Alex Rogan Partner
Covid-19: Rising to the challenge - The Corporate Insolvency and Governance Bill
The Corporate Insolvency and Governance Bill (the “Bill”) published on 20 May 2020 represents the most significant development for restructuring and insolvency laws in the UK in nearly 20 years. The Bill, if passed in its present form, provides significant additional firepower to the UK restructuring arsenal, introducing a new restructuring regime that is capable of rising to the challenge of rescuing businesses and maximising stakeholder value in the difficult economic environment ahead.
The Bill also includes a number of temporary insolvency related measures, which will provide businesses with some much-needed breathing space to weather the initial economic upheaval caused by COVID-19, as well as some practical relief for business through the temporary relaxation of certain governance and filing requirements.
It is reported that the Bill will be fast-tracked through Parliament and it is scheduled to complete its passage through all remaining stages in the House of Commons by 3 June 2020, after which it is set to be debated in the House of Lords on 9 June 2020.
The permanent changes included in the Bill were previously consulted on in 2016 and set out in a government proposal in 2018; however, the implementation of the proposal stalled as a result of Brexit planning. These changes to the UK restructuring toolkit represent a game changer, which will ensure that the UK restructuring regime remains world class. The changes involve:
- A new restructuring plan - an operational as well as financial restructuring tool, incorporating a flexible cross-class cram down mechanic;
- A moratorium - providing companies in financial distress with protection from creditors whilst they explore their rescue and restructuring options; and
- Ipso facto clause protection - restrictions on suppliers using insolvency termination clauses (so-called “ipso facto” clauses) in supply contracts to terminate or vary the terms of those contracts.
The temporary insolvency-related changes included in the Bill involve:
- Changes to wrongful trading liability - providing for an assumption that directors are not responsible for any worsening of the financial position of the company or its creditors between 1 March 2020 and one month after the Bill comes into force, for the purpose of assessing whether a director should make a contribution to the assets of the company as a result of wrongful trading liability; and
- Restrictions on the service of Statutory Demands and presentation of debt-based Winding-Up petitions – temporary prevention of winding-up petitions based on statutory demands made between 1 March 2020 and one month after the Bill comes into force, and a temporary suspension on winding-up petitions, based on cash flow insolvency in circumstances where COVID-19 has had a financial effect on the relevant debtor, presented between 27 April 2020 and one month after the Bill comes into force.
The temporary relaxation of certain governance and Companies House filing requirements involve:
- AGMs - provision for the holding of virtual AGMs and the extension of deadlines to hold AGMs; and
- Companies House - extension of deadlines for public companies to file annual accounts and provisions enabling the Secretary of State to extend deadlines in relation to the registering of charges and the filing of accounts and registration statements.
The Bill also provides a power allowing the Secretary of State to amend certain aspects of corporate insolvency and governance legislation temporarily through regulations made by statutory instrument.
We will cover the detail of these measures in further updates as the Bill progresses through Parliament. However, a brief overview of some of the key points arising out of the proposed changes is set out below.
The New Restructuring Plan
The UK scheme of arrangement is the go-to restructuring tool of choice, alongside the US Chapter 11, for foreign companies considering their restructuring options outside of their home jurisdiction. The new restructuring plan is likely to take over from the scheme of arrangement as a restructuring tool that foreign, as well as UK companies, will need to consider when assessing their options, in light of its greater flexibility to implement tailored restructuring solutions in the face of dissenting creditor or equity stakeholders. This is a very significant and timely development for the UK restructuring toolkit.
In broad overview, the new restructuring plan provides for a restructuring process which follows that of the scheme of arrangement. The key difference is that it provides for a cross-class cram down or cram up which is not available under the scheme. This allows the restructuring to be implemented with the support of just one class of creditor and in the face of opposition from dissenting junior or senior creditor or equity classes. The protection for dissenting stakeholder classes in these circumstances is that the Court must be satisfied that the plan provides for dissenting stakeholders to be no worse off than they would be in the likely alternative where the plan is not implemented. Depending on the context, this would likely be a liquidation or a pre-packaged administration sale at a depressed market value.
This measure will mean that the new restructuring plan will be an effective tool to implement operational as well as financial restructuring solutions. Nevertheless, it will increase the role of the Court in carefully scrutinising the fairness of the restructuring proposal at the sanction of the scheme and robust valuation evidence will be crucial to implementing a restructuring of this nature that does not have the requisite support from each stakeholder class.
