Overview: Corporate Insolvency and Governance Bill
The Corporate Insolvency and Governance Bill is widely expected to become law within the next month or so. When it does, it will have an immediate and significant effect on the law relating to company insolvency. It does not change the law on personal insolvency.
The Bill is 238 pages long. Its provisions are complicated and highly technical. The purpose of this article is to give a concise summary of the main changes being implemented, for those who are not necessarily used to dealing with insolvency issues on a regular basis.
We will circulate more detailed notes on the major permanent changes to the insolvency landscape in the coming weeks.
Company moratorium
This is a new process intended to provide a short period during which no legal action can be taken against a company without the court’s permission, so that the company can pursue a rescue plan. It shares a number of similarities with the protection provided in the US by its Chapter 11 process.
It will restrict all forms of enforcement of commercial rights, by both secured and unsecured creditors, unless permission to enforce is granted by the Court. Permission will generally only be granted where a creditor can demonstrate that the moratorium is causing unjustifiable damage to their business.
Landlords will be prevented from effecting forfeiture or pursuing rent arrears whilst the moratorium is in place (as long as ongoing rent is paid) and lenders with fixed charges will not be able enforce them. Provisions of floating charges that provide for their crystallisation when a moratorium comes into effect or for any event during the moratorium to crystallise them will be of no effect.
These potentially harsh restrictions are however only temporary. If a right to forfeiture arises because of a moratorium being obtained, it will still exist when the moratorium ends unless the landlord waives the right. Likewise, secured creditors’ enforcement rights. In practical terms, if deals cannot be made with these types of creditors during the moratorium, it is likely that a more formal insolvency process will immediately follow.
The moratorium will last for 20 business days, extendable to 40 business days, with unlimited further extensions possible with the agreement of creditors or the court. Extensions must be obtained more than 5 days before the expiry of the moratorium.
The company will be required to pay for supplies, rent, wages and similar costs incurred during the course of the moratorium and it will remain under the control of its directors.
The process will be overseen by an insolvency practitioner, referred to as the “monitor”, who will be obliged to end the moratorium if the ongoing costs referred to above are not paid or if at any time they form the view that the company can no longer be rescued as a going concern.
The moratorium is obtained by filing relatively simple documentation with the court, including a declaration by the directors that the company is or will shortly become unable to pay its debts and confirmation from the monitor that they consider it likely that the moratorium will facilitate the rescue of the company as a going concern.
Termination clauses
The Bill introduces a permanent change to the use of termination clauses in supply contracts.
When a company is in an insolvency or restructuring procedure (including a moratorium) suppliers will not be able to rely on contractual terms to stop supplying or vary contract terms with the company (such as increasing the price of supplies).
The company will have to pay for supplies made whilst it is in the insolvency process (and failure to do so will end the supplier’s duty to continue to supply) but it will not have to pay outstanding amounts for past supplies while arranging a rescue plan.
Suppliers will be able to obtain relief from the requirement to supply by applying to court if they can show that it causes undue hardship.
There will also be a temporary exemption for small company suppliers during the COVID crisis period. A “small entity” is one which can satisfy 2 of the following:
i) Turnover of less than £10.2 million;
ii) Balance sheet total of less than £5.1 million;
iii) No more than 50 employees.
Restructuring plan
The Bill introduces a new restructuring process called a Restructuring Plan, which will be similar to existing schemes of arrangement but also borrow elements from the US Chapter 11 process. There is no insolvency requirement for a restructuring plan to be implemented.
Restructuring plans will allow companies, their members or their creditors to propose a plan which will be voted upon by creditors, separated into various voting classes. All plans will be subject to scrutiny by the Court but if approved by 75% of creditors by value in each class, a plan will generally be approved by the Court.
If certain classes object but the Court is nevertheless satisfied that the plan is fair (because the creditors that object would be no worse off than if the company entered an alternative insolvency procedure) it will be able to override the votes of the dissenting creditors. This is referred to as “cramming down” a class of creditors.
The inability to cram down a class of creditors has previously been perceived as a major hindrance to the approval of schemes of arrangement, so it is hoped that with its inclusion in the restructuring plan, they will be capable of more widespread adoption.
Whilst restructuring plans will be capable of affecting the rights of secured creditors as well as unsecured creditors, secured creditors will be protected by the 75% voting threshold and the requirement that they cannot be crammed down by the court if the plan would put them in a worse position than they would be in any other insolvency process (which do not generally have significant effects on their rights).
Temporary effect on statutory demands & winding-Up petitions
Statutory demands made between 1 March 2020 and 30 June 2020 will become void.
The use of winding-up petitions will be restricted from 27 April 2020 to 30 June 2020. The provisions are complex but in summary, winding-up orders will only be made during that period and on the basis of petitions presented during that period if the petitioning creditor is able to show that the debtor’s financial position was probably not made worse by the COVID-19 crisis.
Orders made during the period above but before the coming into force of the act will be retrospectively made void.
If the bill becomes law after 30 May 2020 (which seems inevitable), the date of 30 June 2020 throughout this note will be replaced with the date 1 month after the act comes into force.
Temporary suspension of wrongful trading
Directors will not be liable for wrongful trading in respect of their actions between 1 March 2020 and 30 June 2020.
No other directors’ duties are affected by this temporary measure, so directors can still be found to be in breach of their fiduciary duties in respect of their acts during this period.
Financial services firms
Certain financial services firms and contracts have been excluded from some of the reforms, on the basis that they have their own sophisticated regulations and insolvency schemes. Amongst the excluded reforms are:
i) The company moratorium
ii) The new termination clause measures
iii) The suspension of wrongful trading
Financial services firms will have access to the new restructuring plan, though with appropriate safeguards including a role for the financial services regulators.
AGMs and other general meetings
The Bill temporarily allows companies to hold meetings of members by other means even if their constitution would not normally allow it. This includes “closed” or remote meetings.
These provisions will be backdated to 26 March 2020 and companies that postponed AGMs due to COVID-19 will have a short grace period in which to convene them.
Extension of filings
The Secretary of State is given the power to make regulations to extend deadlines for filing accounts, confirmation statements and registrations of charges. We understand that extensions are being granted informally by the Registrar of Companies at present but it is expected that relevant secondary legislation will follow shortly after the primary legislation comes into force.
To discuss matters arising from the new legislation or any other aspects of insolvency law or commercial litigation, please contact the author Lee Donoghue on l.donoghue@teacherstern.com or 020 7242 3191
