The much anticipated Corporate Insolvency and Governance Bill (the Bill) was published on 20 May 2020.
The proposed legislation is split into two broad categories: temporary provisions brought about as a result of COVID-19 and permanent provisions which will result in fundamental changes to UK insolvency law. The proposals, both temporary and permanent, reflect a shift towards a more debtor-friendly regime.
While some of these measures have been in the pipeline for some time, others are a much newer creation, and there will very likely be the need for amendments as we work through how these provisions operate in practice. Broadly, however, both the addition of new tools to the UK restructuring and insolvency offering and short term measures designed to help companies survive the financial impact of COVID-19 are welcome developments.
The legislation is detailed, but below is a summary of each of the main proposals. MPs will consider all stages of the Bill on 3 June 2020 and it may therefore still be subject to change. Even with a fast tracked process, it is unlikely that the Bill will be enacted before the end of June.
- The proposed standalone moratorium (ie one which is not dependent on the commencement of a formal insolvency process) is designed to help a company (with the exception of "excluded entities") to be rescued as a going concern.
- Assuming there is no outstanding winding up petition, a company can access the moratorium for an initial period of 20 business days by filing certain prescribed documents at court. Directors will need to confirm that the company is, or is likely to become, unable to pay its debts.
- The moratorium can be extended by the directors for an additional 20 business days and then subsequently requires consent from creditors or permission of the court.
- A "monitor" will be appointed (who will need to be a licenced insolvency practitioner) to oversee compliance with the moratorium, however, directors will remain in control of the company.
- The monitor must confirm in the documents filed at court to access the moratorium that it is likely that a moratorium for the company would result in the rescue of the company as a going concern. The monitor is also required to sanction any transactions not in the ordinary course of the company's business.
- During the moratorium creditors cannot commence legal proceedings or enforce security without permission of court (the monitor, unlike an administrator, cannot consent). The prohibition is broadly in line with the administration moratorium, with the exception that a floating charge cannot be crystallised. Further, any provision in a floating charge purporting to impose restrictions on the disposal of the company's property or allowing the appointment of a receiver based on the moratorium is void.
- The court may give permission for the company to dispose of property free from any security subject to the chargeholder receiving the open market value; where the property is subject to a floating charge then the floating charge secures the proceeds of sale.
- A distinction is drawn between pre-moratorium debts for which the company has a payment holiday (and which will likely form part of the company's restructuring) and post-moratorium debts and/or pre-moratorium debts for which the company does not have a payment holiday which must be paid in full as they fall due.
- Pre-moratorium debts which must be paid during the moratorium include, amongst other things, wages, rent and amounts due under loan agreements.
- There are also some temporary COVID-19 related relaxations to the moratorium rules.
Ipso facto clauses
- The Bill has introduced measures which will prevent suppliers from terminating contracts for supply of goods and services if the counterparty enters into an insolvency procedure (including commencement of the new moratorium). Clauses which permit such termination are known as ipso facto clauses.
- The new measures to restrict the reliance on these clauses will apply to all suppliers (with some exceptions including insurers, banks and investment firms).
- To the extent that the prohibitions bite, a supplier will only be able to terminate a contract where: the office holder consents to the termination, the company consents to the termination, or the court is satisfied that the continuation of the contract would cause the supplier hardship (although there is no guidance on the meaning of "hardship").
- After a company becomes subject to an insolvency procedure, suppliers cannot require the company to pay any outstanding charges in order to supply future goods and services. This would seem to leave suppliers in a potentially vulnerable position, but as indicated above, suppliers may apply to the court for permission to terminate a contract if the continuation of the contract is likely to cause the supplier hardship.
- These measures will apply to existing contracts and new contracts.
- The Bill also includes a temporary exclusion for small suppliers which meet at least two out of three criteria: their turnover is less than £10.2 million, their balance sheet total is less than £5.1 million, or a maximum of 50 employees.
- The temporary exclusion for small suppliers will apply for one month from the date the Bill comes into force.
- Termination on non-insolvency grounds is still permitted, but only if those rights arise following the commencement of the insolvency procedure. To the extent that a termination right arises prior to the commencement of the insolvency procedure, it will be lost following commencement if not already exercised.
- Ipso facto clauses divide opinion and these changes are unlikely to be universally welcomed. A key argument in favour of these new measures is to preserve the business of a company in distress to increase its chances of negotiating a restructuring plan or other form of rescue.
- Other jurisdictions, such as Australia and the US, have adopted a similar approach to ipso facto clauses but, in some jurisdictions, the changes have only been applied to new contracts.
- The proposed restructuring plan is modelled on the familiar scheme of arrangement, but with the important distinction of allowing cross-class cram-down. In common with schemes (but in contrast to CVAs) the restructuring plan will bind secured creditors, including those who vote against it.
