The Corporate Insolvency and Governance Bill
May 21, 2020
By Carly Sandbach and Katherine Traynor (commercial pupil)
The UK government has published its Corporate Insolvency and Governance Bill (‘CIGB’) (a copy of which can be accessed here) aimed at helping companies that are struggling from the economic impacts of the coronavirus pandemic, whilst also allowing businesses to protect jobs, and directors during the economic recovery. The CIGB once introduced, will bring in the biggest reforms to the UK’s insolvency framework since 2002 when the Enterprise Act 2002 implemented administration as the UK insolvency regime of choice, ousting administration receivership. However, it is often suggested that the UK’s administration regime has never truly reached its potential of rescuing companies, instead it has been used as a ‘quasi-liquidation’ process, to sell a company’s assets and business as a going concern. In those circumstances, the businesses are typically saved, but the corporate entity is not.
The measures under the new CIGB, propose to create more opportunities to rescue companies in difficulty, whilst also affording better protection from creditors during the coronavirus pandemic – meaning, the new temporary measures are designed to assist in rescuing companies as a going concern, and help them avoid terminal insolvency.
Some of the measures embodied within the CIGB, have been in contemplation for a number of years – R3 (the trade association for UK insolvency and restructuring professionals) have been calling for reforms of the UK’s corporate insolvency framework since 2016, whilst others have been specifically introduced for the coronavirus pandemic. In that respect, some of the measures under the CIGB are temporary in nature and will only apply for an initial period, however, the UK parliament retains the power to extend any temporary measures should it prove necessary.
The CIGB, has now been laid before parliament, and although there is no given date for enactment, the CIGB is expected to be implemented into law in due course, these measures may be available from the start of July 2020.
The fundamental measures included within the CIGB are summarised in more detail below.
Suspension of Wrongful Trading
The CIGB will temporarily suspend the wrongful trading provisions under Section 214 of the Insolvency Act 1986 (“IA”), for a period of three months, with retrospective effect from 1 March 2020 to 30 June 2020 (“the relevant period”).
By way of background, the wrongful trading provisions under the IA provide protection to the company’s creditors by imposing personal liability upon directors of insolvent companies that continue to trade if the director “knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation or administration” (s.214(2)(b) IA). Whilst the court has a wide discretion in respect of any order as to the level of any such compensation to be made to the company by the director, ordinarily the director would be held liable for any increase in the company’s net liability to its creditors – meaning, the director would be liable for the increase in the deficiency to creditors that occurred between the date the directors ought to have ceased trading, and the date the company actually ceased trading.
The CIGB will however temporarily suspend the wrongful trading provisions, meaning that liquidators and administrators will be unable to bring claims for wrongful trading against the directors of an insolvent company for any losses caused by trading during the relevant period of the suspension of the rules. However, should a court be faced with any such claim, the court is to assume that the director is not responsible for any worsening of the financial position of the company or its creditors, during the relevant period. Whilst directors may not be liable for losses during the relevant period, losses incurred both before and/or after the relevant period still remain a factor. Moreover, directors’ duties to their creditors during this period continue, and these measures will not prevent administrators or liquidators from brining claims against directors for breaches of duties during the coronavirus pandemic.
Accordingly, directors should constantly keep the question as to the company’s future viability under consideration and should continue to be mindful of their obligations.
Statutory Demands and Winding-up Petitions
The second temporary measure introduced under the CIGB, is designed to restrict statutory demands and winding up petitions issued against companies during the pandemic, in circumstances where the debt is unpaid for reasons relating to the coronavirus pandemic.
Accordingly, the CIGB voids statutory demands made between the relevant period and provides that a winding-up petition cannot be presented by a creditor during the period beginning with 27 April 2020 (having retrospective effect) to 30 June 2020, or one month after the CIGB comes into force, whichever is later. However, there are exceptions to this, meaning if a creditor has reasonable grounds for believing that:
i) Coronavirus has not had a financial impact on the debtor; and/or,
ii) The debtor would have been unable to pay its debts in the absence of the coronavirus.
