On 20 May 2020, the Government published the long-awaited Corporate Insolvency and Governance Bill (the “CIGB”).
The CIGB introduced the following insolvency related measures:
- a new statutory moratorium;
- a new restructuring plan for companies in financial difficulty;
- a new prohibition against suppliers terminating agreements by reason of a company’s insolvency;
- a temporary suspension on wrongful trading; and
- temporary restrictions on presenting winding-up petitions.
The measures proposed will have implications far beyond the coronavirus and is set to be the biggest legislative reform in this area since the Enterprise Act 2002. This note aims to give readers a basic understanding of the insolvency measures proposed. However, as the CIGB is proceeding through parliament, further amendments and additions may be added. The CIGB also introduced other measures, such as extensions to Companies House filings, which are not discussed in this note. It is anticipated that the CIGB will become law during the end of June/beginning of July 2020.
New Statutory Moratorium
An eligible company facing financial distress will be able to obtain a moratorium, lasting for an initial 20-business days, provided a qualified insolvency practitioner is willing to act as the company’s “Monitor” and believes that such a moratorium is likely to rescue the company as a going concern.
Under the moratorium, the directors will remain in control of the company, being able to continue to trade without the fear of creditor enforcement action, whilst being carefully monitored by an insolvency practitioner. It is hoped that this moratorium will grant companies in financial distress adequate breathing space within which to recover, whilst providing reassurance to creditors by the company being monitored during this time by a qualified insolvency practitioner.
How to obtain the moratorium
Eligible companies will be able to obtain this moratorium by filing the following documents at court (therefore being an “out-of-court” process):
- a notice that the directors wish to obtain a moratorium;
- a statement from the directors stating that in their view, the company is, or is likely to become, unable to pay its debts;
- a statement from a qualified insolvency practitioner (the “Proposed Monitor”) confirming that they are so qualified and that they consent to act as a Monitor for the company;
- a statement from the Proposed Monitor stating that the company is eligible to receive the moratorium; and
- a statement from the Proposed Monitor that the moratorium would likely result in the rescue of the company as a going concern.
(together being the “Relevant Documents”)
If the company is subject to an outstanding winding up petition, the directors must apply to court for the moratorium. The application must be accompanied by all the Relevant Documents. The court may either grant the moratorium or make any other order it thinks appropriate. The court will only grant the moratorium if it is satisfied that the moratorium would achieve a better result for the company’s creditors than the company being wound up.
The role of the Monitor
The Monitor must carefully monitor the company’s affairs and continue to evaluate whether the moratorium is likely to rescue the company. If the Monitor no longer feels that the moratorium is likely to lead to the company being rescued, they must file a notice with the court ending the moratorium.
Extension of the moratorium
The moratorium may be extended once by the directors for a further 20-business days provided certain documents are filed at court. Any further extension requires the consent of the creditors or the court.
Temporary measures (Coronavirus)
The CIGB states that in the first month of the CIGB coming into force, there will be certain relaxations to the requirements set out above for obtaining the moratorium, these include:
- directors being able to file for a moratorium using the out of court procedure even if their company is subject to a winding-up petition;
- the Monitor's statement submitting that they believe the moratorium would result in the company being rescued can be caveated as follows: “[I believe the moratorium would be likely to result in rescuing the company] or would do so if it were not for any worsening of the financial position of the company for reasons relating to coronavirus”; and
- companies will be eligible for the moratorium despite having been subject in the previous 12 months to a voluntary arrangement or administration.
New Restructuring Procedure
The CIGB has introduced a new restructuring procedure, referred to as a “Part 26A Plan”. The Part 26A Plan is largely based upon the current “Scheme of Arrangement” and allows companies who have encountered, or are likely to encounter, financial difficulties to propose a compromise or arrangement (i.e. a restructuring plan) with the purpose of the restructuring plan being to eliminate, reduce or prevent, or mitigate the effect of the financial difficulties.