- A company, or its creditors or shareholders (or liquidator or administrator) may propose a restructuring plan. However in practice, it is likely to be the company which proposes a restructuring plan in most cases.
- The process broadly follows that of a scheme. It involves two court hearings: a convening hearing at which the court will decide whether to convene meetings of creditors or members and the proposed classes, and a sanction hearing (following the vote of the creditors or members), at which the court will decide whether to sanction the plan (and, as with a scheme, the court may refuse to sanction the plan despite all approval thresholds having been met if, for example, it considers the plan not to be just and equitable).
- In contrast to a scheme, there is an express financial condition which must be satisfied in order for a company to be eligible to propose a restructuring plan: the company must have encountered or is likely to encounter financial difficulties that are affecting or will or may affect its ability to carry on business as a going concern, and the restructuring plan must be a compromise or arrangement with the purpose of eliminating, reducing, preventing or mitigating the effect of the financial difficulties.
- This financial condition may assist in recognition of the restructuring plan in foreign jurisdictions, as it may be perceived as more akin to an insolvency proceeding (despite, like schemes, appearing in the Companies Act 2006).
- Every creditor or shareholder affected by the restructuring plan is entitled to vote on it. However, there is provision for an application to be made to court to exclude creditors or members who do not have "a genuine economic interest in the company".
- The key feature of the restructuring plan is the introduction of cross-class cram-down. While the approval threshold is at least 75% in value of those voting (there is no unconnected creditor threshold, as is the case with CVAs, or a majority in number threshold, as is the case with schemes), the court may still sanction the restructuring plan even where there are classes which vote against the restructuring plan (as long as at least one affected class votes in favour).
- This is to be determined by examining the "relevant alternative": the dissenting class(es) must not be any worse off than if the restructuring plan were not sanctioned. So determining the alternatives, and the estimated outcomes for creditor classes in those alternative scenarios, is likely to be key to the application of cross-class cram-down.
- The Bill is not prescriptive as to the content of a restructuring plan – it is intended to be a very flexible tool, which is likely to have a wide range of potential applications, particularly in cross-border restructurings.
Statutory demand/winding up
- Despite the wording of the original government announcement, these restrictions apply to all debts, not just landlords looking to collect rent and across all sectors, not just retail.
- The court cannot wind up a company based on deemed insolvency following the failure to comply with a statutory demand served between 1 March and 30 days after the legislation is enacted (the "relevant period").
- A creditor can still present a winding up petition against a debtor company on the basis of cash flow or balance sheet insolvency but, during the relevant period, must show that it had reasonable grounds for believing that: COVID-19 has not had a financial effect on the company, or the company would have been insolvent (either on a cash-flow or balance sheet basis) even if COVID-19 had not had a financial effect on the company.
- Neither of these routes is straightforward as creditors are unlikely to have access to up to date financial information on debtor companies. Even companies in a sector which has not been as significantly impacted by COVID-19 as others may well still have suffered from a reduction in turnover. On the face of it, even a very slight worsening of their financial position would rule out reliance as outlined in the first ground above.
- The more straightforward argument may therefore be that the debtor company was insolvent even before COVID-19. A creditor may have to start with the most recent filed accounts at Companies House and, if that suggests insolvency, challenge the debtor company to provide financial information to prove the contrary.
- Either way the court will need to carry out a much more detailed analysis of the financial position of the debtor company than it is used to doing in relation to winding up petitions – especially with regard to the question of the impact that COVID-19 has had on the company.
- Any winding up orders made prior to the enactment of the proposed legislation but within the relevant period are void unless it would have been made under the new legislation.
- Winding up petitions presented in the relevant period cannot be advertised until the court has confirmed that it is likely to be able to make a winding up order under the new provisions and the debtor company will not need permission from the court to engage in any business activity which involves the disposal of assets once a winding up petition is presented.
- Under current law, if the directors (including any shadow or de facto directors) of a company allow it to continue trading beyond the time when they knew or ought to have known that there was no reasonable prospect of the company avoiding insolvent liquidation or insolvent administration, they can be held personally liable for the worsening of the creditor position.
- Once the Bill is enacted, the court is to assume that a director is not responsible for any worsening of the financial position of the company or its creditors that occurs in the relevant period (as defined above).
- This temporary change to the wrongful trading provisions is intended to assist directors in trading through the COVID-19 pandemic and its negative impact on their business.
- Despite these temporary protections, directors will continue to have a duty to act in the best interests of creditors if the company is insolvent or likely to become insolvent. In addition misfeasance claims, fraudulent trading and antecedent transaction provisions will all remain relevant.
- Usual advice regarding directors' conduct during a period of financial distress therefore continues to apply.