The UK Corporate Insolvency and Governance Act 2020: A move to a more debtor-friendly restructuring regime?

Introduction

The Corporate Insolvency and Governance Act 2020 (CIGA or the Act) has introduced new procedures and measures to seek to rescue companies in financial distress as a result of the COVID-19 pandemic and the resulting economic crisis.

CIGA came into force on June 26, 2020 after a speedy progression through Parliament, following the publication of the draft legislation in May. CIGA is part of the Government’s response to the COVID-19 crisis and introduces a number of “debtor friendly” measures to English restructuring and insolvency law, which up to now has been regarded as “creditor friendly”. The two new permanent restructuring procedures leave the current directors in office, with an opportunity to restructure the business with the benefit of wide ranging moratoria and stays of creditor and counterparty rights.

In addition to these new procedures, the Act introduces a number of temporary measures intended to assist in reducing the number of companies entering into restructuring or insolvency procedures and to mitigate the effect of the insolvency regime on the responsibilities of directors whose businesses are struggling due to the COVID-19 crisis. The Act also includes extensive powers for the Secretary of State to amend certain provisions, recognising that this is a complex piece of legislation which has been implemented on an accelerated basis and that there will inevitably need to be some adjustments to deal with issues arising in practice as the Act begins to be used.

CIGA has also introduced a number of extensions to the time periods for the filing of various documents at Companies House, including company accounts, to ease the burden on companies at this time as well as relaxing certain requirements relating to shareholder meetings.

Short-term standalone moratorium

Prior to the Act, one of the criticisms of the restructuring procedures available in the UK was the lack of a “debtor in possession” process under which the directors of a company are left in control to implement a rescue or restructuring plan with the benefit of a moratorium, akin to Chapter 11 in the United States.

The closest thing the UK has to such a “debtor in possession” process is the “company voluntary arrangement” (CVA). In recent years, the CVA has been (and is likely to continue to be) widely used in the retail and hospitality sectors to compromise lease liabilities of underperforming retail stores and restaurants. The CVA has limitations as a general “debtor in possession” restructuring tool. CVAs require the support of at least 75 per cent of the unsecured creditors and the support of any secured and preferential creditors, who usually insist on payment in full. Prior to the Act, during the period of negotiations, save in the case of very small enterprises, there was no moratorium on creditor actions against the company. To gain a moratorium, CVAs have to be coupled with, or used as an exit from, administration, which is a formal insolvency procedure and involves the appointment of an insolvency practitioner to run the company in place of existing management. CVAs cannot be used for a financial restructuring. The negotiation process with the key unsecured creditors is vital and can take several months, and is often difficult to achieve without the protection of a moratorium, as individual creditors can threaten to take enforcement steps in the negotiating period to seek to improve their position.

The disadvantage of the use of a CVA as an exit from administration is that it leaves the company having gone through the administration process prior to the CVA commencing, which may mean that the business has reduced in value having been in an insolvency process and is “tarnished” as a result.

Administration has been the most commonly used rescue procedure in England and Wales and has a three-part purpose. The first part of the purpose is rescuing the company as a going concern. If that is not possible the second part of the purpose is achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration). This is usually achieved by the sale of the business and assets of the company as a going concern. If this cannot be achieved, the third part of the purpose is realising property in order to make a distribution to one or more secured or preferential creditors.

In practice it is rare that the first part of the purpose is achieved and that the company is rescued. It is far more common that the second or third parts of the purpose are achieved and that only part of the business continues as a going concern post sale.

The Act rectifies this gap in UK law by introducing a new standalone moratorium procedure which leaves the directors in control whilst they implement a plan to rescue the company as a going concern.

In given circumstances (set out below), the directors can apply to go into a moratorium for an initial period of 20 business days. In that period, the directors remain in charge but a licensed insolvency practitioner is appointed as “monitor”. He or she is required to monitor the company’s affairs to keep under review whether it remains likely that the moratorium will result in the rescue of the company as a going concern, given that during the moratorium period creditors are asked to stand still and refrain from enforcement action against the company. The objective of the moratorium is to provide protection to the company from adverse creditor action for a short period whilst the directors attempt to restructure and rescue the business. It is not to achieve a sale of its business and assets. This objective is therefore analogous to the first part of the purpose of administration described above.

