The changing landscape of UK insolvencies: The Corporate Insolvency and Governance Bill
The highly anticipated Corporate Insolvency and Governance Bill (the "Bill") was finally published on 20 May 2020. Following its second and third readings in the House of Commons yesterday (3 June 2020), the Bill will now be considered by the House of Lords in the coming days.
The product of both a two-year consultation and some temporary measures implemented in response to the financial consequences of the Covid-19 pandemic and associated measures implemented as a result, this Bill introduces the most significant and far reaching changes to the UK insolvency landscape in over 15 years, not only aimed at supporting companies through this difficult time, but also at promoting more of a "corporate rescue" culture.
As commented in our earlier bulletin the Bill includes various measures aimed at both assisting companies to trade through the pandemic and promoting a business survival culture. These range from a series of temporary rule changes, including a temporary prohibition on issuing winding up petitions due to Covid-19 induced financial difficulties and a temporary suspension of wrongful trading (i.e. trading whilst insolvent), through to permanent changes, which were subject to the two-year consultation, and which include the exclusion of termination clauses on insolvency in supply contracts, the introduction of new moratorium and restructuring regimes for companies in financial distress.
What is new under the Bill?
The Temporary / Covid-19 related measures:
Winding up petitions
The Bill temporarily prevents the commencement of winding-up proceedings against companies on the basis of statutory demands served between 1 March 2020 and 30 June 2020. It also prevents the issue of winding-up petitions where the Covid-19 pandemic has had a negative financial effect on the debtor company between 27 April 2020 and 30 June 2020.
There are, however, some exceptions, for example where a debtor company has not complied with an order of the court for payment and the petitioning creditor is able to show that non-payment is not as a result of Covid-19.
These temporary measures will provide welcome relief to companies that have been badly affected by Covid-19, however may be unwelcome news for creditors, as it will not be possible to petition for the winding-up of a debtor company unless the creditor can demonstrate that the company's inability to pay its debts was not as a result of the pandemic.
This temporary measure only applies to companies and not to individuals.
Suspension of wrongful trading rules
The liability of directors for wrongful trading (i.e. continuing to trade whilst the company is insolvent) will be temporarily suspended. The suspension will take effect retrospectively from 1 March 2020 and will end on 30 June 2020 or one month after the act comes into force, whichever is the later. The Bill includes the option to allow an extension of the suspension for up to 6 months, if necessary.
The suspension aims to give directors greater confidence to trade and minimise losses to creditors during the Covid-19 pandemic, as they no longer face a potential personal wrongful trading claim from any future liquidator or administrator. It also recognises the difficulties and pressures that directors are facing during this turbulent period and provides a practical solution.
It is noteworthy that the suspension only covers losses incurred by a company during the period when the business was adversely affected by the pandemic. Whilst this temporary suspension may be open to abuse by an errant company director, such as a director causing a company to enter into further agreements knowing that the company is insolvent and will be unable to pay under the agreement, the other insolvency clawback mechanisms (such as preferences and fraudulent trading) remain are unaffected.
The Permanent Measures
New "Moratorium" regime
The new moratorium regime effectively stops the clock.
It aims to facilitate the rescue of a company in financial distress (and not necessarily insolvent) by providing the breathing space necessary to enable it to fully consider its options, for example by sourcing further financing, restructuring, or by entering into a voluntary arrangement.
During the moratorium period, a creditor's rights to initiate insolvency proceedings and/or other legal processes are frozen. Similarly, a creditor with a floating charge will not be able to crystallise its charge during the period of the moratorium. The Bill aims to make the process as quick and easy as possible by removing unnecessary administrative pressures.
The moratorium can be applied for by the company's directors without a court hearing and is for an initial period of twenty business days. It is possible for the directors to extend the moratorium by a further twenty business days after the fifteenth business day of the original moratorium period. Further extensions may be sought with the consent of the Monitor (see below) and the creditor, or with the court's consent.
The moratorium will be particularly useful to companies whose revenue has been disrupted, as the immediate risk of legal action over a failure to make payments will be alleviated. However, it should be noted that companies that have already been in a moratorium period at some point over the last 12 months will not be eligible for the scheme.
The moratorium will be overseen by an insolvency practitioner acting as a "Monitor", although the directors will remain in charge of running the business on a day-to-day basis. The Monitor will have the power to terminate the moratorium if certain criteria are met. Creditors who are concerned that this measure may be exploited and used as a way to escape debt enforcement will be reassured by the addition of the independent supervisory measure.
