The Corporate Insolvency and Governance Bill (the Bill) has completed all of its stages in the House of Commons, without material amendment to the Bill as originally drafted. All three readings in the House of Lords are scheduled to take place in June 2020, and expectations are that the Bill will receive Royal Assent, and will be enacted, very shortly thereafter.
As foreshadowed by the government announcement at the end of March (summarised previously), the scope of the Bill is extensive. It includes temporary measures designed to reflect the upheaval being experienced by UK companies as a result of COVID-19 related restrictions while creating two new permanent, debtor-friendly insolvency processes which increase the options available to companies in financial distress. The significance of the new processes and permanent measures cannot be understated. The Moratorium in particular re-emphasises a rescue culture as a fundamental pillar of UK insolvency law.
This note provides an overview of the provisions proposed by the Bill.
The Moratorium
The Moratorium is a new, permanent process designed to stave off formal insolvency and provide a company with breathing space in respect of its debts, regardless of the company’s formal solvency position. A fundamental requirement of the process is that a Moratorium (which is intended to provide directors with a period within which to explore rescue or re-structuring options) must be likely to result in the rescue of the company as a going concern.
The Moratorium is a director-driven process, and the directors retain full management and control of the company throughout. However the regime also requires the appointment of a monitor, who must be a qualified insolvency practitioner. The monitor’s role is to oversee the company’s affairs on an ongoing basis for the purpose of forming a view as to whether it remains likely that the Moratorium will result in the rescue of the company as a going concern.
Effect of the Moratorium
Whilst a Moratorium is in place:
- The company is deemed to have the benefit of a payment holiday in respect of certain pre-moratorium debts. Pre-moratorium debts are debts which arose prior to the Moratorium and which have fallen or will fall due for payment before or during it. No payment holiday is provided, however, in respect of the following:
- the monitor’s remuneration or expenses
- goods or services supplied to the company during the Moratorium
- rent in respect of any period during the Moratorium
- wages or salary arising under a contract of employment
- redundancy payments
- debts or other liabilities arising under a 'contract or other instrument involving financial services' (an extensive definition of which is set out in the new Schedule ZA2 to the Insolvency Act 1986 but which would include amounts due under its financing agreements).
- The commencement of formal insolvency proceedings against the company is not permitted, save for those initiated by the directors or certain petitions brought under the Financial Services and Markets Act 2000.
- There are restrictions on enforcement and/or legal proceedings being raised against the company. This includes enforcement of security (save with the permission of the Court), exercise of rights of forfeiture/irritancy and repossession of goods in the company’s possession under hire-purchase contracts.
- Certain rights of floating charge holders are suspended, i.e. floating charges cannot be crystallised by notice and any provision in a floating charge which purports to restrict a sale of assets cannot be imposed on the company.
- A series of measures take effect for the protection of the company’s counterparties, e.g. the fact that the Moratorium is in place must be publicised; there are restrictions on the amount of credit the company is able to obtain; and there are restrictions on the grant of further security.
Timing
The Moratorium ends 20 business days after it takes effect, unless it is extended. The primary means of extension is for the directors to file a notice and certain supporting documentation at the Court at any time after the 15th business day of the Moratorium first taking effect. Once that has been filed, the Moratorium is automatically extended for a further 20 business days. Alternatively or in addition, the Moratorium can be extended further with the consent of creditors or the consent of the Court.
Who is eligible?
All companies are eligible, unless they fall within one of the exceptions listed in new Schedule ZA1. The excluded companies include insurance companies, banks and investment banks, public private project companies, certain overseas entities and companies that have entered into capital market arrangements.
In addition the process is not available to companies which have been subject to a Moratorium or insolvency procedure in the preceding 12 months.
Challenge
The Moratorium can be challenged on the ground that the eligibility criteria are not met or that its continuation will result in unfair harm (which is not defined) to the applicant’s interests.
The Restructuring Plan
The Restructuring Plan is the second new permanent process contained in the Bill and forms a new Part 26A of the Companies Act 2006.
Similar to a Scheme of Arrangement, the Restructuring Plan involves:
- A compromise / arrangement being proposed by a company and its creditors or a class of creditors, or its members or a class of its members
- Where the purpose of that compromise / arrangement is to 'eliminate, reduce or prevent, or mitigate the effect of' financial difficulties the company has encountered or is likely to encounter that are affecting or will affect its ability to carry on its business as a going concern.
A Scheme of Arrangement requires that 75 per cent in value and a majority in number of all relevant class(es) of creditors and all relevant class(es) of members consent before the Court will sanction the compromise / arrangement proposed. However, under the Restructuring Plan, there is no requirement for a majority in number in each class and the proposed compromise / arrangement may still be sanctioned even if the 75 per cent approval threshold is not met for all relevant classes of creditors and members, provided that:
- The Court is satisfied that those who have not agreed will be no worse off under the proposals than the likely alternative (as determined by the Court); and
- At least one other class of creditors or members has met the approval threshold.
As with Schemes of Arrangement, once sanctioned by the Court all creditors and members are bound by the terms of the Restructuring Plan, opening up the possibility of a cross-class cramdown of creditors for the first time in UK insolvency law. In allowing any cross-class cramdown we would expect the Court to consider the proposals with a high level of scrutiny which may result in greater focus on the method and credibility of valuations that are relied upon.