It ought to be noted that the threshold for ‘financial effect”, is a low one – meaning, coronavirus has a ‘financial effect’ on a debtor if their financial position has worsened in consequence of, or for reasons relating to the pandemic.
These measures are intended to prevent the mass increase of insolvencies, whilst also preventing creditors from being heavy-handed during the coronavirus pandemic.
Companies House Filing Requirements
Under the CIGB the Secretary of State is temporarily permitted to make further extensions to the deadlines in respect, of filing the prescribed documents under the Companies Act 2006. The aim of this measure is to prevent, the imposition of a financial penalty, criminal sanctions against the company’s directors and/or the company being struck off the register of companies.
The extended period for filing must not exceed:
i) 42 days, in a case where the existing period is 21 days or less; and,
ii) 12 months, in a case where the existing period is 3, 5 or 9 months.
Annual General Meetings (‘AGMs’) and General Meetings (GM’)
In addition to the above-mentioned measures, the CIGB also temporarily allows those companies that are under a legal duty to hold an AGM or GM, to hold the meeting by other means – even in circumstances where their constitution would not permit it. Accordingly, shareholders rights are preserved, and directors are not exposed to liabilities for measures that require shareholder endorsements.
Restructuring the Insolvency Regime (permanent reforms)
As briefly mentioned above, the CIGB intends to introduce a new restructuring procedure, which is modelled against the existing ‘Scheme of Arrangement’ procedure, but the new plan will provide a company encountering financial difficulties with the ability to propose a new restructuring plan, which will provide an alternative rescue option for those companies.
The plan will also introduce cross-class cramdown, which will allow dissenting classes of creditors to be bound by the plan, if sanctioned by the court as fair and equitable – this being a feature of US Chapter 11 bankruptcies. By adopting the cross-class cramdown, the new restructuring plan is intended to enable a company to compromise its financial and equity structure, without the company having to resort to the use of administration scheme.
As mentioned, any restructuring plan will be for the court to grant final approval on. The plan can be approved by the court even in circumstances where one or more classes do not vote in favour.
The CIGB introduces a new procedure for companies needing a formal breathing space, allowing the company to obtain a 20-business day moratorium period, which will allow companies time to restructure, seek new investment and pursue a rescue plan. The moratorium is available to all companies with limited exceptions.
The moratorium leaves the company’s management in control of the company, but includes the appointment of a licensed insolvency practitioner, who will monitor the company during this time, whilst also providing some oversight and protection for the creditors. The monitor’s role will however be limited to ensuring the company complied with the requirements of the moratorium, as well as approving any grant of new security over the company’s assets. In addition to this, the monitor is required to assess whether rescue of the company as a going concern continues to be likely.
The moratorium is for an initial 20-business days but can be extended for an additional period with the consent of the creditors, or permission from the court.
Suppliers will often threaten to stop supplying or will stop supplying a company that has entered into an insolvency process or a restructuring procedure – with the supply contract, often providing the supplier with the contractual right to do this. However, such supplies are often fundamental to the ongoing operation and rescue of a company.
Whilst there are already measures in place to stop certain suppliers from ceasing supply by reason of the company’s insolvency and where supplies continue to be paid for, the CIGB introduces a permanent change to the use of termination clauses in supply contracts. Under the new measure, a company’s supplier will not be able to rely on contractual terms to stop supplying, or to vary the contractual terms in circumstances where the supplies continue to be paid for.
This measure also contains safeguards for the supplier, so as to ensure the supplies are paid for, and there is an ability for the supplier to apply to court to allow termination on the grounds of hardship – there is also temporary exception for small companies during the pandemic.
The government hopes that the measures contained within the CIGB will support the business efforts during the coronavirus pandemic, whilst also allowing them to navigate the economic impacts of the coronavirus. Some of the reforms have been called for by the profession for a number of years; others, including many of the temporary reforms, represent a significant shake up to the existing system, and we look forward to analysing their efficacy.
21 May 2020