The Corporate Insolvency and Governance Bill (the "Bill") was laid before Parliament on 20 May 2020, was debated on 3 June 2020 and is expected to received Royal Assent as quickly as possible. As of 25 June 2020, the next stage is for the Commons to debate amendments put forward by the Lords.
As well as introducing temporary measures aimed at alleviating some of the most pressing consequences businesses may be experiencing as a result of the Covid-19 pandemic, the Bill contains significant permanent reforms to the UK's restructuring and insolvency framework, including enhanced restructuring options for businesses experiencing financial difficulties, and measures impacting third parties dealing with insolvent businesses.
Currently, if a company goes into administration or insolvent liquidation and it appears the directors knew or ought to have known there was no reasonable prospect of avoiding that outcome, the directors can be ordered to contribute to the company’s assets. To avoid personal liability, directors facing a wrongful trading claim will try to show they took every step with a view to minimising potential loss to the company’s creditors.
The Bill provides a temporary measure so that when the court is assessing the contribution to the company’s assets that a director may be ordered to make, the court is to assume that the director is not responsible for any worsening of the financial position of the company or its creditors that occurs during the period 1 March 2020 to 30 June 2020. It is important to note that there is no relaxation in directors’ fiduciary duties and obligations.
Winding Up Moratorium
The Bill seeks to introduce a moratorium preventing the use of statutory demands and winding up petitions where the reason for the unpaid debt is due to Covid-19.
These measures will be retrospectively applied and will void any statutory demands which were served between 01 March 2020 and 30 June 2020 from forming the basis of a winding up petition. Winding up petitions for the period 27 April 2020 to 30 June 2020 (or one month after coming into force of the Bill, whichever is the later) will also be prevented from being presented unless the creditor can demonstrate:
- Covid-19 has not had a financial effect on the company; or
- the reason for the unpaid debt would have arisen even if Covid-19 had not had a financial effect on the company.
Should a winding up order be in the period covered by the temporary provisions, the commencement of the winding up will be from the date of the order as opposed to the date of the petition.
The court will be able to retrospectively void any winding up orders made where a petition was presented between 27 April 2020 and the Bill coming into force, which otherwise would not have been made and the court will be able to make any order it thinks appropriate to restore the company.
It had previously been thought that these provisions would apply only to commercial property landlords, to protect tenants facing problems with rent payments due to Covid-19. However, the temporary measures contained in the Bill apply to all companies and debts rather than being limited to commercial tenants.
Companies House filing requirements and Meetings
The Bill also provides extensions on deadlines for companies to file certain documents at Companies House and grants the Secretary of State the power to make further extensions to filing deadlines.
Provision has also been made in the Bill for UK companies due to hold AGMs or GMs to hold meetings by other means, such as virtual meetings, given the social distancing rules in place as a result of Covid-19.
Long term changes
Protection of Supplies
Where a company has entered an insolvency or restructuring process or obtains the new Company Moratorium (see below), the company’s suppliers (of goods or services) will not be able to rely on contractual terms to terminate, stop supplying or vary the contract terms with the company (e.g. increasing the price of supplies).
The customer is required to pay for any supplies made once it is in the Company Moratorium or insolvency process, but is not required to pay outstanding amounts due for past supplies while it is arranging its rescue plan.
The measure will allow an office holder or the company to consent to termination. It also contains safeguards to ensure that suppliers can be relieved of the requirement to supply if it causes hardship to their business. There will also be a temporary exemption for small company suppliers during the Covid-19 pandemic.
The government has accelerated the introduction of a long awaited Company Moratorium, a statutory breathing space where directors will retain control of companies while considering restructuring options, without creditor pressure. This “debtor-in-possession” process is a concept familiar in other jurisdictions.
Key features are that the Company Moratorium is available to all companies (with limited exceptions) and will last for an initial period of 20 days. The directors will need to make a statement that the company is, or is likely to become, unable to pay its debts in order to access the moratorium.
Management will remain in the control of the directors of the company but a licensed insolvency practitioner will be appointed as Monitor to independently oversee the Company Moratorium and provide objective assessment of whether rescue as a going concern continues to be likely.
During the Company Moratorium, the company has a payment holiday from supplier debts and no legal action can be taken against a company in respect of pre-moratorium debts without leave of the court.
There will be a possibility of an extension of a further 20 business days. Any extension of the Company Moratorium beyond 40 business days will require the consent of creditors (for periods of up to a year) or the court.
Creditors will have the ability to challenge the actions of the directors or the Monitor on grounds that their interests have been unfairly prejudiced.
The Bill also seeks to introduce a new mechanism for a “compromise or arrangement” to be put in place between a company and its creditors and/or shareholders, which is widely referred to as a ‘Restructuring Plan’.
For a company to be eligible for a Restructuring Plan:
- it must have encountered, or be likely to encounter, financial difficulties that affect, or threaten to affect, its ability to carry on business as a going concern.
- the purpose of the Plan must be to eliminate, reduce, prevent or mitigate those financial difficulties.
There is no insolvency test, but there must be a degree of existing or forecast financial distress.
The Restructuring Plan is modelled on Schemes of Arrangement under English law (Schemes) which are provided for in the Companies Act 2006. The Bill proposes the Restructuring Plan be brought in under a new part of that Act.
Like Schemes, the Restructuring Plan:
- is a ‘debtor in possession’ process – there is no insolvency practitioner appointed to administer, supervise or monitor, albeit specialist restructuring advisors will be closely involved in its preparation and implementation
- would be subject to court oversight and sanction
- divides affected members and/or creditors into appropriate classes, depending on how their rights are to be affected
- is subject to creditor approval with voting thresholds of 75% by value in each class (Schemes have an additional requirement of 75% in number, which does not apply to the Plan)
- if sanctioned, would bind both unsecured and secured creditors (unlike a CVA)
The Restructuring Plan imports a key feature of US Chapter 11 bankruptcies: a ‘cross class cram down’. The court has the discretion to impose the Plan on dissenting classes if it considers it is fair and equitable, and if satisfied that:
- none of the members of the dissenting class would be any worse off than they would be if the Plan were not sanctioned (comparing it with what is likely to happen to the company otherwise).
- the Plan has been approved by at least one class that would have a genuine economic interest if the Plan were not sanctioned.
The bill is broadly supported but the House of Lords has proposed various amendments which the House of Commons must now consider, so a date for the proposed changes coming into force is awaited.
Ashfords’ Restructuring & Insolvency Team will continue to provide updates on this important proposed legislation.