The Corporate Insolvency and Governance Act 2020 (‘CIGA’ or ‘Act’), passed in less than six weeks in the midst of the Covid-19 pandemic, introduced significant reforms to the UK’s insolvency regime. There were permanent changes, along with temporary measures to help businesses during the pandemic.
This Blog discussed the Act when it came into force, and so in this piece I want to assess how it has operated in practice. Were Allen & Overy, for example, right to claim that the Act was “nothing less than a watershed moment for cross-border restructuring”? Has the legislation lived up to its hype? Is it actually effective? Such questions urgently need to be answered as the UK heads into strong economic headwinds and more businesses are likely to need to rely on restructuring laws to survive. I argue that more still needs to be done.
What the CIGA does
To recap, the CIGA introduced three key permanent measures.
Firstly, a new Restructuring Plan, inserted into Part 26A of the Companies Act 2006, which is similar to Chapter 11 bankruptcy in the US. Under the Plan, the courts can approve a restructuring plan that binds creditors after they have voted on it and, significantly, can impose the plan on dissenting creditors. This is known as a cross-class cram down, which is the key legal innovation from the previous default mode of restructuring, the Scheme of Arrangement.
Second, the option of a twenty-day moratorium, under which creditors cannot take action against the company without the court’s permission (thus giving the company a ‘payment holiday’ on those debts), barring some important caveats. This was made through the creation of a Part A1 of the Insolvency Act 1986, and is aimed at allowing companies ‘breathing space’ to explore restructuring, and potential rescue, options.
Third, which this piece will only mention here, the Act inserts under s. 233B of the Insolvency Act 1986 a prohibition on suppliers stopping supply to a company while it is undergoing a restructuring process. According to Addleshaw Goddard, this is designed to maximise the opportunity for rescue of the company.
The Restructuring Plan
The updated Restructuring Plan was introduced to help companies where the Scheme of Arrangement would not be effective. A Scheme of Arrangement requires the vote of 75% of each class of creditors by value, and a majority in number; the Restructuring Plan does not have the latter condition.
Furthermore, there is the key innovation of the cross-class cram down. Courts can now impose the Plan despite 75% of creditors by value not agreeing to it. According to the statute, the court is now entitled, but not compelled, to impose one when it is satisfied that (A) none of the members of the dissenting class would be any worse off than they would be in the “relevant alternative” situation, and (B) that the Plan was agreed to by at least one class of creditors who “would receive a payment, or have a genuine economic interest in the company” in the event of the relevant alternative.
Described by Norton Rose Fulbright as 'arguably the most significant development in English restructuring law since schemes of arrangement were introduced in 1870', the cross-class cram down was first engaged in Re Deepocean 1 UK Ltd [2021] EWCH 138 (Ch). Here, the court approved a restructuring plan relating to three subsidiaries of DeepOcean Group despite one of them only having the backing of 64.6% of creditors. In finding that condition A was satisfied, Trower J emphasised that the phrase ‘any worse off’ was a “broad concept”. Although the starting point would clearly be a comparison of the likely economic financial return, the court had to be satisfied that the dissenting class is not worse off in relation to all aspects, including the speed of recovery and the security of any covenant to pay.
In exercising his discretion under the CIGA, Trower J expressed the view that a company will have a "fair wind" behind it if conditions A and B are satisfied. However, this seems to sit uneasily with the Explanatory Notes to the Act, which stress that courts have "an absolute discretion over whether or not to sanction a restructuring plan". And in the later case of Re Virgin Active Holdings Limited [2021] EWHC 1246 (Ch). Snowden J rejected the applicant companies' argument, based on Trower J's comments, that there was a rebuttable presumption that a plan would be sanctioned where both conditions were satisfied.
Re Deepocean can be contrasted with the subsequent case of Re Hurricane Energy PLC [2021] EWHC 1759 (Ch), where the court declined to approve a cross-class cram down. As Taylor Wessing reports, the Plan proposed by Hurricane involved issuing creditors with 95% of the company’s equity, eroding the stakes of existing shareholders. Unsurprisingly, 92% of the shareholders voted against the Plan. The court held that condition A was not satisfied since there was a realistic prospect that the shareholders would be better off if the plan was not sanctioned.