The moratorium regime is available to all companies incorporated in the UK, as well as overseas companies in circumstances where the overseas company would be capable of being wound-up under the Insolvency Act 1986 e.g. to foreign-incorporated companies where there are assets or the company's main interests are in the UK.
While the moratorium aims to support financially distressed companies, this does mean that there will be adverse effects for counterparties who will now have to wait longer to pursue debts.
New "Restructuring" Plan
There are currently two main restructuring regimes available to companies: a Company Voluntary Arrangement (an insolvency legislation regime) and a Scheme of Arrangement (a company legislation regime).
In a Scheme of Arrangement, creditors are divided into classes (based on similarities of their rights, for example floating charge holders, employees, unsecured creditors, landlords, etc). In order for a proposed restructuring scheme to be approved, it will require at least 75% by value, and a majority by number of creditors in each class to vote in favour of the scheme. The Scheme will then need to be sanctioned by the court.
Problems may arise where different classes of creditors do not meet the approval threshold. This is usually because of varying interests and differing outcomes for each class as a result of the scheme
The new Restructuring regime is intended to follow the process for approving a Scheme of Arrangement, however it will include the ability for a company to bind certain classes of creditors to a plan, even where not all classes have voted in favour of it. This is known as a "cross-class cram down" and is common in US Chapter 11 bankruptcies.
Court approval of the terms of the Restructuring will be required.
The Bill introduced the exclusion of termination clauses (often referred to as ipso facto clauses) in supply contracts, which typically allow suppliers to terminate either once a debtor company enters into a formal insolvency process or provide for automatic termination upon insolvency.
The current insolvency legislation already provides for the continuation of basic services (such as water, power, telephony etc) to continue to be provided after a company enters liquidation or administration.
- Where a supply contract for the provision of goods or services contains a provision allowing the supplier to terminate the contract or do ‘any other thing’ in respect of that contract because the company enters a relevant insolvency procedure (including the new Moratorium regime and the new Restructuring Regime), the relevant automatic termination clause ceases to have effect.
- Where an event has occurred that would have allowed a supplier to terminate a supply contract before the company entered a relevant insolvency procedure, but that right has not been exercised, that right is suspended once the company enters the relevant insolvency procedure.
- If the supplier’s right to terminate arises after the insolvency procedure begins (for example, non-payment for goods supplied after that time) then the right to terminate is not prohibited.
This measure will only apply to eligible companies and most financial services and essential services are specifically excluded. These exclusions include the category of "financial contracts", a definition which captures, amongst others, contracts for the sale, purchase or loan of commodities (including emission allowances and renewable obligation certificates (ROCs)) and swap agreements. Moreover, these will be excluded whether entered into on a standalone basis or under a master agreement structure. Derivative agreements, spot contracts, and securities financing transactions (which include commodities financing structures such as "repos") are also excluded. The Bill further confirms that the provision will not affect set off or netting arrangements.
These measures will be of particular relevance to many commodities traders, as commodity trading agreements often contain an automatic termination provision or right to terminate in the event of insolvency and, subject to the exclusions detailed above, contracted suppliers will be required to continue to supply, even where there are pre-insolvency arrears. This may be detrimental to suppliers and so it should be noted that suppliers will still be able to rely on an insolvency based contractual termination right in exceptional circumstances where they themselves would otherwise face undue financial hardship.
If suppliers do wish to terminate contracts, they should consider the full range of termination rights which may still be available to them under existing agreements and, of those, which will be most advantageous to them.
Other measures included in the Bill include Covid-19 related amendments to filing arrangements and corporate meetings. The measures are aimed at temporarily relaxing the manner in which corporate annual general meetings (AGMs) are held - for example, if a company was due to hold its AGM during the period 26 March 2020 to 30 September 2020, the company will be given until 30 September 2020 to hold the AGM.
Similarly, in respect of Companies House filings, the Bill contains provisions to allow the Secretary of State to temporarily extend filing deadlines by a period of up to 42 days, where the original filing deadline is 21 days and by a period not exceeding 12 months, where the original filing period is 3, 6 or 9 months. No extensions have been announced yet, however these are expected to follow by statutory instrument shortly after the Bill becomes enacted.
When will the Bill become law
The Bill was introduced on 20 May 2020, with the second and third readings taking place on 3 June 2020. The Bill will now be considered by the House of Lords, with any final amendments made prior to receiving Royal Assent, which we expect in late June or early July.
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