The Government Guidance on the draft legislation states that the new moratorium procedure is aimed at ensuring that companies can maximise their chances of survival during the COVID-19 crisis. It is intended to be a seamless procedure that keeps administrative burdens to a minimum, allows for a speedy entry process and does not add disproportionate costs to already struggling businesses. There are also some temporary relaxations to the requirements of the Act in the period to June 30, 2021 (the COVID Period) which make it easier for companies to use the process. For example the representation that the proposed monitor is required to make prior to the moratorium commencing, that he considers that “it is likely that the moratorium would result in the rescue of the company as a going concern” is qualified by the words “or would do so if it were not for any worsening of the financial position of the company for reasons relating to coronavirus".

The moratorium can be used as a freestanding procedure or a gateway into another insolvency procedure. The exit from the moratorium could be the recovery of the company as a going concern without need for an insolvency process (for example, through a refinancing), or it could be a precursor to a CVA, administration, scheme of arrangement or “restructuring plan” (the second new restructuring procedure introduced by the Act, which is described below).

Importantly, it is a procedure which is not just available to English companies but also to overseas companies, provided that they have a sufficient connection with the English jurisdiction.

Key features of the new moratorium procedure are discussed in further detail below.

Eligibility

No application can be made if the company has entered into a moratorium in the previous 12 months without an order of the court.

Some companies are not eligible for the procedure. A new schedule ZA1 to the Insolvency Act 1986 (IA 1986) introduced by the Act lists the companies which are ineligible such as insurance companies, banks, or companies which are party to a capital markets arrangement in an amount of over £10 million.

The company must be, or likely to become, unable to pay its debts.

Obtaining a moratorium

The directors can obtain a moratorium by application to court for a court order or (provided that there is no outstanding winding up petition against the company and the company is an English company) without a court application simply by filing relevant documents with the court.

During the COVID Period, the moratorium can be obtained by the filing method even if there is an outstanding winding up petition against the company.

A court application is required in the case of an overseas company as the court will need to be satisfied that the company has a sufficient connection with the English jurisdiction.

The directors must file a statement that the company is or is likely to become unable to pay its debts.

The proposed monitor needs to confirm that, in their view, it is likely that a moratorium for the company would result in the rescue of the company as a going concern. This opinion is qualified in the COVID Period by the words “or would do so if it were not for any worsening of the financial position of the company for reasons relating to coronavirus”.

Regulated companies will require the agreement of the relevant regulator to the moratorium process.

Duration

The initial period of the moratorium is 20 business days beginning with the business day after the moratorium comes into force, which is the date of the filing of the documents at court or the court order.

The duration of the moratorium may be extended in a number of ways, as discussed below.

Extension of the initial period by the directors

The initial period can be extended without creditor consent after the first 15 business days, by the directors filing with the court: (a) a notice stating that they wish to extend the moratorium; (b) a statement by the directors that the moratorium debts, and the pre-moratorium debts for which the company does not have a payment holiday, have been paid or discharged; (c) a statement by the directors confirming that the company is, or is likely to become, unable to pay its pre-moratorium debts; and (d) a statement from the monitor that in his or her view it remains likely that the moratorium will result in the rescue of the company as a going concern.

Once those documents are filed the moratorium is extended to the twentieth business day after the initial period ends.

Extension of the period with creditor consent

If the creditors (being those creditors who are not going to be paid during the moratorium because of the payment holiday) consent to an extension, the moratorium can be extended by the directors for a period of up to one year by making the necessary filings at court. The consent of such “pre-moratorium creditors” is obtained by a qualifying decision procedure.

Extension by the directors by application to court

The directors can make an application to court after the 15th business day of the initial moratorium period for an extension of the period. The court will consider whether the extension is in the interests of the pre-moratorium creditors and whether the court considers that the rescue is likely. The court will likely want to consider the views of the monitor on these points and understand why it was not possible to obtain creditor consent.

There are additional provisions for an extension to be granted by the court whilst a proposal for CVA is pending, or in the course of other proceedings such as a scheme of arrangement or restructuring plan.

