The UK's corporate insolvency and restructuring landscape will be changing dramatically, following the Government's announcement on 26 August 2018.
The Government proposes to introduce a wide range of reforms including:
- A standalone restructuring moratorium for companies which are in financial distress
- A statutory restructuring process which will potentially bind dissenting creditors; and
- A prohibition on the termination of contracts on the grounds of the insolvency or restructuring of one of the parties.
Only a broad summary of the changes has been given at this stage and it is not yet known when draft legislation setting out the detail of the proposals will be available.
The headline reforms are summarised below. The report addresses other potential reforms which are not discussed in detail in this insight.
The restructuring moratorium
The new moratorium will give companies in financial distress breathing space from creditor pressure while they seek to put in place a rescue plan.
The directors will continue to run the business and work towards a resolution of the company's financial difficulties. A licensed insolvency practitioner will be appointed as a "monitor" of the moratorium.
The monitor will be responsible for ensuring that statutory eligibility and qualification criteria are satisfied. They will also have the power to veto asset disposals by the company outside the ordinary course of its business and to grant any new security over the company's assets while the moratorium is in force.
The application process will be similar to that for the out of court appointment of administrators. Paperwork will be filed at court, and the monitor will notify all known creditors and the Registrar of Companies that a moratorium is in place.
The moratorium will last for an initial 28 days, but can be unilaterally extended for another 28 days provided the monitor is happy all qualifying conditions are still satisfied. Any further extension will need the consent of creditors or the court.
If the moratorium is terminated by the monitor, creditors will be free to take all action available to them to recover their debts. However, it is anticipated that a rescue plan will be agreed while the company has breathing space. This does not have to be in the form of a restructuring plan, and could be a CVA, scheme of arrangement, formal insolvency process or some other agreement with creditors.
The restructuring plan procedure
The new restructuring plan is intended to be independent of the restructuring moratorium. Although it is anticipated that they will often be used together, this does not have to be the case.
The restructuring plan will be a flexible procedure that will enable the court to bind dissenting classes of creditors to an arrangement that is in the best interests of all stakeholders. The court will oversee approval of the plan and will play a role in safeguarding creditor and shareholder rights. Once approved, any variation of a creditor's rights will be effective immediately. Pre-plan rights will not be reinstated even if the plan is not fully implemented.
The Government does not intend to prescribe the content of the plan, which will vary according to the needs of each company and its stakeholders. There will be no statutory requirement for a formal supervisor. If creditors demand a supervisor as a prerequisite for their approval, then the scope of this role can be agreed in the proposal. As the role is not prescribed by statute, it would be for the parties to agree who would take it on. Any supervisor would not necessarily have to be a licensed insolvency practitioner.
The restructuring plan is intended to be a debtor-in-possession procedure with the option of cross-class cram down of dissenting creditors. This model is adapted from the US Chapter 11 procedure, although the application process is modelled on the UK scheme of arrangement. It is not intended to replace company voluntary arrangements or schemes of arrangement, but to provide another option for companies (whether or not they are insolvent) that are seeking to restructure.
Prohibition on termination clauses triggered by insolvency
Supply contracts often contain clauses that purport to allow one party to terminate the contract on the other's insolvency (ipso facto clauses). The Government proposes to introduce legislation prohibiting the enforcement of these clauses in most contracts (some financial services and public sector contracts will be excluded).
Suppliers will be able to apply to court for permission to terminate. The supplier will need to be able to show that forcing them to continue to supply the insolvent company is more likely than not to cause the supplier to enter an insolvency process, and that allowing them to terminate the contract is reasonable in the circumstances given the effect on the insolvent company.
Other proposed changes
The report also contains detailed proposals for strengthening corporate governance in pre-insolvency situations. This insight does not address these proposals in detail, however insolvency practitioners should be aware of two of the specific reforms proposed in this context.
Firstly, the Government will legislate to increase the cap on the "prescribed part" in line with inflation. The report gives the example that applying an inflationary increase to 31 March 2018 would result in the cap increasing from £600,000 to £800,000.
Secondly, the Government intends to amend the provisions under which officeholders can challenge payments made to one party in preference to other creditors in the run up to insolvency. These amendments will allow a presumption of insolvency where the other party was connected to the company, unless it is proved otherwise. This will mirror the position with challenges to transactions at an undervalue and is intended to make it easier for officeholders to challenge pre-appointment value extraction schemes.
The report does not set out a proposed timescale for producing drafts of the legislation implementing the reforms. Once the draft legislation is available we will be in a position to confirm the full extent of the reforms and the practical implications for those working in this area.