UK Government publishes review of the Corporate Insolvency and Governance Act 2020

The review at a glance

The UK Government has published its statutory review of the effectiveness of the permanent measures introduced by the Corporate Insolvency and Governance Act 2020 (CIGA 2020). CIGA 2020 came into force on 26 June 2020, during the height of the COVID-19 pandemic, with the goals of supporting businesses through the immediate financial difficulties they faced and, in the longer term, saving viable companies.

CIGA 2020 introduced several temporary measures (which have since expired) and three permanent measures (which are the focus of the review):

(1) a standalone moratorium procedure,

(2) a restructuring plan, allowing for cross class cram down (CCCD)

(3) a suspension on contractual provisions terminating or amending the supply of goods or services to companies subject to insolvency proceedings (ipso facto clauses).

The review follows an academic report published last year, which analysed the permanent measures’ effectiveness by looking at empirical data and interviewing stakeholders and insolvency practitioners. The Government concludes that the restructuring plan and the suspension of termination provisions have met their policy objectives, although the evidence for the moratorium procedure’s usefulness is less clear. In part due to the wider corporate support measures introduced during the pandemic, all three tools have been under-utilised when compared against the Government’s original expectations.

The report notes that as at 30 September 2022, there had been 40 moratoriums and 12 restructuring plans. However, official statistics show that by 31 March 2023 the number of restructuring plans had risen to 20. This reflects our own experience that there has been an uptick in companies looking to use restructuring plans, which is increasing as the parameters of the process become clearer.

To increase engagement with the measures, the review suggests the publication of official guidance and also identifies possible refinements, which would require legislative change. Such refinements likely would be the subject of future consultation.

The permanent measures: room for improvement?

Restructuring plan

The restructuring plan, inspired by the UK scheme of arrangement but with greater flexibility, allows a company facing or likely to face financial difficulties to reach a compromise with one or more classes of its creditors or members. If any class does not approve the plan by a 75% by value majority, the court may order that class be crammed down provided other criteria are met[1].

The report recognises the success of restructuring plans, but concludes in particular that the court-led process’ costs can deter some SMEs from using it. It notes that the costs of a restructuring plan can exceed the £1 million-mark for medium sized companies and can be much higher for large companies.

The review suggests possible refinements, including:

• Reducing the associated costs
• Making it a mandatory feature of plans that any future profit is shared between creditors
• Providing for multiple companies within the same group to propose a plan (by introducing a ‘lead company’ concept with jurisdiction extending to affiliated companies)

Suspension of termination (ipso facto clauses)

Prior to CIGA 2020 coming into force, a contractual clause providing for the supply of goods or services to terminate on the insolvency of the customer was valid under English law (subject to certain protections for essential supplies). Such clauses are now ineffective[2] – as are ‘ransom payments’ that require historic debts to be paid in full in return for the ongoing supply of goods or services. There is a narrow defence for suppliers where continuing to supply would cause ‘hardship’, but the scope of this defence remains untested in the courts.

The Government relates that there has been limited reported use of this protection and so it is too early to assess its true impact. The review concludes that, while it would be premature to make any legislative changes, guidance could be published so that insolvency practitioners have clarity on how to exercise the measure with less sophisticated suppliers.

Moratorium

Where a company is likely to survive as a going concern by benefiting from a ‘breathing space’, it may apply for a temporary moratorium of 20 business days (which may be extended if certain conditions are met). The Government accepts that the moratorium procedure as the least successful of the permanent measures introduced by CIGA 2020. There are a number of barriers to the moratorium’s success, including the high entry thresholds (relating to the company’s likely rescue as a going concern and also the requirement that the company owes less than £10m in capital market debt), and the carve out from the payment holiday of debts incurred under financial services contracts.

As well as suggesting fresh guidance be published, the review suggests refinements, including:

• Amending the definition of ‘financial services’ so that it is clear which liabilities are excluded from the payment holiday
• Altering the priority of debts to provide clarity that office-holder fees would be paid in a subsequent insolvency, should the moratorium fail to rescue the company
• Amending the eligibility criteria

What will happen next?

No timescales have been announced in relation to the publishing of future guidance. Similarly, it is unclear when and how much parliamentary time will be earmarked for the suggested refinements requiring changes to primary law. In any event, it is likely that one or more consultations will be launched on the possible refinements before draft legislation is presented to Parliament.

In the meantime, the wider economic climate is likely to trigger an increase in financial distress among companies, in turn leading to greater use of the permanent CIGA 2020-introduced measures. This should produce greater judicial guidance on their scope and also add to the growing body of evidence on their effectiveness.