Termination clauses and protection of supply
In addition to the new processes, the Bill includes a provision, to be inserted into the Insolvency Act 1986 as new clause 233B, which aims to protect the supply of goods and services to companies in certain 'relevant insolvency procedures' (broadly, the Moratorium, administration, administrative receivership, CVA, liquidation or provisional liquidation). The provision is also triggered by the calling of the first meeting in relation to the Restructuring Plan.
New clause 233B in effect prevents termination or variation of a contract under which goods and/or services are supplied to a company, or the exercise of any other right or action arising under that contract, purely as a result of that company entering into a relevant insolvency procedure. This restriction applies even where the ground for termination arose prior to the relevant insolvency process.
Limited safeguards are available for affected suppliers, who will be able to terminate the contract:
- with Court permission, on the grounds that the supplier’s continued performance is causing the hardship to the supplier (as determined by the Court); or
- by agreeing to terminate the contract with the distressed company (or, where applicable, the relevant administrators, liquidators or administrative receivers who are in office).
There is no further guidance as to what will amount to 'hardship' to a supplier, and the Courts will need to develop a set of applicable criteria.
There will be a time-limited exemption for ‘small suppliers’ to help them mitigate the effects of the COVID-19 pandemic. Such suppliers will be exempt as long as their distressed counterparty enters the relevant insolvency procedure during the period starting on the date the Bill is enacted and ending one month thereafter. A supplier is categorised as 'small' if it meets at least two of the following criteria: (i) annual turnover of less than £10.2 million, (ii) balance sheet assets of £5.1 million or less and (iii) no more than 50 employees, although there are proportionate criteria for businesses in their first year of trading.
Temporary coronavirus measures
Finally, the Bill includes a series of short term (and retrospective) measures designed to assist with the most immediate and acute period of distress resulting from COVID-19 restrictions, in terms of governance and compliance.
Wrongful trading
To ensure that directors are not prejudiced by coronavirus related uncertainty the Bill confirms that, in considering an action for wrongful trading as may be later brought against a director, 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 has occurred in the period from 1 March 2020 to the date falling one month after the Bill comes into force.
Whilst the Court could still find a director guilty of wrongful trading during the relevant period and retains a discretion to require a director to contribute to the assets of the company, the Bill significantly limits the scope of that discretion by requiring the Court to make the statutory assumption. Directors should note however that their other fiduciary and statutory duties continue to apply during this period.
Winding up petitions, winding up orders and statutory demands
To ensure that companies are not prejudiced by COVID-19 related financial distress, the Bill provides that:
- statutory demands served on a company during the relevant period (1 March 2020 to the date falling one month after the Bill comes into force) cannot be used to found a winding-up petition presented to the Court on or after 27 April 2020. This effectively means that all statutory demands served on a company during that period will be automatically void, even if the company is in financial difficulties for reasons other than COVID-19.
- a creditor cannot present a winding-up petition during the relevant period (1 March 2020 to the date falling one month after the Bill comes into force) on the grounds of a company's inability to pay its debts unless it has reasonable grounds for believing that coronavirus has not had a financial effect on the company or that the debt issues would have arisen anyway.
- the Court may not grant an order in respect of any winding up petition presented after 27 April 2020 but prior to the date falling one month after the Bill comes into force, unless it is satisfied that the issues would have arisen even if COVID-19 had not had a financial effect on the company.
- winding up orders granted after 27 April 2020 but prior to the Bill coming into force are void if the Court would not have made the order if applying the terms of the Bill in its consideration of the petition.
General meetings and AGMs
Certain companies and other qualifying bodies have been provided with greater flexibility in relation to their general meetings which have been held since 26 March and may be held up to 30 September 2020, although this period can be extended further.
Overriding anything to the contrary in the company or body’s constitutional documents, the provisions allow for general meetings to be held on a virtual basis and for votes to be cast by electronic means and confirm that quorum requirements can be met without any members being together at the same place.
In addition, companies and other qualifying bodies which were due to hold an AGM between 26 March 2020 and 30 September 2020 will be given until 30 September 2020 to hold their AGM, although likewise this period can be extended up to 5 April 2020 at the latest.
Read full details on the proposed changes here.
Company filing requirements
For listed companies which would otherwise be required to file their accounts and reports between 25 March 2020 and 30 September 2020, the Bill provides that the filing deadline shall be the earlier of:
- 30 September 2020; or
- the last day of the period of 12 months immediately following the end of the relevant accounting reference period.
In addition, the Bill enables the Secretary of State, at any time prior to 5 April 2021, to make regulations extending the statutory filing deadlines for:
- accounts
- registrations of charges
- event-driven filings, such as a change to a company’s directors or persons with significant control.
Conclusion
Once enacted, the Corporate Insolvency and Governance Act will result in the most significant changes to UK insolvency law for a number of years. The movement towards more debtor friendly regimes attempts to maintain the UK’s position as a key jurisdiction for conducting international restructurings and aligns broadly with reforms that are taking place elsewhere in Europe. Whilst the timing is welcomed, it remains to be seen how successful the reforms will be in addressing the major challenges currently facing UK corporates.
If you have any questions about the Bill, please contact Andrew Eaton or your usual Burges Salmon contact.