On June 25, the Corporate Insolvency and Governance Act 2020 received Royal Assent, and the majority of its provisions are now in force. The Act has introduced a number of permanent reforms and temporary measures, which together represent the most significant change to English insolvency law in nearly 20 years.
A new restructuring plan is now available to companies of all sizes (including foreign companies which meet a “sufficient connection” test) which, though based largely on the existing procedure for Schemes of Arrangement under the Companies Act 2006, introduces some specific nuances which may make it a preferred restructuring tool where the following conditions apply:
- the company has encountered or is likely to encounter financial difficulties affecting or likely to affect its ability to carry on business as a going concern; and
- a compromise or arrangement is proposed between the company and its creditors, or a (single) class of its creditors, and the purpose is to eliminate, reduce, prevent or mitigate the impact of the financial difficulties.
The plan is voted on by one or more classes of creditors, and must be approved by creditors representing 75 percent or more in value of at least one class. If so approved, the Court has a discretion to sanction a restructuring plan even if only one class of creditors approved the plan and other classes did not – allowing for so called “cross-class cramdown”.
Ipso Facto clauses (clauses which allow for the termination of an agreement on the basis that a party has entered into an insolvency process) are now unenforceable in a wide range of goods and services supply contracts.
Whilst provisions already existed under the Insolvency Act 1986 to prevent providers of “essential supplies” from demanding payment of pre-insolvency debts, the scope has now been extended such that suppliers of goods or services with a contractual right to terminate on insolvency are prohibited from terminating.
The Act contains exclusions for regulated entities, financial and insurance companies and protections are also included to allow creditors to apply to Court for relief in the case of hardship.
A pre-insolvency, standalone moratorium has been introduced whereby directors of a company which is, or is likely to become, unable to pay its debts may apply for a temporary moratorium if it would likely result in the rescue of the company as a going concern.
The moratorium is achieved by filing documents with the Court (or on application to Court if the company is already subject to a winding up petition), and the process is supervised by an independent “monitor” (a qualified insolvency practitioner).
Lasting for an initial 20 business days, the moratorium can be extended up to 12 months with creditor consent, or potentially for a longer period at the discretion of the Court.
It is likely that companies will seek to make use of this new tool to obtain breathing space to implement a restructuring, whether consensually, by way of scheme of arrangement, company voluntary arrangement or restructuring plan.
Certain temporary measures have been introduced to provide support and flexibility to businesses facing financial difficulty due to the economic impact of the pandemic.
These measures will apply until September 30, 2020 (but may be extended) with retrospective effect to March 1, 2020 (March 26, 2020 in respect of corporate governance) and include the following:
- Suspension of liability for wrongful trading, albeit this only really amounts to a limitation on the Court’s discretion to require a director to make a financial contribution in respect of wrongful trading for the relevant period.
- Suspension of the use of statutory demands as a basis for a winding up petition and issuance of winding up petitions where a company can demonstrate the cause was the financial effects of the coronavirus.
- Relaxation of corporate governance requirements with respect to certain meeting and filing obligations.