Notice of a moratorium and any extensions or termination of it

There are detailed requirements as to the notice to be given of the commencement of the moratorium to all creditors, the Pension Protection Fund, Companies House and to employees. Such notification is required to be given by the monitor or the directors.

End of the moratorium as a result of the directors putting the company into an insolvency process

The directors can end the moratorium in the event they consider the rescue of the company as a going concern is no longer viable, by putting the company into administration or liquidation. They must give notice of this to the monitor who will then file a notice of termination of the moratorium.

Debts payable in the moratorium period and the concept of a “payment holiday”

A key concept in the process is the “payment holiday”. All debts of the company at the date of the moratorium are pre-moratorium debts with a payment holiday. This is the way that the Act describes the effect of the stay imposed on pre-moratorium creditors, which protects the company from enforcement action whilst the directors attempt to rescue the company.

Debts payable in the moratorium period fall into two categories:

• Pre-moratorium debts for which there is no payment holiday for amounts falling due in the moratorium period.
• Moratorium debts.

Pre-moratorium debts are: (a) any debts or liabilities to which the company becomes subject before the moratorium comes into force; or (b) any debt or liability to which the company has become or may become subject to during the moratorium by reason of any obligation incurred before the moratorium.

During the moratorium the payment holiday continues for most categories of pre-moratorium debt with six exceptions. Payments falling due during the moratorium in relation to these six categories of debt must be paid during the moratorium period and there is no payment holiday for those payments in that period.

Pre-moratorium debts for which there is no payment holiday for amounts falling due in the moratorium are the following categories of debts and are amounts payable in respect of:

• The monitor’s remuneration or expenses.
• The goods or services supplied during the moratorium.
• Rent in respect of a period during the moratorium.
• Wages or salary arising under a contract of employment.
• Redundancy payments.
• Debts or other liabilities arising under a contact or other instrument involving financial services. The new schedule ZA2 to IA 1986 lists the contracts which come within “financial services” which are covered by this definition such as lending, and financial leasing.

Moratorium debts are:

• Any debt or other liability which a company becomes subject to during the moratorium other than by reason of an obligation incurred before the moratorium came into force.
• Any debt or other liability to which the company has become or may become subject after the end of the moratorium by reason of any obligation incurred in the moratorium.

Pre-moratorium debts for amounts falling due within the moratorium where there is no payment holiday and moratorium debts have to be paid in full during the moratorium, and confirmations that these debts have been paid have to be filed at court to support any extension to the moratorium period. The monitor is required to terminate the moratorium if he or she considers that the company is unable to pay these debts.

Any unpaid moratorium debts and some pre- moratorium debts without a payment holiday, described as “priority pre-moratorium debts”, then get super priority in a subsequent insolvency or restructuring procedure, and there are amendments to the relevant sections of the IA 1986 to reflect this.

There was much discussion following the publication of the draft legislation as to whether lenders would be able to use contractual rights to accelerate a loan during a moratorium. Acceleration of a bank loan would be likely to lead to the termination of the moratorium by the monitor given that the company would in almost all cases be unable to pay the accelerated liability. The accelerated debt would then acquire super priority status in a subsequent insolvency or restructuring procedure started within 12 weeks.

The relevant provisions were debated at length in the House of Lords and some amendments made. As a result, it is now clear that lenders can accelerate loans in the moratorium if they have the contractual right to do so, but the drafting of the relevant provisions in the Act mean that “relevant accelerated debt” will not be a “priority pre-moratorium debt” for the purposes of super priority in a subsequent insolvency or restructuring procedure.

Whilst the position on this is now clear, not all of the potential issues in this area were resolved. For example, arguably the obligation to repay the principal falling due under a revolving credit facility falling due during the moratorium does not arise by reason of acceleration, in which case those amounts would qualify as “priority pre-moratorium debts”.

It is important to note also that, as currently drafted, loans from connected parties such as associated companies and directors could also be accelerated during the moratorium. It is expected that these provisions will require amendment if the rescue is to be given the best chance of success and the procedure is to work as intended to support the rescue of businesses in the moratorium. In practice, therefore, any company considering a moratorium is likely to need to ensure in advance that it will have the support of its lenders (including the connected party lenders) to the moratorium procedure and the proposed rescue plan. This may involve the agreement of a standstill with its lenders and a contractual variation of the loan documentation to provide that no amounts fall due to lenders during the moratorium that the company will be unable to pay. Lenders for this purpose would include the debt lent by connected parties (such as intercompany debt and directors’ loans) to the moratorium and to the rescue proposed.