The Part 26A Plan must be approved by the court. However, the key difference between a Part 26A Plan and a Scheme of Arrangement is that a court can approve the Part 26A Plan and bind dissenting classes of creditors provided that:
- none of the members of the dissenting class would be any worse off under the relevant alternative (the relevant alternative being whatever the court considers would be most likely to occur in relation to the company if the Part 26A Plan was not sanctioned);
- at least 75% by value of a class of creditor 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 Part 26A Plan; and
- the Part 26A Plan proposed is just and equitable.
The ability to bind dissenting classes of creditors in this manner is known as a “cross-class cram-down” and is a common feature in US Chapter 11 bankruptcies.
Prohibition against terminating supply contracts
Suppliers of goods and/or services will often terminate supply contracts due to a company’s insolvency. However, such contracts may be vital to a company’s survival. Current legislation already protects key supplies such as utilities and IT, but the CIGB has recognised that other supplies are equally important. The CIGB has proposed measures whereby if a company enters a relevant insolvency process, any supplier will not be able to terminate a supply contract due to the company’s insolvency or make such supply conditional upon the payment of outstanding charges.
A supply contract to which this new provision applies can still be terminated with the consent of:
- an officeholder (if appointed) (e.g. an administrator or liquidator);
- the company (if no officeholder is appointed); or
- the court, if the court is satisfied that if the contract is not terminated, the supplier will suffer hardship.
Temporary measures (Coronavirus)
Small suppliers will temporarily still be able to terminate such supply contracts based on a company entering into an insolvency process. The reason for this is to protect small suppliers during the pandemic.
Temporary - Suspension of wrongful trading liability
A director commits wrongful trading if they continue trading when they “knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation [or administration]”. The CIGB introduces provisions which largely suspends the liability of directors for wrongful trading between 1 March 2020 and 30 June 2020 (or one month after the CIGB comes into force, whichever is later) (the “Relevant Period”).
These provisions require the court to assume that during the Relevant Period, the director concerned was not responsible for the worsening of the company’s financial position or its creditors.
This will be welcomed by directors, as it will enable them to continue trading through the financial distress caused by the coronavirus. However, there have been serious warnings from insolvency professionals that this suspension may be subject to abuse. However, it should be noted that directors’ duties to their creditors are not suspended, and if they act in breach of those duties a claim may still be brought against a director for misfeasance (i.e. breach of duty). Further, a director can still be liable for wrongful trading before and after the Relevant Period.
Temporary - Restrictions on winding-up petitions
The CIGB prevents winding-up petitions from being presented to court on or after 27 April 2020 where the petition relies upon a statutory demand served between 1 March 2020 to 30 June 2020 or one month after the CIGB comes into force, if later. Consequently, any statutory demand served on or after 1 March 2020 is effectively void.
A creditor is also unable to present a winding-up petition on the basis that a company cannot pay its debts until 30 June 2020 (or one month after the CIGB comes into force, whichever is later) unless they are able to show:
- coronavirus has not had a financial effect on the debtor company; or
- the debtor company would have been unable to pay its debts in the absence of coronavirus.
This provision is aimed at preventing aggressive creditor action and seeks to ensure that as many companies as possible are given a fair opportunity to survive and recover from the pandemic without the threat of winding-up petitions being issued. It is therefore advisable for creditors, in most cases, to delay issuing any winding-up petitions until after 30 June 2020.
The CIGB is aimed at giving companies as much protection as possible during the pandemic whilst also giving companies facing financial distress new tools with which to survive. However, it is an unfortunate reality that despite the changes, many companies will still likely enter a formal insolvency process, especially those that were struggling before the crisis.
For companies facing financial distress during the pandemic, our advice is to use this time whilst aggressive creditor action is restricted to carefully consider the options available. Engaging in frank and honest conversations with creditors will in almost all cases be the best route forward. Directors of struggling companies must consider whether their company is, with the assistance provided by the government, realistically able to trade its way out of financial difficulty. Directors who are unsure of their company’s financial future or believe that their company is no longer viable, are best advised to seek professional advice as soon as possible.
Our Business Restructuring and Insolvency Team are experts in this area. If you have any queries about any of the issues raised above, please do not hesitate to contact us.
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