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This content was originally published in The Gazette.
The Corporate Insolvency and Governance Bill was debated in the House of Commons this week and is expected to received Royal Assent. Cathryn Butler and Katie Farmer of Ashfords LLP explain what effect the Bill will have on the UK's insolvency framework.
What is the Corporate Insolvency and Governance Bill 2020?
The Corporate Insolvency and Governance Bill 2020 (the ‘Bill’) seeks to permanently increase restructuring options for businesses experiencing financial difficulties, and includes temporary measures aimed at easing some of the most pressing consequences businesses may be experiencing as a result of the coronavirus (COVID-19) pandemic.
The Bill contains significant reforms to the UK's restructuring and insolvency framework, including an acceleration of measures, such as the ‘company moratorium’, which have been in contemplation for some time.
The Bill was laid before Parliament on 20 May 2020 and debated in the House of Commons on 3 June 2020 and is expected to received Royal Assent quickly.
What temporary measures would be introduced by the Corporate Insolvency and Governance Bill?
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, 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 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
These measures will be retrospectively applied and will void statutory demands which were served between 1 March 2020 and 30 June 2020 from forming the basis of a winding up petition. Winding up petitions for the period 27 April 2020 and 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 either:
- COVID-19 has not had a financial effect on the company
- 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. Where the date of commencement is altered the relevant dates for antecedent transactions may also be amended.
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.
What permanent measures would be introduced by the Corporate Insolvency and Governance Bill?
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 of the company moratorium include:
- 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 (some may choose to do that by placing a notice in The Gazette) 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 and requires confirmation that non holidayed pre-moratorium and post-moratorium debts have been paid. If they aren’t paid the Monitor should terminate the moratorium.
- Creditors will have the ability to challenge the actions of the directors or the Monitor on grounds that their interests have been unfairly prejudiced.
Protection of supplies
Where a company has entered an insolvency or restructuring process or obtains the new company moratorium, the company’s suppliers will not be able to rely on contractual terms to terminate, stop supplying or vary the contract terms with the company (for example, 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 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 per cent by value in each class (Schemes have an additional requirement of 75 per cent in number, which does not apply to the Plan)
- if sanctioned, would bind both unsecured and secured creditors (unlike a Company Voluntary Arrangement (CVA))
One of the drawbacks of Schemes is the ability for certain creditors to hold out and disrupt a proposal that would otherwise save a company. 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 fair, 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 cross class cram down would enable debt-for-equity swaps to be imposed without shareholder consent, which Schemes cannot achieve, and the potential for empowering junior creditors.
Under the Bill, any company which could be wound up under the Insolvency Act 1986, including a foreign company, could be subject to a Restructuring Plan including financial services companies, albeit the Secretary of State would have the discretion to disapply the provisions in that sector later.