Government Introduces New Insolvency Legislation

NEWS & BLOG

NEWS & BLOG

Can you remember back to the commencement of the daily briefings from Downing Street and, in particular, the newly appointed Chancellor of the Exchequer, Rishi Sunak, promising that the Government will do “whatever it takes” to fight the economic shockwaves of coronavirus? Here we are some three months later with finally an element of political fanfare: the Government has introduced new insolvency legislation in the form of the Corporate Insolvency and Governance Act 2020 (“the Act”), which received Royal Assent on 26 June 2020.

The Act introduces a number of permanent measures and also some temporary measures to offset the issues faced by the corona virus.

The Moratorium

A UK first, the Moratorium introduces a debtor in possession style process akin to the Chapter 11 process that is widely used in America. This has not been introduced as a consequence of the pandemic, as it was the subject of a 2016 consultation headed “A Review of the Corporate Framework”, but the pandemic has certainly been used as a mechanism to get it enacted.

The Moratorium is a process designed to stave off formal insolvency and provide a company with breathing space in respect of its debts, regardless of the company’s formal solvency position. A fundamental requirement of the process is that a Moratorium (which is intended to provide directors with a period within which to explore rescue or re-structuring options) must be likely to result in the rescue of the company as a going concern. It cannot be used as a mechanism to prepare for a formal insolvency.

The Moratorium is a director-driven process, and the directors retain full management and control of the company throughout. However, the regime also requires the appointment of a monitor, who must be a Licensed Insolvency Practitioner. The monitor is required to oversee the company’s affairs on an ongoing basis for the purpose of forming a view as to whether it remains likely that the Moratorium will result in the rescue of the company as a going concern.

My next blog will look into the details of the new Moratorium and explore whether they are workable for smaller companies in the SME space.

Arrangements and reconstructions for companies in financial difficulty

The Restructuring Plan is another newly introduced process which is broadly similar to a Scheme of Arrangement. It involves a compromise/arrangement being proposed by a company and its creditors (or a class of creditors) or its members (or a class of its members). The purpose of that compromise/arrangement is to eliminate, reduce or mitigate the effect of financial difficulties the company has or is likely to encounter that will inhibit its ability to carry on its business as a going concern.

The significant difference to a Scheme of Arrangement is that there is no requirement for a majority in number in each different class, and the proposed compromise/arrangement may still be sanctioned even if the 75 per cent approval threshold is not met for all relevant classes of creditors and members. This is subject to the Court being satisfied that those who have not agreed will be no worse off under the proposals than the likely alternative and at least one other class of creditors or members has met the approval threshold.

As with Schemes of Arrangement, once sanctioned by the Court all creditors and members are bound by the terms of the Restructuring Plan, opening up the possibility of a cross-class cramdown of creditors for the first time in UK insolvency law.

Termination Clauses and Protection of Supply

The aim is to protect the supply of goods and services to companies that are in relevant insolvency procedures that include the new Moratorium as well as more familiar processes such as Administration, CVA and liquidation.

The new provisions will prevent termination or variation of a contract under which goods or services are supplied to a company, or the exercise of any other right of action that may arise, as a direct result of that company entering into a relevant insolvency procedure. The protection will also apply even where the ground for termination arose prior to the insolvency process.

Suppliers will be relieved to hear that they can terminate a contract with the permission of the Court (on the grounds that the continued performance of the contract will cause hardship to the supplier) or by mutual agreement to terminate the contract with the insolvent company.

There is also a temporary carve out for small suppliers whilst we are in the midst of the pandemic.

Temporary measures

Wrongful trading
With effect from 1 March 2020 (another case of retrospective legislation that appears to be creeping in) through to 30 September 2020, a director cannot be found personally liable to make a contribution to the assets of a company if the deficiency of a company worsens while they make their best efforts to continue to trade during the pandemic. This is an amendment to the wrongful trading provisions set out in Section 214 of the Insolvency Act 1986.

Winding-up petitions
To ensure that companies are not wound up due to financial distress suffered as a consequence of the pandemic, the Act provides that:

• Statutory demands served on a company during the relevant period cannot be used to commence a winding-up process on or after 27 April 2020. This effectively means that all statutory demands served on a company during that period will be automatically void, even if the company is in financial difficulties for reasons other than coronavirus.
• A creditor cannot present a winding-up petition during the relevant period on the grounds of a company’s inability to pay its debts unless it has reasonable grounds for believing that the pandemic has not had a financial effect on the company or that the debt issues would have arisen anyway.
• The Court may not grant an order in respect of any winding-up petition presented after 27 April 2020 unless it is satisfied that the issues would have arisen even if the coronavirus had not had a financial effect on the company.
• Winding-up orders granted after 27 April 2020 but prior to the Bill coming into force are void if the Court would not have made the order if applying the terms of the Bill in its consideration of the petition.

Miscellaneous
There have also been a raft of temporary changes amending corporate governance legislation. These include providing companies with greater flexibility on conducting their general meetings and extending the reporting periods. An interesting point here is that even if a company doesn’t have the provision for holding anything other than a physical AGM, the legislation temporarily grants this power. These changes also bring PLC’s into line with the other provisions introduced by the FCA.

And finally…

Something that was discussed at length in the House of Lords was the provisions around Pre-Packs. Whilst the majority of pre-packaged sales meet all the criteria of Statement of Insolvency Practice 16 and ensure that a business can be restructured to return it to profitability, there is still a sense of a stigma that refuses to go away. The sunset provision inserted within the Small Business Enterprise and Employment Act 2015, giving the Secretary of State until 26 May 2020 to bring in new regulations around sales to a connected party, were extended to the end of June 2021. Let’s watch this space.