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The new Corporate Insolvency and Governance Bill was published on 20 May 2020. Frances Coulson, head of insolvency and litigation at Moon Beever LLP considers the Bill from a restructuring and insolvency perspective.
There are seven main points covered in the Bill.
The creation of a new moratorium for businesses—this is a free-standing moratorium which can be sought for an initial 20 business days and extended after day 15 of those either with consent of creditors or by application to court or without creditor consent, but subject to the support of the monitor and only if pre-moratorium and non-payment holiday, excluded moratorium debts (eg rent during the moratorium, wages etc) have been paid.
During the moratorium period the company has to be supervised by a licenced insolvency practitioner called ‘monitor’ (something R3 lobbied hard for as originally this role was wide open). The moratorium itself is intended to give a breathing space to companies to find a solution to its financial difficulties, but the directors remain in control of the company: the ‘debtor is in possession’.
There are limitations. The company cannot have been under a moratorium in the past 12 months (unless the court allows it). The company and its proposed monitor must also make a number of statements regarding the company’s financial state and the prospects for rescue, before it can enter a moratorium. The moratorium must be brought to an end if it becomes apparent to the monitor that the company is unlikely to be rescued or can’t pay the debts set out above. The requirements on prospect for rescue, bringing the moratorium to an end, and certain of the exclusions for entry will be temporarily amended to account for the coronavirus (COVID-19) pandemic. Even a company subject to a winding-up petition may seek a moratorium, but in that instance must apply to court; and the court must think a better return to the body of creditors will be achieved with a moratorium than without.
There is a prohibition on winding-up petitions based on statutory demands served between 1 March 2020 and 30 June 2020, said to be regarded as coming into force on 27 April 2020. (Schedule 10, Part 1).
Any winding-up orders made after 27 April 2020 but before the Act (once the Bill receives Royal Assent) comes into force are treated as void unless they would have met the criteria the new Act will now require. Directions will need to be given restoring the company’s position or dealing with evidence as to what effects coronavirus did or did not have if the petitioner wants to hang on to the order. The official receiver or liquidator is statutorily protected from civil or criminal liability. It is silent as to what happens about incurred costs given the effect is retrospective and costs will have been incurred since 27 April 2020.
This a permanent change to section 233 of the Insolvency Act 1986 (IA 1986). The Bill introduces a new section (IA 1986, s 233B) preventing the termination of a contract simply by reason of insolvency. Temporarily, small suppliers are excluded from this ban on termination for insolvency until 30 June 2020 or a month after commencement of the IA 1986, whichever is later, but after that all sizes of businesses are bound. Suppliers can apply to court to terminate on grounds of hardship.
While the earlier governmental announcements said there would be a suspension of the offence of wrongful trading from 1 March 2020 to 30 June 2020, in fact the Bill merely imposes a statutory presumption against wrongful trading having taken place. In practice this was never really a very useful provision anyway as the period it deals with is so short and it does not anyway absolve directors of their general duties. It is hard to see why any liquidator would pursue a wrongful trading claim for a short period during the pandemic crisis. There would have to be significant other standalone causes of action.
As mooted following the consultation entitled ‘A Review of the Corporate Insolvency Framework’ in 2016, the Bill proposes a new restructuring plan under a new part 26A of the CA 2006-which will allow cross-class cram down to force dissenting creditors to agree the plan if the court approves it and they would be no worse off than in another form of insolvency procedure. It is intended to support the introduction of recue finance.
Reserving a power to amend corporate insolvency or governance legislation and extend provisions by up to six months, to allow swift changes in the future by secondary legislation until 30 April 2021 (though that may be extended).
Note financial services/insurance companies etc excluded from some of the reforms, but not all.
Quick. The first reading was on 20 May 2020; the second reading is set for 3 June 2020. Given that much of what is contained in the Bill has been announced as already in existence (or has been a long time in consultation) it is being pushed through as quickly as possible. The coronavirus pandemic and catastrophic effects on the economy creates the urgency given the wide number of businesses in crisis at the present time and the bill needs to bring into effect many of the reliefs the government has already announced it is putting in to help save businesses.
I do not have a crystal ball as to the longer term effects of coronavirus, and while some of the reliefs are clearly temporary (such as the restriction on the ability to petition for a company’s winding up on the back of a statutory demand), some of the reforms are here to stay and are largely welcome.
The Bill gives power to change/extend by secondary legislation until April 2021 but even that could be extended, a reflection of the current uncertainty about how long the crisis will last.
The moratorium has been mooted and under renewed consultation more recently for at least four years (and in fact for even longer than that) and, absent this present crisis, insolvency reform was probably going to have to wait until 2022 and a big post-Brexit legislative window. The same goes for the new restructuring plan although I think the perceived need for that stemmed from the previous financial crisis and was overtaken somewhat by the improved access to finance and proliferation of other lenders which occurred over the last decade or so. It may do more harm than good.
There is scope for a great deal of uncertainty and litigation, but that is perhaps unavoidable when legislating in a crisis. Whether a company would have been fine save for coronavirus will be a dispute of facts for example.
There will be many issues for the ’monitor’ whose role is elucidated in Chapter 5 of the Bill. They are an officer of the court and much rests on their judgment, but they are entitled to rely on information provided by the company unless there is reason not to. They have to pull the plug if they think moratorium debts or non- payment holiday debts cannot be paid (current rent, wages, redundancy, the monitor’s fees and others). Courts are used to trusting the commercial judgment of office-holders. Stakeholders can challenge the monitor’s actions if they have been unfairly prejudiced. There is no ban on the monitor becoming a subsequent office-holder as had been previously mooted.
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Anna joined the Restructuring and Insolvency team at Lexis®PSL in August 2013 from Berwin Leighton Paisner where she was a senior associate in the Restructuring Team.
Anna has worked on a number of large scale restructurings primarily in the UK market acting on behalf of lending institutions.
Recent transactions include the restructuring of a UK hotel chain and the administration sale of part of the Connaught group. Anna has also spent time on secondment at The Royal Bank of Scotland and trained at Clifford Chance qualifying in 2007.
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