Other key differences to the scheme of arrangement include that it is only available to companies in financial difficulty, which may assist for it to be recognised in foreign jurisdictions, and there is no numerosity requirement for the class vote, which means that it may be passed with the approval of 75% in value of the class without the additional requirement of 50% in number of the class to support it.
The moratorium will allow a company in financial distress (save for a list of excluded entities, which includes certain financial institutions and companies that are party to capital markets arrangement) breathing space in which to explore its rescue and restructuring options free from creditor action.
The company is required to pay all moratorium debts, however the moratorium provides for a payment holiday for most types of pre-moratorium debts, exceptions to this include employee wages and redundancy payments, and payments due under loans or other financial contracts. The scope of the protection that the moratorium provides from creditor action substantially mirrors the moratorium currently available in an administration of a company.
The moratorium will be overseen by an insolvency practitioner who will act as a monitor, although the directors will remain in charge of running the business day-to-day. There is no requirement to have a particular outcome in mind at the time of entry into a moratorium, but the monitor must be satisfied that it is likely that the company can be rescued as a going concern. The monitor is required to end the moratorium if it becomes apparent to them that the company is unlikely to be rescued.
Ipso Facto Clause Protection
When a company enters a restructuring or insolvency procedure, suppliers often stop supplying it under a contractual termination clause triggered by insolvency. This measure will prohibit termination clauses that engage on insolvency or are based on past breaches of contract in circumstances where a company is in an insolvency procedure (including the moratorium or the new restructuring plan). This will mean that, subject to certain exceptions relating to the size of the supplier and the adverse impact on a supplier, contracted suppliers will have to continue to supply, even where there are pre-insolvency arrears. As per the moratorium, the provisions also provide for certain types of entities and contracts to be excluded from this protection.
Restrictions on the Use of Statutory Demands and Winding Up Petitions
The Bill places restrictions on the presentation of debt-based winding-up petitions. There is a temporary prevention of winding-up petitions based on statutory demands made between 1 March 2020 and one month after the Bill comes into force, and a temporary suspension on winding-up petitions, based on cash flow insolvency in circumstances where COVID-19 has had a financial effect on the relevant debtor, presented between 27 April 2020 and one month after the Bill comes into force.
The Court may therefore order the winding up of a company only if it is satisfied that the relevant ground would have applied even if COVID-19 had not had a financial effect on the company. This provision will be deemed as having come into force on 27 April 2020 and any order that is made in contravention to it in the interim will be automatically deemed void upon the Bill coming into force and the Court may give directions to restore the company to the position it was in immediately before the petition was presented.
Whilst these restrictions are wide-reaching and will deter many creditors from presenting a petition between now and the end of the relevant period, they will not affect public interest petitions nor petitions based on debts which arose long before the COVID-19 crisis.
Changes to Wrongful Trading Liability
Wrongful trading provisions in the Insolvency Act 1986 allow liquidators and administrators to apply to the Court for a declaration that directors of the company in liquidation or administration are liable to contribute personally to the assets of the company. The declaration can be made where the directors allowed the company to continue trading beyond the point at which the insolvency procedure was inevitable, and did not take every step to minimise potential losses to creditors.
The Bill does not ‘suspend’ the existing wrongful trading provisions under sections 214 and 246ZB of the Insolvency Act 1986 as may have been expected from the government announcement on 28 March 2020. Rather, the Bill directs the Courts, when determining the contribution (if any) that a director should make to the company’s assets, to assume that a director is not responsible for any worsening of the financial position of the company or its creditors that occurs during the relevant period (i.e. from 1 March 2020 to one month after the Bill comes into force). It is not clear whether the assumption will be rebuttable, but the wording suggests that it will probably not. It is also noted that there is no requirement for the worsening of the company’s financial position to have anything to do with the COVID-19 crisis.
Although this change is important for directors, directors of financially distressed companies will still need to carefully consider any decision to continue to trade. The general duties of directors remain unchanged, and so the directors of a company in the zone of insolvency still have a duty to act in the best interests of creditors. The existing fraudulent trading and director disqualification laws also remain unchanged. Also, directors of certain types of entities, as per the moratorium exclusions, are not covered by these revisions to wrongful trading liability.