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Insolvency Law Reform: The Corporate Insolvency and Governance Act 2020 - Myles Kelly

The Corporate Insolvency and Governance Act 2020 (hereafter CIGA) came into force on 26th June 2020 with the effect of making the ‘most significant changes to UK insolvency law in a generation’. This normative statement derives from CIGA’s introduction of a number of ‘debtor friendly’ measures to English restructuring and insolvency law which, prior to its enactment, had been regarded as ‘creditor friendly’. Housed within this legislation were also temporary measures introduced specifically in response to the pressing challenges that coronavirus brought to businesses, and it was these measures that ensured that the Act had a rapid passage through the UK parliamentary process, making its way from first publication to Royal assent in just over five weeks. This article will therefore seek to explain both the permanent and temporary measures introduced by the Act whilst simultaneously assessing whether the effects of the Act are as significant as claimed.

Permanent Measures introduced by CIGA

The Act introduced three legislative reforms that are intended to significantly enhance the UK’s restructuring rescue culture. These are (1) a new free-standing moratorium, (2) a restructuring plan process and (3) restrictions on termination of contracts for the supply of goods and services.

Short-term free-standing moratorium

The enactment of any moratorium facilitates a temporary suspension of law and the free-standing moratorium introduced will suspend aspects of United Kingdom Insolvency law, thereby helping distressed but viable companies. The moratorium introduced is a director-led process (supervised by an appointed licensed insolvency practitioner) and lasts for 20 business days once initiated; during this period creditors and lenders will be unable to take enforcement action against the debtor company and landlords cannot exercise rights of forfeiture (i.e. right to terminate a lease and re-enter the property). It is worth noting that not all of the companies’ liabilities are waived and the debtor company must continue to pay some of its debt during the moratorium which includes wages and amounts due under financial contracts, including loan agreements. Nonetheless, the introduction of this moratorium rectifies a prior gap in UK law (the so-called lack of a ‘debtor in possession’ process) by leaving the directors in control whilst they implement a plan to rescue the company as a going concern, providing a more than credible alternative to the previously utilised company voluntary arrangement mechanism. This new moratorium process will function to provide companies ‘breathing space’ from creditor action in which they can pursue a turnaround plan without adding significant costs or bring as much stigma as administration and the focus on the recovery of the company, rather than the realisation of assets, is indicative of a marked shift to a debtor-focused process.

Restructuring plan process

The restructuring plan process introduced by CIGA is a court-supervised restructuring process which is described as largely being ‘modelled on schemes of arrangement but with the addition a cross-class cram-down’. By way of necessary context, a scheme of arrangement is utilised contrary to the Companies Act 2006 via a court process and helps a company restructure its debt; in a Scheme the insolvent company looks to compromise different classes of creditors with each class having similar rights. Each class votes on the Scheme and a majority by number is required for its enactment. A cross-class cram down mechanism however allows a court to sanction the approval of a compromise whereby dissenting classes of creditors are bound on certain conditions and the first example of the cross-class cram down mechanism in action was when Norton Rose Fulbright advised a syndicate of lenders to DeepOcean Group Holding on its successful restructuring via inter-conditional Restructuring Plans (under the new Part 26 A of the UK Companies Act 2006, inserted by CIGA). Here, the UK branch of DeepOcean group business underperformance had been exacerbated by Covid 19 and the restructuring plants provided for different treatment for the different categories of creditors, ultimately concluding that the requisite conditions had been met to invoke the cross-class cram-down. In consideration as whole, the introduction of the CIGA will provide greater remedial flexibility than seen before especially since the moratorium can be exercised in conjunction with the restructuring plan functioning either as a freestanding procedure or a gateway into another insolvency procedure.

Restrictions on termination of contracts for the supply of goods and services (‘ipso facto clauses’)

The third permanent change is a restriction on suppliers of goods or services for terminating a contract or supply because the customer has entered a relevant restructuring or insolvency process. Often when a company goes into an insolvency process, suppliers use the threat of termination to require the payment of all arrears as the price for continued supply and/or to change the terms, perhaps by increasing prices for the goods or services. This can make the ongoing trading of the business more challenging and potentially reduces the return to creditors. The restrictions introduced by the CIGA, which apply to all suppliers of goods and services, go much wider than the IA 1986 which only prevents utilities and IT systems suppliers from terminating upon insolvency and so maximises the opportunities for the rescue of businesses reliant on the continuation of supply agreements.

Temporary Measures in Response to the COVID-19 Pandemic

The Act additionally introduced three temporary measures (1) restrictions on the use of winding-up processes, (2) temporary changes to wrongful trading rules and (3) a relaxation of meeting and filing requirements. These temporary measures naturally differ from those discussed above as they were introduced as a direct response to Covid 19, seeking to minimise the number of businesses filing for bankruptcy during the period when the disease was most prevalent, and subsequently will no longer be part of the insolvency framework from the end of June 2021.

Prohibition of the use of the winding-up processes and service of statutory demands

A winding up petition is a legal action by which an unpaid creditor can petition the courts to force an indebted debtor company into compulsory liquidation. Any creditor who is owed more than £750 can present a winding up petition and if the company is deemed insolvent, the court will issue a winding up order and will appoint an Official Receiver to liquidate the insolvent company. However, contrary to schedule 10 of CIGA a creditor cannot present a winding-up petition from 27 April 2020 to 30 June 2021 unless it has reasonable grounds to believe that either coronavirus has not had a financial effect on the debtor company, or that the company was unable to pay its debts regardless of the financial effect of coronavirus. This is a wide-ranging restriction on creditors’ rights, as it applies to a petition for a debt which related to a contract entered into some months prior to the COVID Period, but where the debtor company has been unable to make payment due to its inability to trade in the COVID Period.

Wrongful trading

Section 214 of the Insolvency Act 1986 prescribes that wrongful trading occurs when company directors have continued to trade when they ‘knew, or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation’ and did not take ‘every step with a view to minimise the potential loss to the company’s creditors’. Hence, this statutory provision essentially requires that directors must be found to have acted reasonably and responsibly in the time preceding the company’s insolvency to avoid wrongful trading proceedings. Section 12 of CIGA however provides for the temporary suspension of these wrongful trading rules, and this suspension ought to prevent directors from hurrying to start insolvency proceedings where they otherwise would have done so. This is because wrongful trading, where made out, waives limited liability protection and this means that directors could be personally liable for debts and trading losses, a potentially dire consequence. Whilst the other liabilities of company directors under Insolvency Act 1986 remain unaffected (e.g .they will continue to receive sanctions if they attempt to defraud creditors), this provision nonetheless is a positive move in ensuring business survival and ought to encourage directors to continue to trade through the COVID crisis.

Filing of accounts and meetings

The third temporary measure includes an extension to deadlines for filing accounts and to other Companies House filing deadlines, contrary to section 38 and 39 of CIGA. In addition to this, section 37 and schedule 14 of the Act provides that regulations surrounding company meetings, whether AGMs or general meetings, such as the requirements that meetings be held at a particular place, meetings be cast in person and meetings must be held with a quorum of participants together in one place, no longer needed to be met. This collection of measures seeks to ease the administerial burden on companies whilst simultaneously ensuring that they are able to hold meetings in a manner consistent with the need to prevent the spread of coronavirus.

In sum, the CIGA represents a necessary and significant reform to the insolvency framework in the United Kingdom, permanently increasing restructuring options for businesses and transforming the way creditors and other stakeholders interact with businesses in financial difficulty.

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Great read!


Thank you!

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