The Corporate Insolvency and Governance Act 2020 represents the most significant reform to the insolvency framework since the introduction of administration under the Enterprise Act in 2002. It implemented new procedures and measures to rescue companies in financial distress due to the COVID-19 outbreak and the resulting economic crisis.
The Act introduced three major permanent reforms to insolvency law, which are not time-limited by reference to COVID-19. These reforms seek to create a more debtor-friendly rescue environment for companies in difficulty and reduce the number of companies entering into restructuring or insolvency procedures.
The Act also introduced several temporary insolvency and corporate governance changes, which will remain in place until September 2020 unless extended. These temporary measures seek to tackle the pressures resulting from the COVID-19 pandemic and mitigate the insolvency regime’s effect on the responsibilities of directors whose businesses are struggling due to the COVID-19 crisis.
The legislation is complex and long. This note is intended only to summarise its key points rather than provide a full and detailed analysis.
Permanent Changes
Moratorium
The Insolvency & Corporate Governance Act introduces a new standalone moratorium procedure, which can be used to afford distressed but viable businesses some breathing space from creditor action to pursue a plan to rescue the company as a going concern. The initial period for the moratorium is 20 business days, but this can be extended for a further 20 business days without consent. Further extensions of up to one year or more are available with the court’s permission or creditors’ consent.
In that moratorium period, the directors remain in control, but a licensed insolvency practitioner is appointed as a “monitor”, whose consent is required before the directors can undertake certain transactions.
As long as the moratorium applies, it prevents the commencement of insolvency proceedings or other legal proceedings against the company (including the enforcement of security) and the forfeiture of a lease. However, the company must pay debts falling due during the moratorium, although with certain exceptions, it does not have to pay debts falling due before the moratorium.
Restructuring plan
This new reorganisation measure is a court-supervised restructuring process similar to a scheme of arrangement, but with the addition of a “cross-class cram down”, which enables the court to sanction the approval of a compromise or arrangement where dissenting classes of creditors are bound on certain conditions. The restructuring plan is available to companies which have encountered, or are likely to encounter, financial difficulties that affect their ability to carry on the business as a going concern and that propose a compromise or arrangement between the company and its creditors or any class of them (or the members, or any class of them).
As with a scheme of arrangement, creditors are divided into classes according to the similarity of their rights before and as a result of the plan. Each affected creditor has the opportunity to vote on the plan and provided that one class of creditors who would receive a payment or have a genuine economic interest approves the plan and the plan delivers a better outcome than liquidation or administration, it becomes binding on creditors of all classes if sanctioned by the court. The court’s role is to assess whether the classes have been properly formulated, whether the plan is fair and equitable and whether each creditor receives more than they would under liquidation or administration.
Ban on termination (known as ipso facto) clauses
The third permanent measure restricts suppliers of goods and services from terminating, varying or exercising any right under a contract because the counterparty has entered an insolvency or restructuring process. Suppliers are also banned from requiring payment of sums falling due before the insolvency as a condition of ongoing supply. As a result, suppliers shall continue to supply the debtor on the same terms without a guaranteed payment of arrears. There are significant carve-outs (including by contract and entity type) to the operation of these provisions, including a temporary exclusion for small company suppliers, which expires on 30 September 2020.
Temporary Changes
Suspension of wrongful trading
The Insolvency & Corporate Governance Act includes a temporary suspension of the wrongful trading regime, such that the court, in considering whether a director should contribute to the assets of the company, is to assume that the director is not responsible for any worsening of the financial position of the company or its creditors between 1 March 2020 and 30 September 2020. It removes, therefore, one potential threat of personal liability on directors trading through the COVID-19 pandemic.
Winding-up petitions and statutory demands
The Act temporarily removes the threat of statutory demands and winding-up petitions when the unpaid debt is due to COVID-19. From 27 April to 30 September 2020, a creditor cannot present a winding-up petition unless it has reasonable grounds to believe that the debtor was not financially affected by COVID-19 or could not pay its debts regardless of the pandemic. No winding-up order will be made if the court dissents with the creditor.
Similarly, the measure bans using statutory demands served between 1 March 2020 and 30 September 2020 to present a winding-up petition on or after 27 April 2020.
Filing requirements and members’ meetings
The Act grants a temporary extension to account filing and other Companies House filing deadlines and provides temporary flexibilities relating to how and when members’ meetings of private and public companies may be held.
For further information, call corporate lawyer Evangelos Kyveris today.
Note: This is not legal advice; it provides information of general interest about current legal issues.