Corporate Insolvency and Governance Act 2020

Corporate Insolvency and Governance Act 2020

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Corporate Insolvency and Governance Act 2020 The Corporate Insolvency and Governance Act 2020 (“CIGA”) became law on 26 June 2020. CIGA sets out the detail of the UK Government’s reforms to the existing restructuring and insolvency regime as part of its response to the economic crisis caused by the COVID-19 pandemic.

Johnathan Rees Partner | Head of Corporate & Commercial johnathan.rees@laytons.com +44 (0)20 7842 8009

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Corporate Insolvency and Governance Act 2020

Background

Permanent Reforms

The legislation was enacted in little more than 6 weeks and introduced the most significant reforms to the UK’s restructuring and insolvency regime in almost 35 years. According to CIGA’s explanatory notes its overarching objective is “to provide businesses with the flexibility and breathing space they need to continue trading, and to help them avoid insolvency during this period of economic uncertainty. The measures are designed to help UK companies and other similar entities by easing the burden on businesses and helping them avoid insolvency during this period of economic uncertainty.”

CIGA introduces 3 permanent reforms. These were subject

CIGA complements various COVID-19 related legislation and

to a previous consultation by the UK government and culminated in a report by the Department for Business, Energy and Industrial Strategy in August 2018. These changes are intended to introduce greater flexibility into the insolvency regime and maximize the chances of survival of struggling businesses by affording them breathing space to explore rescue options.

Restructuring Plan CIGA has introduced a new form of restructuring allowing the court to impose a compromise on a company’s creditors and shareholders even where a class votes against it.

schemes enacted earlier in the year (including the Coronavirus Act 2020). It makes 3 significant permanent reforms to the UK’s restructuring and insolvency regime and implements a number of temporary measures designed to mitigate some of the economic challenges of COVID-19.

CIGA introduces a restructuring plan procedure to offer companies facing financial difficulty a flexible means of implementing a restructuring. The procedure is modelled closely on the existing UK Companies Act scheme of arrangement but with some important distinctions. In particular a key feature is the inclusion of a “cross-class cram down” mechanism which will allow a company to bind all creditors even those who vote against the plan.

This will enable the court to sanction a plan even if the support of a creditor class has not been obtained. There are conditions to this namely that no dissenting class will be worse off in the “relevant alternative” and the Plan is approved by 75% in value of creditors or members who are “in the money” i.e. would receive a payment or have a genuine economic interest in that “relevant alternative”.

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The “relevant alternative” is whatever the court considers

The moratorium is intended to result in a better, more efficient

would be the most likely outcome if the compromise is not

rescue plan that benefits all of the company’s stakeholders -

sanctioned.

consistent with the rescue purpose of the reforms. The rescue could take a number of forms including a Company Voluntary

The overarching objective of the plan is to eliminate financial

Arrangement (CVA), a CIGA reconstruction plan (see above)

difficulties affecting the company’s ability to carry on business.

or the introduction of new capital.

All companies will be eligible to apply for an arrangement and reconstruction plan, including overseas companies which can

The moratorium will:

demonstrate a sufficient connection to the UK. • protect a company from winding up petitions and most Whilst a company need not be insolvent to avail itself of the restructuring it must satisfy two conditions to propose a plan:

types of legal proceedings • impose a payment holiday in respect of certain premoratorium liabilities

• the company must have encountered or be likely to have encountered financial difficulties that are affecting,

• prevent creditors from taking certain enforcement action.

or will or may affect, its ability to carry on business as a going concern

It should be noted that there are a number of exceptions limiting the number of eligible companies and the liabilities

• a compromise or arrangement must be proposed

caught and little or no protection against financial creditors.

between the company and its creditors or members and the purpose of such compromise or arrangement must

There are two routes to obtaining the moratorium:

be to eliminate, reduce, prevent or mitigate the effect of any of the financial difficulties the company is facing.

