STOP PRESS: Since the introduction of The Corporate Insolvency and Governance Act 2020 (CIGA) in June 2020 and the date this blog was originally written, there have been multiple amendments and extensions to the temporary provisions intended to take account of the continuing unprecedented financial climate caused by the Coronavirus pandemic. We highlight the key updates as follows:
After the Business Secretary announced almost two months ago that the government would be bringing forward new legislation for approval in Parliament which would provide shiny new insolvency tools and suspend laws prohibiting wrongful trading retrospectively from 1 March to 30 June 2020, we have finally (as at 20 May 2020) had sight of the long-anticipated draft Bill. The Bill will receive its second reading on 3 June but will then go before the House of Lords. It is unlikely to receive Royal Assent before the end of June.
A more considered analysis will follow after the second reading of the bill next month, but in the meantime here are our…
Companies which are (or are likely to become) insolvent will be able to obtain a moratorium lasting for an initial period of 20 working days to allow them some breathing space to seek further credit or restructure free from creditor action. During the period of the moratorium, the effects include: landlords being unable to forfeit a company premises lease without the permission of the court, no steps able to be taken to enforce security over company property (except to enforce a collateral security charge or arrangement), and no steps able to be taken to repossess goods except with permission of the court.
Companies would automatically be eligible to obtain a moratorium unless they are expressly excluded (e.g. if they are/ were subject to a current or recent formal insolvency procedure, insurance companies, banks, investment firms etc.). Directors would obtain a moratorium via court application with a statement that the company is unable to pay its debts and a statement from the proposed ‘monitor’ that it is likely that a moratorium would result in the rescue of the company as a going concern. Once in place, moratoriums would be supervised by the monitor, who will need to be a licensed insolvency practitioner.
Directors who wish to extend this period would be able to do so for a further 20 working days without requiring creditor consent, by filing a further notice and statements with the court. Further extensions beyond 40 working days would be subject to pre-moratorium creditor approval or the permission of the court.
Companies which have encountered or are likely to encounter financial difficulties which are affecting or will affect their ability to carry on business as a going concern would be able to propose a restructuring arrangement to any class of its creditors or members, which aims to eliminate, reduce, prevent, or mitigate the effect of any of these financial difficulties.
The proposed arrangement would have to be agreed by 75% by value of creditors or members of each class. Dissenting classes of creditors and members would also be bound by the restructuring agreement, by sanction of the court, provided that it is satisfied that no dissenting class would be worse off than if the company entered into a full insolvency procedure. This cross class ‘cramming down’ should enable the company to compromise its financial and equity structure without resorting to an insolvency procedure between 1 March and 30 June – effectively providing further breathing space to companies in difficulty.
Creditors would be unable to petition for the winding up of a company between 27 April (retrospectively) and 30 June 2020 based (where used) on the expiry of a statutory demand served between 1 March and 30 June. Similarly, creditors would be unable to petition based on an unsatisfied judgment, inability to pay debts as they fall due, or the value of company assets being less than its liabilities, unless that creditor holds reasonable belief that Coronavirus had not had a financial effect on the debtor company, or the circumstances would have arisen even if Coronavirus had not had a financial effect on the company.
The court “may” make a winding up order from a petition presented after 1 March, so long as it is satisfied that the ground relied upon would apply even if Coronavirus had not had a financial effect on the debtor company.
However, existing winding up orders which were made on or after 27 April but before the day the Bill comes into force which would not have been made if the court considered the points above will be considered, retrospectively, void. The court may give directions to restore the company to the position it was in immediately before the petition was presented. If in doubt, the Official Receiver or private sector liquidator (if any) should refer the matter to the court.
It remains to be seen if such provisions can be made to work in practice, but it should be noted that they go much further than Alok Sharma indicated, as these provisions are not confined to commercial tenants.
In determining the liability of a director for wrongful trading and the contribution (if any) to a company’s assets that it is proper for a person to make, the court is expected to assume that the director is not responsible for any worsening of the financial position of the company or its creditors that occurred between 1 March and 30 June 2020. Again, what this means in practice is uncertain.
Most larger suppliers of goods and services would no longer be able to enforce termination clauses and contractual terms (e.g. to cease the supply) due to the company being subject to an insolvency procedure between 1 March and 30 June 2020, or due to an event occurring prior to the start of the insolvency period. Suppliers would need to apply to the court to terminate the contract if it causes undue hardship.
There would be a temporary relaxation to the normal requirements for meetings and statutory filing which have deadlines between 26 March to 30 September 2020. The Secretary of State will be empowered to make further extensions to deadlines, but where the extended period for filing does not exceed 42 days, where the existing period is 21 days or fewer, and 12 months where the existing period is 3, 6, or 9 months.
Companies would also be given flexibility to hold and vote in necessary meetings by alternative means (e.g. electronically) even if this is not provided for in the constitution.
The wrongful trading and petition changes are, in our view, unlikely to have any significant helpful effect, and raise more questions than they provide answers. For instance, the prohibition on wrongful trading itself is not to be excluded, nor would the law alter any of the other existing directors’ duties, which means that directors would still be personally liable for any substantive breaches (for more details, see our blog: COVID-19 and CR&I – week 8). As to the more interesting aspects of a supervised moratorium and cram down reorganisation schemes, coupled with the new rules on termination of supplier contracts, we fully expect these to be refined on the second reading on 3 June, so we of course will give a more considered digest then.
At least the publication of the draft bill provides those of us working in the insolvency profession something to work with – and we will (hopefully) not need to rely on ‘law by 5 o’clock briefing’ any more. We appreciate that the Insolvency Service has worked hard to deliver a workable draft under considerable time pressure and unprecedented circumstances during this crisis, which draft incorporates the findings from consultations over the last few years with an intention to encourage businesses through what is no doubt an incredibly and uncertain challenging period. The real work now begins as we in the insolvency profession work out what beneficial use can be made of these new provisions.
We hope you will forgive us for taking a short break from blogging over ‘half term’ next week (commencing 25 May), and we hope that our readers will enjoy the opportunity to get out – responsibly! – as we start to explore the possibilities of life after lockdown.
If you or any of your contacts require any guidance in light of the above, please do get in touch with one of our Corporate Restructuring & Insolvency team who would be delighted to help.
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This update was co-written by Lucy Andrews, trainee solicitor and Christopher Parsons, solicitor.