Restrictions on creditors during the moratorium period

During a moratorium, creditors cannot petition for the winding up of the company, no resolution for the winding up of the company may be passed by the shareholders other than if recommended by the directors, no application for administration may be made other than by the directors, no notice of intention to appoint an administrator by the holder of a qualifying floating charge can be lodged at court and no administrative receiver may be appointed.

These restrictions do not bind the directors so they remain able to take these steps. In particular, the directors are still able to use paragraph 22(2) of Schedule B1 IA 1986 to appoint an administrator, but the Qualifying Floating Charge holder is unable to use its powers to appoint an administrator under paragraphs 14 or 22.

The Act also provides for the following restrictions on enforcement and legal proceedings against the company:

• No right of forfeiture can be exercised in relation to premises occupied by the company.
• No enforcement of security over the company’s property, other than steps to enforce the following charges: (a) a collateral security charge (within the meaning of the Financial Markets and Insolvency (Settlement Finality) Regulations 1999); (b) security created or otherwise arising under a financial collateral arrangement (within the meaning of Regulation 3 of the Financial Collateral Arrangements (No 2) Regulations 2003); and (c) steps taken with the permission of the High Court.
• No repossession of goods.
• No “legal process” can be issued or continued against the company or judgements enforced. However, this does not apply to employment disputes.

No notice of the crystalisation of a floating charge may be given during the moratorium, nor any other event occur that would have the same effect as such a notice. These restrictions can be overcome with the permission of the court, save that no application to court can be made for permission to enforce a pre-moratorium debt to which the payment holiday applies or to crystallise a floating charge.

Borrowing, payment restrictions, granting security and asset disposals during a moratorium

The company may borrow and incur credit provided it discloses that there is a moratorium, and it may grant security over property provided that the monitor consents. That security can be enforced during the moratorium. This therefore opens the door to “debtor in possession finance” (often known as “DIP finance”) which is used in many other jurisdictions to finance rescues.

Save where a payment comes within a de minimis threshold, the company may only make payment of pre-moratorium debts to which the payment holiday applies if: (a) the monitor consents; (b) payment is required by a court order; or (c) the court gives permission in respect of the disposal of charged or hired property. The de minimis threshold is £5,000 or 1 per cent of the value of the debts or other liabilities of the company to unsecured creditors. The monitor may give consent to a payment only if the monitor thinks it will support the rescue of the company.

Property which is not subject to a security interest can be disposed of: (a) in the ordinary way of the company’s business; (b) with the consent of the monitor; or (c) in pursuance of a court order. As above, the monitor may only consent if the monitor thinks the disposal will support the rescue of the company.

Property which is subject to a security interest, can be disposed of only: (a) in accordance with the terms of the security; or (b) with the permission of the court. The court may give such permission only if it considers that the disposal will support the rescue of the company.

The monitor

The monitor is an officer of the court and must be an insolvency practitioner.

He/she must monitor the company’s affairs for the purpose of forming a view as to whether it remains likely that the moratorium will result in the rescue of the company as a going concern. He/she is entitled to rely on information provided by the company during the moratorium unless he/she has reason to doubt its accuracy.

The directors are required to supply information that the monitor requests. If they do not comply it is a ground for the monitor to terminate the moratorium.

The monitor can apply to court for directions.

The monitor must bring the moratorium to an end by filing a notice at court if he/she thinks that:

• The moratorium is no longer likely to result in the rescue of the company as a going concern.
• The objective of rescue has been achieved.
• He/she is unable to carry out his functions as the directors have not provided him with the relevant information.
• The company is unable to pay moratorium debts which have fallen due or pre-moratorium debts for which the company does not have a payment holiday.

The monitor can be replaced by the court.

Challenges to actions of a monitor can be brought by an application to court by a creditor or anyone affected by the moratorium on the grounds that an act, omission or decision of the monitor has caused unfair harm. That application can seek an order to reverse or modify a decision of the monitor, or give him/her directions or make such order as the court thinks fit, but no compensation can be ordered to be paid by the monitor under this provision.

