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This News Analysis considers in detail the new moratorium and restructuring plan procedures introduced by the Corporate Insolvency and Governance Act 2020 (CIGA 2020). It also considers whether the rise of the restructuring plan will ultimately be the death knell of the traditional scheme of arrangement under Part 26 of the Companies Act 2006. It is based on a webinar given for P.R.I.M.E. Finance on 27 July 2020. Written by Jennifer Marshall.
CIGA 2020 entered into force on 26 June 2020. CIGA 2020 represents the most significant reforms to the insolvency framework in the UK since, at least, the widespread introduction of administration under the Enterprise Act in 2003. CIGA 2020 was brought into law very quickly to bring about changes seen as necessary to support struggling businesses as they deal with the economic fallout from coronavirus (COVID-19). It should be noted, however, that many of the changes are permanent rather than temporary in nature and they will transform the way creditors and others interact with businesses in financial difficulty. The legislation is long and complex. This analysis attempts to summarise some of the key questions that practitioners may have in relation to the new legislation.
The legislation focuses on some permanent reforms in three key areas: a moratorium, a ban on the operation of termination provisions (or so called ipso facto clauses—see News Analysis: Corporate Insolvency and Governance Act 2020: freezes on contract terminations and the introduction of a new pre-insolvency rescue and reorganisation procedure (the restructuring plan)). There are also some temporary measures such as the relaxation of the wrongful trading regime and the suspension of statutory demands and winding-up petitions where financial difficulties are attributable to the coronavirus pandemic. This article focuses on the permanent reforms.
CIGA 2020 introduces a new Part A1 to the Insolvency Act 1986 (IA 1986), which will replace the ‘small company moratorium’ for putting together proposals for a company voluntary arrangement which, in practice, was rarely used by companies. The new provisions will provide businesses with a statutory breathing space from creditors within which to formulate a rescue plan. With certain key exceptions, the company will not have to pay debts falling due prior to the moratorium but will have to pay debts falling due during the moratorium. The moratorium will be similar to that which is available in an administration. For as long as the moratorium applies, it will prevent the enforcement of security (other than financial collateral), the commencement of insolvency proceedings or other legal proceedings against the company and forfeiture of a lease. The moratorium will last for an initial period of 20 business days with an ability to extend for a further period of 20 business days without consent and with the possibility of further extensions of up to one year or more.
The moratorium is intended to be used by companies that are in financial distress, but is not intended to delay the inevitable insolvency of a company that has no realistic prospect of survival. Therefore the moratorium can only be used where:
The moratorium is a ‘debtor in possession’ procedure, meaning that the directors will remain in control of the company. However, for the duration of the moratorium, a ‘monitor’ (who must be a licenced insolvency practitioner, usually an accountant) will be in place. The role of the monitor is to protect creditor interests and to ensure continued compliance with the moratorium entry requirements and conditions. The monitor will be able to attend board meetings and request information from the directors. Any transactions that are not in the ordinary course of business for the company will need to be sanctioned by the monitor.
It appears the moratorium has only been used a couple of times since the legislation came into force, once in relation to a ‘micro’ company and once to provide a breathing space until a scheduled large payment could be made to the company to restore it to profitability. This is consistent with our view that the moratorium will most likely be used by small to medium sized companies where the financial creditors are on board. Given the exclusions from the payment holiday provisions (and indeed the ipso facto provisions) for financial contracts, it is likely that a company could only use the moratorium with the support of its financial creditors (for example, where it has agreed a contractual standstill with such creditors or has sufficient monies to pay them during the moratorium). In such circumstances, it could provide a useful tool for giving the company a breathing space from hostile action by landlords or suppliers.
In theory, the moratorium could be used as a standalone procedure, as is shown by the example referred to above (where the moratorium was used to give the company a breathing space until certain scheduled payments were made). In practice, though, we suspect that the moratorium will be used in order to put together a company voluntary arrangement or restructuring plan as a means of reducing the debt burden of the company so that the monitor can give the confirmation that the moratorium would lead to the rescue of the company.
As referred to above, the role of the monitor is to protect creditor interests and to ensure continued compliance with the moratorium entry requirements and conditions. For example, as well as giving the initial assessment as to whether the company is capable of being rescued, the monitor is required to bring the moratorium to an end if this ceases to be their view or if any debts that are excluded from the payment holiday are not paid. The monitor is an officer of the court and must perform various duties while occupying this position. If the monitor fails to perform certain duties without reasonable excuse, he or she will commit an offence.
A creditor (including, in certain circumstances, the Board of the Pension Protection Fund in place of trustees or managers of pension schemes), director, member of the company or any other person affected by the moratorium can challenge the monitor’s actions if it results in unfairly harming their interests. If successful, the court will make appropriate remedial orders but the monitor will not be liable to pay any compensation.