• In the case of a UK company which is not subject to an outstanding winding-up petition, its directors file the

Moratorium A new moratorium is introduced which will allow businesses protection from creditors without court or creditor approval and prevent the commencement of legal or insolvency proceedings against the company.

“relevant documents” with the court namely: • a notice that the directors wish to obtain a moratorium • a statement from a qualified person (“the proposed monitor”) that they are a qualified person who consents to act • a statement that the company is an “eligible company” • a statement that the company is, or is likely to

The second permanent reform is the introduction of a

become, unable to pay its debts and that, in

standalone moratorium procedure designed to facilitate a

the proposed monitor’s view, it is likely that the

rescue of the company by allowing distressed companies

moratorium would result in the rescue of the

breathing space to explore restructuring options.

company as a going concern.

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Corporate Insolvency and Governance Act 2020

• If the company is subject to an outstanding winding-up

will remain a limited window of opportunity for suppliers to

petition, or is an overseas company, application can be

act where the onset of a customer’s insolvency appears likely.

made by the directors as above but the Court may only

In particular, the measures do not affect the enforceability

make an order for a moratorium where it is satisfied that

of a provision which is linked to the customer’s inability to

it will achieve a better result for the company’s creditors

pay its debts (i.e. cash flow or balance sheet insolvent) rather

as a whole than would be likely if the company were

than the entering into of a formal insolvency process; the

wound up (without first being subject to a moratorium).

prohibition is triggered by formal insolvency, rather than actual insolvency.

A company is “eligible” unless it is an “excluded” company.

Unfortunately the list of excluded companies is wide and

Suppliers should review their contracts and consider the

captures potentially many SME and larger companies.

inclusion of early warning triggers to mitigate their potential exposure to struggling customers.

Termination Clauses Contractual provisions permitting termination of supply on a customer’s entry into an insolvency procedure will cease to have effect.

Temporary Measures These measures were introduced specifically to help businesses during the current crisis and concern the suspension of liability for wrongful trading and restrictions on

The final permanent reform is also one of the most significant

statutory demands and winding up petitions. The measures

features of the legislation for suppliers namely that provisions

are designed to support directors of struggling businesses to

in supply contracts allowing for termination by the supplier

continue trading through the emergency without the threat

on the customer’s insolvency (or similar) will cease to have

of personal liability whilst protecting their companies from

effect (ipso facto provisions). Suppliers will also be prevented

aggressive creditor action.

from making payment of outstanding debts a condition of continued supply i.e. demand ransom payments for continued supply (see our June newsletter). The prohibition will not apply to a wide range of financial contracts nor will it cover all types of commercial arrangements.

The measures are intended to complement the policy for the moratorium and the Plan and part of the general objective of

Wrongful Trading Liability for wrongful trading is largely suspended where incurred in the period between 1 March 2020 and 30 September 2020.

enhancing the rescue opportunities for financially distressed companies.

As part of its early COVID-19 response the Government announced in March that the wrongful trading regime

However whilst this measure offers some protection for

would be temporarily suspended. This was intended “to

distressed companies, it will only exacerbate the exposure of

give company directors greater confidence to use their

suppliers who will be obliged (subject to certain exclusions) to

best endeavours to continue to trade during the pandemic

continue to supply. Suppliers will need to be extra vigilant in

emergency without the threat of personal liability should be

monitoring the financial condition of their counterparts. There

company ultimately fall into insolvency”. The suspension

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Corporate Insolvency and Governance Act 2020

applies retrospectively from1 March 2020 until 30 September

In summary:

2020.

• No petition can be presented on the basis of a statutory The new regulations provide that when determining the

demand where that demand was served in the “relevant

contribution a director who has wrongfully traded is to make

period” i.e. from 1 March 2020 ending on 30 September

to a company’s assets, the Court is required to assume that a

2020.

director is not responsible for any worsening of the financial position of the company or its creditors that occurs between

• No creditor may present a petition on the grounds that

1 March 2020 and 30 September 2020. In this way CIGA

the company is unable to pay its debts unless it has

reduces rather than suspends the wrongful trading regime

reasonable grounds for believing that coronavirus has

and does not protect directors who may have wrongful

not had a financial effect on the company or that the

trading liability which pre-dates that period.

relevant ground would have arisen anyway.