The Pension Protection Fund is to be treated as a creditor of the company and is able to challenge the decisions of the monitor.

The monitor’s remuneration can be challenged by a subsequent administrator or liquidator.

The role of the directors during the moratorium

The directors’ executive powers continue during the moratorium (in contrast to the position in an administration where their powers are suspended and the administrator controls the company). The actions of the directors can be challenged by a creditor or member of the company by application to court, on the ground that the company’s affairs are being managed in a way that unfairly harms the interests of its creditors or members or some part of them.

Challenge to directors’ actions can be brought by application to court by creditors or shareholders.

The Pension Protection Fund is to be treated as a creditor of the company and is able to challenge the decisions of the directors.

The Act introduces criminal liability of directors if they commit an offence of fraud in anticipation of the moratorium or false representation to obtain a moratorium.

The schedules to the Act provide for sections of the current Insolvency Rules to apply to the procedure until more detailed rules are produced in due course.

Comment

The moratorium procedure is another tool that can be used to help rescue companies and avoid insolvency. It will give companies a breathing space during which directors can try to restructure the company with the benefit of a stay on creditor action. Management will not be displaced and so it should be cheaper and carry less stigma than administration whilst having the protections that a CVA lacks. It may be combined with other formal procedures or used as a standalone process to implement a refinancing or turnaround.

This process will allow directors to consider possibilities to restructure the company with the benefit of the moratorium whilst they remain in control of the company and the company is not tarnished by entering into an insolvency procedure. Whilst at the current time creditors are generally exercising forbearance, this will not continue indefinitely, particularly as the lock down eases. As companies are required to contribute to furlough payments made to staff from August 2020, and when the furlough scheme ends in October 2020, cash flow will be stretched even further, which may result in significant redundancies for employees in businesses which cannot continue to operate as they did prior to the COVID-19 pandemic. Companies will need time to manage the transition out of lock down. The moratorium may offer them a bridge to formulate a rescue by a CVA or restructuring plan.

This process leaves the directors in control of the planning for the proposed restructuring under supervision of an insolvency practitioner. In the COVID Period this is likely to be valuable and to be a process that directors will consider is a sensible option to enable them to explore restructuring options with the protection of a moratorium. They can seek to refinance in the period or pursue a CVA or a restructuring procedure.

Whilst the moratorium prohibits secured creditors from appointing an administrator and enforcing their security, payments falling due to lenders during the moratorium need to be made, and the support of lenders will therefore be key to any proposed restructure. Their ongoing support and their agreement to a standstill is key if the moratorium is to be extended and not to be terminated by the monitor by reason of the non- payment of monies falling due to secured creditors in the period.

Extension of prohibition on termination of contracts “by reason of” (or “ipso facto”) insolvency

When a company goes into an insolvency process, such as administration, suppliers often stop or threaten to stop supplying the company, relying on the right to terminate the contract because of the insolvency. They often use the threat of termination to require the payment of all arrears as the price for continued supply and/or to change the terms, perhaps by increasing prices for the goods or services. This can make the ongoing trading of the business, or the sale of the business as a going concern, more challenging and potentially reduces the return to creditors. The IA 1986 already prevents utilities and IT systems suppliers from terminating supply upon insolvency, but the new restrictions, which apply to all suppliers of goods and services (with some exceptions), go much wider. The Act should therefore maximise the opportunities for rescue of businesses reliant on the continuation of supply agreements.

The Act provides that:

• The prohibition is extended in the Act by the addition of a new Section 233B to the IA 1986 to cover all contracts for the supply of goods and services other than contracts excluded from the operation of the section (as set out in Schedule 4ZZA).
• The provision is also extended to apply in the two new restructuring procedures, the moratorium and the restructuring plan.
• The categories of supplier and categories of contract which are excluded are set out in Schedule 4ZZA of the Act. Excluded suppliers are predominantly suppliers of financial services such as banks and insurers.
• Excluded contracts largely relate to financial services.
• There is a short term exclusion of small suppliers in the COVID Period.
• There is no requirement for the insolvency practitioner to supply a personal guarantee, but the payments accruing will be expenses of the insolvent estate, or debts which would be payable in full in a moratorium period or whilst the restructuring plan is being prepared.
• Suppliers can apply to court for permission to terminate a contract on the grounds of hardship. The Government Guidance indicates that “hardship” is likely to mean the possible insolvency of the supplier if it is forced to continue to supply.
• Issues may arise on the ability of the company/officeholder to enforce the provisions against an overseas company, or in relation to a contract which is not governed by English law. Until the courts have had an opportunity to give guidance on such issues, some litigation is likely if a compromise between the supplier and the company/officeholder cannot be reached out of court.
• The clause in the contract allowing the supplier to terminate “ceases to operate” so both the supplier and the company/office holder need to communicate once the insolvency/restructuring procedure commences to establish if the continued supply is needed and the arrangements for payment.
• The prohibition is on termination or “any other thing” by reason of insolvency so would prohibit increasing prices or arguably calling on a guarantee.

Comment

This new provision is likely to be of assistance in enabling insolvency practitioners to restructure companies, as it will improve the chances of the cooperation of the key suppliers to the business (both restricting the termination of the supply, and the doing of “any other thing” under the contract by reason of the insolvency e.g. making it a condition of supply that outstanding charges are paid) provided that the company is able to pay for the supplies incurred from the date of the appointment.

Suppliers are likely to look to insert earlier triggers for termination in contracts as a result to preserve their ability to terminate the contract if the company shows initial signs of financial difficulties.

Office holders need to review supply contracts prior to appointment to establish which suppliers they need to contact on appointment to confirm or terminate supplies.

One uncertainty will be the ability of the supplier to make an application to court to seek an order that, in their particular circumstances, it would cause them hardship to be required to continue to supply.

Unlike in the US Chapter 11 process, there is no requirement for the company in the process to assume or reject contracts within set time periods and so suppliers could be left with a period of uncertainty where they cannot terminate. It may be that such arrangements evolve in the case law on these provisions.

As a result of these provisions, more companies are likely to survive or be sold as going concerns thus ensuring better realisations for the creditors of the company. However, as drafted, the provisions may be viewed as unwelcome by some suppliers; particularly where this could prevent them from making claims against others, for example, guarantors.

Arrangements and reconstructions of companies in financial difficulty by a compromise or arrangement with creditors and/or members under Part 26A CA 2006 (Restructuring Plan)

Currently there are two procedures under English law for compromise with creditors; the CVA (which cannot compromise the claims of secured creditors), and the scheme of arrangement under Part 26 Companies Act 2006 (Scheme). In a Scheme, the company looks to compromise different classes of creditors and members with each class having similar rights. Each class votes on the Scheme and the approval of 75 per cent in value and a majority by number is required. The court then decides whether to sanction the Scheme.

The Act includes a new restructuring process as Part 26A of the Companies Act 2006 which will enable directors to propose a Restructuring Plan to compromise the claims of creditors and/or members. A key feature of the new provisions is the new “cross-class cram down”, which is not possible in a Scheme. This allows the court to sanction the approval of a compromise or arrangement where dissenting classes of creditors or members are bound on certain conditions.

The Restructuring Plan is available to companies which have encountered or are likely to encounter financial difficulties that affect their ability to continue to trade as a going concern, and that propose a compromise or arrangement between the company and its creditors, or any class of them, or the members, and any class of them. The purpose of the compromise or arrangement has to be to eliminate, reduce, prevent or mitigate the effect of the financial difficulties.

The process is similar to the process for the approval of a Scheme, with a two-stage court approval. The Government Guidance states that the courts can refer to the existing case law in relation to Schemes where appropriate, which will assist the court with the approval process. Key aspects of the process are as follows:

