Essential Corporate News: Week ending May 22, 2020

Corporate Insolvency and Governance Bill

On May 20, 2020, the Corporate Insolvency and Governance Bill was published and had its first reading in Parliament. A key aim of the Bill is to provide businesses with the flexibility and breathing space necessary to enable them to continue trading during the COVID-19 pandemic and so 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.

This Bill has three main sets of measures to achieve its purpose:

• To introduce greater flexibility into the insolvency regime, allowing companies breathing space to explore options for rescue whilst supplies are protected, so they can have the maximum chance of survival.
• To temporarily suspend parts of insolvency law to support directors to continue trading through the emergency without the threat of personal liability and to protect companies from aggressive creditor action.
• To provide companies and other bodies with temporary easements on company filing requirements and requirements relating to meetings including annual general meetings (AGMs).

Permanent changes to the UK’s insolvency regime involve the following:

Free-standing moratorium

Companies will be able to seek a moratorium without entering an insolvency procedure and with the directors remaining in control. A moratorium will be available where (i) a company is, or is likely to become, unable to pay its debts; and (ii) it is likely the moratorium would result in the rescue of the company as a going concern. In most cases, to obtain a moratorium, a number of documents will need to be filed with the court and, once obtained, will be effective immediately. Companies will have an initial breathing space of 20 business days and, subject to various conditions, the directors can ask that it be extended for a further 20 business days. It could be extended up to one year if pre-moratorium creditors consent. An insolvency practitioner will act as “monitor” so as to monitor the company’s affairs and form a view as to whether it remains likely the moratorium will result in the rescue of the company as a going concern. Creditors and shareholders can apply to the court for the moratorium to end if they believe the actions of the monitor or the directors are harming their interests.

Recovery plan – New scheme of arrangement allowing cross-class cram-down

A new Part 26A Companies Act 2006 is being introduced to complement the existing Part 26 regime governing schemes of arrangement. The aim is to enable companies in financial difficulties to enter into a “restructuring plan” with greater scope for making it binding on dissenting creditors than would be possible under a scheme of arrangement.

Termination clauses in supply contracts

A new section 223B Insolvency Act 1986 will prevent all suppliers (subject to exceptions) from making it a condition of ongoing supply that pre-insolvency arrears are paid. This will complement sections 233 and 233A Insolvency Act1986 which prohibit termination of utility, communications and IT supplies. However, if during the moratorium directors fail to pay a supplier, the supplier’s rights will not be affected and it can apply to the court to permit it to terminate the supply contract. “Small suppliers” will temporarily be excluded from the regime until June 30 or one month after the coming into force of the provisions.

Temporary COVID-19 measures comprise the following:

Suspension of wrongful trading provisions

This is not a true suspension since the Bill says that the court must assume that any director in respect of whom a liquidator brings a wrongful trading claim “is not responsible for any worsening of the financial position of the company or its creditors” that occurs between March 1, 2020 and 30 June 30, 2020 (or, if later, one month following the coming into force of the legislation). This is the case irrespective of whether it is shown that the worsening of the company’s position resulted from COVID-19.

Effectively, the directors will still have a liability (as for fraudulent trading or their duty to consider the interests of creditors where applicable), but in assessing their liability for wrongful trading, in terms of quantum, they will not be liable for losses incurred in the period March – June 2020.

Statutory demands and winding-up petitions

A statutory demand served by any creditor between March 1, 2020 and June 30, 2020 (or, if later, one month following the coming into force of the legislation) will be prevented from forming the basis of a winding-up petition.

In addition, creditors who wish to present a winding-up petition against a company before June 30, 2020 (or, if later, one month following the coming into force of the legislation) will have to have reasonable grounds for believing that the company’s inability to pay its debts is not as a result of COVID-19. A winding-up order against the company will only be made if the court is satisfied that this is the case.

Provisions in relation to meetings

These are covered by Clause 35 and Schedule 14 of the Bill. They include the following:

• For company meetings, whether AGMs or general meetings, held between March 26, 2020 and September 30, 2020 (referred to in the Bill as the “relevant period”), the meeting need not be held at a particular place; meetings may be held and votes may be cast by electronic or other means; the meeting may be held without a quorum of participants having to be together in one place; and members do not have the right to attend in person, to participate other than by voting, or to vote by particular means. Members will however continue to have a right to vote by some means.
• The temporary provisions outlined above are intended to ensure that companies and other qualifying bodies are able to hold AGMs and other meetings in a manner consistent with the need to prevent the spread of COVID-19. The requirements of a company’s articles of association, and any relevant provisions in legislation, will have effect subject to these temporary provisions.
• The period within which a company or other qualifying body must hold an AGM (whether as a result of legislation or a provision in the company’s articles) has been extended. This applies where a company or other qualifying body was or is required to hold an AGM before the end of a period expiring during the period between March 26 and September 30, 2020. It has the effect of giving businesses until the end of that period to hold their AGM.
• The Secretary of State also has authority to make regulations to further extend, on a temporary basis, the deadline for holding an AGM but those regulations cannot be used to extend the period for holding an AGM by more than eight months.