It has been suggested that the monitor has extensive duties (and potential liability) in respect of the moratorium without having sufficient power or control to be able to protect themselves from liability. It is also intended that this process should be low cost (compared with, for example, an administration) and so a monitor may consider that the risks that they are taking on in relation to this role is not commensurate with the remuneration or fees that they would receive. It remains to be seen whether these issues will prevent insolvency practitioners from accepting appointments as monitor. We note that R3 (the Association of Business Recovery Professionals) was very much in favour of this procedure and it may be that sufficient pre-planning and discussions between the company and the proposed monitor will address some of the issues.
CIGA 2020 introduces a new Part 26A to the Companies Act 2006 (CA 2006) headed ‘Arrangements and Reconstructions: Companies in Financial Difficulty’ but referred to in this analysis as the ‘restructuring plan’ for short. This new reorganisation measure is similar to a scheme of arrangement which many companies already use successfully to restructure their debts. As with a scheme, creditors and/or members are divided into classes based on the similarity of their rights prior to and as a result of the restructuring plan. Each affected creditor or member has the opportunity to vote on the restructuring plan and, provided that: (a) one ‘in the money’ class of creditors or members approves the restructuring plan; and (b) the restructuring plan delivers a better outcome to the dissenting class than the ‘relevant alternative’ (which will often be liquidation or administration), the restructuring plan will become binding on creditors or members in all classes if sanctioned by the court. The court’s role is to consider whether the classes have been properly formulated, whether each creditor or member receives more than they would under the ‘relevant alternative’ and whether the restructuring plan is fair and equitable.
The ‘relevant alternative’ is defined as whatever the court considers would be most likely to occur in relation to the company if the compromise or arrangement were not sanctioned by the court. The question of what will be the relevant alternative will depend on the particular facts. If the company is running out of cash and, but for the restructuring plan, would have no option but to file for insolvency proceedings, it may be relatively easy to show what the relevant alternative would be. If, however, the cash position is less critical, it may be possible for dissenting creditors to argue that an alternative scheme or plan might have been achievable (although such creditors would have to show that the alternative scheme or plan would have had the support of the requisite majority of creditors). We suspect that the court will want to see an analysis prepared by an accountancy or financial advisory firm on this topic (sometimes referred to as an ‘entity priority model’) together with evidence from the company that it has given proper consideration to any and all alternatives to the proposed restructuring plan.
It is likely that the ‘relevant alternative’ analysis will come under more scrutiny when the court is considering whether to cram down a dissenting class of creditors. In such cases, the court will want to know:
In some ways, the relevant alternative analysis is similar to the comparator analysis with which the court will be familiar in the context of a scheme of arrangement (under CA 2006, Pt 26) and it is not clear that the test is intended to be different, just because it is given a different name. Hence the court may have reference to the case law on the comparator analysis in a scheme context when considering the relevant alternative. For the reasons given above, however, the relevant alternative analysis could have added significance when cross-class cram-down is being utilised and so this analysis could come under greater scrutiny in the context of the restructuring plan.
As with the scheme of arrangement, the restructuring plan has been introduced under the CA 2006 and not under IA 1986; this could be important when considering whether the restructuring plan is part of the restructuring or the insolvency toolbox. The question of whether the restructuring plan is seen as insolvency or a restructuring procedure could be important in terms of market perception (as there is arguably less stigma involved with a restructuring process) but it could also be relevant in a number of other contexts including:
One question that remains is whether restructuring professionals are still going to use the scheme of arrangement (under CA 2006, Pt 26) now that CA 2006, Pt 26A has been introduced. The two main advantages of the restructuring plan (over the scheme) are (a) the cross-class cram-down mechanism; and (b) the fact that it is only necessary to obtain the consent of 75% by value of each class (and not also 50% by number). On the other hand, it is necessary to satisfy the financial condition, referred to above, to use the restructuring plan. More importantly, the scheme of arrangement has been tried and tested and practitioners know where they are with that procedure (whereas the case law still needs to develop in respect of the restructuring plan).
In summary, we consider that, where each class of creditors is supportive of the restructuring, practitioners are more likely to use the tried and tested scheme of arrangement (which is borne out by the number of schemes that are being implemented at the moment). However, where there are concerns about getting the requisite majorities of each class of creditors, practitioners may well turn to the restructuring plan.
Jennifer Marshall is a partner in Allen & Overy’s global restructuring group and has recently joined the P.R.I.M.E. finance panel of experts. Jennifer has spoken about the new Corporate Insolvency and Governance Act for PRIMEtime, P.R.I.M.E. Finance’s virtual events programme. To see this and other PRIMEtime Virtual Events, see:
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