• The first application to court is for an order that meetings of creditors, or classes of creditors, or members, or classes of members, should be convened to consider the Restructuring Plan.
• Those creditors and/or shareholders who do not have a genuine economic interest in the company will not need to participate in the meeting.
• Once an order to convene the meeting is made the “ipso facto” provisions referred to above apply and suppliers can be forced to continue to supply the company.
• At the meeting the creditors, or classes of creditors, or members, or classes of members, will be asked to approve the Restructuring Plan and it will be approved if 75 per cent in value of those voting approve it. There is no “creditor numbers” or “numerosity” requirement as there is in a Scheme.
• The court will then be asked to approve the Restructuring Plan if one or more classes of creditors or members approve the Restructuring Plan.
• The court can bind dissenting classes of creditors on certain conditions:
  • Condition A: members of the dissenting class would not be any worse off in the Restructuring Plan than they would be in the event of the relevant alternative to the Restructuring Plan. The relevant alternative is likely to be liquidation.
  • Condition B: The Restructuring Plan has been approved by 75 per cent in value of a class of creditors or members who would receive a payment or have a genuine economic interest in the company in the event of the relevant alternative.
• “Relevant Creditors” are not entitled to vote on the Restructuring Plan and can only be bound if they consent to be bound. Relevant Creditors are creditors with moratorium debts or priority moratorium debts.
• It will be possible for a company to apply for a new free standing moratorium whilst negotiating a Restructuring Plan with its creditors, if it fulfils the criteria in the Act to make such an application, but in that case there are restrictions on the ability of the company to bind relevant creditors in the Restructuring Plan.

Comment

This is a welcome development and its flexibility will facilitate more successful restructurings of companies in the UK, and also foreign companies where they have sufficient connection to the UK.

In and following the COVID Period, it will be a useful tool to add to the restructuring tool box where there is a need to treat different classes of creditors in different ways, and seek to compromise the claims of secured creditors, unsecured creditors and members.

It may also be used by companies seeking to reach a compromise with trade creditors who would have otherwise used a CVA in order to achieve a compromise at the same time with the financial creditors.

Temporary suspension of the wrongful trading provisions in Section 214 IA 1986

The Government announced on March 28, 2020 what was referred to as a retrospective “suspension” of potential personal liability for directors for wrongful trading for a period from March 1, 2020 to September 30, 2020. This was then reinstated for the period from November 26, 2020 to April 30, 2021 and then further extended to June 30, 2021. The Government said that it considered that this was important in order to support directors to continue to trade though the COVID crisis, without worrying about their potential personal liability for wrongful trading. This is thought often to be the trigger that leads to directors deciding to put a company into an insolvency process. It seems unlikely that directors would be considered to be wrongfully trading initially in the COVID crisis, given that the best interests of the creditors of the company would be likely to be served by the company exploring the ability to obtain cash grants, loans and other support from the Government and its existing lenders and formulating a plan for the exit from lock down. However, as the lockdown eases, the risks of wrongful trading may increase as such support ceases to be available.

Key aspects of the suspension provisions in CIGA (similar measures have been introduced in other jurisdictions in recent months including Australia and Singapore) are as follows:

• The Act does not provide for a clear and blanket “suspension” of liability.
• When the court considers an application by a liquidator against a director under Section 214 IA 1986, when making an assessment of the director’s liability to contribute to the losses of the company in the period of wrongful trading, it should “assume that the person is not responsible for any worsening of the financial position of the company or its creditors that occurs during the relevant period”.
• Is this a rebuttable presumption? Commentators are divided on this. It seems unlikely if evidence that the person was responsible for losses in the COVID Period , for example as a result of fraud, were before the court, that the court would continue to make that assumption. There could also be compensation ordered for wrongful trading prior to, during and after the COVID Period, for which the director could be ordered to compensate the creditors but where the liability would not include any worsening of the financial position or the company or its creditors during the COVID Period. The “suspension” is until June 30, 2021.
• Importantly the suspension does not apply to companies which are excluded from being “eligible” and are listed in the Schedules to the Act which include insurance companies, banks, public private partnership project companies and overseas companies.

Irrespective of the suspension of wrongful trading, directors continue to have potential liability during the COVID Period and beyond under other legislation and common law (with many such claims overlapping with those under the wrongful trading regime) such as:

• Under IA 1986 (and separately under the Companies Act 2006 as a criminal offence) for fraudulent trading (the Act requires dishonest intent although this could be inferred and is more likely to be engaged where a company incurs credit knowing it cannot be paid when due or shortly thereafter).
• Under IA 1986 for misfeasance (Section 212) which could involve for example the authorisation of a preference payment or a transaction at an undervalue by the company.
• To be disqualified as a director under the Directors Disqualification Act 1986 which includes the ability to order compensation where conduct has caused loss to creditors, including to particular creditors or classes of creditors.
• As a matter of common law, for example, for breach of fiduciary duty.
• Pursuant to other statutes including the duty to act in the best interests of creditors when a company is insolvent in accordance with Section 172 Companies Act 2006 as interpreted in the recent decision in BIT v Sequana 2019 EWAC Civ 112.
• Under other statutes including employment and environmental legislation.

