On 20 May 2020, the Corporate Insolvency and Governance Bill (the Bill) was introduced to the House of Commons for its first reading, with the aim of completing all its stages in the Commons and progressing through the House of Lords by late June or early July. The Bill has the purpose of introducing three permanent reforms to the existing insolvency legislation and certain temporary measures designed to address the immediate impact of the Coronavirus (COVID-19) pandemic on UK businesses. This On the Subject provides a high-level overview of the changes.
Moratorium: a new stand-alone moratorium to provide businesses with an initial 20-business-day stay from creditor action.
The moratorium may be granted to companies that are, or are likely to become, unable to pay their debts when they fall due, provided they obtain a statement from a licensed insolvency practitioner. Management will remain in control of running the business, but the practitioner will act as “monitor” and provide oversight and protections for creditors. Grant of the moratorium is subject to a “more likely than not” test that it will lead to the rescue of the company as a going concern. For those companies that can satisfy this test, the process will be valuable, and directors are likely to take full advantage of a process that allows them to explore restructuring alternatives with the safety net of the moratorium.
Companies will be exempt from paying most debts falling due prior to the moratorium (with the exception of certain payments, such as wages) but would still have to pay debts falling due during the moratorium. The moratorium is therefore intended to protect against action from larger creditors in the main, but there must be sufficient cash to continue to meet key liabilities.
The moratorium will prevent creditor action such as enforcement of security, the commencement of insolvency or other legal proceedings against a company, and a landlord forfeiting a lease.
The initial period is 20 business days with an option for directors to extend for a further period of 20 business days (subject to approval from the monitor) and certain other permitted extensions up to one year subject to creditor approval and/or court order.
The moratorium is distinct from the existing statutory moratorium under Schedule B1 to the Insolvency Act 1986 granted only to companies that have entered, or are going into, administration.
Companies which are, or have been in the preceding 12 months, subject to any insolvency proceedings are rendered ineligible, as are certain financial institutions and companies which have accessed the capital markets (which initially appears to include all high-yield note issuers but may be intended for companies whose equity is traded). The moratorium is, however, available to overseas companies upon application to the court. It will be interesting to see how this fits within the context of Brexit and the EC regulations applicable to a “centre of main interests”, as well as the anticipated swathe of European restructuring reforms.
Restructuring plan: a new procedure modelled on the existing scheme of arrangement with changes inspired by Chapter 11 in the United States. The intention is to incorporate this into the Companies Act 2006 to sit alongside current provisions relating to schemes of arrangement.
The procedure is aimed at companies facing financial difficulties affecting their ability to carry on business as a going concern. Such companies need not be insolvent to propose the plan.
Eligibility will turn on having a sufficient connection to, as opposed to requiring a business to have its centre of main interests in, the United Kingdom, and so the plan is also available to overseas companies.
The company, any creditor or shareholder may apply to the court to convene meetings to vote on the plan.
The procedure will broadly mirror that of a scheme of arrangement in terms of division of classes with every affected creditor and shareholder having the opportunity to vote on the plan unless the court is satisfied that none of the members of a particular class have a genuine economic interest in the company.
Approval subject to 75% in value must vote in favour of the scheme, but there is no requirement for 50% in number to vote in favour of the scheme (as is the case for a scheme of arrangement).
The procedure will benefit from a “cross-class-cram-down” (compared with the “cram-in” of only the dissenting minority of a class under a scheme), which provides that the plan may still be confirmed by the court if one or more classes do not vote in favour, provided that:
(i) The court is satisfied that none of the members of the dissenting classes would be any worse off under the plan than they would be in the event of the “relevant alternative” (and the court will have to consider what the most likely relevant alternative is).
(ii) At least one class who would receive a payment or has a genuine economic interest in the company has voted in favour of the plan.
The ability to bind dissenting creditor classes (and potentially eliminate out of the money creditors and equity) will offer an alternative to the current procedure of using a pre-pack administration sale in combination with a scheme.
Ban on ipso facto termination clauses: protection for a company’s supply chain during relevant insolvency procedures.
The ban prevents suppliers from terminating, varying or exercising any right under a contract due to its counterparty entering into an insolvency or restructuring procedure. An increased amount of suppliers will be forced to continue transacting on the same terms and may not require payment of pre-insolvency amounts a condition of continued supply.
A supplier can apply to court for permission to terminate a contract where it would cause undue hardship to the supplier.
Certain suppliers are excluded from these provisions—these are predominantly financial service suppliers and small company suppliers.
Key Temporary Measures
Items that were introduced in response to the onset of the COVID-19 pandemic have been extended by the proposed draft legislation:
Voidance of statutory demands issued against companies during COVID-19, allowing creditors to present a winding up petition only where they have “reasonable grounds” to believe that either (i) the company’s financial position has not worsened in consequence of, or for reasons relating solely to, COVID-19, or (ii) the relevant insolvency condition would have arisen irrespective of COVID-19. The winding up petition applies retroactively from 27 April 2020 until 30 June 2020 currently, and the wording in the Bill is more far-reaching than the Government statement in April 2020.
Suspension of wrongful trading, allowing directors to act more freely at the point the company has reached the “zone of insolvency” (the point at which there is no reasonable prospect of avoiding insolvent liquidation). At that time, duties shift to the company’s creditors, and the directors can be personally liable for wrongful trading, but the suspension (which applies retrospectively from 1 March 2020 until 30 June 2020 or the date 30 days from the legislation coming into force and subject to potential extension) will mitigate this spectre of personal liability for directors, albeit it will not constitute a blanket suspension of all liability.
Permission to hold virtual AGMs and general meetings, in light of social distancing laws, for UK companies that are under a legal duty to hold an AGM or GM (applying to any meeting held from 26 March 2020 until 30 September 2020).
Extensions to filing deadlines at Companies House, such as an extension for public companies to file their annual accounts and reports. Remains in effect until 30 September 2020.
Whilst significant detail has already been released on these proposed reforms, we expect there will be heightened scrutiny and various changes as the Bill goes through parliamentary review. The proposals introduce much welcome change to existing insolvency regimes that will remain in the long term, and also provide much-needed comfort and temporary relief to certain businesses facing financial difficulty during COVID-19. There are, however, many areas of the proposals that require further clarification or modification, particularly in light of wide carve-outs for certain companies and institutions that will not be able to avail themselves of the proposed reforms.