The Restructuring Plan, and in particular the cross-class cram down, has been successfully deployed in cases where a scheme of arrangement would not have worked. Re Amicus Finance plc [2021] EWHC 3036 (Ch), the first CIGA restructuring of a mid-market company, is just one example. The plan was enforced even though the senior secured creditor class had not approved it.
But the Plan has significant flaws, too. A Kirkland & Ellis analysis argues that it has proved too costly and time-consuming, especially for SMEs. For example, two court hearings (convening and sanction) and a high level of disclosure are required before a Plan can be approved. Although there have been sanctioned Plans proposed by SMEs, most were proposed when the company was already in administration, and otherwise were not substantively challenged in court. Hence, as Travers Smith argues, Restructuring Plans may not be feasible for SMEs that are not under administration, or who are facing meaningful opposition to their proposals.
The introduction of a standardised restructuring plan could help reduce costs. Also, the Kirkland analysis proposes that simple cases be dealt with by an Insolvency and Companies court judge (rather than one from the High Court) in a single hearing, or alternatively that the first hearing be dealt with out-of-court.
Another weakness concerns fears that in some circumstances creditors may find it extremely difficult to challenge plans, given the high costs involved. This runs counter to the policy objective of protecting dissenting creditors. Access to information is also a stumbling block. In Re Virgin Atlantic Airways Ltd [2020] EWHC 2191 (Ch), it was suggested that creditors only receive sufficient detail about the proposals at such a stage where it is hard to suggest a viable alternative, given how well-formulated the plan is. Further, the time period between the convening and sanction hearings is seen by some as too short for creditors to come up with convincing rebuttals of the evidence.
One solution to this problem suggested by Travers Smith is to require greater transparency and disclosure of information. The aim would be to ensure that creditors have sufficient time to review and rebut proposals.
There is also criticism of the 75% creditor consent threshold under the Restructuring Plan. Almost half of respondents to the Insolvency Service's recently published Evaluation Report on the Act supported a reduction to a simple majority or two thirds. This reflects concerns about the competitiveness of the UK restructuring regime in relation to other jurisdictions who have implemented Plans with lower thresholds, like Germany, the Netherlands, and Singapore.
The Moratorium
To effect a moratorium, the company requires (A) a statement from its directors that the company is, or is likely to become, unable to pay its debts, and (B) a statement from a proposed monitor (an independent insolvency practitioner) that in their view it is likely that a moratorium would result in the rescue of the company. The monitor is then appointed to supervise the company’s affairs. If the monitor considers that the company cannot pay its pre-moratorium debts for which the company does not have a payment holiday, or that the moratorium is no longer likely to result in the rescue of the company, the monitor must terminate the moratorium.
The moratorium is controversial. First and foremost, the moratorium does not apply to financial creditors (i.e. banks). An exclusion on companies subject to capital market arrangements adds to the many large companies which are prevented from using the moratorium. MHG v Dymant and ors [2022] EWHC 340 (Ch) was the first contested moratorium. The creditor, whose debts were not covered by the moratorium, alleged that the moratorium should have been terminated since the first condition of termination was satisfied. Whilst agreeing that the monitor should have terminated the moratorium at the time, the court did not enforce the termination due to a subsequent offer of immediately available interim funding coming through to the company. This case reveals the obvious, but intended, exemption in the legislation from financial creditors, which the Kirkland report argues dampens the effectiveness of the moratorium. Furthermore, the duration of the moratorium is arguably too short to be effective.
The moratorium has not been a popular tool. From the Act’s introduction in June 2020 to February 2022 there have been less than fifty cases utilising it, compared to the Government’s prediction of 1,250 cases per year. Clearly, the market is unconvinced. Efforts at persuasion should start with expanding eligibility.
Conclusion
Whilst the CIGA is a welcome change to assist companies with restructuring, more can be done to improve its reach, and access to its measures. Fundamentally, allowing for Restructuring Plan cases to be heard in lower courts, and creating at least some payment holiday from financial creditors. Such changes would need to occur soon, given the difficulties that UK businesses, and the economy, are facing.