Corporate Insolvency and Governance Bill – a response to Covid-19 and the promotion of the UK’s Rescue Culture

On 21 May 2020, the Corporate Insolvency and Governance Bill (the Bill) was laid before Parliament. It has long been talked about as a tool to support our corporate insolvency regime; administration believed by some to be inadequate as a rescue tool.  In addition, it responds to the Covid19 issues companies face which were first announced by Business Secretary, Alok Sharma MP, on 28 March 2020.  Since then businesses (both creditors and debtors) and practitioners have been eagerly awaiting further detail.

This article provides a summary of the provisions split into the following categories and more detailed analysis will follow as practitioners get their heads around how the Bill will operate in practice.

The key proposals in the bill are:

The permanent provisions introduce the biggest change in our restructuring and insolvency landscape since the Enterprise Act.  Alongside the Bill's interaction with the existing insolvency regime, the devil is in the detail of the 238 page Bill (subject to potential amendment in its passage through Parliament).

Immediate response to Covid-19

Coronavirus has had a sudden and severe effect on businesses, with the mandatory lock down meaning that "business as normal" has been far from normal.  From the furloughing or redundancy of employees to the borrowing required by UK businesses on the Government introduced loan schemes, few businesses have escaped the need to carefully manage their cash and to put more debt onto their balance sheets.  All this at a time when there can be little certainty of being able to avoid insolvency longer term or being able to pay creditors as they fall due and who have enforcement rights.  It has been a worrying time for businesses and their boards.  The Bill seeks to address two areas of immediate concern:

Suspension of Wrongful Trading Liability

Wrongful trading provisions within the Insolvency Act 1986 provide that a director can be made personally liable for the losses of a company where they continue to trade in circumstances where there was no realistic prospect of avoiding a formal insolvency event, such as an administration or a liquidation.  The Bill does not remove wrongful trading per se but removes the threat of personal liability. In order to limit the consequence of the wrongful trading provisions, when calculating the appropriate contribution that a person is to make, the court is to assume that the person is not responsible for any worsening of the financial position of the company or its creditors that occurs during the period from 1 March 2020 to either 30 June 2020 or, if later, one month after the Bill is enacted.

This provision is designed to encourage directors to continue to trade through the crisis despite there being no certainty of the future nor an absolute ability to avoid an insolvency.  As already noted, however, in our earlier briefing, directors are subject to a number of duties and responsibilities not just wrongful trading, and the need to take account of the interests of creditors at this time remains.  Prudent and careful decision making remains the order of the day.

Restriction on use of Statutory Demands and Winding up Petitions

These provisions in the Bill are intended to restrict the ability of a creditor to use a statutory demand and/or winding up petition to recover a debt due.  At a time when cash is essential both for the debtor and the creditor the concern was that use of these existing tools could lead to increased insolvencies of businesses that, but for Covid19, would have paid their creditors in the ordinary course.  Therefore, the Bill introduces, with retrospective effect to 27 April 2020, a prohibition on the presentation of winding up petitions until 30 June 2020 or, if later one month after the enactment of the Bill if:

• the petition is based on a statutory demand served between 1 March and 30 June 2020; or
• The petitioning creditor fails to evidence that they had reasonable grounds for believing that (a) coronavirus has not had a "financial effect" on the company, or (b) the winding up ground relied upon would have arisen even if coronavirus had not had a financial effect on the company.
  
  

The meaning of "financial effect" is where a debtor's financial position worsens in consequence of, or for reasons relating to, coronavirus.  Whilst on the face of it this would appear to apply to most companies at this time it will be interesting to see how this is interpreted by the courts.  In the short term though the provision is likely to dissuade creditors from seeking to use these tools during the current pandemic, the challenge, however, will be as we turn the corner when businesses are still likely to have significant cash constraints – the restricted period may require extension.

Permanent reforms

New Moratorium

A new "breathing space" moratoriumwill be available to an "eligible" company who is, or is likely to become unable to pay its debts. It appears to be available to most companies save those in banking and insurance markets.  An insolvency practitioner (called a Monitor in this case) will be appointed and is required to make a statement that it is likely that the moratorium would result in the rescue of the company as a going concern (there are some temporary provision to relax this for a short initial period to deal with the Covid19 pandemic).

This new form of moratorium has an initial period of 20 business days but can be extended by the directors for a further 20 Business Day period or for a period up to a maximum of one year by creditors' consent (following the defined procedures) or for a longer period if ordered by the court.  The moratorium will be binding on both secured and unsecured creditors and incumbent management will remain in control of the company during the moratorium period.  Whilst the moratorium has some similarities to the administration moratorium it is not identical.

The moratorium is designed to provide a payment holiday from most pre-moratorium debts and the Monitor will have an important role in approving payments above prescribed thresholds and the granting of any non-ordinary course sales or creation of security.

Creditor protections based on unfair prejudice are included in the provisions to allow for challenge of actions of both the directors and the Monitor.

Save where the moratorium lapses, it would be brought to an end when the company enters into an insolvency procedure or when the Monitor or a court so determine.

The detail of the new moratorium requires analysis but on the face of it could provide much needed protection to companies looking to use a company voluntary arrangement to restructure or to achieve a consensual restructuring with its creditors.

New Restructuring Plan

Companies have long been able to use a scheme of arrangement as a restructuring tool and the proposed new restructuring plan is modelled on the existing scheme of arrangement but with enhanced rights similar to those used in Chapter 11 in the US.  It appears that the new restructuring plan will be capable of binding dissenting classes of creditors and members known as "cross class cram down" as opposed to simply binding minorities in a particular class which is the current position.  Any plan will still need to pass the usual tests of being fair and equitable.  Not only will the plan require court sanction but it will require 75% in value in each class to vote in favour.

The UK has used the existing scheme of arrangement tool to great effect over a number of years and it is hoped that these additional provisions will further strengthen our restructuring offering.

Ipso Facto – termination provisions of suppliers

These provisions are designed to prevent suppliers from exercising contractual rights usually triggered upon insolvency that allow them to cease supply immediately.  Often such supplies are critical to achieving continued trading or the rescue of a business through an insolvency process.

The Bill seeks to suspend (a) any automatic termination (or any other automatic effect); and (b) the arising of an entitlement to terminate - in a contract for the supply of goods or services, where the right derives from a contractual provision taking effect when the counterparty is subject to an insolvency procedure (which will include the new "breathing space" moratorium above).

Current legislation already places restrictions on utility companies stopping supply but this now extends that principle to wider suppliers and also prevents the amendment of contractual terms, to increase price for example for delivery in insolvency.  There are some exemptions built into the drafting where continued supply would cause supplier hardship and for a temporary Covid19 related period there is an exception for small company suppliers. Otherwise suppliers are protected as they will be paid for continued supply.

Comments

As the Bill transitions quickly through Parliament, both creditors and debtors will be keen to get to grips with the practicalities of the proposals to assess whether the additional tools offer better opportunities for corporate turnaround than the existing regimes.

For creditors and contractual counterparties, the additional temporary protections for debtors dramatically change the usual levers creditors would look to pull. Statutory demands have in the short term lost the simplicity and consequences for which they are often chosen.

Forbearance has been the prevailing approach in many cases since coronavirus took hold. In the immediate period these proposals will further encourage parties to defer aggressive debt enforcement but in the longer term the proposals may encourage better stakeholder engagement particularly where companies need to restructure and reimagine to remain solvent in a fast changing world.