Posted on May 21, 2020 in Insolvency & Restructuring by Pamela Muir
The Corporate Insolvency and Governance Bill 2020 was laid before Parliament yesterday and is expected to be passed shortly after the coming two week Parliamentary recess.
The contents of the Bill and the proposals had been widely trumpeted by Government in advance of the legislation finally becoming available and there are few, if any, surprises contained within its provisions.
The Bill itself makes effectively two types of changes to the UK’s insolvency law, those that are temporary, to address perceived issues during the current COVID-19 pandemic and those intended to be permanent changes to the restructuring tools available to distressed companies.
The temporary changes are those focusing on the Government’s earlier announcements around the temporary suspension of Wrongful Trading and the promised legislation to prevent commercial landlords using statutory demands or the threat of winding-up to force tenants to pay rent. Interestingly, that proposed reform, is now not limited to commercial landlords’ actions.
The permanent changes to insolvency law, are arguable the most significant change since the Enterprise Act 2002 brought us the “new” administration process. There are 3 new areas of change, a new moratorium process to protect distressed companies whilst they try to restructure, a new restructuring process, which at last introduces into UK law, a “debtor in possession” process which has more than a nod to Chapter 11 in the USA.
The Temporary Changes
As widely mentioned in the press, and at the Coronavirus daily briefings several weeks ago, the Insolvency Act’s Wrongful Trading provisions have been suspended against company directors, temporarily, for a period from 1 March to a month after the enactment of the Bill. This can be extended if required. This is intended to protect company directors from personal liability if they trade past the point where insolvency is inevitable. The new provisions prevent liquidators and administrators from bringing claims against the director’s personally for their actions during the suspension period. The main policy hope is that directors will not make hasty decisions to wind up their companies in a period of such uncertainty. Other director duties are not suspended however and whilst this looks to be a thoughtful way to address director concerns, it both leaves directors exposed in other ways, and could be open to abuse.
Statutory demands and winding up petitions
Hoping to prevent aggressive debt collection tactics against struggling companies, the Bill includes temporary provisions to restrict the operation of statutory demands and winding-up petitions against companies where the reason for their potential insolvency is due to Covid-19.
Winding-up petitions, presented by creditors, may not be presented from the period between 27 April and 30 June (or a month after the date of the Bill) unless there are reasonable grounds for believing that COVID-19 has not had “a financial effect” on the company, and that the company would have been unable to pay its debts notwithstanding the effects of COVID-19.
The meaning of “financial effect” appears to be defined in such a way as it can be easily met by most companies; COVID-19, will have had a financial effect on a company if the company’s financial position can be said to have worsened due to reasons related to the pandemic.
This, in effect, brings in the probability of a preliminary hearing in court on any creditor petition presented to examine the “reasonable grounds” for believing the current crisis is not the reason for the debtor’s inability to pay. Given the courts are not at anything like capacity on commercial and insolvency matters, this is going to be a more effective barrier for creditors than intended, I think.
Petitions for winding-up a company cannot be presented after 27 April on the grounds that the company has failed to satisfy a statutory demand if the demand was served during the period beginning 1 March and ending on 30 June. This is surprising as the indication was that statutory demands by commercial landlords would be suspended against commercial tenants, but that restriction has not worked its way through into the Bill and it is a blanket restriction on the use of statutory demand and relying on them in terms of an insolvency process thereafter.
Miscellaneous changes in respect of Companies House filing requirements
The fixed deadlines for Companies House for filing have been extended to 42 days where the existing period is 21 days or less and 12 months in the case where existing period is 3, 6 or 9 months.
The Permanent Changes
Companies facing the threat of insolvency can now obtain a 20 business day moratorium from their creditors, to allow the company to pursue a restructuring plan, and which allows a 20 day payment holiday and protection from court action and enforcement, but only if it is likely to assist in the successful restructuring of the business.
The 20 day “breathing space” from creditor action is to allow time for the company to explore all reasonable options available to it, under supervision from a monitor.
In terms of the practicalities of implementing the moratorium period, the company has to select and engage an licensed insolvency practitioner who will confirm in a statement to creditors that the moratorium is likely to result in the rescue of the company as a going concern, which is not all that unusual to insolvency practitioners or creditors familiar with the process of an administration.
The initial 20 day period can be extended with the consent of creditors or of the Court. A request for an extension must be made within the initial 15 days of the original moratorium start date. Again, this will be challenging in the current climate give the lack of availability of court time.
What is key and interesting about the moratorium is that both secured and unsecured creditors are prohibited from taking any action against the company during the moratorium period. The company itself remains within the day to day direction of the directors whilst the monitor operates to a supervisory function. The monitor’s oversight role extends to the disposal of assets or sale of parts of the business during the moratorium period. Any decisions or actions taken by the directors or the monitor during this period are subject to review and challenge by the creditors.
A new restructuring process
A new restructuring process sits alongside the moratorium, and it is modelled on the existing scheme of arrangement procedures. It is designed to facilitate a co-operative and consensual approach to sensible restructuring needs. Any company, technically insolvent or otherwise, will be able to produce a restructuring plan, and present proposals to different classes of creditors, on the basis that implementing the restructuring plan and the variation of their debt will allow the company to continue as a going concern. What is interesting about this proposal is that although 75% of each class will be required to pass the plan, in the event that these voting thresholds are not met, the company may seek court approval to implement the plan regardless. This would effectively drag along reluctant creditors in what is called a cross-class cram-down. The new arrangement will have the ability to bind both secured and unsecured creditors against their wishes.
Supplier Termination Clauses
Unsurprisingly when suppliers find themselves with an insolvent customer they often refuse to continue to supply, particularly if there is a significant outstanding debt in relation to earlier supply. Oftentimes the contractual relationship between the supplier and customer allow termination on that basis. Unfortunately, in some cases there will be some suppliers whose continued willingness to supply an insolvent business is key to its restructuring and preservation as a going concern. Utility companies already have to continue to supply a company in insolvency and any supply during the insolvency process is met as an expense of that process. As with utilities, suppliers who are obliged to continue to supply, will be paid for new deliveries. What these provisions do is effectively prevent key suppliers from increasing price or refusing to supply until older debt is repaid. There is a provision which allows suppliers to seek relief from the courts to avoid this obligation, if they can demonstrate that it causes hardship to their own business and there is a further exemption for small company suppliers.
Breathing space, is the important theme of these reforms, along with a significant push to try to “not so gently” encourage the co-operative approach between creditors and companies that the Government is desperate to see. The Government have certainly brought into legislation the wrongful trading protection provisions that they announced several weeks ago and there are some sensible changes around Companies House and administrative matters in relation to the remainder of the Bill.
The insolvency profession, as usual, will no doubt step up and use these new restructuring tools as another option to protect jobs and protect businesses, but, it remains to be seen whether or not a temporary suspension of creditor driven petitions will protect SMEs or simply place an unreasonable burden on creditors hoping to recover much needed sums from unable or unwilling debtors.
I suspect, as is the way with most hastily introduced regimes, that the unintended consequences will be with us for some time to come. The restructuring process provisions have been discussed, but not implemented since 2018 at least, and this urgent implementation has much to be concerned about around the lack of detail. The devil, of course, is as always in the detail and I look forward to the progress of this Bill and any amendments that will follow.
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