Temporary prohibition on the presentation of winding up petitions, service of statutory demands and making of winding up orders

In April 2020, the Government made a statement that in order to protect tenants from enforcement action by landlords seeking to recover rent in the COVID Period, no statutory demands should be served, or winding up petitions issued, or winding up orders made, in relation to the recovery of rent. In addition landlords were not permitted to forfeit leases in that period.

The Act includes provisions which are far wider than those envisaged by that statement, and cover statutory demands and petitions by all creditors, unless the petitioning creditor can satisfy an additional condition, namely that it “has reasonable grounds for believing that: coronavirus has not had a financial effect on the company, or the facts by reference to which the relevant ground [to petition for the winding up] applies would have arisen even if coronavirus had not had a financial effect on the company”.

This is a wide ranging restriction on creditors’ rights, as it would apply to a petition for a debt which related to a contract entered into some months prior to the COVID Period, but where the debtor company has been unable to make payment due to its inability to trade in the COVID Period. This applies to any winding up petition presented in the period from April 27, 2020 to June 30, 2021.

The Official Receiver or any liquidator or provisional liquidator is not liable in any civil or criminal proceedings for anything done pursuant to the order. The court may give directions to the Official Receiver or any liquidator or provisional liquidator as it thinks fit, for the purpose of restoring the company to which the order relates to the position it was in immediately before the petition was presented.

If the petition has been issued and no order made, the court “shall make such order as it thinks appropriate to restore the position to what it would have been if the petition had not been presented”.

The provisions do not affect the ability of the Secretary of State to petition in the public interest.

Comment

This is welcome news for companies unable to pay rent or for supplies until lockdown eases, as it provides temporary protection from creditors. 

However, it is not good news for landlords and suppliers also in need of cash because it prevents them from putting pressure on the debtor to pay the debt.

Power to amend corporate insolvency or governance legislation and amendments to meeting and filing requirements

The Act includes time limited powers for the Government to amend corporate insolvency legislation through regulations made by statutory instrument rather than further legislation, in the interests of speed. This will be useful regarding the further amendments required to the Insolvency Rules and perhaps to the time periods of the various COVID Period suspensions referred to above, if needed to support rescues in an extended COVID Period.

The Act also includes a number of extensions to the time periods for the filing of various documents at Companies House, and the filing of company accounts, again, to ease the burden on companies at this time. Requirements to hold physical meetings such as annual general meetings are also relaxed for a limited time in light of the lock down.

Provisions in relation to meetings

These are covered by Section 37 and Schedule 14 of the Act.

For company meetings, whether AGMs or general meetings, held between March 26, 2020 and March 30, 2021 (referred to in the Act 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 however continue to have a right to vote by some means, whether that is electronically or by the traditional proxy method.

These temporary provisions 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 the coronavirus. The requirements of a company’s articles of association, and any relevant provisions in legislation, now 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 (or a later date, if extended) 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

Section 38 of the Act 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 ends 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), so the company has until September 30, 2020 to file its accounts.

Temporary extension of period for filing information at Companies House

Section 39 of the Act concerns the filing of certain documents with the registrar at Companies House. The Act provides the Secretary of State with the power to make regulations to extend the time period which a company or other entity has to provide the registrar with these filings (and these regulations have now been made). Maximum time periods which may be substituted for the existing periods for those filings are specified and Section 40 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 deadline for registering a charge with Companies House has been extended. Section 39 expired at the end of the day on April 5, 2021.

Conclusion

The Act includes a number of much needed measures to assist with the rescue of businesses in the COVID Period and beyond, such as the new moratorium procedure. This gives directors a real chance to pursue a rescue outside an insolvency process, whilst remaining in control of the company. It marks a move to a far more debtor friendly restructuring process in the UK designed to require all stakeholders to cooperate to ensure the survival of as many businesses as possible in the “new normal” post lock down.