This briefing was updated on 2 December 2020.
The Corporate Insolvency and Governance Act 2020 (the "Act") received Royal Assent on 25 June 2020 following a fast-tracked legislative process, with the majority of provisions taking effect from 26 June 2020.
The Act introduces a number of temporary measures in response to the Covid-19 crisis, as well as new permanent reforms of the UK insolvency regime. This note summarises the key restructuring and insolvency-related aspects of the Act.
Summary of the measures
The Act introduces a new restructuring tool into the Insolvency Act 1986 in the form of a free-standing moratorium which can be instigated through a relatively simple process by the directors. The aim of the moratorium is to provide a company in financial distress with breathing space to explore its restructuring options free from the majority of creditor action. Whilst the moratorium is available for use by most types of companies, there are detailed eligibility requirements (some of which have been relaxed temporarily to account for the effects of COVID-19).
The moratorium is a debtor-in-possession option. Whilst it is overseen by a "monitor" (an insolvency practitioner), the directors retain the majority of the day-to-day control of the company.
The moratorium is only available where a company is unable, or likely to become unable, to pay its debts and there is a likelihood of rescuing the company as a going concern. Although it is not necessary to identify the particular desired outcome before using the moratorium, it should involve the survival of the company. Therefore the rescue could be achieved through a CVA, solvent sale, scheme of arrangement, restructuring plan or by other consensual agreement with creditors. The moratorium is not appropriate for use as a preliminary step before a pre-pack or other insolvent process as this would not ordinarily involve the survival of the company as a going concern.
The initial term of the moratorium is 20 business days, however it is possible for this period to be extended in certain circumstances once by the directors, or otherwise with the approval of creditors or by the Court.
The moratorium provides the distressed company with protection against creditor action similar to that afforded to companies in administration. However, once in a moratorium, there are certain restrictions on what the directors of the company can do without the consent of the monitor or the Court and the company must ensure that it pays certain types of pre and post-moratorium debts. The moratorium is also required to be publicised widely and all creditors must be notified.
See below for a detailed outline of the new free-standing moratorium.
The Act introduces a new restructuring mechanism within the Companies Act 2006 for companies which are in financial difficulty. Such companies (or their creditors, members or appointed insolvency practitioner) will be able to propose a restructuring proposal between the company and its creditors or members. This proposal will involve an arrangement or compromise aimed at eliminating, reducing or preventing, or mitigating the effect of, the company's financial difficulties. The contents of the proposal are flexible and not prescribed.
The restructuring plan mechanism can bind all creditors, including secured creditors and junior classes of creditors even if they vote against the plan, through the use of a cross-class cram down provision. However, there are conditions to cross-class cram down, including a requirement that the court be satisfied that no member of the dissenting class(es) be any worse off under the restructuring plan than they would be in the event of the likely alternative if the plan was not approved.
The intention of this new restructuring mechanism is to fill the gap between CVAs (which cannot bind preferential or secured creditors) and schemes of arrangement (which lack a cross-class cram down mechanism), but not to replace or impact upon either of these two procedures. This is a standalone procedure, but it can be used alongside a moratorium.
Many of the provisions for the restructuring plan are similar to the scheme of arrangement mechanism. In particular, similarly to the process for a scheme of arrangement, there is a requirement for multiple Court hearings. The intention is that the Court will be able to draw on scheme of arrangement jurisprudence where appropriate.
See below for a detailed outline of the new restructuring plan mechanism.
The Act introduces new measures into the Insolvency Act 1986 in relation to contracts for the supply of goods or services as follows:
This will mean that (subject to certain exclusions), suppliers will be obliged under their supply contracts to continue to supply to a customer once it enters an insolvency or restructuring process, even where there are pre-insolvency arrears. They will also be prevented from making the payment of such arrears a condition of continued supply.
The new provisions build on the existing essential supplies regime, which requires certain essential suppliers to continue to supply an insolvent company notwithstanding contractual termination rights. The new provisions will prevent suppliers of a much wider range of goods and services from relying on termination clauses or doing "any other thing" (e.g. changing payment terms) due to a company entering into a qualifying restructuring or insolvency procedure.
The relevant contract may only be terminated if the company or the appointed insolvency practitioner (e.g. if the company is in administration or liquidation) consents, or with the leave of the Court if the Court is satisfied that the continuation of the contract would cause the supplier hardship.
If the supplier's right to terminate arises after the insolvency or formal restructuring process begins (e.g. for non-payment of goods supplied after that time), then there is no prohibition on termination.
A number of types of suppliers are exempt from these measures, for example suppliers who provide financial services and those who are covered by the existing continuation of essential supplies provisions.
Suppliers which are small companies2 are also temporarily exempt in response to COVID-19 (this will apply for the period between the Act coming into force and 30 March 2021). Where a company enters into a formal restructuring procedure or insolvency after this period, small company suppliers will be affected by these provisions unless otherwise exempted.
Unlike the continuation of essential supplies regime, suppliers will not be permitted to require a personal guarantee to be provided by the office-holder or the directors as a condition of the continuation of supply.
Click here for our comprehensive briefing note on this topic.