Directors would be well advised to proceed with caution and not view these measures as some form of “green flag”. It also

• If a moratorium is obtained then, except with the permission of the court, no steps may be taken:

worth remembering that the measures do not affect the raft of other legislation under which directors can incur personal liability.

• to enforce any security over the company’s property (save under a financial collateral arrangement or a step to enforce a collateral security charge);

Winding up Petitions CIGA imposes restrictions on the presentation of winding up petitions based on statutory demands dated 1 March 2020 to 30 September 2020. A creditor will be unable to wind up a company unless it has reasonable grounds to believe that COVID-19 has not had a financial effect on the company.

• to repossess any goods under a hire-purchase agreement; • to forfeit a lease by peaceable re-entry of business premises; and • to commence or continue legal proceedings against the company or its property (with limited exceptions).

• A moratorium prevents the crystallization of a floating charge This reform is likely to represent a significant hurdle to

CIGA has introduced a number of obstacles into the path of

creditors obtaining a winding-up order in the current climate.

a creditor’s potential winding up of debtor companies. Any

Conversely it reduces the threat of wrongful trading personal

creditor considering whether to serve a statutory demand or

liability for directors of struggling businesses who continue to

present a winding up petition needs to consider these new

trade through the present crisis while uncertain whether their

measures and the obstacles they create.

company will ultimately avoid insolvency. Debtor companies need to remember that this legislation does not preclude creditors taking other action for payment defaults such as seeking to trigger an administration process.

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Corporate Insolvency and Governance Act 2020

Closing thoughts Clearly designed to be debtor friendly the new measures are intended to enhance the rescue culture of the UK insolvency regime and, set against the backdrop of the current crisis, provide tools for directors and their advisers to save struggling businesses which are otherwise fundamentally sound. There remains a question whether the reforms strike a fair balance between the various stakeholders and the UK government will be watching the position closely to determine whether further reform or review is necessary.

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Corporate Insolvency and Governance Act 2020

Expertise

Corporate & Commercial We provide a complete range of corporate and commercial advice and support for clients who extend from start-ups, individual entrepreneurs and family offices to multinational corporations.

We advise on every facet of our client’s corporate legal needs through the complete life-cycle of an enterprise, from its inception, through its growth and expansion to, perhaps, its sale or flotation on a public market. Our teams focus on acquiring a deep understanding of the particular needs and objectives of our clients to deliver advice and outcomes that are tailored to those needs and objectives and which meet them swiftly and cost-effectively. The approach to technical problems is informed, insightful and proportionate, and we take pride in viewing problems from a fresh perspective to provide innovative solutions.

Johnathan Rees Partner | Head of Corporate & Commercial johnathan.rees@laytons.com +44 (0)20 7842 8009

John Gavan

Esther Gunaratnam

Dimitri Iesini

Partner john.gavan@laytons.com +44 (0)20 7842 8000

Partner esther.gunaratnam@laytons.com +44 (0)20 7842 8000

Partner dimitri.iesini@laytons.com +44 (0)20 7842 8081

Robert MacGinn

Brian Miller

Daniel Oldfield

Partner robert.macginn@laytons.com +44 (0)20 7842 8000

Partner brian.miller@laytons.com +44 (0)20 7842 8000

Partner daniel.oldfield@laytons.com +44 (0)20 7842 8037

Daniele Penna

Christopher Sherliker

Cameron Sunter

Partner daniele.penna@laytons.com +44 (0)20 7842 8053

Partner christopher.sherliker@laytons.com +44 (0)20 7842 8015

Partner cameron.sunter@laytons.com +44 (0)20 7842 8036

Liza Zucconi Partner liza.zucconi@laytons.com +44 (0)20 7842 8092

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