The Corporate Insolvency and Governance Act 2020 (Act), which came into force on 26 June 2020, brings into effect previously announced insolvency reforms.
We summarise below the main provisions of the Act. This LawFlash was updated on 26 June 2020 following the enactment of the Corporate Insolvency and Governance Act 2020 on 25 June 2020.
As expected, the Act introduces a new moratorium procedure for a company in financial distress: a “debtor-in-possession” process with the aim of facilitating the rescue of a company as a going concern. The company’s directors would remain in place and continue to run the business with the protection of the moratorium, giving the company breathing space and preventing creditors (with some exceptions) from pursuing payment or taking enforcement action while the company explores its rescue and restructuring options. A monitor, a licensed insolvency practitioner, oversees the moratorium.
The moratorium is freestanding—it is not a gateway to a particular insolvency procedure and may not lead to any insolvency process at all if the company can be rescued during the moratorium, or can come up with a restructuring plan which is accepted by its creditors.
As also expected, the Act introduces a new restructuring procedure, also known as the “cross-class cram-down” procedure, to “eliminate, reduce or prevent, or mitigate the effect of, any of the financial difficulties” which have affected or will affect the ability of a company to carry on its business as a going concern.
The option to implement a restructuring plan is available if two statutory conditions are met:
The restructuring plan legislation will be added as a new Part 26A to the UK Companies Act 2006, and the procedures closely resemble those for a scheme of arrangement set out in Part 26 of the UK Companies Act 2006. The UK government has stated that the overall commonality between the restructuring plan and the scheme of arrangement should allow courts to draw on the existing body of case law where appropriate.
There are no set parameters in the legislation on what the restructuring plan should cover. It will therefore be up to the person proposing the plan (most likely the company itself in conjunction with the monitor of the moratorium if there is one, although technically a creditor or member could propose a plan) to put forward a plan which strikes the right balance between compromising sufficient claims to enable the company to mitigate the financial difficulties that have led it to propose the plan in the first place, and the proposed plan being acceptable to those creditors and members (or relevant classes of creditors and members) who will need to vote in favour of it.
Unlike schemes of arrangement, which require 75% by value of the relevant creditors who are compromised by the scheme to vote in favour of it, a restructuring plan contains a cross-class cram-down procedure. This provides that a restructuring plan can nevertheless be approved by the court notwithstanding that less than 75% of a particular class of creditors (the “dissenting class”) have approved the plan, if these two conditions are met:
The “relevant alternative” is whatever the court considers would be most likely to occur in relation to the company if the restructuring plan were not sanctioned by the court.
As in a scheme of arrangement, class classification is likely to be a hot topic in any restructuring plan. Classes are generally determined based on a test of “those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest,” which will likely need to be determined on a case-by-case basis.
A restructuring plan sanctioned by the court is binding on all creditors/members or the relevant classes of creditors/members and the company.
The court has absolute discretion on whether to sanction a plan, and may refuse to do so on the basis that it would not be just and equitable to do so, even if all the class approvals have been obtained.
Continuing with the “rescue culture” theme of the new legislation, the Act prohibits suppliers from invoking insolvency termination clauses in supply contracts upon a company entering into a relevant insolvency or restructuring procedure.
The measures are intended to prevent reliance by suppliers on termination and other clauses such as a right to change payment terms that are triggered by insolvency or are based on past breaches of contract. This will mean that (subject to certain exclusions) contracted suppliers will have to continue to supply, even where there are pre-insolvency arrears.
The new provisions do not apply to finance contracts such as loan agreements, and will not prevent secured creditors from exercising their rights to stop providing funding or to terminate those agreements, although the moratorium will stay their rights to enforce security or initiate legal proceedings or insolvency proceedings.
Where the new provision applies, the supplier can only terminate the contract in one of the following circumstances for the duration of the relevant insolvency or restructuring procedure:
The Act also brings into effect the previously announced temporary restrictions on winding-up petitions and temporary suspension of the wrongful trading rules as a result of the coronavirus (COVID-19) pandemic, but rather than introducing a blanket suspension of the wrongful trading rules, the Act provides that during the “relevant period” the courts are to assume that directors are not responsible for any worsening of a company’s financial position for the purposes of the wrongful trading provisions in the Insolvency Act 1986. The “relevant period” during which the temporary restrictions will apply is 1 March 2020 to 30 September 2020 and may be extended further.
The Act also includes provisions in relation to company meeting and filing requirements. Please see our LawFlash on this topic.
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