There is a further measure in the legislation that will enable the Secretary of State to temporarily amend corporate insolvency related legislation. This will enable the legislative insolvency and business regime to react quickly and adapt to the uncertain future challenges COVID-19 may bring. The powers are wide ranging, but there are also some significant restrictions on their use.
The Act has introduced two new measures to reduce the threat of winding up petitions and statutory demands to companies during the COVID-19 period.
The first temporary measure prevents a creditor from presenting a petition for the winding up of a company on the basis of its inability to pay debts during the COVID-19 period unless the petitioner has reasonable grounds for believing that COVID-19 has not had a financial effect on the company, or that the ground for winding up would have applied even if COVID-19 had not had a financial effect on the company. This provision has retrospective effect from 27 April 2020 and (following a recent extension) will apply until 31 December 2020.3
The second temporary measure prevents the use of a statutory demand as a basis for issuing a winding-up petition against a company. The provision applies to all statutory demands served between 1 March 2020 and 31 December 2020 and prevents them from forming the basis of a winding-up petition presented after 27 April 2020.
There are provisions to rectify the situations where a petition has been brought, or a winding-up order made prior to the enactment of the new measures.
There are also temporary measures to ensure that a company who has received a potentially valid winding up petition on the basis of its inability to pay debts will not need to seek a validation order from the Court in order to continue to trade while the petition is outstanding.
The Insolvency Act 1986 wrongful trading provisions require directors to take every step to minimise loss if they consider that a company has no reasonable prospect of avoiding insolvent liquidation or administration. Failure to do so results in a risk of personal liability for the director in respect of the net deficiency caused to the company's creditors from the point when they should have realised that there was no reasonable prospect of avoiding an insolvency process.
The Act introduces a temporary safe harbour for directors of the majority of companies. The Court will not hold a director responsible for any worsening of the financial position of the company or its creditors, initially during the period between 1 March 2020 and 30 September 2020. The safe harbour measures have since been reintroduced and will now run from 26 November 2020 to 30 April 2021 . There is no requirement to show that the company's worsening financial position was due to COVID-19. Secondary legislation may be used to extend this period further if the impact of the pandemic on business continues.
This will assist directors to take decisions on trading in the uncertain times of COVID-19 without this specific threat of personal liability. However a number of other duties (such as acting in the best interests of creditors and avoiding fraudulent trading) continue to apply, and directors should still act within these duties and be mindful that there remains a risk personal liability or disqualification for breach of these duties.
A number of types of companies are excluded from this temporary suspension of liability, including insurance companies, banks, building societies, electronic money institutions, companies that are a party to a market contract, companies that are subject to certain other capital market arrangements, and certain other types of financial services companies.
The Insolvency Act will introduce a standalone moratorium preventing creditor enforcement action being taken against a company while it considers and implements a rescue. It will be available for all companies who meet certain eligibility criteria and qualifying conditions.
Entry into the moratorium will be triggered by filing the necessary papers at Court (a process resembling the current procedure for an out of court appointment of an administrator) unless the company is an overseas company or has a pending winding up petition, in which case there will need to be a Court hearing. There are additional requirements if the company is a regulated entity.
The moratorium will be overseen by one or more monitors (who will be insolvency practitioners and officers of the Court), however the directors will remain in charge of the company generally and run the business on a day-to-day basis. The monitor will notify all creditors and Companies House of the moratorium. The monitor must continually assess whether it remains likely that the moratorium will result in the rescue of the company as a going concern.
The moratorium begins when the documents are filed at Court (if out of Court) or otherwise when the Court order is made.
A number of restrictions apply during the moratorium, including the following4:
The moratorium will be terminated in the following circumstances:
During COVID-195, there will be a number of relaxations to the new legislation, including:
Restructuring plan proposal: further detail
The Insolvency Act introduces new Companies Act 2006 provisions for arrangements and reconstructions for companies in financial difficulty which allow such companies to propose a restructuring plan.
The Court may may sanction a restructuring plan despite it not having been approved by a class or classes of creditors or members, provided that:
The Secretary of State has the ability to vary the conditions for cross-class cram down through the implementation of Regulations.
The Insolvency Act contains additional provisions for restructuring plans containing specific types of arrangements, including a reconstruction of one or more companies or an amalgamation of two or more companies or where the plan amends a company's articles of association.
1 The provisions apply when a company becomes the subject of the relevant insolvency procedure (e.g. for a CVA, this will be when the CVA is approved, not when the CVA is proposed, and for administration, this will be when the company enters administration, rather than taking steps to appoint administrators by serving a notice of intention to appoint, for instance). There is the potential that suppliers will use earlier termination trigger points to mitigate risk.
2 The qualifying conditions are that at least two of the following apply: (i) the supplier’s turnover was not more than £10.2 million (or an average of £850,000 each calendar month if the supplier is in its first financial year); (ii) the supplier’s balance sheet total was (or is) not more than £5.1 million; and (iii) the number of the supplier’s employees was (or is) not more than 50.
3 In addition, the Court should not make a winding-up order on the basis of a petition presented during this period unless it is satisfied that the company would be unable to pay its debts even if coronavirus had not had a financial effect on the company.
4 In each case where monitor consent is required, the monitor should only grant this consent if it believes the relevant action would support the rescue of the company as a going concern.
5 Currently the period is set to end 30 March 2021 (following an extension), but subject to amendment.