Temporary extension of period for public company to file accounts

Clause 36 of the Bill provides for a temporary extension to the period which a public company has to file accounts and reports with the registrar at Companies House. It applies where the filing period would end after March 25, 2020, and before the “relevant day”. That is defined as the earlier of September 30, 2020 and the last day of the period of 12 months immediately following the end of the relevant accounting reference period. As an example, if a public company’s accounting reference period ended on December 1, 2019 then under Section 442 Companies Act 2006, the directors of the company must deliver to the registrar the company’s accounts and reports on or by June 1, 2020. This deadline of June 1, 2020 falls within the time period referred to above (i.e. between March 25, 2020 and the relevant day), and is therefore extended until September 30, 2020.

Temporary extension of period for filing information at Companies House

Clause 37 of the Bill concerns the filing of certain documents with the registrar at Companies House. The Secretary of State can make regulations to extend the time period which a company or other entity has to provide the registrar with these filings. Maximum time periods which may be substituted for the existing periods for those filings are specified and Clause 38 lists the provisions in the Companies Act 2006 and other legislation that relate to the particular filings and allows for certain deadlines to be extended. These deadlines include the periods for filing accounts and confirmation statements. They also include the time allowed to notify the registrar of certain relevant events that are covered by the confirmation statement, such as notifying the registrar of a change in director. In addition, the regulations may extend the deadline for registering a charge with Companies House.

The second reading of the Bill is due in the House of Commons on June 3, 2020.

(Corporate Insolvency and Governance Bill, 19.05.2020)
(Corporate Insolvency and Governance Bill, Explanatory Notes, 20.05.2020)
(BEIS, Government introduces legislation to relieve burden on businesses and support economic recovery, 20.05.2020)

Takeover Panel: Panel Statements 2020/4 and 2020/5 – Offer by Brigadier for Moss Bros

On May 19, 2020, the Takeover Panel announced that the Panel Executive had ruled in relation to the submissions it had received from Brigadier Acquisition Company Limited (Brigadier) and Moss Bros Group PLC (Moss Bros) concerning Brigadier’s request that it be permitted to invoke certain conditions in the scheme circular dated April 7, 2020, relating to its offer for Moss Bros. This was on account of the impact on Moss Bros of the COVID-19 pandemic and related UK government measures which had led to, among other things, the closure of Moss Bros stores.

The Panel Executive ruled that Brigadier had not established that the circumstances giving rise to its right to invoke the relevant conditions were of material significance to it in the context of its offer as required by Rule 13.5(a) of the Takeover Code and so Brigadier could not invoke any of those conditions.

Brigadier was given time to decide whether it wanted a review of this ruling by the Hearings Committee of the Takeover Panel and on May 21, 2020 the Takeover Panel announced that Brigadier had requested a review. That hearing will be convened and another announcement issued in due course.

(Takeover Panel, Panel Statement 2020/4, 19.05.2020)
(Takeover Panel Statement 2020/5, 21.05.2020)

FRC: Guidance for companies on Corporate Governance and Reporting (including Interim Reports) – Updated 20 May 2020

On May 20, 2020, the Financial Reporting Council (FRC) updated the guidance on corporate governance and reporting published on May 12, 2020, by explaining how companies should report exceptional items and alternative performance measures (APMs) in their reports and accounts in the context of the COVID-19 crisis.

Exceptional or similar items

Companies should consider whether additional income or expenditure items resulting from the COVID-19 crisis should be separately disclosed. The nature and amounts of such items should be presented in a way that is helpful to readers, together with information about the effect of these or similar items on cash flows, their timing and tax.

Companies should:

• Be even-handed in identifying any gains as well as losses/
• Not describe amounts as “non-recurring” or “one-off” if they are expected to arise in future periods.
• Not disclose costs as exceptional, solely because of a reduction in, or elimination of, the related revenue streams due to the COVID-19 crisis.
• Not identify incremental costs as exceptional if they result in incremental revenue that is not also described as exceptional.

APMs

Where the COVID-19 crisis has caused a company to make changes to its operations or business model and so make changes to the APMs used to run and monitor the business, these changes should be set out with an explanation of why they provide reliable and more relevant information.

APMs which attempt to provide a measure of “normalised” or “pro forma” results, excluding the estimated effect of COVID-19, are likely to be subjective and so unreliable and so the FRC does not expect companies to provide these measures.

(FRC, Guidance for companies on Corporate Governance and Reporting (including Interim Reports) – Updated 20 May 2020, 20.05.2020)

ESMA: Public Statement on implications of the COVID-19 outbreak on the half-yearly financial reports

On May 20, 2020, the European Securities and Markets Authority (ESMA) issued a Public Statement to promote transparency and the consistent application of European requirements for the information provided in half-yearly financial reports under the current circumstances related to the COVID-19 outbreak.

The Public Statement covers the following:

• Timing of publication of half-yearly financial reports 2020
• Half-yearly financial statements – the application of IAS 34, disclosures reflecting significant uncertainties, going concern and risks linked to COVID-19, impairment of non-financial assets, presentation of COVID-19-related items in the statement of profit or loss and other disclosure requirements applicable to half-yearly financial statements
• Interim management reports

(ESMA, Public Statement on implications of the COVID-19 outbreak on the half-yearly financial reports, 20.05.2020)