transaction to be unwound.
There are also financial and criminal sanctions for the proposed buyer. There is pressure on the Government to replace this automatic voiding of a notifiable acquisition which has not followed procedural requirements, with a provision for voiding on the order of the Secretary of State. This would be preferable from an insolvency perspective, due to the huge complexities and uncertainties of a sale being declared void after completion and, potentially, distribution of realisations.
Rights that are exercisable by an administrator or by creditors while a company is in administration are not to be regarded as held by the administrator or creditors even while the entity is in those proceedings. So, the appointment of administrators over the parent company will not of itself constitute a “trigger event” for the purposes of the legislation (although a subsequent disposal of those shares by the insolvent company may do so).
Insolvency practitioners appointed in respect of a company that has a business or assets falling within one of the 17 “sensitive” sectors should be speaking to potential purchasers about their plans for ensuring compliance with the new regime. These sectors are described in detail here National Security and Investment: Sectors in Scope of the Mandatory Regime - government response.
The need for approval and the potential for delays in high risk scenarios will need to be taken into account as part of the insolvency process and any negotiations of proposed transactions. Appropriate contractual protections to guard against subsequent calling in should now be built into asset purchase agreements for all sales in “sensitive sectors”. The Act continues to be the subject of ongoing consultation with, and scrutiny by, affected industries and organisations and it is anticipated that more detail will become available in the coming months. We will provide further updates as this detail becomes available.
If you would like to discuss any aspect of the issues raised in this article, please contact a member of our Restructuring & Insolvency team.
You can also find further useful information in our detailed FAQs.
Contributor: Tessa Durham
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at May 2021. Specific advice should be sought for specific cases. For more information see our terms & conditions.
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